We
are subject to those financial risks generally associated with development
stage enterprises. Since we have sustained losses since inception, we will
require financing to fund our development activities and to support our
operations and will independently seek additional financing. However, we may be
unable to obtain such financing. We are also subject to risk factors specific
to our business strategy and the private equity industry. An investment in our
securities involves a high degree of risk. You should carefully consider the
risks and uncertainties described in this prospectus and the documents
incorporated by reference into this prospectus. The risks and uncertainties
described in this prospectus are not the only ones we face. Additional risks
and uncertainties that we do not presently know about or that we currently
believe are not material may also adversely affect our business, business
prospects, results of operations or financial condition. If any of the risks
and uncertainties described in this prospectus or the documents incorporated by
reference into this prospectus actually occurs, then our business, results of
operations and financial condition could be adversely affected in a material
way. In addition to the other information provided in this annual report, you
should carefully consider the following risk factors in evaluating our business
before purchasing any of our common stock. All material risks are discussed in
this section.
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
Investing in our common stock involves a
high degree of risk because our business is subject to numerous risks and
uncertainties, as fully described below. The principal factors and
uncertainties that make investing in our common stock risky include, among
others:
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We are a small company with a relatively limited
operating history, which may result in increased risks, uncertainties,
expenses and difficulties, and makes it difficult to evaluate our future
prospects.
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Our revenue growth rate and financial performance in
recent periods may not be indicative of future performance and such growth
may slow over time.
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The COVID-19 pandemic has harmed and could continue
to harm our business, financial condition and results of operations.
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If we fail to effectively manage our growth, our
business, financial condition and results of operations could be adversely
affected.
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We have incurred net losses in the past, and we may
not be able to maintain or increase our profitability in the future.
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Our quarterly results are likely to fluctuate and as
a result may adversely affect the trading price of our common stock.
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If we are unable to build and maintain a diverse and
robust loan funding program, our growth prospects, business, financial condition
and results of operations could be adversely affected.
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Our business is subject to a wide range of laws and
regulations, many of which are evolving, and failure or perceived failure to
comply with such laws and regulations could harm our business, financial
condition and results of operations.
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We rely on strategic relationships with loan
aggregators to attract applicants to our platform, and if we cannot maintain
effective relationships with loan aggregators or successfully replace their
services, or if loan aggregators begin offering competing products, our
business could be adversely affected.
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Substantially all of our revenue is derived from a
single loan product, and we are thus particularly susceptible to fluctuations
in the unsecured personal loan market. We also do not currently offer a broad
suite of products that bank partners may find desirable.
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We are a
rapidly growing company with a relatively limited operating history, which may
result in increased risks, uncertainties, expenses and difficulties, and makes
it difficult to evaluate our future prospects.
We were a small company with limited
operating experience. Our limited operating history may make it difficult to
make accurate predictions about our future performance. Assessing our business
and future prospects may also be difficult because of the risks and
difficulties we face. These risks and difficulties include our ability to:
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Develop and improve the effectiveness and
predictiveness of our ML- AI models;
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Build and maintain and increase the volume of loans
facilitated by our AI lending platform;
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enter into new and maintain existing bank
partnerships;
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successfully build and maintain a diversified loan
funding strategy, including bank partnerships and whole loan sales and
securitization transactions that enhance loan liquidity for the Bank partners
that use our loan funding capabilities;
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successfully fund a sufficient quantity of our
borrower loan demand with low cost bank funding to help keep interest rates
offered to borrowers competitive;
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maintain competitive interest rates offered to
borrowers on our ML-AI platform, while enabling the Bank partners to achieve
an adequate return over their cost of funds, whether through their own
balance sheets or through our loan funding programs;
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successfully build our brand and protect our
reputation from negative publicity;
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Develop and increase the effectiveness of our
marketing strategies, including our direct consumer marketing initiatives;
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continue to expand the number of potential
borrowers;
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successfully adjust our proprietary ML- AI models,
products and services in a timely manner in response to changing
macroeconomic conditions and fluctuations in the credit market;
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comply with and successfully adapt to complex and
evolving regulatory environments.
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protect against increasingly sophisticated
fraudulent borrowing and online theft;
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successfully compete with companies that are
currently in, or may in the future enter, the business of providing online
lending services to financial institutions or consumer financial services to
borrowers;
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enter into new markets and introduce new products
and services;
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effectively secure and maintain the confidentiality
of the information received, accessed, stored, provided and used across our
systems;
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successfully obtain and maintain funding and
liquidity to support continued growth and general corporate purposes;
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attract, integrate and retain qualified employees;
and
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effectively manage and expand the capabilities of
our operations teams, outsourcing relationships and other business
operations.
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If we are not able to timely and effectively
address these risks and difficulties as well as those described elsewhere in
this “Risk Factors” section, our business and results of operations may be
harmed.
The COVID-19 pandemic has harmed and could
continue to harm our business, financial condition and results of operations.
The COVID-19 pandemic has caused extreme
societal, economic, and financial market volatility, resulting in business
shutdowns, an unprecedented reduction in economic activity and significant
dislocation to businesses, the capital markets, and the broader economy. In
particular, the impact of the COVID-19 pandemic on the finances of borrowers on
our platform has been profound, as many have been, and
will likely continue to be, impacted by unemployment, reduced earnings and/or
elevated economic disruption and insecurity.
The COVID-19 pandemic may lead to a
continued economic downturn, which is expected to decrease technology spending
generally and could adversely affect demand for our platforms and services, in
addition to prolonging the foregoing challenges in our business.
We have taken precautionary measures
intended to reduce the risk of the virus spreading to our employees, partner
banks, vendors, and the communities in which we operate, including temporarily
closing our offices and virtualizing, postponing, or canceling partner bank,
employee, or industry events, which may negatively impact our business.
Furthermore, as a result of the COVID-19 pandemic, we have required all
employees who are able to do so to work remotely through the end of the first
quarter of 2021. It is possible that widespread remote work arrangements may
have a negative impact on our operations, the execution of our business plans,
the productivity and availability of key personnel and other employees
necessary to conduct our business, and on third-party service providers who
perform critical services for us, or otherwise cause operational failures due
to changes in our normal business practices necessitated by the outbreak and
related governmental actions. If a natural disaster, power outage, connectivity
issue, or other event occurred that impacted our employees’ ability to work
remotely, it may be difficult or, in certain cases, impossible, for us to
continue our business for a substantial period of time.
The increase in remote working may also
result in increased consumer privacy, data security, and fraud risks, and our
understanding of applicable legal and regulatory requirements, as well as the
latest guidance from regulatory authorities in connection with the COVID-19
pandemic, may be subject to legal or regulatory challenge, particularly as
regulatory guidance evolves in response to future developments.
The extent to which the COVID-19 pandemic
continues to impact our business and results of operations will also depend on
future developments that are highly uncertain and cannot be predicted,
including new information which may emerge concerning the severity of the
disease, the duration and spread of the outbreak, the scope of travel restrictions
imposed in geographic areas in which we operate, mandatory or voluntary
business closures, the impact on businesses and financial and capital markets,
and the extent and effectiveness of actions taken throughout the world to
contain the virus or treat its impact. An extended period of economic
disruption as a result of the COVID-19 pandemic could have a material negative
impact on our business, results of operations, and financial condition, though
the full extent and duration is uncertain. To the extent the COVID-19 pandemic
continues to adversely affect our business and financial results, it is likely
to also have the effect of heightening many of the other risks described in
this “Risk Factors” section.
If we are unable to develop and
continuously improve our ML- AI models or if our ML- AI models contain errors
or are otherwise ineffective, our growth prospects, business, financial
condition and results of operations would be adversely affected.
Our ability to attract potential borrowers
to our proposed ML-AI lending platform and build/increase the number of
ML-AI-powered loans will depend in large part on our ability to effectively
evaluate a borrower’s creditworthiness and likelihood of default and, based on
that evaluation, offer competitively priced loans and higher approval rates.
Further, our overall operating efficiency and margins will depend in large part
on our ability to develop and maintain a high degree of automation in our loan
application process and achieve incremental improvements in the degree of
automation. If our ML- AI models fail to adequately predict the
creditworthiness of borrowers due to the design of our models or programming or
other errors, and our ML- AI models do not detect and account for such errors,
or any of the other components of our credit decision process fails, we may
experience higher than forecasted loan losses. Any of
the foregoing could result in sub-optimally priced loans, incorrect
approvals or denials of loans, or higher than expected loan losses, which in
turn could adversely affect our ability to attract new borrowers and bank
partners to our platform, increase the number of ML-AI-powered loans or
maintain or increase the average size of loans facilitated on our platform.
Our ML- AI models would also target and
optimize other aspects of the lending process, such as borrower acquisition,
fraud detection, default timing, loan stacking, prepayment timing and fee
optimization, and our continued improvements to such models have allowed us to
facilitate loans inexpensively and virtually instantly, with a high degree of
consumer satisfaction and with an insignificant impact on loan performance.
However, such applications of our ML- AI models may prove to be less predictive
than we expect, or than they have been in the past, for a variety of reasons,
including inaccurate assumptions or other errors made in constructing such
models, incorrect interpretations of the results of such models and failure to
timely update model assumptions and parameters. Additionally, such models may
not be able to effectively account for matters that are inherently difficult to
predict and beyond our control, such as macroeconomic conditions, credit market
volatility and interest rate fluctuations, which often involve complex interactions
between a number of dependent and independent variables and factors. Material
errors or inaccuracies in such ML- AI models could lead us to make inaccurate
or sub-optimal operational or strategic decisions, which could
adversely affect our business, financial condition and results of operations.
Additionally, errors or inaccuracies in
our ML- AI models could result in any person exposed to the credit risk of
ML-AI-powered loans, whether it be us, our bank partners or investors in our
loan funding programs, experiencing higher than expected losses or lower than
desired returns, which could impair our ability to retain existing or attract
new bank partners and investors to participate in our loan funding programs,
reduce the number, or limit the types, of loans bank partners and investors are
willing to fund, and limit our ability to increase commitments under our
warehouse and other debt facilities. Any of these circumstances could reduce
the number of ML-AI-powered loans and harm our ability to maintain a diverse
and robust loan funding program and could adversely affect our business,
financial condition and results of operations.
Continuing to improve the accuracy of our
ML- AI models would be central to our business strategy. However, such
improvements could negatively impact transaction volume, such as by lowering
approval rates. While we believe that continuing to improve the accuracy of
our ML- AI models is key to our long-term success, those improvements could,
from time to time, lead us to reevaluate the risks associated with certain
borrowers, which could in turn cause us to lower approval rates or increase
interest rates for any borrowers identified as a higher risk, either of which
could negatively impact our growth and results of operations in the short term.
Risks Related to the Digital Currency
Industry
The characteristics of digital currency
have been, and may in the future continue to be, exploited to facilitate
illegal activity such as fraud, money laundering, tax evasion and ransomware
scams; if any of our customers do so or are alleged to have done so, it could
adversely affect us.
Digital currencies and the digital
currency industry are relatively new and, in many cases, lightly regulated or
largely unregulated. Some types of digital currency have characteristics, such
as the speed with which digital currency transactions can be conducted, the
ability to conduct transactions without the involvement of regulated
intermediaries, the ability to engage in transactions across multiple
jurisdictions, the irreversible nature of certain digital currency transactions
and encryption technology that anonymizes these transactions, that make digital
currency particularly susceptible to use in illegal activity such as fraud, money
laundering, tax evasion and ransomware scams. Two prominent examples of
marketplaces that accepted digital currency payments
for illegal activities include Silk Road, an online marketplace on the dark web
that, among other things, facilitated the sale of illegal drugs and forged
legal documents using digital currencies and AlphaBay, another darknet market
that utilized digital currencies to hide the locations of its servers and
identities of its users. Both of these marketplaces were investigated and closed
by U.S. law enforcement authorities. U.S. regulators, including the Securities
and Exchange Commission, or the SEC, Commodity Futures Trading Commission, or
the CFTC, and Federal Trade Commission, or the FTC, as well
as non-U.S. regulators, have taken legal action against persons
alleged to be engaged in Ponzi schemes and other fraudulent schemes involving
digital currencies. In addition, the Federal Bureau of Investigation has noted
the increasing use of digital currency in various ransomware scams.
