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Denver, Colorado-based Safe Harbor Financial (Nasdaq: SHFS) was profiled by Cannabis Business Executive back in February 2022, in the middle of a De-SPAC transaction that, once completed, would greatly expand the fintech platform’s reach and ability to provide its long-established banking services to the cannabis industry. The newly christened SHF Holdings began trading shares in late September of 2022, and as CEO/President Sundie Seefried explained during a recent call, making the arduous transition to public markets was a protracted learning experience that included several surprises.
“Oh, yeah, I think there were lots of surprises,” she said when asked. “The first surprise was probably how long it took us to get onto the NASDAQ and go through that education process, which was probably delayed by three to four months. They were doing their due diligence, so I understand, but it took a little longer to move through that process because we were cannabis-related.”
Timing was also a factor. “When we ended up going through the de-SPAC, the SPAC market was really drying up and people were souring on it,” said Seefried, “so while we went in with a PIPE (private investment in public equity) investment of $70 million committed, we ended up with a PIPE investment of about $23 million committed, which didn’t cover what we needed it to cover. That left a pretty big debt on our back to deal with, and that was probably the most discouraging thing that I think we went through in the last year.
“But we knew our parent company well,” she added, referring to Partner Colorado Credit Union (PCCU), the Colorado-chartered credit union she helmed as CEO for over 25 years. “I was their CEO for 20 years, and this was their baby, so we said, ‘We are so close to the de-SPAC, let’s go through with it and then we’ll deal with it. And they were able to give us some relief. We worked with them for a couple of months to negotiate how we could make it work for Safe Harbor to have a solid future, or at least the ability to run in the future and manage the debt with Partner Colorado Credit Union, and that went out in March. I would say right about then I was feeling a little more relief that we can service the debt, which is at four and a quarter [percent] and they took the majority of it in equity, which demonstrated their confidence in our ability to move forward.”
That was the most difficult part of the transaction, but it was not the only learning curve awaiting her. “Trying to work with investors during that time period, and learning to work with investors, was also a new experience for me,” noted Seefried. “Coming out of the not-for-profit world, we only had a board and members, and so actually working with investors was new, but the difficult part was because we had this debt and the fact that PIPE investors that were left in there had a conversion option and if the share price fell below a certain dollar amount – like $1.58 or $1.68 – then they were able to convert into common stock at eight to one, and that really harmed the stock price. So, that was another surprise, learning how those PIPE agreements don’t always work in favor of the company, watching those conversions happen, and then the damage it did to the stock and its price.”
Indeed, SHFS has seen almost an 80 percent decline in its stock price in the past year, which is part and parcel for cannabis stocks over that same time period. On March 16, 2023, however, the company received a letter from Nasdaq notifying it had not maintained a minimum closing bid price of $1 per share for its common stock, and had 180 calendar days, or until September 12, to regain compliance. In early September, it received another notice stating it was eligible for an additional 180 calendar day period, or March 11, to regain compliance. In a recent SEC filing, Safe Harbor noted that it “intends to actively monitor the closing bid price for its common stock and will consider available options to resolve the deficiency and regain compliance with the Minimum Bid Price Requirement, including initiating a reverse stock split.” Currently experiencing an upswing, SHFS is trading around 77 cents per share, and is up almost 19 percent over the past five days.
Seefried has not let the deteriorating stock price deter her. To the contrary, “I went out and have had probably 150 investor meetings this year, and I really listened to those investors,” she added. “What they told me is that while you have cash on the balance sheet and are cash-flow positive, you’ve got this debt and now you’ve dealt with it, the only thing that’s really going to prove to the market is going to be your performance quarter over quarter over quarter. So even though it was a learning experience, I had good investors who gave me good advice to move me forward in this learning experience and get up-to-speed in terms of how to impact the stock price in a positive manner going forward.
“Now, when we make announcements like we did where we restructured the recent Abaca deal,” she continued, “the question in conversations with even the investors after our earnings call was why didn’t that impact our stock price in a positive way? We had a good earnings report, we restructured the debt and reduced dilution in that area, so it wasn’t going to be nearly the dilutive event that it was going to be, but yet the market didn’t respond the way we were hoping it would. So, watching the stock and the impact of what we do on the stock is the interesting thing to me in terms of a challenge to figure out and to learn.”
