Executive Summary / Key Takeaways

• Safe Harbor Financial (SHFSW) has strategically diversified its revenue streams, successfully growing its high-margin lending program which represented over 40% of revenue in Q1 2024, offsetting declines in traditional deposit-related fees.
• The company's proprietary fintech platform and deep compliance expertise provide a significant competitive moat in the complex cannabis financial services sector, enabling faster, more efficient processing than traditional methods and positioning it as a preferred partner for financial institutions and CRBs.
• Recent financial performance, particularly in Q1 2025, shows a decline in total revenue driven by reduced deposit activity and changes in revenue allocation under an amended agreement with its key partner, PCCU, despite efforts to reduce operating expenses.
• SHFSW faces significant liquidity challenges, with cash projected to fund operations only through September 2025 and a substantial working capital deficit, raising substantial doubt about its ability to continue as a going concern, compounded by a Nasdaq listing compliance issue.
• Management is actively pursuing strategic partnerships, financing options, and operational efficiencies, including deferring principal payments on the PCCU debt, but the probability of success in securing sufficient capital remains uncertain.

Setting the Scene: Safe Harbor's Niche in Cannabis Finance

Founded in 2015 by Partner Colorado Credit Union (PCCU), SHF Holdings, Inc., operating as Safe Harbor Financial, carved an early leadership position in a nascent and complex market: providing compliant financial services to the legal cannabis industry. Recognizing the significant challenges cannabis-related businesses (CRBs) faced in accessing basic banking services due to federal illegality and stringent regulatory requirements, Safe Harbor developed a proprietary technology platform designed to facilitate banking services through financial institution partners. This platform enables CRBs to access essential tools like checking and savings accounts, cash management, and electronic payments, while providing partner institutions with the necessary compliance infrastructure for monitoring and validation.

Over its history, Safe Harbor has built a track record, assisting in processing approximately $25.6 billion in cannabis-related deposits and navigating numerous state and federal banking exams. This experience established a foundation of expertise and a compliant infrastructure that became increasingly valuable as the state-legal cannabis market expanded across the United States. The company's core strategy centered on being the trusted intermediary, bridging the gap between CRBs needing financial access and financial institutions wary of the regulatory complexities and risks.

A Foundation of Compliance and Technology

At the heart of Safe Harbor's business lies its proprietary fintech platform. This technology is specifically tailored to the unique compliance demands of banking the cannabis industry, ensuring strict adherence to Bank Secrecy Act (BSA) and anti-money laundering (AML) provisions, including FinCEN guidance. The platform facilitates initial customer due diligence (Know Your Customer), manages customer applications, supports program management, and provides ongoing compliance monitoring and regulatory exam assistance for financial institution partners.

The tangible benefits of this technology are rooted in efficiency and risk mitigation. While specific quantifiable metrics comparing the platform's speed or error rates directly against traditional banking systems or competitor platforms are not detailed, the company emphasizes its ability to streamline operations and ensure proper compliance in a segment where most financial institutions are either unable or unwilling to undertake the necessary management complexities. This specialized capability, built over a decade, represents a significant barrier to entry for potential competitors and allows Safe Harbor to offer services that traditional banks find difficult to replicate. The company's focus remains solely on cannabis financial services, providing a level of dedicated expertise that differentiates it from broader financial institutions.

Strategic Evolution and Diversification

Building upon its foundational deposit and compliance services, Safe Harbor has strategically evolved its business model to diversify revenue streams and capture higher-margin opportunities. A key initiative has been the expansion of its lending program, introduced in 2022. Recognizing the limited access to capital for CRBs, Safe Harbor began facilitating commercial lending through its financial institution partners, offering senior secured debt and operating lines of credit. This move was a natural extension, leveraging the company's deep understanding of the cannabis market and its relationships with compliant financial institutions.

The lending program has rapidly grown in significance. By the end of Q1 2024, loan income represented just over 40% of the company's total revenue, a substantial increase from approximately 11% in Q1 2023. The loan book nearly tripled year-over-year by the end of Q1 2024, reaching $55.66 million by the end of 2023. This growth demonstrates market acceptance and the company's ability to address a critical need in the industry. The successful exit of a $3.1 million defaulted loan in Q2 2024, recovering full principal and accrued interest, further validated the strength of Safe Harbor's underwriting process and increased its lending capacity.

Beyond lending, Safe Harbor has also introduced new deposit products, such as the first interest-bearing commercial deposit account for cannabis businesses nationwide in July 2023. These strategic initiatives aim to attract new customers, increase the deposit base (which correlates with lending capacity and investment income), and create a more robust, diversified financial service center for CRBs.

Financial Performance: A Mixed Picture

Safe Harbor's financial performance in recent periods reflects both the success of its diversification strategy and the impact of market headwinds and operational challenges.