While we believe that our risk management
and compliance framework, which includes thorough reviews we conduct as part of
our due diligence process (either in connection with onboarding new customers
or monitoring existing customers), is reasonably designed to detect any such
illicit activities conducted by our potential or existing customers (or, in the
case of digital currency exchanges, their customers), we cannot ensure that we
will be able to detect any such illegal activity in all instances. Because the
speed, irreversibility and anonymity of certain digital currency transactions
make them more difficult to track, fraudulent transactions may be more likely
to occur. We or our potential banking counterparties may be specifically
targeted by individuals seeking to conduct fraudulent transfers, and it may be
difficult or impossible for us to detect and avoid such transactions in certain
circumstances. If one of our customers (or in the case of digital currency
exchanges, their customers) were to engage in or be accused of engaging in
illegal activities using digital currency, we could be subject to various fines
and sanctions, including limitations on our activities, which could also cause
reputational damage and adversely affect our business, financial condition and
results of operations. For more information regarding the regulatory agencies
and regulations to which we are subject, see “—Risks Related to Regulation”.
Lastly, we may experience a reduction in our deposits if such an incident were
to impact one of our customers, even if there was no wrongdoing on our part.
Risks Related to Our Digital Currency
Initiative
The majority of the Bank’s deposits are
from businesses involved in the digital currency industry. As a result, we rely
heavily on the success of the digital currency industry, the development and
acceptance of which is subject to a variety of factors that are difficult to
evaluate.
We intend to create a technology-led
digital currency infrastructure platform, including the BEN and cash management
solutions, to facilitate cash transactions for the Bank’s digital currency
deposit customers. This platform would drive growth of a customer base that would
include some of the fastest growing companies within the digital currency
industry, consisting primarily of digital currency exchanges, institutional
investors and other industry participants. See “Prospectus Summary—Digital
Currency Customers.”
The businesses in which these customers
engage involve digital currencies such as bitcoin, other technologies
underlying digital currencies such as blockchain, and services associated with
digital currencies and blockchain. The digital currency industry includes a
diverse set of businesses that use digital currencies for different purposes
and provide services to others who use digital currencies. This is a new and
rapidly evolving industry, and the viability and future growth of the industry
and adoption of digital currencies and the underlying technology is subject to
a high degree of uncertainty, including based upon the adoption of the
technology, regulation of the industry, and price volatility, among other
factors. Because the sector is relatively new, your investment may be exposed
to additional risks which are not yet known or quantifiable.
Bitcoin, the
first widely used digital currency, and many other digital currencies were
designed to function as a form of money. However, digital currencies have only
recently become selectively accepted as a means of payment for goods and
services and then only by some retail and commercial businesses. Use of digital
currency by consumers as a form of payment is limited. Some digital currencies
were built for uses other than as a substitute for fiat money. For example, the
Ethereum network is intended to permit the development and use of smart
contracts, which are programs that execute on a blockchain. The digital asset
known as Ether was designed to facilitate transactions involving smart
contracts on the Ethereum network. Many of these digital currencies are listed
on digital currency exchanges and are traded and purchased as investments by a
variety of market participants.
Other factors affecting the further
development of the digital currency industry and our business include, but are
not limited to:
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the
adoption and use of digital currencies, including adoption and use as a
substitute for fiat currency or for other uses, which may be adversely
impacted by continued price volatility;
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government
and quasi-government regulation of digital currencies, their use, and
intermediaries and other businesses involved in digital currencies, noting in
particular that the SEC has taken action against several cryptocurrency
operators and has raised questions whether certain digital currency exchanges
must be registered with the SEC to continue operating;
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the
use of digital currencies, or the perception of such use, to facilitate
illegal activity such as fraud, money laundering, tax evasion and ransomware
scams by our customers;
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restrictions
on or regulation of access to and operation of the digital currency exchanges
or other platforms that facilitate trading in digital currencies;
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heightened
risks to digital currency businesses, such as digital currency exchanges, of
hacking, malware attacks, and other cyber-security risks, which can lead to
significant losses;
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developments
in digital currency trading markets, including decreasing price volatility of
digital currencies, resulting in narrowing spreads for digital currency
trading and diminishing arbitrage opportunities across digital currency
exchanges, or increased price volatility, which could negatively impact our
customers and therefore our deposits, either of which in turn may reduce the
benefits of the BEN and negatively impact our business;
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changes
in consumer demographics and public taste and preferences;
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the
maintenance and development of the software protocol of the digital currency
networks;
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the
availability and popularity of other forms or methods of buying and selling
goods and services, including new means of using fiat currencies;
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the
use of the networks supporting digital currencies for developing smart
contracts and distributed applications;
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general
economic conditions and the regulatory environment relating to digital
currencies; and
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increased
regulatory oversight of digital currencies and the costs associated with such
regulatory oversight.
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If any of these factors, or other factors,
slows development of the digital currency industry, it could adversely affect
our digital currency initiative and therefore have a material adverse effect on
our business, financial condition and results of operation. For example, a
decline in the digital currency industry that leads to a decline in deposit
balances by digital currency customers would negatively affect our anticipated
sources of funding. In such circumstances, we may be forced to rely more
heavily on other, potentially more expensive and less stable funding sources.
Consequently, a decline in the growth of the digital currency industry could
have a material adverse effect on our business, financial condition and results
of operations.
We may not be able to implement aspects of
our growth strategy, which may impact our position as the leading provider of
innovative financial infrastructure solutions and services to participants in
the digital currency industry and adversely affect our
ability to maintain our recent growth and earnings trends.
We intend to grow, primarily through ML-AI
enabled lending platform and a Blockchain-powered technology platform related
to our digital currency initiative. We may not be able to execute on aspects of
our growth strategy, which may impair our ability to sustain this rate of
growth or prevent us from growing at all. More specifically, we may not be able
to generate sufficient amounts of new loans and deposits within acceptable risk
and expense tolerances or obtain the personnel or funding necessary for
additional growth, which may therefore preclude the proposed Bank from
developing products and services relating to digital currency transaction flows
and collateral, custodian services, international expansion of our customer
base and other potential fintech opportunities.
The success of new or improved solutions
and services depends on several factors, including costs, timely completion,
regulatory approvals, the introduction, reliability and stability of our
solutions and services, differentiation of new or improved solutions and market
acceptance. There can be no assurance that we will be successful in developing
and marketing our digital currency initiative in a timely manner or at all, or
that our new or improved solutions and services will adequately address market
demands. Market acceptance and adoption of solutions and services within our
digital currency initiative will depend on, among other things, the solutions
and services demonstrating a real advantage over existing products and
services, the success of our sales and marketing teams in creating awareness of
our solutions and services, competitive pricing of such solutions and services,
customer recognition of the value of our technology and the general willingness
of potential customers to try new technologies. In particular, if we are unable
to achieve sufficient market adoption of the BEN, our growth strategy may be
adversely affected.
Various factors, such as general economic
conditions, conditions in the digital currency industry and competition with
other financial institutions and infrastructure service providers, may impede
or preclude the growth of our operations. Our business and the growth of our
operations would be dependent on, among other things, the continued success and
growth of the BEN. If conditions in digital currency markets change such that
certain trading strategies currently employed by our institutional investor
customers become less profitable, the benefits of the BEN and the API may be
diminished, resulting in a decrease in our deposit balance and adversely
impacting our growth strategy. In addition, if a competitor or another third
party were to launch an alternative to the BEN (such as the Federal Reserve’s
recently announced plan to develop a virtually real-time payment system for
banks, which is expected to be available as early as 2023), we could lose
noninterest bearing deposits and our business, financial condition, results of
operations and growth strategy could be adversely impacted. Further, we may be
unable to attract and retain experienced employees, which could adversely
affect our growth.
The success of our proposed strategy would
also depend on our ability to manage our growth effectively, which would depend
on many factors, including our ability to adapt the regulatory, compliance,
credit, operational, technology and governance infrastructure to accommodate
expanded operations, particularly as these relate to the digital currency
industry. If we are successful in continuing our growth, we cannot assure you
that further growth would offer the same levels of potential profitability, or
that we would be successful in controlling costs and maintaining asset quality
in the face of that growth. Accordingly, an inability to build and maintain
growth, or an inability to effectively manage growth, could have a material
adverse effect on our business, financial condition and results of operations.
The further development and acceptance of digital currencies and blockchain
technology are subject to a variety of factors that are difficult to evaluate,
as discussed above. The slowing or stopping of the development or acceptance of
digital currency networks and blockchain technology may adversely affect our
ability to continue to grow and capitalize on our digital currency strategy.
The Bank
would have large depositor relationships that would be concentrated in the
digital currency industry generally and among digital currency exchanges in
particular, the loss of any of which could force us to fund our business
through more expensive and less stable sources.
The proposed Bank, once acquired, would be
exposed to high customer concentration with our BEN exchange customers. A
decision by the customers of an exchange to exit the exchange or a decision by
an exchange to withdraw deposits or move deposits to our competitors could
result in substantial changes in the Bank’s deposit base. Exchanges present
additional risks because they have been frequent targets and victims of fraud
and cyber attacks and the failure or exit of one or more exchanges as customers
could have a material adverse effect on our business, financial condition and
results of operations.
In addition, withdrawals of deposits by
any one of the Bank’s largest depositors could force us to rely more heavily on
borrowings and other sources of funding for our business and withdrawal
demands, adversely affecting our net interest margin and results of operations.
The Bank may also be forced, because of deposit withdrawals, to rely more
heavily on other, potentially more expensive and less stable funding sources.
Consequently, the occurrence of any of these events could have a material
adverse effect on our business, financial condition and results of operations.
The prices of digital currencies are
extremely volatile. Fluctuations in the price of various digital currencies may
cause uncertainty in the market and could negatively impact trading volumes of
digital currencies and therefore the extent to which participants in the
digital currency industry demand our services and solutions, which would
adversely affect our business, financial condition and results of operations.
The value of digital currencies is based
in part on market adoption and future expectations, which may or may not be
realized. As a result, the prices of digital currencies are highly speculative.
The prices of digital currencies have been subject to dramatic fluctuations to
date. Several factors may affect price, including, but not limited to:
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Global
digital currency supply, including various alternative currencies which
exist, and global digital currency demand, which can be influenced by the
growth or decline of retail merchants’ and commercial businesses’ acceptance
of digital currencies as payment for goods and services, the security of
online digital currency exchanges and digital wallets that hold digital
currencies, the perception that the use and holding of digital currencies is
safe and secure and regulatory restrictions on their use;
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Changes
in the software, software requirements or hardware requirements underlying a
blockchain network. For example, a fork occurs when there is a change to a
digital currency’s underlying protocol, which creates new rules for the
system. Forks in the future are likely to occur and there is no assurance
that such a fork would not result in a sustained decline in the market price
of digital currencies;
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Changes
in the rights, obligations, incentives, or rewards for the various
participants in a blockchain network;
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The
maintenance and development of the software protocol of digital currencies;
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Digital
currency exchanges deposit and withdrawal policies and practices, liquidity
on such exchanges and interruptions in service from or failures of such
exchanges;
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Regulatory
measures, if any, that affect the use and value of crypto-assets;
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Competition
for and among various digital currencies that exist and market preferences
and expectations with respect to adoption of individual currencies;
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Actual
or perceived manipulation of the markets for digital currencies;
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Actual
or perceived threats that digital currencies and related activities such as
mining have adverse effects on the environment or are tied to illegal
activities; and
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Expectations
with respect to the rate of inflation in the economy, monetary policies of
governments, trade restrictions and currency devaluations and revaluations.
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The digital currency market is volatile,
and changes in the prices and/or trading volume of digital currencies may
adversely impact our growth strategy and our business. In particular, the
impact that changes in prices and/or trading volume of digital currencies have
on our deposit balance from customers in the digital currency industry is
unpredictable, as any reduction in deposits attributable to such changes may be
amplified or mitigated by other developments, such as the onboarding of new
customers, loss of existing customers and changes in our customers’ operational
and trading strategies. We have experienced deposit fluctuations over the last
18 months, which have been correlated with or contrary to the price and/or
trading volume of digital currencies at various times. There can be no
assurance that a decrease in the value of digital currencies would not
adversely impact the amount of such deposits in the future. In addition,
volatility in the values of digital currencies caused by the factors described
above or other factors may impact the demand for our services and therefore
have a material adverse effect on our business, financial condition and results
of operations.
Risks Related to Cybersecurity and
Technology
System failure or cybersecurity breaches
of our network security could subject us to increased operating costs as well
as litigation and other potential losses.
Our computer systems and network
infrastructure, including the BEN and API, could be vulnerable to hardware and
cybersecurity issues. Our operations are dependent upon our ability to protect
our computer equipment against damage from fire, power loss, telecommunications
failure or a similar catastrophic event. We could also experience a breach by
intentional or negligent conduct on the part of employees or other internal
sources. Any damage or failure that causes an interruption in our operations
could have a material adverse effect on our financial condition and results of
operations.
