By Ray Birch
ARVADA, Colo.—While the sale of a cannabis banking CUSO has not yet resulted in the anticipated big windfall for one credit union and will likely lead to losses for several years, the CU says the is still good for it and its members—but it will take time to prove that’s true.
As CUToday.info reported, Partner Colorado sold its Safe Harbor Banking CUSO for close to $200 million in 2022, but it also had to eventually settle for far less cash as part of the deal. That reduction in cash led Partner Colorado to post a $45.5 million loss in the first quarter of 2023, following a $55.4 million gain in 2022.
“It’s easy to just look at the numbers here, and if you don’t know the backstory it looks like a deal that has gone bad,” acknowledged Fagan. “This is not a simple story to tell—just by looking at the numbers.”
Acquired by SPAC
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.
But an analysis performed by Chip Filson on his blog, chipfilson.com, shows the credit union posted a multi-million-dollar loss in Q1 of 2023. 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.
Stock Price Plunges
“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.”
Fagan told CUToday.Info the going concern footnote was addressed with the completion of the debt renegotiation in March 2023
But outside those numbers, Fagan said he expects this deal, as well as the story itself, to eventually end well for the credit union and its members.
Doug Fagan
He told CUToday.info a stock market decline that occurred after the agreement was signed to sell the CUSO led to investors backing out of investing in the SPAC.
“This looked like a good opportunity to investors before the market crashed,” explained Fagan. “But when the market crashed things changed dramatically. Many investors pulled out of the SPAC, because they did not want to invest in anything when stock prices are falling. That left far less money to pay the credit union.”
‘We Were Past That’
Although the deal has not resulted to date in the payout Partner Colorado had projected, Fagan said the credit union did not want to keep running its Safe Harbor CUSO.
“We felt we were past that,” said Fagan. “That’s why we restructured this deal. Our board was at a point where it felt Safe Harbor had served its purpose. We started the business to get a lot of cash off the streets, which is a dangerous situation, and we accomplished that goal. But Safe Harbor was actually outgrowing us in terms of size. It was getting too big for our balance sheet. Therefore, it made financial sense to do this deal.”
The agreement was restructured, giving Partner Colorado significantly less cash, about $13 million, and far more stock (22.5 million shares) in Safe Harbor Financial Services, the entity that has continued after the SPAC was dissolved.
Firm Changes Name
In September 2022, Northern Lights Acquisition Corp. changed its name to SHF Holdings, Inc. The company trades on the Nasdaq Capital Market(ticker symbol SHFS).
In a statement announcing the new name, the entity said, “The Company also closed on September 28, 2022 a PIPE in the amount of $20.45 million of convertible preferred stock and warrants. To offset the reduced PIPE amount, Partner Colorado Credit Union, Safe Harbor's indirect parent (PCCU), agreed to a further amendment to the Unit Purchase Agreement (as amended, the Unit Purchase Agreement), dated February 11, 2022, among the Company, 5AK, LLC, the Company's sponsor, Safe Harbor, SHF Holding Co., LLC, the sole member of Safe Harbor (the Seller), and PCCU, the parent of the Seller, to provide for the deferral of approximately $57 million (the ‘Deferred Cash Consideration’) of the $70 million due to the Seller at the closing of the business combination. The increase in the Deferred Cash Consideration will provide the Company with additional cash to support its post-closing activities.”
PIPE Investors Pull Out
“When the PIPE (private investment in public equity) investors pulled out there wasn't $70 million in cash to give us, so, we took the $13 million and the additional stock,” Fagan said. “The deal still made sense from a balance sheet perspective and also from a risk perspective. We knew the cannabis banking business was getting more complex, the compliance piece of it was getting to be a concern, as well…”
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.”
Fagan said he expects members someday will receive a payback despite the current rock-bottom stock price.
“That is still our intention,” stressed Fagan. “We do own 22.5 million shares of Safe Harbor Financial Services, and as the stock price increases and get we'll eventually get out of that ownership position and sell the stock and get the cash. We'll figure out a way to give money back to the members who took the risk with us.”
Response to Report
Filson, in his report, asserted Partner Colorado 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,” he said in the report.
Fagan responded to that by saying, “(Safe Harbor Financial Services) owes us $14.5 million in a senior secured note, in which they're making payments in a timely manner, and has already made one payment. And we have 22-and-a-half-million shares of their stock and $13 million in cash. Ultimately, that's how the deal ended up.”
Fagan acknowledged the sale of the CUSO will lead to at least one unprofitable year for Partner Colorado, if not more.
“It is clear we will have a net loss for 2023,” Fagan said. “We anticipate having a net loss for two to three years because of the sale, which we told our examiners and they are comfortable with that.”
Partner Colorado reported a net worth ratio of 14.82% as of March 31.
‘Not Our Expertise’
Fagan acknowledged that getting involved in Wall Street deals not a core skill for credit unions.
“It's really not our expertise to get involved in that kind of risk,” he said. “But in this case, at the very outset, it made a lot of sense because that's how we were able to divest the cannabis business and allow Safe Harbor to continue to grow. Getting involved in Wall Street is definitely out of our core competency, but we had a lot of help along the way from people who are very skilled in that area.”