In this edition of "Rising High," The Fly conducted an exclusive interview with Sundie Seefried, Founder and Chief Executive Officer of Safe Harbor Financial (SHFS), a financial services provider to the regulated cannabis industry. Here are some highlights:
CANNABIS LENDING: SHF Holdings, Inc., doing business as Safe Harbor, is a Colorado-based financial services provider offering compliance, monitoring and validation services to financial institutions while providing traditional banking services to cannabis, hemp, CBD and ancillary operators. In September, the company completed a business combination with Northern Lights Acquisition, in which Northern Lights acquired Safe Harbor from a subsidiary of Partner Colorado Credit Union.
“The biggest factor that gives us a competitive advantage is that we work on both sides of the balance sheet,” Seefried said. “We do depository services and we do lending. Because we lend off our deposits at banks and credit unions, we can offer a lower cost of funds. We do not have to go to the capital markets to raise money because we have those deposits as a base within our partner financial institutions.”
FIRST QUARTER EARNINGS: In May, Safe Harbor reported first quarter loss per share of 6c on revenue of $4.18M, compared to 0c per share on revenue of $1.67M for the same period last year. The company also reported that processed deposits increased 33% to $1.1B in Q1 and monthly average number of accounts held with financial institution clients increased 68% to 993. Safe Harbor also guided 2023 revenue up by at least 50%, compared to the $9.4M in revenue reported for 2022.
“The results signify that we do have a strong business underlying the fact that we are a public company and we can generate cash to pay for operations,” the CEO said. “We continue to increase that revenue and that really should give our investors a vote of confidence in terms of our business model.” She added she was pleased with the financial results, which put Safe Harbor in an even better position as it continues to build the company’s lending portfolio. “Obviously top-line revenue is important, but we know that net income and adjusted EBITDA are also important on the bottom-line,” Seefried said. “Having the banker background, I’m certainly focused on net income as we move forward.”
She noted Q1 financials included certain expenses attributed to 2022, such as employee bonuses that weren’t properly accrued for that year. “That is a significant amount, plus we did stock option plans and awards to staff to motivate them further to reach our goals,” the CEO said. “Those things are important to keep the operation strong, moving forward and growing.”
REAL ESTATE LOANS: Additionally in May, Safe Harbor originated four commercial real estate-backed loans for subsidiaries of a tier-one multistate operator. An approximate amount of $5.5M in aggregate, the loans are secured by a first deed of trust on four retail dispensary locations in a key limited-license state. “One of the biggest income drivers that we are putting out there to our investors is the interest income that we will earn on the loans,” Seefried said. “To us, those are milestones in terms of delivering on our promises that we make.”
Lending will be a strong component of Safe Harbor’s revenue this year, she said, stating the company had a slow start in Q1 in terms of booking that credit. “We had to rebuild a pipeline and in today’s market and in terms of the banking environment, we wanted a pipeline full of strong real estate loans and senior secured debt,” the CEO said. “We are not looking to make projection loans or invest in these companies. We work with financial institutions and ensure our staff is writing to the standards that our financial institutions would be able to accept.”
She said the company has also revamped its internal operations and is continuing to build that model out. "What you’ll see is that in the second, third and fourth quarter, we will have a strong enough pipeline of the type of credit that we want to finance and be able to put those on the books and to compensate for a slow first quarter,” Seefried said.
FIVE STAR BANK PARTNERSHIP: Also in May, Safe Harbor announced a partnership with Five Star Bank (FISI) to expand access to cannabis banking nationwide. Backed by Five Star Bank’s ability to dedicate up to $1B in deposit capacity through its relationship with Safe Harbor, cannabis businesses will be afforded greater access to credit facilities along with a suite of cannabis banking services. The collaboration will also enable multi-state operators to consolidate their financial operations and realize normalized commercial banking services.
“One of the reasons we launched Safe Harbor out from under PCCU was because of the balance sheet constraints,” the CEO said. “Compared to a smaller credit union of say $700M, you’re now looking at a $10B bank that has a great deal more capacity on the balance sheet for us to service larger operations and larger MSOs. We can now expand our client base to include those larger operations, consolidate their banking into one financial institution and provide them more ease in banking.”
