ARVADA, Colo.–A credit union that sold a CUSO for close to $200 million in 2022 has not only yet to see that windfall, it actually reported a loss at year-end 2022, according to a detailed new analysis.
As CUToday.info reported here, Partner Colorado Credit Union sold the CUSO it formed eight years ago to provide financial services to the cannabis industry, Safe Harbor Financial Services, for $185 million. The CUSO was acquired by New York-based Northern Lights Acquisition Corp., a blank check company, sometimes known as a SPAC, that was formed for the specific purpose of effecting a merger or acquisition. The company was to pay $70 million in cash and $115 million in Northern Lights stock for Safe Harbor Financial, which became a national model for credit unions seeking to provide financial services to cannabis companies, especially retailers.
In an interview with CUToday.info at the time of the sale, Sundie Seefried, CEO of Safe Harbor Financial and the former CEO of the credit union, said, “We've done this for our members. They took the risk with us and hopefully they're going to be rewarded for it.”
Negative Retained Earnings
But an analysis performed by Chip Filson on his blog, chipfilson.com, shows the credit union has not only not posted a gain, it has reported a loss. Filson previously served as NCUA’s Director of the Office of Programs (CLF, NCUSIF, and Examination Policy) and later helped to start Callahan & Associates and remains active in various credit union issues.
“Within 90 days of Safe Harbor, (Partner Colorado) Credit Union’s CUSO subsidiary, becoming a public company, the December 2022 financial result reported a negative retained earnings of $39.7 million,” Filson reported. “The company’s stock has fallen from a peak of over $10 per share in October 2022 to close at $.39 (last week). Auditors have raised a going concern footnote as a result of its December financial position.”
The $700-million Partner Colorado Credit Union, which was the founder and owner of the CUSO, recorded a $44-million dollar loss in the March quarter, to offset the gains from the sale recognized in the 4th quarter of 2022, Filson wrote on his blog.
‘Yet to Receive Payments’
“Except for ongoing revenue from its operating service agreements with SHFS, the credit union has yet to receive any payments from this sale closed in September 2022,” Filson stated.
How did what looked like a windfall for Partner Colorado and its members “turn south so quickly,” as Filson phrased it in his analysis?
“One observation at this point is that there is no ‘free’ market,” stated Filson. “The credit union is learning that a private firm using the SPAC process has to ‘pay to play’ to become publicly traded.”
Filson said his review of certain disclosures forms, including a May 2023, 10-Q SEC filing, offer some insights, the first of which is to note the sale was structured as Safe Harbor buying out the NLIT SPAC, “not the reverse as suggested in the $185 million announcement.
“Second, it is impossible to tell which investors got paid what in this transaction,” Filson continued. “Certainly, the brokers, accountants, lawyers and other facilitators were paid fees. But which SPAC shareholders were paid what return?”
Extended Payments
What is known, said Filson, is that Partner Colorado Credit Union has not received anything from the sale. “Moreover, it has converted a significant amount of the debt portion to stock and extended the much reduced debt payments further out,” according to Filson.
Filson said his review shows the new entity’s first major transaction was to acquire in November 2022 another cannabis business for $30 million in stock and cash. The tangible assets in this acquisition were minimal, Filson wrote, and the contribution to immediate earnings unstated.
“It would seem to be a transaction negotiated before the full financial impact of the (CUSO) sale were known,” Filson stated.
According to Filson, Safe Harbor Financial Services continues to compare in its filings the current financials with its pre-public quarterly results. “This previous financial performance, under the credit union’s auspices, reveals a very modest business, albeit, with positive financial bottom line,” Filson said.
The Impact on PCCU
Filson noted Partner Colorado appears well capitalized (14.82% as of March 31), but also said the cannabis business relationships from SHFS are important. About 35%-40% of its deposit base appears to be from cannabis-related businesses, much of which he suggested is held in share draft accounts.
“Prior to the public sale, PCCU recorded its CUSO investment at $8 million,” Filson said. “To date, the credit union has not received any of payments, not even the $3,143,388 in cash and cash equivalents held by Safe Harbor prior to the sale.”
What SEC Filings Reveal
Filson said that throughout the SEC filings it is clear Partner Colorado CU is Safe Harbor’s primary banking partner. Those SEC filings, said Filson, state, “Currently, the Company substantially relies on PCCU to hold customer deposits and fund its originated loans. As of this time, substantially all of the Company’s revenue is generated by deposits and loans hosted by its PCCU pursuant to various services agreements.”
In addition, Filson said, the disclosures show the credit union has limits on the amounts of total CRB-related loans it will hold as part of its service agreements. That includes:
- PCCU’s board has approved aggregate lending limits at the lessor of 1.3125 times PCCU’s net worth or 60% of total CRB deposits.
- CRB deposit limits: Under the Support Services Agreement, PCCU will continue to allow its ratio of CRB-related deposits to total assets up to 65% unless otherwise dictated by regulatory, regulator or policy requirements. Actual CRB deposits at March 31, 2023, were $214 million and $161 at Dec. 31, 2022.