I asked her if she had been able to put her finger on what it might be. “If I were to assess that in my position, and after having spoken with so many investors at this point in time, I think without performance there’s no value for shareholders. So, first and foremost, I’m on top of what we’re doing operationally, and on top of what’s happening in the financial area. To me, it’s all about performance, performance, performance, and I have a solid team around me who understands that as well.”
The rest of it was because of two things. “The complication of our transaction perhaps caused a lot of downside about Safe Harbor,” she surmised, “because there was an uncertainty between the debt being managed and the Abaca transaction waiting to be restructured, and those types of things I think caused an issue. The other part is that we have a complex model, an understanding of how the fintech platform works with the financial institutions and how we earn our money. So, I really listened to my investors on this last earnings call, and I just tried to dissect it. Now, when I do presentations and talk to investors, I spend a good deal of time on the model, how we earn money, and how we project to earn money in the future to diversify the business and scale the business. I think these are the things I have to continue to do – educate, educate, educate.”
That said, a stigma still attaches itself to the plant. “Yes, I think cannabis is still a difficult sell in the market,” conceded Seefried. “It’s not quite there. I think what’s happening in DC and the incremental change that could occur, the possible rescheduling, and just the fact that there’s good conversation going on in DC, means people are getting comfortable. But let’s face it, cannabis is a very complex industry, and it’s a state-by-state regulated industry. I always tell investors, ‘You really need to understand what you’re investing in,’ and understanding the cannabis business, just like understanding a service provider like Safe Harbor, is not an easy task for investors. It’s much easier to go out and buy stock in a bank than in a fintech that serves cannabis patients all across the country.”
A National Model for Cannabis FinTech
Assuming readers have some of the same questions as investors, I asked Seefried to tell us what they need to understand about the industry. “One of the important things,” she said, “is an understanding of cannabis history and how it has and will continue to emerge as a market. First, it’s ever-changing, which we always find interesting in the banking sector, because every time it changes, we have to evolve in terms of risk-mitigation strategies, and if that fast pace makes bankers nervous, it’s got to make investors nervous.
“It’s understanding that while [the industry] started out in two legalized adult states – Colorado and Washington state – it has spread across the country into 38 states,” she continued. “But why is that? How do companies manage to move cross-border and expand, how is acquisition in the industry happening, and do they know what they’re doing? It used to be that there was a lot of distrust in terms of who was doing it, and were they sophisticated enough to do it. I looked at it, and they had such an uphill battle in terms of everything they were doing, it was enough to make everybody tired watching them. But as things evolved, they stuck with it, and now we’re in the situation where, do we just go with the multistate operators, or do we look at those companies?”
There are two things going on here, she added. “There’s acquisition and the creation of major multistate operators, and then there’s the surviving entities who know what they’re doing, and they’re moving from just one license into vertical integration, which gives them good control of their supply chain and allows them to compete in the market.”
It’s an example of how understanding the evolution of the market is vital for an investor. “And then you go to the next most complex issue in the industry – are they really making money – and I have said from the very beginning, they are literally banking on future legalization. When you have an effective tax rate that’s 70 to 80 percent because you can’t take normal deductions, two things will happen: you start living on every dollar that you’re making and access to capital is difficult. So, if they can’t get access to normalized capital without having to go to the equities market at very expensive rates, it doesn’t help them grow their business. So that’s the first thing; how do they grow their business when they have such a high effective tax rate?
“The second thing is that in order to try to take advantage of the fact that 280e doesn’t allow normal business deductions on taxes, they structure their businesses in very complex manners,” she continued. “So, in which entity are you investing? If there’s one holding company, and there’s a management company, and there’s a real estate company, how do you determine your investment, and how do those companies all work together?”
The answer is already happening. “What we’re going to see in that area if it gets rescheduled, and what we are already seeing, is more consolidation,” noted Seefried. “The fact is companies used to separate everything to protect assets and because of the taxation issue. But think about the expense of creating five companies to support one company? That’s a difficult thing to invest in, let alone to understand why they do it, and then of course it becomes inefficient, and it becomes expensive at every level for these companies.