DEBT RESOLUTION: In April, Safe Harbor announced the resolution of approximately $68.6M in debt obligations. The debt resolution included agreements the company entered with PCCU that resulted in the settlement of the approximately $64.7M deferred payable owed to PCCU, comprised of $14.5M in serviceable debt payable at a 4.25% annual interest rate over a five-year period; and 11.2M shares of Class A common stock in the company valued at $50,162,549. The remaining $3.9M in debt was resolved via a payment of $1.7M in cash and $700,000 in serviceable debt payable at 0% interest over a one-year period.
“It was a great relief to restructure that debt for Safe Harbor,” Seefried said. “We inherited that debt as a result of deSPAC back in September and many people thought our company was on life support, even if we were cash flow positive.”
The debt was weighing Safe Harbor down, she said, taking away from investor perception of the company as a good investment opportunity.
“Because we were able to take that over $60M down to a debt of $14.5M, it becomes serviceable,” the CEO said. “We can pay that debt, continue to operate and produce income and cash flow at the bottom line. It makes us much more able now to launch the company on a national level.”
INDUSTRY COST CUTS: Several multi-state operators have recently announced cost-cutting initiatives including reduced footprints and headcounts and Seefried said she believes these are smart moves for the industry.
“It is what every company does when they have to pull things in,” she said. ”What happened is the industry had better access to capital in the last several years and suddenly capital has dried up in the cannabis space. There have been some projections that haven’t been met and when that happens, companies must take certain action to become more profitable.”
The CEO said, in her opinion, when cannabis companies were receiving substantial investor funds, it made it easier to overlook expenses.
“I’ve always been with a small company, so expenses are top of mind,” she said. “I think companies are just getting smarter, leaner, meaner and more capable of running really good operations across the board.”
ECONOMIC CONCERNS: When asked about how rising concerns around inflation and recession will impact the space, Seefried noted that cannabis tends to be recession resistant.
“One of the very things as a banker that I love about this sector is it is recession resilient,” she said. “You can compare it to alcohol and tobacco and these sectors grew and thrived during COVID, when everything else was shut down.”
When the economy is down, cannabis products will remain as a category consumers will continue to fit into their budget, the CEO said.
“It’s not a bad situation to be in the cannabis industry at this point in time, so long as you are running your company efficiently,” she said.
LEGALIZATION: Following the mid-term elections, Republicans won control of the House of Representatives while Democrats retained control of the Senate and Seefried said she does not expect it to affect federal legalization.
“I’m probably more negative than most people in terms of full legalization on the federal level,” she said. “There are too many federal agencies involved that will have to help make that decision and the DOJ has a difficult time fulfilling its charter to catch the illicit activities that are tied to the cash in the industry.”
Until banking is optimized and the black market is eliminated or at least reduced, the CEO said she doesn’t expect agencies to come together to legalize cannabis.
“There’s still too much cash in the industry and I don’t believe that the cash is going to get reduced year after year,” she said. “At some point it will decrease, but there is still a lot of stigma attached to cannabis that makes people utilize physical cash, similar to alcohol. They still remain high-risk businesses for financial institutions.”
SAFE BANKING: In April, Oregon’s U.S. Senator Jeff Merkley along with Montana’s U.S. Senator Steve Daines and U.S. Representatives Dave Joyce and Earl Blumenauer introduced the bipartisan, bicameral Secure and Fair Enforcement Banking Act of 2023. The bill looks to ensure that legal cannabis businesses have access to critical banking and financial services.
“I am a little more positive on SAFE Banking,” Seefried said. “It’s been shot down seven times, so it’s been disappointing for the industry, but even more so for the bankers. It does remove the prosecution risk for any financial institution or service provider servicing the cannabis industry.”
She noted certain directors are subject to prosecution, although nobody has yet been prosecuted for banking the cannabis industry.