- PCCU’s CEO and CFO are members of SHFS board; the credit union owns 55% of the voting stock from the restructuring, Filson said, citing documents. The credit union’s current operations certainly benefit from SHFS’s clients apart from what may be received from the sale of the CUSO.
Twists & Turns
Filson said Safe Harbor Financial Services’ SEC filings provide many details of its business history and “financial twists and turns.”
Citing the latest 10-Q, which was filed May 15, 2023, and which can be found here, as well as Schedule 14 A, filed April 23, 2023 for the firm’s annual meeting and which can be found here, Filson said two financial questions are partially answered in the documents.
The questions, said Filson, include what did the SPAC holding $100 million in cash do with the working capital that had become so depleted by yearend? In addition, how did SHFS end up with more than $39.7 million in negative retained earnings at December 2022, “requiring the complete restructuring of the transaction” with Partners Colorado CU?
‘Complex’ Story
Filson said his analysis shows the story is complex and there is not a single narrative point of view, as the filings show different elements of the financials in various footnotes.
The documents provide information around both quantitative and qualitative (business risk factors) issues, he said.
“One positive note that may bode well for the future is that Safe Harbor’s website and links are one of the most comprehensive examples of transparency I have reviewed,” wrote Filson. “The stock valuation information is complete currently and historically. All of the required SEC and financial reports can be accessed.”
Additional ‘Excerpts’
Citing “selected excerpts from SEC 10-Q filings,” Filson pointed to:
- From Note 3, the Business Combination detailed in Note 1 was accounted for as a reverse recapitalization, with no goodwill or other intangible assets recorded, in accordance with GAAP. “Under this method of accounting, NLIT (the SPAC) was treated as the acquired company for financial reporting purposes Accordingly, for accounting purposes, the Business Combination was treated as the equivalent of SHF issuing shares for the net assets of NLIT, accompanied by a recapitalization.
“For tax purposes, the transaction is treated as a taxable asset acquisition, resulting in an estimated tax basis Goodwill balance of $44,102,572, creating a deferred tax asset reported as Additional Paid-in Capital in the equity section of the balance sheet as of the date of the business combination,” Filson continued.
- In November, 2022 SHFS acquired Abaca together with its proprietary financial technology platform in exchange for $30 million, paid in a combination of cash and shares of the company, the filings cited by Filson state.
- Filson pointed to a November 2022 press release that stated, “The acquisition increases Safe Harbor’s customer base to include more than 11,000 unique depository accounts across 40 states and U.S. territories adds Abaca’s fintech platform to Safe Harbor’s existing technology; increases Safe Harbor’s financial institution client relationships and access to balance sheet capacity to five unique financial institutions strategically located across the United States; increases Safe Harbor’s projected monthly revenue by approximately 40%; increases Safe Harbor’s lending capacity; and nearly doubles Safe Harbor’s team, adding to the existing talent pool of the cannabis industry’s foremost financial services and financial technology experts.”
- Filson said page 20 in the 10-Q shows what NLIT’s fair value assets it offered to support the $185 million CPCU purchase valuation.
“The key point is that $80 million was held in shares subject to possible redemption and the remaining cash of $19 million was held in trust,” Filson said. “It is not clear how many common A shares were redeemed, or how the money in trust was used. The result is that at December 2022 SHFS had only $8 million in cash and negative working capital (current assets less current liabilities) of $39 million.”
Additional Findings
- According to Filson, The details of the restructure of the $185 million for PCCU was reported on March 23, 2023. It shows that exchange of debt for common stock resulted in $38.4 million for issuance of common shares. “These are subject to a Lockup agreement restricting their sale,” he said.
- In addition, Filson said PCCU acquired a first lien on all of the company’s assets as a result of the restructure. SHFS issued a five-year Senior Secured Promissory Note (the “Note”) in the principal amount of $14,500,000 bearing interest at the rate of 4.25% and a Security Agreement pursuant to which the Company will grant, as collateral for the Note, a first priority security interest in substantially all of the assets of the company, Filson said.
- According to Filson’s review, contributing to the loss in 2022 (from note 17 Forward Purchase Agreement page 35): “The trading value of the common stock combined with preferred shareholders electing to convert their preferred shares to common stock triggered a lower reset price embedded in the forward purchase agreement, or FPA. As of December 31, 2022, the Company had already called a special meeting to lower the make-whole price under the preferred share purchase agreement to $1.25/share.”
More From SEC Filings
Filson said the documents show those events significantly reduced the FPA receivable to approximately $4.6 million, from approximately $37.9 million reported at the end of the September 2022 quarter. The loss in value resulted not only in a compression of the balance sheet, but also $42.3 million charge to other expense on the statement of operations in the fourth quarter of 2022, Filson said.
According to Filson’s review, at March 30, 2023, SHFS’s balance sheet shows negative retained earnings of $47 million offset by $91 million of additional paid in capital from the restructure of the $180 million initial terms and other stock transactions. Eighty-one percent of SHFS’s March 2023, $89 million assets are $19 million in goodwill, $10.2 intangible and a deferred tax asset of $42.6 million.
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