Our operations would be dependent upon our
ability to protect our computer systems and network infrastructure, including
the BEN, the API, and our other online banking systems, against damage from
physical break-ins, cybersecurity breaches and other disruptive
problems caused by the internet or other users. Such
computer break-ins and other disruptions would jeopardize the
security of information stored in and transmitted through our computer systems
and network infrastructure, which may result in significant liability, damage
our reputation and inhibit the use of our internet banking services by current
and potential customers. We could also become the target of various
cyberattacks as a result of our focus on the digital currency industry. We
regularly add additional security measures to our computer systems and network
infrastructure to mitigate the possibility of cybersecurity breaches, including
firewalls and penetration testing. However, it is difficult or impossible to
defend against every risk being posed by changing technologies as well as acts
of cyber-crime. Increasing sophistication of cyber criminals and terrorists
make keeping up with new threats difficult and could result in a system breach.
Controls employed by our information
technology department and cloud vendors could prove inadequate. A breach of our
security that results in unauthorized access to our data could expose us to a
disruption or challenges relating to our daily operations, as well as to data
loss, litigation, damages, fines and penalties, significant increases in
compliance costs and reputational damage, any of which could have a material
adverse effect on our business, financial condition and results of operations.
We may not have the resources to keep pace
with rapid technological changes in the industry or implement new technology
effectively.
The financial
services industry is undergoing rapid technological changes with frequent
introductions of new technology-driven products and services. In addition to
serving customers better, the effective use of technology increases efficiency
and enables financial institutions to reduce costs. As a result, to stay
current with the industry, our business model may need to evolve as well. Our
future success will depend, at least in part, upon our ability to address the
needs of our customers by using technology to provide products and services
that will satisfy customer demands for convenience as well as to create
additional efficiencies in our operations as we continue to grow and expand our
products and service offerings. We may experience operational challenges as we
implement these new technology enhancements or products, which could impair our
ability to realize the anticipated benefits from such new technology or require
us to incur significant costs to remedy any such challenges in a timely manner.
From time to time, we may modify aspects of our business model relating to our
product mix and service offerings. We cannot offer any assurance that these or
any other modifications will be successful.
The technology relied upon by the Company,
including the BEN, the API and our other on-line banking systems, may
not function properly, which may have a material impact on the Company’s
operations and
financial conditions. There may be no
alternatives available if such technology does not work as anticipated. The
importance of the BEN, the API and our other on-line banking systems
to the Company’s operations means that any problems in its functionality would
have a material adverse effect on the Company’s operations. This technology may
malfunction because of internal problems or because of cyberattacks or external
security breaches. Any such technological problems would have a material
adverse impact on the Company’s business model and growth strategy.
Many of our prospective larger competitors
have substantially greater resources to invest in technological improvements.
Third parties upon which we rely for our technology needs may not be able to
develop, on a cost-effective basis, systems that will enable us to keep pace
with such developments. As a result, our larger competitors may be able to
offer additional or superior products compared to those that we will be able to
provide, which would put us at a competitive disadvantage. We may lose
customers seeking new technology-driven products and services to the extent we
are unable to provide such products and services. The ability to keep pace with
technological change is important and the failure to do so could adversely
affect our business, financial condition and results of operations.
Our operations could be interrupted if our
third-party service providers experience operational or other systems
difficulties, terminate their services or fail to comply with banking
regulations.
We intend to outsource some of our
operational activities and accordingly depend on relationships with many
third-party service providers. Specifically, we would rely on third parties for
certain services, including, but not limited to, core systems support,
informational website hosting, internet services, online account opening and
other processing services. Our business depends on the successful and
uninterrupted functioning of our information technology and telecommunications
systems and third-party service providers. The failure of these systems, a
cybersecurity breach involving any of our third-party service providers or the
termination or change in terms of a third-party software license or service
agreement on which any of these systems is based could interrupt our
operations. Because our information technology and telecommunications systems
interface with and depend on third-party systems, we could experience service
denials if demand for such services exceeds capacity or such third-party
systems fail or experience interruptions. Replacing vendors or addressing other
issues with our third-party service providers could entail significant delay,
expense and disruption of service.
As a result, if these third-party service
providers experience difficulties, are subject to cybersecurity breaches, or
terminate their services, and we are unable to replace them with other service
providers, particularly on a timely basis, our operations could be interrupted.
If an interruption were to continue for a significant period, our business,
financial condition and results of operations could be adversely affected. Even if we can replace third-party service providers, it
may be at a higher cost to us, which could adversely affect our business,
financial condition and results of operations.
In addition, the Bank’s primary federal
regulator, the Federal Reserve, has issued guidance outlining the expectations
for third-party service provider oversight and monitoring by financial
institutions. The federal banking agencies, including the Federal Reserve, have
also issued enforcement actions against financial institutions for failure in oversight
of third-party providers and violations of federal banking law by such
providers when performing services for financial institutions. Accordingly, our
operations could be interrupted if any of our third-party service providers
experience difficulties, are subject to cybersecurity breaches, terminate their
services or fail to comply with banking regulations, which could adversely
affect our business, financial condition and results of operations. In
addition, our failure to adequately oversee the actions of our third-party
service providers could result in regulatory actions against the Bank, which
could adversely affect our business, financial condition and results of
operations.
Risks Related to Our Traditional Banking
Business
As a business operating in the financial
services industry, our business and operations may be adversely affected in
numerous and complex ways by weak economic conditions.
After the acquisition of the Bank, our
business and operations, which primarily consist of lending money to clients in
the form of loans, borrowing money from clients in the form of deposits and
investing in interest earning deposits in other banks and securities, are
sensitive to general business and economic conditions in the United States. We
would solicit deposits throughout the United States and, while our primary
lending market would be either the state of California or Georgia, we would
purchase and originate loans throughout the United States. If the U.S.
economy weakens, our growth and profitability from our lending, deposit and
investment operations could be constrained. Uncertainty about the federal
fiscal policymaking process, the medium- and long-term fiscal outlook of the
federal government and future tax rates is a concern for businesses, consumers
and investors in the United States. While there has been an improvement in the
U.S. economy since the 2008 financial crisis as evidenced by a rebound in the
housing market, lower unemployment and higher equity capital markets, economic
growth has been uneven and opinions vary on the strength and direction of the
economy. Uncertainties also have arisen regarding the potential for a reversal
or renegotiation of international trade agreements, the effects of the
legislation commonly known as Tax Cuts and Jobs Act of 2017, or the Tax Act,
and the impact such actions and other policies the current administration may
have on economic and market conditions.
Weak economic conditions are characterized
by numerous factors, including deflation, fluctuations in debt and equity
capital markets, a lack of liquidity and depressed prices in the secondary
market for mortgage loans, increased delinquencies on mortgage, consumer and
commercial loans, residential and commercial real estate price declines and
lower levels of home sales and commercial activity. The current economic
environment is characterized by lower interest rates than historically have
been the case, which impacts our ability to generate attractive earnings
through our loan and investment portfolios. These factors can individually or
in the aggregate be detrimental to our business, and the interplay between
these factors can be complex and unpredictable. Adverse economic conditions
could have a material adverse effect on our business, financial condition and
results of operations.
We would face strong competition from
financial services companies and other companies that offer banking services.
We would operate in the highly competitive
financial services industry and face significant competition for customers from
financial institutions located both within and beyond our principal markets. We
compete with commercial banks, savings banks, credit unions, nonbank financial
services companies and other financial institutions
operating both within our market areas and nationally, and in respect of our
digital currency initiative,
we also compete with other entities in the
digital currency industry, including a limited number of other banks providing
services to the digital currency industry and digital currency exchanges. In
addition, as customer preferences and expectations continue to evolve,
technology has lowered barriers to entry and made it possible for banks to
expand their geographic reach by providing services over the internet and for
nonbanks to offer products and services traditionally provided by banks, such
as automatic payment systems. The Banking industry is experiencing rapid
changes in technology and, as a result, our future success will depend in part
on our ability to address our customers’ needs by using technology. Customer
loyalty can be influenced by a competitor’s new products, especially offerings
that could provide cost savings or a higher return to the customer. Increased
lending activity of competing banks following the 2008–2009 economic downturn
has also led to increased competitive pressures on loan rates and terms for
high quality credits. We may not be able to compete successfully with other
financial institutions in our markets, and we may have to pay higher interest
rates to attract deposits, accept lower yields to attract loans and pay higher
wages for new employees, resulting in lower net interest margins and reduced
profitability.
Many of our non-bank competitors
are not subject to the same extensive regulations that govern our activities
and may have greater flexibility in competing for business. The financial
services industry could become even more competitive because of legislative,
regulatory and technological changes and continued consolidation. In addition,
some of our current commercial banking customers may seek alternative banking
sources as they develop needs for credit facilities larger than we may be able
to accommodate.
Our inability to compete successfully in
the markets in which we operate could have a material adverse effect on our
business, financial condition or results of operations.
We may not be able to measure and limit
our credit risk adequately, which could lead to unexpected losses.
The business of lending is inherently
risky, including risks that the principal of or interest on any loan will not
be repaid in a timely manner or at all or that the value of any collateral
supporting the loan will be insufficient to cover our outstanding exposure.
These risks may be affected by the financial condition of the borrower, the
strength of the borrower’s business sector and local, regional and national
market and economic conditions. Many of our loans are made to small-
to medium-sized businesses that may be less able to withstand
competitive, economic and financial pressures than larger borrowers. Our risk
management practices, such as monitoring the concentration of our loans within
specific industries, and our credit approval practices may not adequately
reduce credit risk. Further, our credit administration personnel, policies and
procedures may not adequately adapt to changes in economic or any other
conditions affecting customers and the quality of the loan portfolio. A failure
to measure and limit the credit risk associated with our loan portfolio
effectively could lead to unexpected losses and have a material adverse effect
on our business, financial condition and results of operations.
Appraisals and other valuation techniques
we use in evaluating and monitoring loans secured by real property, other real
estate owned and repossessed personal property may not accurately describe the
net value of the asset.
In considering whether to make a loan
secured by real property, we generally require an appraisal of the property.
However, an appraisal is only an estimate of the value of the property at the
time the appraisal is made and, as real estate values may change significantly
in relatively short periods of time (especially in periods of heightened
economic uncertainty), this estimate may not accurately describe the net value
of the real property collateral after the loan is
made. As a result, we may not be able to realize the full amount of any
remaining indebtedness when we foreclose on and sell the relevant property. In
addition, we rely on appraisals and other valuation techniques to establish the
value of our other real estate owned, or OREO, and personal property that we
acquire through foreclosure proceedings and to determine certain loan
impairments. If any of these valuations are inaccurate, our combined and
consolidated financial statements may not reflect the correct value of our
OREO, and our allowance for loan losses may not reflect accurate loan
impairments. This could have a material adverse effect on our business,
financial condition or results of operations.
In the case of defaults on loans secured
by real estate, we may be forced to foreclose on the collateral, subjecting us
to the costs and potential risks associated with the ownership of the real
property, or consumer protection initiatives or changes in state or federal law
that may substantially raise the cost of foreclosure or prevent us from
foreclosing at all.
Since we intend to originate loans secured
by real estate, we may have to foreclose on the collateral property to protect
our investment and may thereafter own and operate such property for some
period, in which case we would be exposed to the risks inherent in the
ownership of real estate. The amount that we, as a mortgagee, may realize
after a default depends on factors outside of our control, including, but not
limited to, general or local economic conditions, environmental cleanup
liabilities, assessments, interest rates, real estate tax rates, operating
expenses of the mortgaged properties, our ability to obtain and maintain
adequate occupancy of the properties, zoning laws, governmental and regulatory
rules, and natural disasters. Our inability to manage the amount of costs or
size of the risks associated with the ownership of real estate, or write-downs
in the value of other real estate owned, could have a material adverse effect
on our business, financial condition and results of operations.
Additionally, consumer protection
initiatives or changes in state or federal law may substantially increase the
time and expense associated with the foreclosure process or prevent us from
foreclosing at all. Some states in recent years have either considered or
adopted foreclosure reform laws that make it substantially more difficult and
expensive for lenders to foreclose on properties in default. If new state or
federal laws or regulations are ultimately enacted that significantly raise the
cost of foreclosure or raise outright barriers, such laws could have a material
adverse effect on our business, financial condition and results of operation.
We are subject to claims and litigation
pertaining to intellectual property.