For the three months ended March 31, 2025, total revenue was $1.93 million, a significant decrease from $4.05 million in the comparable prior year period. This decline was primarily driven by reductions in account fee income (down 33.84% to $1.07 million), investment income (down 61.18% to $0.30 million), and loan interest income (down 66.99% to $0.54 million). The decrease in account fee and investment income is largely attributed to a reduction in average daily deposit balances and a decline in high-value accounts, alongside a change in how account hosting fees are calculated under the Amended PCCU CAA (shifting to a fixed asset hosting fee based on average daily balance, which increased account hosting expenses). The substantial decrease in loan interest income is mainly due to the implementation of a new loan yield allocation formula under the Amended PCCU CAA, which determines the interest income split between Safe Harbor and PCCU based on the Constant Maturity US Treasury Rate and a proprietary risk rating, replacing the prior structure where Safe Harbor received full interest income and paid a servicing fee.

Despite the revenue decline, total operating expenses decreased by 8.47% to $3.41 million in Q1 2025 compared to $3.73 million in Q1 2024. This reduction was primarily driven by a significant decrease in compensation and employee benefits (down 41.13% to $1.34 million), reflecting workforce reductions and lower stock-based compensation. However, this was partially offset by a substantial increase in professional services expenses (up 120.45% to $1.02 million), mainly due to higher legal fees associated with ongoing litigation, including a $300,000 accrual for an employment-related legal matter. The elimination of the indemnity liability to PCCU as of December 31, 2024, also resulted in a credit loss benefit expense reversal in Q1 2025.

The net result for Q1 2025 was a net loss of $313,627, compared to net income of $2.05 million in Q1 2024. Adjusted EBITDA for the three months ended March 31, 2025, was $1.23 million, compared to $1.96 million in the prior year period.

Looking back at the full year 2023, Safe Harbor reported record revenue of $17.56 million, an 85.3% increase from 2022. This growth was fueled by strong increases across all revenue streams: deposit and onboarding income (up 42% to $8.6 million), investment income (up 175.6% to $5.84 million), and loan interest income (up 163% to $2.97 million). However, the termination of the agreement with Central Bank in July 2023 led to a decrease in total client accounts from 1,040 in March 2023 to 721 by December 2023, impacting deposit-related fees in Q4 2023 and carrying into 2024.

Operating expenses for the full year 2023 increased significantly to $38.3 million, primarily due to substantial goodwill and intangible asset impairment charges ($16.9 million in Q2 2023 and a $2 million charge in Q4 2023 related to the Abaca transaction), as well as higher compensation and Abaca consideration restructuring charges. Excluding impairment charges, operating expenses for the nine months ended September 30, 2024, decreased by approximately $4.4 million compared to the same period in 2023, indicating some success in cost optimization efforts.

Liquidity and Going Concern Challenges

As of March 31, 2025, Safe Harbor's financial position presents significant liquidity challenges. The company reported cash and cash equivalents of $931,397 and a net working capital deficit of $6.72 million, a considerable deterioration from a working capital deficit of $983,833 as of December 31, 2024.

Management has stated that the cash position as of March 31, 2025, is not believed to be sufficient to fund operations and meet obligations over the next 12 months, projecting current funds to support operations only through September 30, 2025. This, coupled with the working capital deficit and uncertainty surrounding cash flows from operations, raises substantial doubt about the company's ability to continue as a going concern for at least twelve months from the issuance date of the Q1 2025 financial statements.

Adding to the pressure, Safe Harbor was notified by Nasdaq on April 7, 2025, that it no longer meets the continued listing requirements for the Nasdaq Capital Market due to a stockholders' equity deficit of $12.29 million as of December 31, 2024, falling below the required $2.50 million minimum.

Management is actively developing plans to address these liquidity needs, including implementing strategic partnerships to broaden revenue, renegotiating the senior secured loan with PCCU (which resulted in an amendment deferring principal payments until February 5, 2027), offering stock-based compensation, restructuring Board compensation, and exploring financing options or other strategic transactions with potential investors, lenders, and partners.

However, the probability of success for these plans is uncertain, and there is no assurance that sufficient capital will be secured on favorable terms or at all. A default on the Amended PCCU debt could allow PCCU to accelerate the debt and exercise its security interest in all company assets, although CRB deposits held with partner financial institutions would not be affected. The company is required to submit a plan to regain compliance by May 22, 2025.

Competitive Positioning and Market Dynamics

Safe Harbor operates in a highly competitive, albeit specialized, market for financial services catering to the cannabis industry. Its primary competitors include other niche financial technology providers and, to a lesser extent, traditional financial institutions with limited cannabis exposure or major cannabis companies with ancillary financial service arms.

Compared to traditional banks like Home Federal Bancorp of Louisiana (HFBL), Safe Harbor's core technological platform provides a distinct advantage in handling the complex compliance requirements of cannabis banking. While HFBL may have lower operational costs due to its regional focus, Safe Harbor's specialized technology enables efficiencies in transaction processing and compliance monitoring that are difficult for traditional institutions to replicate. Safe Harbor's strategy is deeply focused on this niche, whereas HFBL's cannabis exposure is likely a smaller part of its overall business.

