Rising High: Exclusive talk with financial services firm Safe Harbor Financial

In this edition of “Rising High,” The Fly conducted an exclusive interview with Tyler Beuerlein, chief strategic business development 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 Financial, 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. The company has facilitated over $23B in deposit transactions for businesses with operations spanning over 41 states and territories in regulated cannabis markets.

As competition continues to accelerate within the cannabis industry, Beuerlein pointed to Safe Harbor’s ability to serve all state legal markets as a key differentiator for the firm. “Instead of the traditional route where operators that operate across the country have five, ten or fifteen different banking relationships, with Safe Harbor they can bring everything under one canopy,” he said. “There is one interface and one point of contact. As a result, operators can save a significant amount of money and be in a better streamlined situation.”

The company’s lending program as well as its experience and reliability offer additional points of differentiation for Safe Harbor, the CSBDO added. “We have a pretty robust lending program, and it is very competitively priced in the market,” he said. “The other thing is we are arguably the first to bank this industry and this is all we do, this is all we know. Operators are not going to get a call from us three months after opening, saying, ‘Sorry, we went through our first regulatory exam, and we are getting out of the business.'”

CONTRACT EXTENSIONS: In September, Safe Harbor announced extensions to the contracts of three key executives and a restructuring of their compensation packages. The restructured agreements extended CEO Sundie Seefried’s contract for one year through September 2025 and Dan Roda’s contract through June 30, 2025.  Roda, formerly COO, transitioned into the newly created role of chief credit officer, focusing on the company’s lending and loan participation business lines. The agreements also included Beuerlein, whose term remains unchanged, continuing through February 2025.

As part of the restructuring, the company will realize an initial cost savings of $350,000 as the new compensation structure reduces base pay in favor of incentives aligned more closely with company revenue and growth objectives. “We have a very defined plan and we know how to win, not just for us, but for our clients,” Beuerlein said. “The extensions signal more confidence in what we are doing, where we are going and how we’re going about it. It sets us up to provide stability to the industry for the longer-term.”

He added the compensation changes arose as the firm has collectively focused on getting leaner across the board. “Not only for us, but for our shareholders,” the CSBDO said. “We have all taken the approach that we are going to invest in ourselves to really put us into a position to thrive long term.”

EARNINGS: In August, Safe Harbor reported second quarter earnings per share of 2c on revenue of $4M, which compared to a loss per share of (40c) on revenue of $4.6M for the same period last year. “We’re building and we internally have a very distinct direction that we are going to take going forward to try to maximize profitability in a beneficial way for our client base and for our shareholders,” Beuerlein said. “We’re in the position where we have the ability to realize continued growth and we are looking at the long-term, not the short-term.”

SCHEDULING: In August, the Drug Enforcement Administration announced that it would be holding a hearing on December 2 on the proposal to reclassify cannabis as lower-risk and reschedule the drug from Schedule I to Schedule III. “The biggest impact of rescheduling is 280E potentially going away,” the CSBDO said. “As we all know the burden of 280E on the cannabis industry has been insurmountable. It has a direct impact on cashflow and net revenues. From a banking and regulatory standpoint, rescheduling doesn’t change much, but from a liquidity and revenue standpoint it has a huge impact in a number of ways.”

He pointed to Safe Harbor’s offering of interest-bearing accounts for clients as one example. “It goes without saying, but if you have larger deposits and you’re earning more interest on those deposits that is a revenue stream that is not currently there for clients,” Beuerlein said. “Additionally, going back to lending with 280E potentially out the picture, that gives us not only a broader client base to lend to because they qualify based on our current debt service ratios, but it enables the industry to potentially have more sources of lending.”

However, he noted that the illegality of cannabis will still necessitate rigorous Bank Secrecy Act compliance even with rescheduling. “Under Schedule III, the product is still federally illegal so the compliance burden on any institution remains the same,” the CSBDO said. “I don’t think the industry fully grasps that there is a myriad of perfectly legal industries outside of cannabis that have the same, if not greater, banking challenges. The reason being is because any cash-intensive, highly-regulated industry puts a significant compliance burden on any bank or credit union trying to bank it. There is a chance that even upon federal legality, the need for robust compliance programs is going to stay intact. I hope the industry understands that even federal legality may not change the banking climate dramatically.”

The announced hearing by the DEA strikes down the hope of a Final Rule rescheduling cannabis coming before the 2024 Presidential Election, but Beuerlein noted that former President Donald Trump announced his support for the move in September. “I don’t think it makes any difference at this point,” he said. “This has become a bipartisan issue and one of the biggest catalysts for it is tax revenue. The industry is generating so much tax revenue at this point that the cat is out of the bag, and this is not going to go backwards. Everybody now sees the benefit of a potential reschedule and I think it is imminent regardless of who gets into the presidency.”

INDUSTRY EXITS: Following a potential rescheduling, more traditional financial institutions may enter the space from a lending standpoint, the CBSDO said, however he expects more exits than entrances in the next two years. “I firmly believe that this year and next year will be the first time in the decade-plus that I have been in this industry that we see more institutions exit their cannabis banking programs as opposed to new entrances into the market,” he said. “The reason being is because the depository side has gotten so highly competitive that unless institutions are lending or they have other offerings, they just can’t compete. What we’re seeing is institutions are getting into it, they don’t realize anywhere near the revenue or they can’t get the business that they were anticipating, and they fold up their programs in short order.”