Banking and other financial services
companies, such as our Company, rely on technology companies to provide
information technology products and services necessary to support
their day-to-day operations. Technology companies frequently pursue litigation
based on allegations of patent infringement or other violations of intellectual
property rights. In addition, patent holding companies seek to monetize patents
they have purchased or otherwise obtained. Competitors of our vendors, or other
individuals or companies, may from time to time claim to hold intellectual
property sold to us by our vendors. Such claims may increase in the future as
the financial services sector becomes more reliant on information technology
vendors. The plaintiffs in these actions frequently seek injunctions and
substantial damages.
Regardless of the scope or validity of
such patents or other intellectual property rights, or the merits of any claims
by potential or actual litigants, we may have to engage in protracted
litigation. Such litigation is often expensive, time-consuming, disruptive to
our operations and distracting to management. If we are found to infringe one
or more patents or other intellectual property rights, we may be required to
pay substantial damages or royalties to a third party. In certain cases, we may
consider entering into licensing agreements for disputed intellectual property,
although no assurance can be given that such licenses can be obtained on
acceptable terms or that litigation will not occur. These licenses may also
significantly increase our operating expenses. If
legal matters related to intellectual property claims were resolved against us
or settled, we could be required to make payments in amounts that could have a
material adverse effect on our business, financial condition and results of
operations.
Third parties may assert intellectual
property claims relating to the holding and transfer of digital assets and
their source code. Regardless of the merit of any intellectual property or
other legal action, any threatened action that reduces confidence in long-term
viability or the ability of end-users to hold and transfer the
currency may adversely affect an investment in digital currencies.
Additionally, a meritorious intellectual property claim could prevent investors
and other end-users from accessing, holding or transferring their
digital currency, which could force the liquidation of holdings of such digital
currency (if liquidation is possible). As a result, intellectual property
claims against large digital currency participants could adversely affect the
business and operations of digital currency exchanges as well as our own.
We may not be able to protect our
intellectual property rights, and may become involved in lawsuits to protect or
enforce our intellectual property, which could be expensive, time consuming and
unsuccessful.
Competitors may violate our intellectual
property rights. To counter infringement or unauthorized use, litigation may be
necessary to enforce or defend our intellectual property rights, to protect our
trade secrets and/or to determine the validity and scope of our own
intellectual property rights or the proprietary rights of others. Such
litigation can be expensive and time consuming, which could divert management
resources and harm our business and financial results. Potential competitors
may have the ability to dedicate greater resources to litigate intellectual
property rights than we can. Accordingly, despite our efforts, we may not be
able to prevent third parties from infringing upon or misappropriating our intellectual
property.
We may be subject to environmental
liabilities relating to the real properties we own and the foreclosure on real
estate assets securing loans in our loan portfolio.
In conducting our business, we may
foreclose on and take title to real estate or otherwise be deemed to be in
control of property that serves as collateral on loans we make. As a result, we
could be subject to environmental liabilities with respect to those properties.
We may be held liable to a governmental entity or to third parties for property
damage, personal injury, investigation and clean-up costs incurred by
these parties relating to environmental contamination, or we may be required to
investigate or clean up hazardous or toxic substances or chemical releases at a
property. The costs associated with investigation or remediation activities
could be substantial. In addition, if we are the owner or former owner of a
contaminated site, we may be subject to common law claims by third parties
based on damages and costs resulting from environmental contamination emanating
from the property.
The cost of removal or abatement may
substantially exceed the value of the affected properties or the loans secured
by those properties, we may not have adequate remedies against the prior owners
or other responsible parties and we may not be able to resell the affected
properties either before or after completion of any such removal or abatement
procedures. If material environmental problems are discovered before
foreclosure, we generally will not foreclose on the related collateral or will
transfer ownership of the loan to a subsidiary. It should be noted, however,
that the transfer of the property or loans to a subsidiary may not protect us
from environmental liability. Furthermore, despite these actions on our part,
the value of the property as collateral will generally be substantially reduced
or we may elect not to foreclose on the property and, as a result, we may
suffer a loss upon collection of the loan. Any significant environmental
liabilities could have a material adverse effect on our business, financial
condition and results of operations.
The Bank’s mortgage warehouse division may
not continue to provide us with significant noninterest income and interest
income.
A portion of our lending would involve the
funding of single family residential mortgage loans originated by third party
mortgage bankers. Mortgage warehouse fee income would fluctuate with mortgage
warehouse activity. The residential mortgage business is highly competitive and
highly susceptible to changes in market interest rates, consumer confidence
levels, employment statistics, the capacity and willingness of secondary market
purchasers to acquire and hold or securitize loans, and other factors beyond
our control. Additionally, in many respects, the traditional mortgage
origination business is relationship-based, and dependent on mortgage banker
relationships. The loss one or more mortgage banker relationships could have
the effect of reducing the level or rate of growth of our mortgage warehouse
activity. Because of these factors, we cannot be certain that we will be able
to maintain or increase the volume or percentage of revenue or net income
produced by the mortgage warehouse business.
The Bank’s mortgage warehouse lending
business may expose us to increased lending and other risks.
Risks associated with the Bank’s mortgage
warehouse loans include risks relating to the mortgage bankers to which we
provide funding, including the risk of intentional misrepresentation or fraud;
changes in the market value of mortgage loans originated by the mortgage
banker, the sale of which is the expected source of repayment of the warehouse
funding we provide, due to changes in interest rates during the time in
warehouse; and originations of mortgage loans that are unsalable or impaired,
which could lead to decreased collateral value and the failure of a prospective
purchaser of the mortgage loan to ultimately purchase the loan from the
mortgage banker. Any one or a combination of these events may adversely affect
our loan portfolio and may result in increased delinquencies, loan losses and
increased future provision levels, which, in turn, could adversely affect our
business, financial condition and results of operations.
A lack of liquidity could impair our
ability to fund operations and adversely impact the Bank’s business, financial
condition and results of operations.
Liquidity is essential to the Bank’s
business. We would rely on the Bank’s ability to generate deposits and
effectively manage the repayment and maturity schedules of our loans and
investment securities, respectively, to ensure that we have adequate liquidity
to fund our operations. An inability to raise funds through deposits,
borrowings, sales of our investment securities, sales of loans or other sources
could have a substantial negative effect on our liquidity and our ability to
continue our growth strategy.
Additional liquidity would be provided by
the Bank’s ability to borrow from the Federal Home Loan Bank of San Francisco,
or the FHLB, and the Federal Reserve Bank of San Francisco, or the FRB. The
Bank may also borrow funds from third-party lenders, such as other financial
institutions. The Bank’s access to funding sources in amounts adequate to finance
or capitalize our activities, or on terms that are acceptable to us, could be
impaired by factors that affect us directly or the financial services industry
or economy in general, such as disruptions in the financial markets or negative
views and expectations about the prospects for the financial services industry.
Our access to funding sources could also be affected by one or more adverse
regulatory actions against us.
Any decline in available funding could
adversely impact the Bank’s ability to originate loans, invest in securities,
meet our expenses or fulfill obligations such as repaying our borrowings or
meeting deposit withdrawal demands, any of which could, in turn, have a
material adverse effect on our business, financial condition and results of
operations.
By engaging in derivative transactions, we
would be exposed to additional credit and market risk.
By engaging in derivative transactions, we
would be exposed to counterparty credit and market risk. If the counterparty
fails to perform, credit risk exists to the extent of the fair value gain in
the derivative. Market risk exists to the extent that interest rates change in
ways that are significantly different from what was modeled when we entered
into the derivative transaction. The existence of credit and market risk
associated with our derivative instruments could adversely affect our revenue
and, therefore, could have a material adverse effect on our business, financial
condition and results of operations.
We would be dependent on the use of data
and modeling in our management’s decision-making, and faulty data or modeling
approaches could negatively impact our decision-making ability or possibly
subject us to regulatory scrutiny in the future.
The use of statistical and quantitative
models and other quantitative analyses is necessary for bank decision-making,
and the employment of such analyses is becoming increasingly widespread in our
operations.
Liquidity stress testing, interest rate
sensitivity analysis and the identification of possible violations of
anti-money laundering regulations are all examples of areas in which we are
dependent on models and the data that underlies them. The use of statistical
and quantitative models is also becoming more prevalent in regulatory compliance.
While we are not currently subject to annual Dodd-Frank Act stress testing and
the Comprehensive Capital Analysis and Review submissions, we believe that
model-derived testing may become more extensively implemented by regulators in
the future.
We anticipate data-based modeling will
penetrate further into bank decision-making, particularly risk management
efforts, as the capacities developed to meet rigorous stress testing
requirements are able to be employed more widely and in differing applications.
While we believe these quantitative techniques and approaches improve our
decision-making, they also create the possibility that faulty data or flawed
quantitative approaches could negatively impact our decision-making ability or,
if we become subject to regulatory stress-testing in the future, adverse
regulatory scrutiny. Secondarily, because of the complexity inherent in these
approaches, misunderstanding or misuse of their outputs could similarly result
in suboptimal decision-making.
The Bank’s would be subject to interest
rate risk as fluctuations in interest rates may adversely affect our earnings.
Most of the Bank’s banking assets and
liabilities would be monetary in nature and subject to risk from changes in
interest rates. Like most financial institutions, our earnings are
significantly dependent on our net interest income, the principal component of
our earnings, which is the difference between interest earned by us from our
interest earning assets, such as loans and investment securities, and interest
paid by us on our interest bearing liabilities, such as deposits and
borrowings. We expect that we will periodically experience “gaps” in the
interest rate sensitivities of our assets and liabilities, meaning that either
our interest bearing liabilities will be more sensitive to changes in market
interest rates than our interest earning assets, or vice versa. In either case,
if market interest rates should move contrary to our position, this gap will
negatively impact our earnings. The impact on earnings is more adverse when the
slope of the yield curve flattens; that is, when short-term interest rates
increase more than long-term interest rates or when long-term interest rates
decrease more than short-term interest rates. Many factors impact interest rates,
including governmental monetary policies, inflation, recession, changes in
unemployment, the money supply, international economic weakness and disorder
and instability in domestic and foreign financial markets. In addition, the
Federal Reserve has stated its intention to end its quantitative easing program and has begun to reduce the size of its balance
sheet by selling securities, which might also affect interest rates.
Interest rate increases often result in
larger payment requirements for the Bank’s borrowers, which increases the
potential for default and could result in a decrease in the demand for loans.
At the same time, the marketability of the property securing a loan may be
adversely affected by any reduced demand resulting from higher interest rates.
In a declining interest rate environment, there may be an increase in
prepayments on loans as borrowers refinance their loans at lower rates. In
addition, in a low interest rate environment, loan customers often pursue
long-term fixed rate borrowings, which could adversely affect our earnings and
net interest margin if rates later increase. Changes in interest rates also can
affect the value of loans, securities and other assets. An increase in interest
rates that adversely affects the ability of borrowers to pay the principal or
interest on loans may lead to an increase in nonperforming assets and a
reduction of income recognized, which could have a material adverse effect on
our results of operations and cash flows. Further, when we place a loan on
nonaccrual status, we reverse any accrued but unpaid interest receivable, which
decreases interest income. At the same time, we continue to incur costs to fund
the loan, which is reflected as interest expense, without any interest income
to offset the associated funding expense. Thus, an increase in the amount of
nonperforming assets could have a material adverse impact on net interest
income. If short-term interest rates remain at their historically low levels
for a prolonged period and assuming longer-term interest rates fall further, we
could experience net interest margin compression as our interest earning assets
would continue to reprice downward while our interest bearing liability rates
could fail to decline in tandem. Such an occurrence would reduce our net
interest income and could have a material adverse effect on our business,
financial condition and results of operations.
The potential cessation of LIBOR and the
uncertainty over possible replacements for LIBOR may adversely affect the
Bank’s business.
On July 27, 2017, the Chief Executive
of the United Kingdom Financial Conduct Authority, which regulates LIBOR,
announced that it intends to stop persuading or compelling banks to submit
rates for the calculation of LIBOR to the administrator of LIBOR after 2021.
The announcement indicates that the continuation of LIBOR on the current basis
cannot and will not be guaranteed after 2021. It is impossible to predict
whether and to what extent banks will continue to provide LIBOR submissions to
the administrator of LIBOR or whether any additional reforms to LIBOR may be
enacted in the United Kingdom or elsewhere. The potential cessation of LIBOR
quotes in 2021 and the uncertainty over possible replacement rates for LIBOR
creates substantial risks to the Banking industry, including us.