“When we start to see rescheduling,” she concluded, “I think you’re going to see the industry get a little more simplified and a little less complex. Not lower risk, but you will see the industry start to benefit with the ability to take those tax deductions, which will go to their bottom line, and will immediately allow them to get more access to normalized commercial debt versus equities markets. I think you’re going to see a huge benefit to the industry at that point in time, and then I think you’re going to see investment become a much easier decision for investors.”
As difficult as the public markets may be, added Seefried, Safe Harbor is actually enabled by them. “We’re in our 10th year,” she said. “We are experts in the industry with over 50 years of expertise on our senior management team alone, people who understand the industry and have been evolving with it. Because we were a division of Partner Colorado Credit Union, we were very limited in what we could do, but by going into the public market – and more importantly decoupling ourselves from Partner Colorado Credit Union – we now have a bigger platform. We now take money from 40 different states, and we are serving the MSOs with our other bank partners at this point in time because we don’t have the limitations of the balance sheet that we had at Partner.
“But the better thing is that we actually loan off of our deposits,” she added. “So, as they get access to more capital, as they’re making more money, we’re going to gain more in deposits, which then allows us to grow our loan portfolio, which is diversifying our income. If you really look at the components of our income, loan interest used to be 7 percent of our income and deposit fees were maybe 80 percent of our income. Now, our deposit fees are down to 57 percent and loan income is up to 21 percent. So, we are growing different income opportunities as a company that now has the ability to grow in that way, and we’re not just sitting on the old model. We’re developing a new, national model with more tools and expertise and opportunities.”
What’s more, Safe Harbor’s model is not dependent upon any catalyst. “I’m saying that no matter what happens – rescheduling or descheduling – the model we’re creating is a risk-mitigation model for financial institutions,” clarified Seefried. “You don’t necessarily want to have this high-risk market mixed in with 50 other billion dollars of your bank activities, because it’s too expensive to manage a high-risk market like the cannabis industry, and it will remain high-risk due to the 38 states with 38 different regulations and the complexity of organizing in each of those states, requiring a different bank account and a different entity in every single one.”
That has been the game all along for Safe Harbor. “We’ve already been doing that on a national platform from an individual location as a fintech model, so for us it’s not going to change and we have the ability to continue to scale that,” noted Seefried. “We also have something that other entrants that want to get into this industry do not, the reliability factor. Safe Harbor is now in its 10th year of doing this, and we continue to see a lot of financial institutions, because one of our strategies is acquiring other portfolios of accounts, and banks want to exit the business.
“But with Safe Harbor in the middle, managing and servicing the cannabis industry and doing the compliance for the bank, and the bank still getting a piece of the industry, we have a long future and that’s due to the high-risk nature of the business because of the complexities and the fact that there is still an illicit market existing in plain sight that has to be monitored, and that’s what we do,” she added. “We look for legitimate businesses, we legitimize those businesses with banking services, and we make sure that illicit players don’t get into a financial institution. And if they do get into a financial institution, we find them and we help law enforcement, because they can now do their job and move that black market out. So, we feel that we’re doing a good service for the financial institution and legitimate cannabis businesses and law enforcement, all in one.”
Serving an Irregular Market
Not all cannabis markets and companies are the same, of course. There are older, more open markets that tend to populate the west, and newer, often limited-license markets that seem to define the states coming online as legalization moves eastward, and variations in-between. Did those differences impact Safe Harbor’s offerings? “It’s a great question,” said Seefried. “Oddly enough, when I first got into the banking back in 2015, California was going legal, and everybody said, ‘Focus your attention on California,’ and kept pushing me in that direction. And because I had already been banking it a little bit, my gut instinct was, ‘That’s going to be a difficult market for a very long time. I’ll focus on every other market, you guys have fun with California,’ and that’s exactly what we did at Safe Harbor. We followed the markets we felt were going to be easier to manage, and some of the best markets to look at now that we’re extending credit to the industry are the limited-license states. They’re not over-saturating the market with licenses, and therefore every entity is more valuable and has a longer shelf life, so we want to make sure that we’re right on top of that.”