Beuerlein does expect more investors to enter the industry upon a potential rescheduling. “With 280E being removed from the equation, it will entice investors into the space because your potential for profits and revenue increase substantially,” he said. “For that factor alone, and if Schedule III opens up access to capital markets, I think we are going to see some pretty explosive M&A activity and an influx of capital.”

SAFER BANKING: In September 2023, a U.S. Senate committee voted to advance The Secure and Fair Enforcement Regulation Banking Act bill, which seeks to ensure that all businesses, including cannabis businesses, have access to deposit accounts, insurance and other financial services. “SAFE was introduced ten years ago now and I believe we have been through seven different iterations of it,” the CSBDO said. “The interesting part of SAFE is when it was introduced it was relevant and if you go back even five years ago, cannabis banking was in some cases very difficult to come by. Now fast forward all of these years, this problem has wholly been solved by the private sector and it’s gotten so highly competitive now. The need at this point is not anywhere near what it was when the legislation was originally introduced.”

He said if SAFER can give U.S. multi-state operators access to public markets that would be a huge win. “But the other thing I would say about the legislation is most people think that SAFER would bring in the branded card networks,” Beuerlein said. “It’s highly likely that they will not enter this market until federal legalization, which means that it will no have effect on the payment side. Payments are going to remain a pain point in this industry for the foreseeable future. I support SAFER, I hope it passes, but I do not feel optimistic about it.”

CHALLENGES: When asked about the largest hurdles facing the cannabis space, the CSBDO said he believes challenges in the industry are dependent on market. “For example, I know of a social equity licensee that opened in downtown Trenton, New Jersey,” he said. “He was the only one licensed in that area and a couple of weeks after he opened, he had to let go most of his staff. The reason being is because there are 21 unlicensed shops in the Trenton area and the city has done nothing to shut them down. The unlicensed market is one major issue.”

Beuerlein also cited access to reasonably priced capital on the lending side as an obstacle in the space. “And there is still an equity issue because new licensees in new markets do not have cash flow to show to get traditional financing,” he said. “They have to raise equity to be able to, in most cases, open. That is a challenge. The other two are 280E still being intact, which is a huge obstacle to overcome, and then lastly access with payments. You can still not legally use a Visa or MasterCard branded product at a state legal dispensary.”

OPPORTUNITIES: As the cannabis space develops, the CSBDO said he sees the biggest opportunities in new markets opening up. “To cite Kentucky, I believe they have over 4,100 applicants for 48 retail licenses that will be issued in that state,” he said. “Those we’re not cheap applications to submit. If you look at the risk to reward in scenarios like that, it is pretty self-explanatory. There is a huge opportunity for operators that have cut their teeth in traditional retail that are very well run to take market share, and we are seeing that in many markets. They have built quite a footprint, and I think from an M&A standpoint, you are going to see those really well run operators thrive over the next few years to expand and compete with the MSOs.”

Looking at Safe Harbor, Beuerlein said the firm is excited to be the infrastructure for the industry’s growth. “We are excited to see how all these things play out and we’re excited to help,” he said. “I have been in this industry for over a decade and I have always enjoyed helping people and seeing them thrive. As an organization we take that same approach. To anybody out there in the banking world, if you need help or if an operator is at an institution that has made the decision to get out, this is something we’re very experienced in and we are here to help anyone at any time.”

CANNABIS/PSYCHEDELIC STOCKS: Publicly-traded companies in the space include Acreage (ACRHF), Ascend Wellness (AAWH), Atai Life Sciences (ATAI), Aurora Cannabis (ACB), Ayr Wellness (AYRWF), Avant Brands (AVTBF), BZAM (BZAMF), The Cannabist Company (CBSTF), Cannara Biotech (LOVFF), Canopy Growth (CGC), Cansortium (CNTMF), Chicago Atlantic (REFI), Clearmind (CMND), Clever Leaves (CLVR), Compass Pathways (CMPS), CordovaCann (LVRLF), Cresco Labs (CRLBF), Cronos Group (CRON), Curaleaf (CURLF), CV Sciences (CVSI), Cybin (CYBN), Entourage Health (ETRGF), Enveric (ENVB), Flora Growth (FLGC), Trees Corporation (CANN), Greenlane (GNLN), Green Thumb (GTBIF), GrowGeneration (GRWG), Hemp (HEMP), Heritage Cannabis (HERTF), High Tide (HITI), IGC Pharma (IGC), IM Cannabis (IMCC), Innovative Industrial Properties (IIPR), InterCure (INCR), Lowell Farms (LOWLF), Lucy Scientific Discovery (LSDI), MediPharm (MEDIF), MindMed (MNMD), NewLake Capital (NLCP), Numinus (NUMIF), Optimi Health (OPTHF), Organigram (OGI), PharmAla (MDXXF), Planet 13 (PLNHF), Psyence Biomedical (PBM), Red White & Bloom (RWBYF), Relmada Therapeutics (RLMD), Reunion Neuroscience (REUN), RIV Capital (CNPOF), Safe Harbor Financial (SHFS), Skye Biosciences (SKYE), SNDL (SNDL), Stem Holdings (STMH), TerrAscend (TRSSF), Tilray (TLRY), Trulieve (TCNNF), Tryp Therapeutics (TRYPF), Verano (VRNOF), Village Farms (VFF), Vireo Health (VREOF), Zynerba (ZYNE) and 4Front Ventures (FFNTF).