On April 3, 2018, the Federal Reserve Bank
of New York commenced publication of three reference rates based on overnight
U.S. Treasury repurchase agreement transactions, including the Secured
Overnight Financing Rate, which has been recommended as an alternative to U.S.
dollar LIBOR by the Alternative Reference Rates Committee. Further, the Bank of
England is publishing a reformed Sterling Overnight Index Average, comprised of
a broader set of overnight Sterling money market transactions, which has been
selected by the Working Group on Sterling Risk-Free Reference Rates as the
alternative rate to Sterling LIBOR. Central bank-sponsored committees in other
jurisdictions, including Europe, Japan and Switzerland, have, or are expected
to, select alternative reference rates denominated in other currencies.
However, at this time, no consensus exists as to what rate or rates may become
accepted alternatives to LIBOR and it is impossible to predict the cost of
transitioning to or the effect of any such alternatives on the value of
LIBOR-based securities or the outstanding loans with interest rates based on
LIBOR that the Bank had made to borrowers, including certain of the Company’s
derivatives, other securities or financial arrangements given LIBOR’s role in
determining market interest rates globally. If a published LIBOR rate is
unavailable after 2021, the interest rates on our subordinated debentures,
which are currently based on the LIBOR rate, will be determined as set forth in
the accompanying offering documents, and the value of
such securities may be adversely affected. Uncertainty as to the nature of
alternative reference rates and as to potential changes or other reforms to
LIBOR could also cause confusion that could disrupt the capital and credit
markets more broadly. Currently, the manner and impact of this transition and
related developments, as well as the effect of an alternative reference rate on
our future and legacy funding costs, loan and investment securities portfolios,
asset-liability management and business, is uncertain.
Any future failure to maintain effective
internal control over financial reporting could impair the reliability of our
financial statements, which in turn could harm our business, impair investor
confidence in the accuracy and completeness of our financial reports and our
access to the capital markets and cause the price of our common stock to
decline and subject us to regulatory penalties.
If we fail to maintain effective internal
control over financial reporting, we may not be able to report our financial
results accurately and in a timely manner, in which case our business may be
harmed, investors may lose confidence in the accuracy and completeness of our
financial reports, we could be subject to regulatory penalties and the price of
our common stock may decline.
Our management is responsible for
establishing and maintaining adequate internal control over financial reporting
and for evaluating and reporting on that system of internal control. Our
internal control over financial reporting consists of a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles, or GAAP. As a public company, we
will be required to comply with the Sarbanes-Oxley Act and other rules that
govern public companies. We will be required to certify our compliance with
Section 404 of the Sarbanes-Oxley Act beginning with our second annual
report on Form 10-K, which will require us to furnish annually a
report by management on the effectiveness of our internal control over
financial reporting. In addition, our independent registered public accounting
firm may be required to report on the effectiveness of our internal control
over financial reporting beginning as of that second annual report
on Form 10-K.
The accuracy of our financial statements
and related disclosures could be affected if the judgments, assumptions or
estimates used in our critical accounting policies are inaccurate.
The preparation of financial statements
and related disclosures in conformity with GAAP requires us to make judgments,
assumptions and estimates that affect the amounts reported in our consolidated
financial statements and accompanying notes. Our critical accounting policies,
which are included in the section captioned “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” in this prospectus,
describe those significant accounting policies and methods used in the
preparation of our consolidated financial statements that we consider critical
because they require judgments, assumptions and estimates that materially
affect our consolidated financial statements and related disclosures. As a
result, if future events or regulatory views concerning such analysis differ
significantly from the judgments, assumptions and estimates in our critical
accounting policies, those events or assumptions could have a material impact
on our consolidated financial statements and related disclosures, in each case
resulting in our need to revise or restate prior period financial statements,
cause damage to our reputation and the price of our common stock and adversely
affect our business, financial condition and results of operations.
There could be material changes to our
financial statements and disclosures if there are changes in accounting
standards or regulatory interpretations of existing standards
From time to time the FASB or the SEC may
change the financial accounting and reporting standards that govern the
preparation of our financial statements. Such changes may result in us being
subject to new or changing accounting and reporting
standards. In addition, the bodies that interpret the accounting standards
(such as banking regulators or outside auditors) may change their
interpretations or positions on how new or existing standards should be
applied. These changes may be beyond our control, can be hard to predict and can
materially impact how we record and report our financial condition and results
of operations. In some cases, we could be required to apply a new or revised
standard retrospectively, or apply an existing standard differently and
retrospectively, in each case resulting in our needing to revise or restate
prior period financial statements, which could materially change our financial
statements and related disclosures, cause damage to our reputation and the
price of our common stock, and adversely affect our business, financial
condition and results of operations.
We could recognize losses on investment
securities held in our securities portfolio, particularly if interest rates
increase or economic and market conditions deteriorate.
We invest a percentage of our total assets
in investment securities with the primary objectives of providing a source of
liquidity, providing an appropriate return on funds invested, managing interest
rate risk and meeting pledging requirements. Factors beyond our control can significantly
and adversely influence the fair value of securities in our portfolio. For
example, fixed-rate securities are generally subject to decreases in market
value when interest rates rise. Additional factors include, but are not limited
to, rating agency downgrades of the securities, defaults by the issuer or
individual borrowers with respect to the underlying securities and instability
in the credit markets. Any of the foregoing factors could cause
other-than-temporary impairment in future periods and result in realized
losses. The process for determining whether impairment is other-than-temporary
usually requires difficult, subjective judgments about the future financial
performance of the issuer and any collateral underlying the security to assess
the probability of receiving all contractual principal and interest payments on
the security. Because of changing economic and market conditions affecting
interest rates, the financial condition of issuers of the securities and the
performance of the underlying collateral, we may recognize realized and/or
unrealized losses in future periods, which could have a material adverse effect
on our business, financial condition and results of operations.
We are subject to certain operational
risks, including, but not limited to, customer, employee or third-party fraud
and data processing system failures and errors.
Employee errors and employee or customer
misconduct could subject us to financial losses or regulatory sanctions and
seriously harm our reputation. Misconduct by our employees could include hiding
unauthorized activities from us, improper or unauthorized activities on behalf
of our customers or improper use of confidential information. It is not always
possible to prevent employee errors and misconduct, and the precautions we take
to prevent and detect this activity may not be effective in all cases. Employee
errors could also subject us to financial claims for negligence.
We maintain a system of internal controls
to mitigate operational risks, including data processing system failures and
errors and customer or employee fraud, as well as insurance coverage designed
to protect us from material losses associated with these risks, including
losses resulting from any associated business interruption. If our internal
controls fail to prevent or detect an occurrence, or if any resulting loss is
not insured or exceeds applicable insurance limits, it could adversely affect
our business, financial condition and results of operations.
In addition, we rely heavily upon
information supplied by third parties, including the information contained in
credit applications, property appraisals, title information and employment and
income documentation, in deciding which loans we will originate, as well as the
terms of those loans. If any of the information upon which we rely is
misrepresented, either fraudulently or inadvertently, and the misrepresentation
is not detected prior to loan funding, the value of the loan may be
significantly lower than expected, or we may fund a
loan that we would not have funded or on terms that do not comply with our
general underwriting standards. Whether a misrepresentation is made by the
applicant or another third party, we generally bear the risk of loss associated
with the misrepresentation. A loan subject to a material misrepresentation is
typically unsellable or subject to repurchase if it is sold prior to detection
of the misrepresentation. The sources of the misrepresentations are often
difficult to locate, and it is often difficult to recover any of the resulting
monetary losses we may suffer, which could adversely affect our business,
financial condition and results of operations.
We rely heavily on our executive
management team and other key employees, and we could be adversely affected by
the unexpected loss of their services.
We are led by an experienced core
management team with substantial experience in the markets that we serve, and
our operating strategy focuses on providing products and services through
long-term relationship managers and ensuring that our largest clients have
relationships with our senior management team. Accordingly, our success depends
in large part on the performance of these key personnel, as well as on our
ability to attract, motivate and retain highly qualified senior and middle
management. Competition for employees is intense and the process of locating
key personnel with the combination of skills and attributes required to execute
our business plan may be lengthy. If any of our executive officers, other key
personnel or directors leaves us or our Bank, our financial condition and
results of operations may suffer because of his or her skills, knowledge of our
market, years of industry experience and the difficulty of promptly finding
qualified personnel to replace him or her.
Negative public opinion regarding the
Company or failure to maintain our reputation in the communities we serve could
adversely affect our business and prevent us from growing our business.
As a community bank and service provider to
the digital currency industry, our Bank’s reputation within the communities we
serve is critical to our success. We believe we have built strong personal and
professional relationships with our customers and are active members of the
communities we serve. As such, we strive to enhance our reputation by
recruiting, hiring and retaining employees who share our core values of being
an integral part of the communities we serve and delivering superior service to
our customers. If our reputation is negatively affected by the actions of our
employees or otherwise, including because of a successful cyberattack against
us or other unauthorized release or loss of customer information, we may be
less successful in attracting new talent and customers or may lose existing
customers, and our business, financial condition and results of operations
could be adversely affected. In addition, if the reputation of the digital
currency industry as a whole is harmed, including due to events such as
cybersecurity breaches, scams perpetrated by bad actors or other unforeseen
developments as a result of the evolving regulatory landscape of the digital
currency industry, our reputation may be negatively affected due to our
connection with the digital currency industry, which could adversely affect our
business, financial condition and results of operations. Our exposure to and
interactions with the digital currency industry put us at a higher risk of
media attention and scrutiny. Further, negative public opinion can expose us to
litigation and regulatory action and delay and impede our efforts to implement
our expansion strategy, which could further adversely affect our business,
financial condition and results of operations.
We may not be able to raise the additional
capital needed, in absolute terms or on terms acceptable to us, to fund our
growth in the future if we continue to grow at our current pace.
After giving effect to this offering, we
believe that we will have sufficient capital to meet our capital needs for our
immediate growth plans. However, we will continue to need capital to support
our longer-term growth plans. If capital is not available on favorable terms
when we need it, we will have to either issue common stock or other securities
on less than desirable terms or reduce our rate of growth until market conditions become more favorable. Either of such
events could have a material adverse effect on our business, financial
condition and results of operations.
Risks Related to Regulation
There is substantial legal and regulatory
uncertainty regarding the regulation of digital currencies and digital currency
activities. This uncertainty or adverse regulatory changes may inhibit the
growth of the digital currency industry, including our customers, and therefore
have a material adverse effect on the digital currency initiative.
The U.S. Congress, U.S. state
legislatures, and a number of U.S. federal and state regulators and law
enforcement agencies, including FinCEN, U.S. federal banking regulators, SEC,
CFTC, the Financial Industry Regulatory Authority, or FINRA, the Consumer
Financial Protection Bureau, or CFPB, the Department of Justice, the Department
of Homeland Security, the Federal Trade Commission, the Federal Bureau of
Investigation, the Internal Revenue Service, or the IRS, and state banking
regulators, state financial services regulators, and states attorney generals,
have been examining the operations of digital currency networks, exchanges, and
digital currency businesses, with particular focus on the extent to which
digital currencies can be used for illegal activities, including but not
limited to laundering the proceeds of illegal activities, funding criminal or
terrorist enterprises, engaging in fraudulent activities (see “—Risks Related
to the Digital Currency Industry”), as well as whether and the extent to which
digital currency businesses should be subject to existing or new regulation,
including those applicable to banks, securities intermediaries, derivatives
intermediaries, or money transmitters.
For example, FinCEN requires firms engaged
in the business of administration, exchange, or transmission of a virtual
currency to register with FinCEN under its money services business licensing
regime. The New York DFS has established a licensing regime for businesses
involved in virtual currency business activity in or involving New York,
commonly known as BitLicense regime. The SEC and CFTC have each issued formal
and informal guidance on the applicability of securities and derivatives
regulations to digital currencies and digital currency activities. The SEC has
suggested that, depending on the circumstances, an initial coin offering, or
ICO, may constitute securities offerings subject to the provisions of the
Securities Act of 1933, as amended, or the Securities Act, and the Securities
Exchange Act of 1934, as amended, or the Exchange Act, and that some ICOs in
the past have been illegal, which could, in turn, result in regulatory actions
or other scrutiny against our customers or us. The SEC has also stated that
venues that permit trading of tokens that are deemed securities are required to
either register as national securities exchanges under Section 6 of the
Exchange Act or obtain an exemption. If we or any of our digital currency
customers are subject to regulatory actions relating to illegal securities
offerings or are required to register as a national securities exchange under
the Exchange Act, we may experience a substantial loss of deposits and our
business may be materially adversely affected.