There is a renewed focus on companies, too. “Where we didn’t focus on them in the past, we now also like to focus on the MSOs,” she added. “Wherever they are, we want to consolidate the multistate operators. Some of which may have as many as 25 bank accounts across the country. Our job at this point in time is to bring them under the Safe Harbor roof and have just one bank relationship. That doesn’t mean they only have one bank, because it’s always good to have a backup, so our platform will allow them to have an account at this bank, and an account at that bank, and an account at that other bank, and yet manage them all through the Safe Harbor fintech platform.
“That is a huge advantage for diversification, having all your eggs in one basket, and being able to take advantage of insurance at financial institutions, which the Safer Act should pretty much ensure will be covered at that point in time,” noted Seefried. “So, our focus is on new markets coming up, like New York, and then on the MSOs. We’re looking at the businesses themselves to make sure they’re in it for the long term and that we’ve got all the long-term players with us.”
In terms of industry sectors served by Safe Harbor, “We have all of them,” said Seefried. “We go right across the gamut down to service providers who serve the industry in one way or another who don’t have a license and find it difficult to get banking because they are taking cash from the industry and their bank doesn’t want to do business with them. We even take those, so we run the gamut, and we like them all.”
Where do they fall in the hierarchy of companies? “It balances out,” she replied. “One of the things we have to do on a regular basis is to be tested to see if 80 percent of our income comes from 20 percent of our clients, and it does not. We have a well-distributed client base where it’s right across the board, and that’s good. We have built it not on MSOs in the past, and we can add those MSOs and not skew our numbers so that we’re top-heavy with big companies.
“But what we are seeing is that some of the mom and pops are having a difficult time competing with larger multistate operators and even single-state operators that are very large organizations,” she added. “We’re seeing consolidation happen, and we’re also seeing them sell their licenses. One of the trends is that they have medical licenses, and they have retail licenses, and we see a lot of them starting to divest themselves of their medicinal licenses because retail is the bigger operation, the consumer doesn’t have to have a medical license to get cannabis, and the path of least resistance is to buy on the retail level. So, it’s very interesting to watch that happen as well.”
The movement to incorporate social equity guarantees into state programs is also a Safe Harbor priority. “One of the things we are doing very actively is trying to support the social equity licensees,” said Seefried. “We give them discounts, and we are trying to put together a program working with some other associations where we help give them education and mentoring support and that type of thing. So, we’re definitely supportive of that, it’s something that we want to be doing, and I don’t see it as a complication for us. We rely on the license, that’s what’s important. We’re aligned with the state, we review the licensee paperwork, we know they’re legitimate, and then we get to know our customers, which means we’re talking to them monthly at first, and then at least quarterly thereafter, which is so important when you are in the cannabis banking arena.
“But I do see complications coming down the road,” she continued. “Let’s say cannabis goes to full legalization sometime in the future. You’ve got 50 states, or 48 states, that have legalized at that point in time, and they’re all different. How do you start acting like a federally legal product when we’ve got so many different regulations? How do you start communicating between states? ‘Oh, I’m going to be able to just put my product across the state line,” people say, but when you have different regulations in each of the states, that’s when it’s going to get even more complex. And not only that, but if you’ve got a solid market as a state, are you really going to want to open your borders to a market that may not be as organized?”
Still, it seems that no matter what happens opportunities will continue to exist for Safe Harbor. “Absolutely,” said Seefried. “Ultimately, when there is full legalization, and when we build this business and we’ve got a sizable portfolio, the banks are going to look at us and say they don’t want us competing with them. So, I think ultimately we make ourselves a target, but it’s a turnkey target, and I think they’re tolerating me right now.”
A Big Bank Haven
So, what are the biggest challenges to growing Safe Harbor’s deposit base? “The biggest challenge we had before was the balance sheet capacity, and now that isn’t a challenge,” she said. “When we went public, what I found interesting is that we have more large banks interested in giving us a piece of their balance sheet and working with us as a fintech model. But those banks are really limited to the super regional banks, where they understand the fintech platform, they understand the need for fintech, integrating with core systems, and they’ve already specialized in fintech. So now they’re saying, ‘Well, it’s a fintech model, we know how to do that really well, so we just have to learn cannabis.’ And then what we bring behind that is the fact that we’ve got 16 examinations as a financial institution, so they’ve got the confidence in what we’re doing as well as the reliability.
