KEY POINTS
- Northern Lights Acquisition Corp will de-SPAC into Safe Harbor Financial (SHF) for $185M pending shareholder approval on 6/24.
- Deal valued at 9.1x ’23 EV/EBITDA vs 9.7x peer group average
- Enterprise Value /IPO 0x vs Cannabis SPAC average of 3.0x
- Redemption Backstop of up to $50M
- SHF (founded in 2014) is a first mover in providing a variety of banking services to cannabis businesses including, but not limited to, managed deposit accounts and commercial lending through its affiliation with Partner Colorado Credit Union.
- As the industry continues to evolve, the clear and present risk of transacting business in “cash only” continues to supervene as many businesses are not able to accept debit or credit cards, write checks nor make (or receive) payments electronically.
- While public safety concerns continue to escalate, and banking reform gains momentum on both sides of the aisle, SHF is well positioned to expand its compliance solutions and other service offerings with a proven track record for repeatedly enduring the tests of regulatory scrutiny.
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NORTHERN LIGHTS ACQUISITION CORP
IPO Date: 6/23/2021
Sponsor: 5AK
Size: $115M
Trust $117.5M
Warrants/Unit .50/Unit
Warrant Exercise Price $11.50
Outstanding Warrants ~3M
Additional Information can be found at:
WEBINAR REPLAY: Discussion w/ Sundie Seefried and John Darwin
Table 1: Price History
Source: Boardroom Alpha
Table 2: Transaction Overview
Source:Northern Lights Acquisition Corp
Table 3: Total SPAC Market Activity
Table 4: Cannabis SPAC Summary
Table 5: Relative Valuation
BACKGROUND
Cannabis remains classified as a Schedule 1 narcotic, and accordingly, federally chartered and insured financial institutions have generally refrained from transacting business with any known entity that derives its revenues from cannabis related activities. As the industry continues to evolve, the clear and present risk of transacting business in “cash only” continues to supervene as many businesses are not able to accept debit or credit cards, write checks nor make (or receive) payments electronically. These limitations plague not only entities that “touch the plant” but also, to some extent, ancillary businesses and service providers.
Simply, this means that, as long as the Drug Enforcement Agency (DEA) effectively defines the federal legality of marijuana, all cannabis related enterprises are compelled to transact sales and the disbursement of operating expenses by means of cash or nontraditional payments. This transaction model poses an inherent risk to investing in the cannabis industry. Additionally, these enterprises are forced to operate under adverse taxing regulations (most notably the inability to deduct most business expenses from revenues). Consequently, businesses find it difficult or impossible to obtain financing as capital needs must be either self funded or raised privately.
Federal laws such as the Bank Secrecy Act (BSA) and USA PATRIOT Act, and other anti-money-laundering and anti-terrorism statutes enforced by the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN), prohibit federally chartered banks from transacting business with entities known to be even distantly connected with activities prohibited by federal law. This prohibition is inclusive to financial institutions operating in states where the activity is legal by state statutes.
Even with an eventual passage of banking reform (SAFE Act), there will be an ongoing need for SHF’s compliance solutions as it relates to BSA and FInCen reporting requirements.
To put in perspective, we estimate 2022 cannabis retail sales of ~$30B; adding to this sales tax collections ~$34.5B. We cannot determine precisely how much of the total is transacted in cash, but we do know that as more states legalize, there is more at risk.
Table 6: Estimated U.S. Retail Sales + Sales Tax Collections
ABOUT SAFE HARBOR FINANCIAL
“Safe Harbor Financial was conceived in 2015 as a solution to a major problem that plagued the nascent legalized cannabis industry in Colorado– access to reliable and compliant financial services. Once SHF addressed the local Colorado issues surrounding lack of banking and industry participants became banked, clients started seeking out of state licenses; leading SHF to a national presence and the establishment of a national foundation that enabled SHF to solve the same issues on a national level. As a result, Safe Harbor presently processes funds from 20 different states nationally.
Safe Harbor, realizing the funds from the cannabis industry were better banked than unbanked, ventured forward to do the right thing for everyone, bank the deposits under Partner Colorado Credit Union as a DBA up until 2021. Cannabis related funds were already finding their way into the financial system one way or another via hidden, misrepresented accounts and criminal banking behaviors similar to money launderers. After great research, it was obvious that every agency wanted to have accountability and transparency from the industry, but legislation was not supportive of such.
Safe Harbor, based upon their research determined that it was the right thing to do to protect the financial system from criminal activity and provide legitimacy to the legal operators at the same time. A high-level compliance program was created at the highest level of the organization; using decades of regulatory experience to create a safe and sound program that would accomplish industry accountability and protect the financial system. The program encompassed all types of cannabis, hemp, CBD and ancillary service providing entities to include cultivators, retailer, manufacturers, payroll companies, payment processors and professionals serving and taking cash from the industry.
Since inception, Safe Harbor has processed over $12 billion in cannabis related funds into the financial system with the highest level of monitoring and validation. SHF has successfully completed 16 state and federal exams without interruption to providing reliable financial services.. The Safe Harbor portfolio is composed of nearly 600 accounts; managed by 13 private bankers. The portfolio was built in a methodical manner to ensure continuity of service while under great regulatory scrutiny. Annual deposits/cash flow in 2021 were approximately $4 billion. Safe Harbor has enjoyed a great track record of securing and retaining clients with their existing value proposition. The process of obtaining an account is difficult due to BSA regulatory requirements; making for a good long-term relationship.”
Source: Safe Harbor Financial
THE OPPORTUNITY
The company’s investment thesis (see investor deck):
- Leading Provider of Cannabis Related Financial Services in the US
- Unique low cost of capital lending
- Deep expertise in building complaint banking and Financial solutions for CRBs
- Platform to consolidate highly fragmented cannabis financial services industry
- Team with the knowledge and experience to execute on strategy
We note that In 2017, we published “Navigating the Shoals of Cannabis Banking” in which we highlighted Partner Colorado Credit Union and Safe Harbor. The following has seemingly come to fruition (longer term viability and concentration risk mitigated with expansion into additional states):
“We believe that until such time as the federal government ends prohibition or passes legislation to change existing laws that the cannabis industry will be impelled to seek out temporary solutions to facilitate banking transactions. It is hoped that some of these work-arounds will be suited for longer term viability and will (or continue to) stand the tests of regulatory scrutiny.”
While we recognize the apparent efficacy and viability of PCCU’s model and its Safe Harbor platform we also make note that such a large concentration of sector business being housed with a single institution may represent an inherent risk management hurdle for some investors. This concentration risk will likely be alleviated as PCCU (as well as other firms providing similar services) continues its success in licensing or otherwise propagating its Safe Harbor platform to additional credit unions or financial services entities.”
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