Many state and federal agencies have also
issued consumer advisories regarding the risks posed to users and investors in
digital currencies. U.S. federal and state legislatures, regulators and law
enforcement agencies continue to develop views and approaches to a wide variety
of digital currencies and activities involved in digital currencies and it is
likely that, as the legal and regulatory landscape develops, additional
regulatory requirements could apply to digital currency businesses, including
our digital currency customers and us. U.S. state and federal, and foreign
regulators and legislatures have taken legal actions against digital currency
businesses or adopted restrictions in response to adverse publicity arising
from hacks, consumer harm, criminal activity, or other activities related to
digital currencies. Ongoing and future regulatory actions may alter, perhaps to
a materially adverse extent, the nature of the digital currency industry or the
ability of our customers to continue to operate. This may significantly impede
the viability or growth of our existing funding
sources based on deposits from digital currency business as well as our digital
currency initiative. In addition, we may become subject to additional
regulatory scrutiny as a result of certain aspects of our growth strategy,
including our plans to develop credit products for the purchase of digital
currency, custodian services and to expand our international customer base.
Digital currencies and digital currency
related activities also currently face an uncertain regulatory landscape in
many foreign jurisdictions such as the European Union, China, the United
Kingdom, Australia, Japan, Russia, Israel, Poland, India, Hong Kong, Canada and
Singapore. Various foreign jurisdictions may adopt laws regulations or
directives that affect digital currencies. Such laws, regulations or directives
may conflict with those of the United States and may negatively impact the
acceptance of digital currencies by users, merchants and service providers outside
the United States and may therefore impede the growth or sustainability of the
digital currency industry in these jurisdictions as well as in the United
States and elsewhere, or otherwise negatively affect the digital currency
industry or our customers, which may adversely affect our digital currency
initiative and could therefore result in a material adverse effect on our
business, financial condition, results of operations and growth prospects.
Legislative and regulatory actions taken
now or in the future may increase our costs and impact our business, governance
structure, financial condition or results of operations.
Economic conditions that contributed to
the financial crisis in 2008, particularly in the financial markets, resulted
in government regulatory agencies and political bodies placing increased focus
and scrutiny on the financial services industry. The Dodd-Frank Act, which was
enacted in 2010 as a response to the financial crisis, significantly changed
the regulation of financial institutions and the financial services industry.
The Dodd-Frank Act and the regulations thereunder have affected both large and
small financial institutions. The Dodd-Frank Act, among other things, imposed
new capital requirements on bank holding companies; changed the base for FDIC
insurance assessments to a bank’s average consolidated total assets minus
average tangible equity, rather than upon its deposit base; raised the standard
deposit insurance limit to $250,000; and expanded the FDIC’s authority to raise
insurance premiums. The Dodd-Frank Act established the CFPB as an independent
entity within the Federal Reserve, which has broad rulemaking authority over
consumer financial products and services, including deposit products,
residential mortgages, home-equity loans and credit cards, and contains
provisions on mortgage-related matters, such as steering incentives,
determinations as to a borrower’s ability to repay and prepayment penalties.
Compliance with the Dodd-Frank Act and its implementing regulations has and may
continue to result in additional operating and compliance costs that could have
a material adverse effect on our business, financial condition, results of
operations and growth prospects.
On May 24, 2018, President Trump
signed into law the “Economic Growth, Regulatory Relief and Consumer Protection
Act,” or the Regulatory Relief Act, which amends parts of the Dodd-Frank Act,
as well as other laws that involve regulation of the financial industry. While
the Regulatory Relief Act keeps in place fundamental aspects of the Dodd-Frank
Act’s regulatory framework, it does make regulatory changes that are favorable
to depository institutions with assets under $10 billion, such as the
Bank, and to bank holding companies, or BHCs, with total consolidated assets of
less than $10 billion, such as the Company, and also makes changes to
consumer mortgage and credit reporting regulations and to the authorities of
the agencies that regulate the financial industry. These and other changes are
more fully discussed under “Supervision and Regulation—The Regulatory Relief
Act.” Certain provisions of the Regulatory Relief Act favorable to the Company
and the Bank require the federal banking agencies to either promulgate
regulations or amend existing regulations, and it may take some time for these
agencies to implement the necessary regulations or amendments.
Federal and
state regulatory agencies frequently adopt changes to their regulations or
change the way existing regulations are applied. Regulatory or legislative changes
to laws applicable to the financial industry, if enacted or adopted, may impact
the profitability of our business activities, require more oversight or change
certain of our business practices, including the ability to offer new products,
obtain financing, attract deposits, make loans and achieve satisfactory
interest spreads and could expose us to additional costs, including increased
compliance costs. These changes also may require us to invest significant
management attention and resources to make any necessary changes to operations
to comply and could have a material adverse effect on our business, financial
condition and results of operations.
Changes in tax laws and regulations, or
changes in the interpretation of existing tax laws and regulations, may have a
material adverse effect on our business, financial condition, results of
operations and growth prospects.
We operate in an environment that imposes
income taxes on our operations at both the federal and state levels to varying
degrees. We engage in certain strategies to minimize the impact of these taxes.
Consequently, any change in tax laws or regulations, or new interpretation of
existing laws or regulations, could significantly alter the effectiveness of
these strategies.
In December 2017, the Tax Act was signed
into law. The act includes numerous changes to existing U.S. federal income tax
law, including a reduction in the federal corporate income tax rate from 35% to
21%, which took effect January 1, 2018. The reduction in the federal
corporate income tax rate resulted in an impairment of our net deferred tax
asset based on our reevaluation of the future tax benefit of these deferrals
using the lower tax rate.
Because of the Dodd-Frank Act and related
rulemaking, the Bank and the Company are subject to more stringent capital
requirements.
In July 2013, the U.S. federal banking
authorities approved the implementation of regulatory capital reforms of the
Basel Committee on Banking Supervision, which is referred to as Basel III, and
issued rules effecting certain changes required by the Dodd-Frank Act. Basel
III is applicable to all U.S. banks that are subject to minimum capital
requirements as well as to bank and saving and loan holding companies other
than those subject to the Federal Reserve’s Small Bank Holding Company Policy
Statement. The Small Bank Holding Company Policy Statement currently
applies to certain holding companies with consolidated assets of less than
$3.0 billion that do not have a material amount of SEC-registered debt
or equity securities outstanding. While the Company is exempt from the
consolidated capital requirements at June 30, 2019, it will not be
eligible for the Small Bank Holding Company Policy Statement upon the issuance
of the equity securities that are the subject of this registration statement.
Relative to the capital requirements that
predated it, Basel III increased most of the required minimum regulatory
capital ratios and introduced a new common equity Tier 1 capital ratio and the
concept of a capital conservation buffer. Basel III also narrowed the
definition of capital by establishing additional criteria that capital
instruments must meet to be considered additional Tier 1 and Tier 2 capital.
The Basel III capital rules became effective as applied to the Bank on
January 1, 2015 and to the Company on January 1, 2018 prior to the
amendment to the Small Bank Holding Company Statement discussed above. See
“Supervision and Regulation—Capital Adequacy Guidelines.”
Certain ratios calculated under the Basel
III rules are sensitive to changes in total deposits, including the minimum
leverage ratio that is discussed further under “Supervision and
Regulation—Capital Adequacy Guidelines.” Due to the potential volatility of
deposits related to our Digital Currency Initiative, the Bank may be at
increased risk of a sudden adverse change in these ratios.
The failure to
meet applicable regulatory capital requirements could result in one or more of
the Bank’s regulators placing limitations or conditions on our activities,
including our growth initiatives, or restricting the commencement of new
activities, and could affect customer and investor confidence, our costs of
funds and FDIC insurance costs, our ability to pay dividends on our common
stock, our ability to make acquisitions, and our business, results of
operations and financial condition.
Federal banking agencies periodically
conduct examinations of our business, including our compliance with laws and
regulations, and our failure to comply with any supervisory actions to which we
are or become subject based on such examinations could adversely affect us.
As part of the Bank regulatory process,
the Federal Reserve and the California Department of Business Oversight,
Division of Financial Institutions, or the DBO, would periodically conduct
examinations of our business, including compliance with laws and regulations.
If, based on an examination, one of these federal banking agencies were to
determine that the financial condition, capital resources, asset quality,
earnings prospects, management, liquidity, asset sensitivity, risk management
or other aspects of any of our operations have become unsatisfactory, or that
the Company, the Bank or their respective management were in violation of any
law or regulation, it may take such remedial actions as it deems appropriate.
These actions include the power to enjoin unsafe or unsound practices, to
require affirmative actions to correct any conditions resulting from any
violation or practice, to issue an administrative order that can be judicially
enforced, to direct an increase in our capital levels, to restrict our growth,
to assess civil monetary penalties against us, the Bank or their respective
officers or directors, to remove officers and directors and, if it is concluded
that such conditions cannot be corrected or there is an imminent risk of loss
to depositors, to terminate the Bank’s deposit insurance. If the Bank become
subject to such regulatory actions, our business, financial condition, results
of operations and reputation could be adversely affected.
Our regulators may limit current or
planned activities related to the digital currency industry.
The digital currency industry is
relatively new and is subject to significant risks. The digital currency
initiative involves customers and activities with which regulators, including
our primary banking regulators the Federal Reserve and DBO, may be less familiar
and which they may consider higher risk than those involving more established
industries. While we have consulted, and will continue to consult with, our
regulators regarding our activities involving digital currency industry
customers and the digital currency initiative, in the future a regulator may
determine to limit or restrict one or more of these activities. Such actions
could have a material adverse effect on our business, financial condition, or
results of operations.
Financial institutions, such as the Bank,
face risks of noncompliance and enforcement actions related to the BSA and
other anti-money laundering statutes and regulations (in particular, as such
statutes and regulations relate to the digital currency industry).
The BSA, the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001, or the USA PATRIOT Act, FinCEN and other laws and
regulations require financial institutions, among other duties, to institute
and maintain an effective anti-money laundering program and file suspicious
activity and currency transaction reports as appropriate. To administer the
Bank Secrecy Act, FinCEN is authorized to impose significant civil money
penalties for violations of those requirements and has recently engaged in
coordinated enforcement efforts with the individual federal banking regulators,
as well as the U.S. Department of Justice, Drug Enforcement Administration and
the IRS. There is also increased scrutiny of compliance with the sanctions
programs and rules administered and enforced by the Treasury Department’s
Office of Foreign Assets Control.
The Bank’s
compliance with the anti-money laundering laws is in part dependent on our
ability to adequately screen and monitor our customers for their compliance
with these laws. Customers associated with our digital currency initiative may
represent an increased compliance risk given the prevalence of money laundering
activities using digital currencies. We intend to develop enhanced procedures
to screen and monitor these customers, which include, but are not limited to,
system monitoring rules tailored to digital currency activities, a system of
“red flags” specific to various customer types and activities, the development
of and investment in proprietary technology tools to supplement our third-party
transaction monitoring system, customer risk scoring with risk factors specific
to the digital-currency industry, and the use of various blockchain monitoring
tools. We believe these enhanced procedures adequately screen and monitor our
customers associated with the digital currency initiative for their compliance
with anti-money laundering laws; however, given the rapid developments in
digital currency markets and technologies, there can be no assurance that these
enhanced procedures will be adequate to detect or prevent money laundering
activity. If regulators determine that the Bank’s enhanced procedures are
insufficient to address the financial crimes risks posed by digital currencies,
the digital currency initiative may be adversely affected, which could have a
material adverse effect on our business, financial condition and results of
operations.
To comply with regulations, guidelines and
examination procedures in this area, the Bank intend to dedicate significant
resources to its anti-money laundering program. If the Bank’s policies,
procedures and systems are deemed deficient, we could be subject to liability,
including fines and regulatory actions such as restrictions on our ability to
pay dividends and the inability to obtain regulatory approvals to proceed with
certain aspects of our business plans, including acquisitions and de novo
branching.
We are subject to anticorruption laws,
including the U.S. Foreign Corrupt Practices Act, or FCPA, and we may be
subject to other anti-corruption laws, as well as anti-money laundering and
sanctions laws and other laws governing our operations, to the extent our
business expands to non-U.S. jurisdictions. If we fail to comply with
these laws, we could be subject to civil or criminal penalties, other remedial
measures, and legal expenses, which could adversely affect our business,
financial condition and results of operations.