“Everybody wants the accountability and accountability is important to federal agencies, so I see that working in favor of the banks,” the CEO said. “The question becomes ‘do I think a lot of financial institutions are going to jump in to bank the cannabis industry?’ Probably not. It takes a lot of resources to manage the regulations surrounding bank secrecy, which is the real elephant in the room.”
The SAFE Banking Act does not change bank secrecy, which only gets more complex every year, she stated.
“It’s been around for decades and it’s not going to be reduced easily in the near future, because it does help federal agencies sort out illicit money from legal money,” Seefried said. “It is important for federal agencies to be able to watch, check and analyze the money, which is what bank secrecy allows them to do.”
CHALLENGES: When asked about the largest hurdles facing the cannabis space, the CEO pointed out that a lot of investors believe the industry is flattening out and will not be as profitable as expected.
“There are definitely always competitive issues in terms of pricing, but what I really see is that cannabis continues to thrive,” she said. “We’re not seeing a lot of issues, but we are seeing a lot of companies make the right moves to become more efficient.”
Seefried added competition is spreading out across the country, meaning people no longer have to vacation in Colorado to have access to cannabis when it's likely they can get it in their own state.
“Safe Harbor has the opportunity to pick up what we’re losing in our present states, with value in other states, which is why it is a great time for us to expand on the national level,” she said.
OPPORTUNITIES: As the cannabis sector develops, the CEO said she sees the biggest opportunities in vertical integration.
“The greatest opportunity is in control over the supply chain and expansion of operations,” she said. “Consolidation is not necessarily bad for everybody as there’s opportunity in that. What we’re most excited about is being able to secure something like the relationship with Five Star Bank and offer the cannabis industry greater access to banking services and solid banking financial partners.”
CANNABIS/PSYCHEDELIC STOCKS: Publicly-traded companies in the space include Aleafia Health (ALEAF), Acreage (ACRHF), Atai Life Science (ATAI), Audacious (AUSAF), Aurora Cannabis (ACB), Avant Brands (AVTBF), Awakn Life Sciences (AWKNF), Ayr Wellness (AYRWF), Body and Mind (BMMJ), BZAM (BZAMF), Cannara Biotech (LOVFF), Canopy Growth (CGC), Chicago Atlantic (REFI), Clever Leaves (CLVR), CordovaCann (LVRLF), Cresco Labs (CRLBF), Cronos Group (CRON), Columbia Care (CCHWF), Compass Pathways (CMPS), Curaleaf (CURLF), CURE Pharmaceutical (CURR), CV Sciences (CVSI), Cybin (CYBN), Delic Holdings (DELCF), Delta 9 (DLTNF), Entourage Health (ETRGF), Fire & Flower (FFLWF), Flora Growth (FLGC), General Cannabis (CANN), Greenlane (GNLN), Green Thumb (GTBIF), GrowGeneration (GRWG), Goodness Growth (GDNSF), Hemp (HEMP), HEXO (HEXO), High Tide (HITI), India Globalization Capital (IGC), Indiva (NDVAF), Innovative Industrial Properties (IIPR), InterCure (INCR), IM Cannabis (IMCC), Wellbeing Digital (KONEF), Khiron Life Sciences (KHRNF), Lowell Farms (LOWLF), Lotus Ventures (LTTSF), MediPharm Labs (MEDIF), MedMen (MMNFF), NewLake Capital (NLCP) Organigram (OGI), Planet 13 (PLNHF), Reunion Neuroscience (REUN), Revitalist (RVLWF), RIV Capital (CNPOF), Relmada (RLMD), RYAH Group (RYAHF), Small Pharma (DMTTF), SNDL (SNDL), Sproutly (SRUTF), Skye Biosciences (SKYE), Stem Holdings (STMH), Sunniva (SNNVF), TerrAscend (TRSSF), Tetra Bio-Pharma (TBPMF), Tilray (TLRY), Trulieve (TCNNF), Tryp Therapeutics (TRYPF), Verano (VRNOF), Village Farms (VFF), Wesana Health (WSNAF), Zynerba (ZYNE) and 4Front Ventures (FFNTF).