“So, I think that the balance sheet was our biggest constraint, but with our new partners, we can grow by a billion dollars,” she added. “Of course, we don’t plan on growing by a billion dollars, but we could in the next couple of years because we’ve got good capacity. So, then it boils down to the services, and there we’ve been working on interest bearing deposits, which are being very well-received by our clients, and lines of credit, which come with Know Your Customer. You’ve been doing business with me for two years now, and every single month you’re making deposits of $2.5 million into this account. I’ve watched your growth, know your officers, and we’re now going to extend you a line of credit. That’s where that relationship in banking is so important and why we want to retain building our clients. But as far as getting those balances, the first strategy is obviously acquisition, going out there and making the attempt to purchase other portfolios and help people out of the business gracefully.”
Is the idea to increase the deposit base, which allows Safe Harbor to increase the size of its loan book? “Yes, but there are a couple of models,” responded Seefried. “That is the model that exists with us yesterday and today, but the model that will exist with us tomorrow may include that but not necessarily 100 percent. We have other conversations going on with our financial institutions that will decouple lending away from deposits. The fact is, banks want that lending relationship, because it’s the strongest relationship you have with a client and a business, and so they want the lending piece, but they don’t necessarily want the depository activity. So, we can decouple the deposits. We’re not at that point in time because we don’t need to be, but those conversations are happening.”
So, Safe Harbor can potentially build a loan book that is much larger than its deposit base can support, but which its partner banks can support? “Yes, and they are participating,” stated Seefried. “Let’s say we get a bank that wants to put $100 million into their book, because it’s a good market and these are good, real estate-backed loans. And this is what I would consider a recession-resilient market, so it’s attractive, and there’s a premium on these loans because of the complexity and the regulations that govern the Banking Secrecy Act (BSA) that take so much work to comply with. While the bank doesn’t want to deal with that, they certainly want to go ahead and have that depository relationship, because what they really want is the loans. And while we don’t make $30 million loans because of our size, we can make a $30 million loan for an MSO, and that may take $15 million being put on one bank’s books, and the next bank will take another $10 million. So there becomes a network of banks that say, ‘Let’s diversify the risk here, but we can all benefit from the lending relationship that Safe Harbor can bring to us while they’re monitoring and managing deposits and compliance.’”
Are they all real estate backed loans? What if someone has a monopoly in a great location or something like that? “We’re still in the early stages of credit building, building portfolios, and cherry picking, and the best loan out there is a real estate-based loan, so that is definitely what we’re looking at,” clarified Seefried. “But that doesn’t mean that if we want that piece of real estate senior secured, and you’re building that relationship with us, let’s look at that license in a limited license state, let’s look at the value of your equipment, let’s build more of this lending opportunity, because you are a good client with us. So, it really is about relationship building.”
I asked about the current credit worthiness of the average cannabis business, adding that FundCanna, which I spoke with recently, only loans to businesses that have revenue. “It’s really about having assets and cash flow,” said Seefried. “Yes, I have to agree with FundCanna there. What we find is that many of the companies who come to us are used to going into the capital markets and using projections and getting investors and are not necessarily used to getting into debt. So, if we want to normalize debt in a commercial lending environment, it’s a different game than going out and getting investors, but it doesn’t mean that after we get to know them we won’t take a further risk with them. It just means, let’s get to know you first for a little while and we see the cash flow and the profitability of the business to make sure you have enough to service the debt, and then we’ll go from there.”
In terms of catalysts for the industry and for Safe Harbor, Seefried said the one that matters most to her right now is the one that is currently underway. “I’m still on the first catalyst, which is the fast and growing legalized market,” she said. “Because we were limited to Colorado and just our clients and slow growth and a limited balance sheet, our biggest opportunity now is the business development in all those other states we never tried to develop in the past. So, we are keeping up with the legalizing states, because that is still a big opportunity for Safe Harbor in the very near future and in the long term.”
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