Against larger cannabis players like Tilray Brands (TLRY) and Canopy Growth Corporation (CGC) that have ventured into ancillary financial services like payments and lending, Safe Harbor positions itself as a dedicated financial services expert rather than a cannabis producer with financial add-ons. While TLRY and CGC benefit from scale and potentially faster innovation in certain areas due to vertical integration, Safe Harbor's expertise lies specifically in the compliant financial infrastructure itself. Its lending program, for instance, offers access to capital with terms often more competitive than the high rates sometimes seen in the industry. Safe Harbor's successful exit of a defaulted loan demonstrates a level of underwriting rigor specific to this market.

Safe Harbor's competitive moat is built on its decade of experience, its proprietary compliance technology, and its established network of financial institution partners. This allows it to offer a suite of services, including compliant deposit solutions and lending, that few others can fully replicate. The company's strategy to "lead with lending" aims to leverage its unique lending capabilities to attract new customers and drive organic deposit growth, further solidifying its market position.

However, the competitive landscape is evolving. Increased competition within the cannabis sector itself, including pricing pressures and excess supply, negatively impacts the financial health of CRBs, which in turn affects Safe Harbor's deposit base and revenue streams. The emerging market of CBD and THC derivatives from hemp, lacking clear state-level regulation, also presents a higher-risk area for compliant financial services.

Regulatory developments, such as the proposed rescheduling of cannabis from Schedule I to Schedule III, are viewed as potential catalysts. Rescheduling could alleviate tax burdens under Section 280E for CRBs, potentially strengthening their balance sheets and increasing their capacity for deposits and borrowing, which would benefit Safe Harbor's lending opportunities. The SAFER Banking Act, while potentially facilitating greater access to traditional banking, is seen as neutral for Safe Harbor as it does not eliminate the need for BSA compliance expertise, which remains a core strength.

Outlook and Key Considerations

Safe Harbor's outlook for 2024, as guided by management, reflects the challenging operating environment and the impact of recent strategic and contractual changes. As of the Q3 2024 earnings call, the company expected full year 2024 revenue in the range of $15 million to $15.5 million, a downward revision from earlier guidance. This revised outlook incorporates the observed declines in deposit activity and the changes in revenue allocation under the Amended PCCU CAA.

While specific full-year 2024 Adjusted EBITDA guidance was not reiterated in the Q3 2024 call, earlier guidance from Q2 2024 projected a range of $3.75 million to $4.25 million, suggesting an expectation of profitability on an adjusted basis despite revenue pressures, likely reflecting ongoing cost optimization efforts and the higher-margin nature of the growing lending business.

The most critical consideration for investors is the company's liquidity position and the substantial doubt raised about its ability to continue as a going concern. The success of management's plans to raise additional debt or equity financing is paramount to addressing the working capital deficit and ensuring the company can meet its obligations beyond September 2025. The outcome of the Nasdaq compliance review is also a significant near-term factor.

Beyond the immediate liquidity concerns, the long-term outlook hinges on Safe Harbor's ability to execute its strategy of diversifying revenue through lending and new product offerings, attracting new financial institution partners to offset the impact of lost accounts, and capitalizing on potential positive regulatory changes like cannabis rescheduling. The company's proprietary technology and compliance expertise remain valuable assets in a market that will continue to require specialized financial solutions, regardless of federal scheduling status or banking reform efforts.

Risks to the Investment Thesis

Investing in Safe Harbor Financial carries significant risks, prominently highlighted by the company's recent financial disclosures. The most pressing risk is the substantial doubt about the company's ability to continue as a going concern due to insufficient liquidity. Failure to secure additional financing could severely impact operations and potentially lead to default on debt obligations, including the senior secured note with PCCU.

The potential delisting from the Nasdaq Capital Market due to the stockholders' equity deficit poses a risk to the stock's visibility and trading liquidity. There is no guarantee that the company's plan to regain compliance will be accepted or successful.

Operational risks include the reliance on a limited number of financial institution partners, particularly PCCU, and the impact of changes to key agreements, as seen with the Amended PCCU CAA affecting revenue allocation. The company has also identified multiple material weaknesses in its internal controls over financial reporting, which could impact the reliability of financial reporting if not effectively remediated.

Market risks include the inherent volatility and uncertainty in the cannabis industry, including pricing pressures, excess supply, and regulatory shifts at both the state and federal levels. Ongoing litigation also presents a financial and operational burden. Furthermore, the federally illegal status of cannabis continues to pose risks to both the company and its clients.

Conclusion

Safe Harbor Financial has successfully established itself as a key player in the niche cannabis financial services market, leveraging its proprietary technology and compliance expertise to build a diversified business model that includes high-margin lending. While the company demonstrated strong revenue growth in 2023 and made strides in cost optimization, recent performance in Q1 2025 reflects significant revenue pressures stemming from reduced deposit activity and changes in key partner agreements. The most critical factor currently overshadowing the investment thesis is the company's precarious liquidity position, which raises substantial doubt about its ability to continue as a going concern and has led to a Nasdaq listing compliance issue. Management is actively seeking solutions, but the outcome remains uncertain. For investors, the story of Safe Harbor is one of a specialized fintech company with a proven model and competitive advantages in a growing industry, currently facing an urgent need to recapitalize and navigate significant financial headwinds to realize its long-term potential.