We would pursue deposit sourcing
opportunities outside of the United States. Once we acquire a bank, we would be
subject to anti-corruption laws, including the FCPA. The FCPA and other
applicable anti-corruption laws generally prohibit us, our employees and
intermediaries from bribing, being bribed or making other prohibited payments
to government officials or other persons to obtain or retain business or gain
other business advantages. We may also participate in collaborations and
relationships with third parties whose actions could potentially subject us to
liability under the FCPA or other jurisdictions’ anti-corruption laws. There is
no assurance that we will be completely effective in ensuring our compliance
with all applicable anti-corruption laws, including the FCPA. If we are not in
compliance with the FCPA or other anti-corruption laws, we may be subject to
criminal and civil penalties, disgorgement and other sanctions and remedial
measures, and legal expenses, which could have an adverse impact on our
business, financial condition and results of operations. Similarly, any
investigation of any potential violations of the FCPA or other anti-corruption
laws by authorities in the United States or other jurisdictions where we
conduct business could also have an adverse impact on our reputation, business,
financial condition and results of operations.
Once we acquire a bank, we would be subject
to numerous laws and regulations, designed to protect consumers, including the
Community Reinvestment Act and fair lending laws, and failure to comply with
these laws or regulations could lead to a wide variety of sanctions.
The Community Reinvestment Act, or CRA,
directs all insured depository institutions to help meet the credit needs of
the local communities in which they are located, including low- and
moderate-income neighborhoods. Each institution is
examined periodically by its primary federal regulator, which assesses the
institution’s performance. The Equal Credit Opportunity Act, the Fair Housing
Act and other fair lending laws and regulations impose nondiscriminatory lending
requirements on financial institutions. The CFPB, the U.S. Department of
Justice and other federal agencies are responsible for enforcing these laws and
regulations. The CFPB was created under the Dodd-Frank Act to centralize
responsibility for consumer financial protection with broad rulemaking
authority to administer and carry out the purposes and objectives of federal
consumer financial laws with respect to all financial institutions that offer
financial products and services to consumers. The CFPB is also authorized to
prescribe rules applicable to any covered person or service provider,
identifying and prohibiting acts or practices that are “unfair, deceptive, or
abusive” in any transaction with a consumer for a consumer financial product or
service, or the offering of a consumer financial product, or service. The
ongoing broad rulemaking powers of the CFPB have potential to have a
significant impact on the operations of financial institutions offering
consumer financial products or services. The CFPB has indicated that it may
propose new rules on overdrafts and other consumer financial products or
services, which could have a material adverse effect on our business, financial
condition and results of operations if any such rules limit our ability to provide
such financial products or services.
A successful regulatory challenge to an
institution’s performance under the CRA, fair lending or consumer lending laws
and regulations could result in a wide variety of sanctions, including damages
and civil money penalties, injunctive relief, restrictions on mergers and
acquisitions activity, restrictions on expansion, and restrictions on entering
new business lines. Private parties may also challenge an institution’s
performance under fair lending laws in private class action litigation. Such
actions could have a material adverse effect on our business, financial
condition and results of operations.
Increases in FDIC insurance premiums could
adversely affect our earnings and results of operations.
Once we acquire a bank, the deposits of
our Bank would be insured by the FDIC up to legal limits and, accordingly,
subject it to the payment of FDIC deposit insurance assessments as determined
according to the calculation described in “Supervision and Regulation—Deposit
Insurance.” To maintain a strong funding position and restore the reserve
ratios of the DIF following the financial crisis, the FDIC increased deposit
insurance assessment rates and charged special assessments to all FDIC-insured
financial institutions. Further increases in assessment rates or special
assessments may occur in the future, especially if there are significant
additional financial institution failures. Any future special assessments,
increases in assessment rates or required prepayments in FDIC insurance
premiums could reduce our profitability or limit our ability to pursue certain
business opportunities, which could have a material adverse effect on our
business, financial condition and results of operations.
The Federal Reserve may require us to
commit capital resources to support the Bank at a time when our resources are
limited, which may require us to borrow funds or raise capital on unfavorable
terms.
Once we acquire a bank, we would be
classified as a Bank Holding Company (BHC). The Federal Reserve requires a BHC
to act as a source of financial and managerial strength to its subsidiary banks
and to commit resources to support its subsidiary banks. Under the “source of
strength” doctrine that was codified by the Dodd-Frank Act, the Federal Reserve
may require a BHC to make capital injections into a troubled subsidiary bank at
times when the BHC may not be inclined to do so and may charge the BHC with
engaging in unsafe and unsound practices for failure to commit resources to
such a subsidiary bank. Accordingly, we could be required to provide financial
assistance to the Bank if it experiences financial distress.
A capital injection may be required at a
time when our resources are limited, and we may be required to borrow the funds
or raise capital to make the required capital injection. Any loan by a BHC to
its subsidiary bank is subordinate in right of
repayment to payments to depositors and certain other creditors of such
subsidiary bank. In the event of a BHC’s bankruptcy, the Bankruptcy trustee
will assume any commitment by the holding company to a federal bank regulatory
agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law
provides that claims based on any such commitment will be entitled to a
priority of payment over the claims of the holding company’s general unsecured
creditors, including the holders of any note obligations. Thus, any borrowing
by a BHC for making a capital injection to a subsidiary bank often becomes more
difficult and expensive relative to other corporate borrowings. Borrowing funds
or raising capital on unfavorable terms for such a capital injection may have a
material adverse effect on our business, financial condition and results of
operations.
We are exposed to a various types of
credit risk due to interconnectivity in the financial services industry and
could be adversely affected by the insolvency of other financial institutions.
Financial services institutions are
interrelated based on trading, clearing, counterparty or other relationships.
We have exposure to many different industries and counterparties, and routinely
execute transactions with counterparties in the financial services industry,
including commercial banks, brokers and dealers, investment banks and other
institutional clients. Many of these transactions expose us to credit risk in
the event of a default by a counterparty or client. In addition, our credit
risk may be exacerbated when our collateral cannot be foreclosed upon or is
liquidated at prices not sufficient to recover the full amount of the credit or
derivative exposure due. Any such losses could adversely affect our business,
financial condition and results of operations.
Monetary policies and regulations of the
Federal Reserve could adversely affect our business, financial condition and
results of operations.
In addition to being affected by general
economic conditions, our earnings and growth are affected by the policies of
the Federal Reserve. An important function of the Federal Reserve is to
influence the U.S. money supply and credit conditions. Among the traditional
methods that have been used to achieve this objective are open market
operations in U.S. government securities, changes in the discount rate for bank
borrowings, expanded access to funds for non-banks and changes in
reserve requirements against bank deposits. More recently, the Federal Reserve
has, as a response to the financial crisis, significantly increased the size of
its balance sheet by buying securities and has paid interest on excess reserves
held by banks at the Federal Reserve. Both the traditional and more recent
methods are used in varying combinations to influence overall growth and
distribution of bank loans, investments and deposits, interest rates on loans
and securities, and rates paid for deposits.
The monetary policies and regulations of
the Federal Reserve have had a significant effect on the operating results of
commercial banks in the past and are expected to continue to do so in the
future. The monetary policies of the Federal Reserve are influenced by various
factors, including inflation, unemployment, and short-term and long-term
changes in the international trade balance and in the fiscal policies of the
U.S. government. Following a prolonged period in which the federal funds rate
was stable or decreasing, the Federal Reserve has begun to increase this
benchmark rate. In addition, the Federal Reserve Board has stated its intention
to end its quantitative easing program and has begun to reduce the size of its
balance sheet by selling securities. Future monetary policies, including
whether the Federal Reserve will continue to increase the federal funds rate
and whether or at what pace it will continue to reduce the size of its balance
sheet, cannot be predicted, and although we cannot determine the effects of
such policies on us now, such policies could adversely affect our business,
financial condition and results of operations.
Risks Related to an Investment in Our
Common Stock
The
market price of our common stock may be subject to substantial fluctuations,
which may make it difficult for you to sell your shares at the volume, prices
and times desired.
The market price of our common stock may
be highly volatile, which may make it difficult for you to resell your shares
at the volume, prices and times desired. There are many factors that may affect
the market price and trading volume of our common stock, including, without
limitation, the risks discussed elsewhere in this “Risk Factors” section and:
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actual
or anticipated fluctuations in our operating results, financial condition or
asset quality;
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changes
in general economic or business conditions;
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changes
in digital currency industry conditions;
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the
effects of, and changes in, trade, monetary and fiscal policies, including
the interest rate policies of the Federal Reserve;
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publication
of research reports about us, our competitors or the financial services
industry generally, or changes in, or failure to meet, securities analysts’
estimates of our financial and operating performance, or lack of research
reports by industry analysts or ceasing of coverage;
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operating
and stock price performance of companies that investors deem comparable to
us;
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additional
or anticipated sales of our common stock or other securities by us or our
existing shareholders;
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additions
or departures of key personnel;
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perceptions
in the marketplace regarding our competitors or us;
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significant
acquisitions or business combinations, strategic partnerships, joint ventures
or capital commitments by or involving our competitors or us;
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other
economic, competitive, governmental, regulatory or technological factors
affecting our operations, pricing, products and services; and
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other
news, announcements or disclosures (whether by us or others) related to us,
our competitors, our core markets or the financial services industry.
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The stock market and the market for
financial institution stocks has experienced substantial fluctuations in recent
years, which in many cases have been unrelated to the operating performance and
prospects of particular companies. In addition, significant fluctuations in the
trading volume in our common stock may cause significant price variations to
occur. Increased market volatility may materially and adversely affect the
market price of our common stock, which could make it difficult to sell your
shares at the volume, prices and times desired.
While our growth strategy is focused on
the digital currency industry, investors should not expect that the value of
our common stock to be correlated with the value of digital currencies.
Investing in our common stock is not a proxy for gaining exposure to digital
currencies.
While our growth strategy is focused on the
digital currency industry and the majority of the Bank’s deposits are from
digital currency-related activities, investors should not expect that investing
in our common stock is a proxy for gaining exposure to digital currencies. The
impact of fluctuations in prices and/or trading volume of digital currencies on
our deposit balance from customers in the digital currency industry and, by
extension, our profitability, is unpredictable, and the price of our common
stock may not be correlated to the prices of digital currencies.
Though not a proxy for gaining exposure to
digital currencies, market participants may view our common stock as such,
which could in turn attract investors seeking to buy or sell short our common
stock in order to gain such exposure, therefore increasing the price volatility
of our common stock. There may also be a heightened level of speculation in our
common stock as a result of our exposure to the digital currency industry. For
more information regarding the volatility of digital currencies, see “—Risks
Related to Our Digital Currency Initiative—The prices
of digital currencies are extremely volatile. Fluctuations in the price of
various digital currencies may cause uncertainty in the market and could
negatively impact trading volumes of digital currencies and therefore the
extent to which participants in the digital currency industry demand our
services and solutions, which would adversely affect our business, financial
condition and results of operations.”
RISKS
RELATED TO OUR INDUSTRY
Our limited operating history makes evaluating our business and future
prospects difficult, and may increase the risk of your investment.
On
September 15, 2020, the Company spun-off its specialty real estate holding
business to an operating subsidiary and then pivot back to being a technology
company. Going forward, the Company intends to
acquire: (1) a cloud-based machine learning and artificial intelligence (AI)
enabled lending platform; (2) a one-four branch Bank that serves majority black
neighborhoods; and (3) Blockchain-Powered Payment and Financial Transactions
Processing and Digital Currency platform that connects
consumers, banks, and institutional investors. The Company has not been
in the business services and finance industry before. Thus, in the
Bank, Fintec or Digital Currency, the Company is an early stage company. You
must consider the risks and difficulties we face as an early stage company with
limited operating history. If we do not successfully address these risks, our
business, prospects, operating results and financial condition will be
materially and adversely harmed. We have a very limited operating history on
which investors can base an evaluation of our business, operating results and
prospects. We intend to derive our revenues from lending fees, interest income
and digital currency transactions fees. However, there is no assurance that we
could achieve this goal because we are new to this industry.
RISKS
RELATED TO OUR BUSINESS
Our business, operating results, cash
flows and financial condition are subject to various risks and uncertainties,
including, without limitation, those set forth below, any one of which could
cause our actual operating results to vary materially from recent results or
from our anticipated future results.
We have a limited operating history, and
may not be able to operate our business successfully or generate sufficient
cash flow to sustain distributions to our stockholders.
We have a limited operating history. We currently own three investment
properties. We are subject to many of the business risks and uncertainties
associated with any new business enterprise. We cannot assure you that we will
be able to operate our business successfully or profitably or find additional
suitable investments. Our ability to provide attractive risk-adjusted returns
to our stockholders over the long term is dependent on our ability both to
generate sufficient cash flow to pay an attractive dividend and to achieve
capital appreciation, and we cannot assure you we will do either. There can be
no assurance that we will be able to continue to generate sufficient revenue
from operations to pay our operating expenses and make distributions to
stockholders. The results of our operations and the execution on our business
plan depend on several factors, including the availability of additional
opportunities for investment, the performance of our existing properties and
tenants, the availability of adequate equity and debt financing, the federal
and state regulatory environment relating to the conditions in the financial
markets and economic conditions.
Risks
Related to Our Real Estate Investments and Operations
Our current real estate portfolio consists
of three investment properties and will likely continue to be concentrated in a
limited number of properties in the future, which subjects us to an increased
risk of significant loss if any property declines in value or if we are unable
to lease a property.
As at December 31, 2020, we owned one real
estate investment property. We have no tenant nor rental revenues for the year
ended December 31, 2020. A significant decline in the value of any single
property would materially adversely affect our business, financial position and
results of operations, including our ability to make distributions to our
stockholders. A lack of diversification may also increases the potential that a
single underperforming investment could have a material adverse effect on our
cash flows and the price we could realize from the sale of our properties. Any
adverse change in the financial condition of any of our future tenants would
subject us to a significant risk of loss.
In addition, failure by any our future
tenants to comply with the terms of its lease agreement with us could require
us to find another lessee for the applicable property. We may experience delays
in enforcing our rights as landlord and may incur substantial costs in
protecting our investment and re-leasing that property. Furthermore, we cannot
assure you that we will be able to re-lease that property for the rent we
currently receive, or at all, or that a lease termination would not result in
our having to sell the property at a loss. The result of any of the foregoing
risks could materially and adversely affect our business, financial condition
and results of operations and our ability to make distributions to our
stockholders.
General real estate investment risks may
adversely affect property income and values.
Real estate investments are subject to a
variety of risks. If the multifamily properties and other real estate
investments do not generate sufficient income to meet operating expenses,
including debt service and capital expenditures, cash flow and the ability to
make distributions to GMPW's stockholders will be adversely affected. Income
from the multifamily properties may be further adversely affected by, among
other things, the following factors:
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changes in the general or local economic climate, including
layoffs, plant closings, industry slowdowns, relocations of significant local
employers and other events negatively impacting local employment rates and
wages and the local economy;
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local economic conditions in which the multifamily properties
are located, such as oversupply of housing or a reduction in demand for
rental housing;
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the attractiveness and desirability of our multifamily
properties to tenants, including, without limitation, our technology
offerings and our ability to identify and cost effectively implement new,
relevant technologies, and to keep up with constantly changing consumer
demand for the latest innovations;
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inflationary environments in which the costs to operate and
maintain multifamily properties increase at a rate greater than our ability
to increase rents, or deflationary environments where we may be exposed to
declining rents more quickly under our short-term leases;
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competition from other available housing alternatives;
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changes in rent control or stabilization laws or other laws
regulating housing;
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the Company’s ability to provide for adequate maintenance and
insurance;
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declines in the financial condition of our tenants, which may
make it more difficult for us to collect rents from some tenants;
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tenants' perceptions of the safety, convenience and
attractiveness of our multifamily properties and the neighborhoods where they
are located; and
changes in interest rates and availability of financing.
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As leases at the multifamily properties expire, tenants may enter into new
leases on terms that are less favorable to the Company. Income and real estate
values also may be adversely affected by such factors as applicable laws,
including, without limitation, the Americans with Disabilities Act of 1990 (the
"Disabilities Act"), Fair Housing Amendment Act of 1988 (the
"FHAA"), permanent and temporary rent control laws, rent
stabilization laws, other laws regulating housing that may prevent the Company
from raising rents to offset increased operating expenses, and tax laws.
Short-term leases expose us to the
effects of declining market rents, and the Company may be unable to renew
leases or relet units as leases expire.
Substantially all of our apartment
leases are for a term of one year or less. If the Company is unable to promptly
renew the leases or relet the units, or if the rental rates upon renewal or
reletting are significantly lower than expected rates, then the Company’s
results of operations and financial condition will be adversely affected. With
these short term leases, our rental revenues are impacted by declines in market
rents more quickly than if our leases were for longer terms.
National and regional economic
environments can negatively impact the Company’s liquidity and operating
results.
The Company's forecast for the national
economy assumes growth of the gross domestic product of the national economy
and the economies of the west coast states. In the event of a recession, the
Company could incur reductions in rental rates, occupancy levels, property
valuations and increases in operating costs such as advertising and turnover
expenses. A recession may affect consumer confidence and spending and
negatively impact the volume and pricing of real estate transactions, which
could negatively affect the Company’s liquidity and its ability to vary its
portfolio promptly in response to changes to the economy. Furthermore, if
residents do not experience increases in their income, they may be unable or
unwilling to pay rent increases, and delinquencies in rent payments and rent
defaults may increase.
Rent control, or other changes in
applicable laws, or noncompliance with applicable laws, could adversely affect
the Company's operations or expose us to liability.
The Company must own, operate, manage,
acquire, develop and redevelop its properties in compliance with numerous
federal, state and local laws and regulations, some of which may conflict with
one another or be subject to limited judicial or regulatory interpretations.
These laws and regulations may include zoning laws, building codes, rent
control or stabilization laws, federal, state and local tax laws, landlord
tenant laws, environmental laws, employment laws, immigration laws and other
laws regulating housing or that are generally applicable to the Company's
business and operations. Noncompliance with laws could expose the Company to
liability. If the Company does not comply with any or all of these
requirements, it may have to pay fines to government authorities or damage
awards to private litigants, and/or may have to decrease rents in order to
comply with such requirements. The Company does not know whether these
requirements will change or whether new requirements will be imposed. Changes
in, or noncompliance with, these regulatory requirements could require the
Company to make significant unanticipated expenditures, which could have a
material adverse effect on the Company's financial condition, results of
operations or cash flows.
In addition, rent control or rent
stabilization laws and other regulatory restrictions may limit our ability to
increase rents and pass through new or increased operating costs to our
tenants. There has been a recent increase in
municipalities, including those in which we own properties, considering or
being urged by advocacy groups to consider rent control or rent stabilization
laws and regulations or take other actions which could limit our ability to
raise rents based solely on market conditions. These initiatives and any other
future enactments of rent control or rent stabilization laws or other laws regulating
multifamily housing, as well as any lawsuits against the Company arising from
such rent control or other laws, may reduce rental revenues or increase
operating costs. Such laws and regulations limit our ability to charge market
rents, increase rents, evict tenants or recover increases in our operating
expenses and could reduce the value of our multifamily properties or make it
more difficult for us to dispose of properties in certain circumstances.
Expenses associated with our investment in these multifamily properties, such
as debt service, real estate taxes, insurance and maintenance costs, are
generally not reduced when circumstances cause a reduction in rental income
from the community. Furthermore, such regulations may negatively impact our ability
to attract higher-paying tenants to such multifamily properties.
Acquisitions of multifamily properties
involve various risks and uncertainties and may fail to meet expectations.
The Company intends to continue to
acquire apartment multifamily properties. However, there are risks that
acquisitions will fail to meet the Company’s expectations. The Company’s
estimates of future income, expenses and the costs of improvements or redevelopment
that are necessary to allow the Company to market an acquired apartment
community as originally intended may prove to be inaccurate. In addition,
following an acquisition, the value and operational performance of an apartment
community may be diminished if obsolescence or neighborhood changes occur
before we are able to redevelop or sell the community. Also, in connection with
such acquisitions, we may assume unknown liabilities, which could ultimately
lead to material costs for us that we did not expect to incur. The Company
expects to finance future acquisitions, in whole or in part, under various
forms of secured or unsecured financing or through the issuance of partnership
units by the Operating Partnership or related partnerships or joint ventures or
additional equity by the Company. The use of equity financing, rather than
debt, for future developments or acquisitions could dilute the interest of the
Company’s existing stockholders. If the Company finances new acquisitions under
existing lines of credit, there is a risk that, unless the Company obtains
substitute financing, the Company may not be able to undertake additional
borrowing for further acquisitions or developments or such borrowing may be not
available on advantageous terms.
Development and redevelopment activities
may be delayed, not completed, and/or not achieve expected results.
The Company pursues development and
redevelopment projects and these projects generally require various
governmental and other approvals, which have no assurance of being received
and/or the timing of which may be delayed from the Company’s expectations. The
Company defines development projects as new multifamily properties that are
being constructed or are newly constructed and are in a phase of lease-up and
have not yet reached stabilized operations, and redevelopment projects as
existing properties owned or recently acquired that have been targeted for
additional investment by the Company with the expectation of increased
financial returns through property improvement.
The Company’s development and
redevelopment activities generally entail certain risks, including, among
others:
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funds may be expended and management's time devoted to
projects that may not be completed on time or at all;
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construction costs of a project may exceed original estimates
possibly making the project economically unfeasible;
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projects
may be delayed due to, without limitation, adverse weather conditions, labor
or material shortage, or environmental remediation;
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occupancy
rates and rents at a completed project may be less than anticipated;
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expenses
at completed development or redevelopment projects may be higher than
anticipated, including, without limitation, due to costs of environmental
remediation or increased costs for labor, materials and leasing;
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we
may be unable to obtain, or experience a delay in obtaining, necessary
zoning, occupancy, or other required governmental or third party permits and
authorizations, which could result in increased costs or delay or abandonment
of opportunities;
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we
may be unable to obtain financing with favorable terms, or at all, for the
proposed development or redevelopment of a community, which may cause us to
delay or abandon an opportunity; and
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we
may incur liabilities to third parties during the development process, for
example, in connection with managing existing improvements on the site prior
to tenant terminations and demolition (such as commercial space) or in
connection with providing services to third parties (such as the construction
of shared infrastructure or other improvements.)
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These risks may reduce the funds available for distribution to our
stockholders. Further, the development and redevelopment of multifamily
properties is also subject to the general risks associated with real estate
investments. For further information regarding these risks, please see the risk
factor above titled "General real estate investment risks may adversely
affect property income and values."
Our apartment multifamily properties may be subject to unknown or
contingent liabilities which could cause us to incur substantial costs.
The
properties that the Company owns or may acquire are or may be subject to
unknown or contingent liabilities for which the Company may have no recourse,
or only limited recourse, against the sellers. In general, the representations
and warranties provided under the transaction agreements related to the sales
of the properties may not survive the closing of the transactions. While the
Company will seek to require the sellers to indemnify us with respect to
breaches of representations and warranties that survive, such indemnification
may be limited and subject to various materiality thresholds, a significant
deductible or an aggregate cap on losses. As a result, there is no guarantee
that we will recover any amounts with respect to losses due to breaches by the
sellers of their representations and warranties. In addition, the total amount
of costs and expenses that may be incurred with respect to liabilities
associated with apartment multifamily properties may exceed our expectations,
and we may experience other unanticipated adverse effects, all of which may
adversely affect our business, financial condition and results of operations.
The geographic concentration of the Company’s multifamily properties
and fluctuations in local markets may adversely impact the Company’s financial
condition and operating results.
The
geographic concentration of our properties could present risks if local
property market performance falls below expectations. In general, factors that
may adversely affect local market and economic conditions include, among
others, the following:
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the
economic climate, which may be adversely impacted by a reduction in jobs or
income levels, industry slowdowns, changing demographics and other factors;
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local
conditions, such as oversupply of, or reduced demand for, apartment homes;
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declines
in household formation or employment or lack of employment growth;
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rent
control or stabilization laws, or other laws regulating rental housing, which
could prevent the Company from raising rents to offset increases in operating
costs, or the inability or unwillingness of tenants to pay rent increases;
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competition
from other available apartments and other housing alternatives and changes in
market rental rates;
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economic
conditions that could cause an increase in our operating expenses, including
increases in property taxes, utilities and routine maintenance; and
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regional
specific acts of nature (e.g., earthquakes, fires, floods, etc.).
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Because
the Company’s multifamily properties would be primarily located in Southern
California, Northern California, Clark County, Nevada, and Baltimore, Maryland
and other metropolitan area, the Company is exposed to greater economic
concentration risks than if it owned a more geographically diverse portfolio.
The Company is susceptible to adverse developments in California, Nevada,
Maryland and Urban/metropolitan economic and regulatory environments, such as
increases in real estate and other taxes, and increased costs of complying with
governmental regulations. In addition, the State of California is generally
regarded as more litigious and more highly regulated and taxed than many
states, which may reduce demand for the Company’s properties. Any adverse
developments in the economy or real estate markets in California, Nevada,
Maryland and Urban/metropolitan, or any decrease in demand for the Company’s
multifamily properties resulting from the California, Nevada, Maryland and
Urban/metropolitan regulatory or business environments, could have an adverse
effect on the Company’s business and results of operations.
Our success depends on certain key personnel.
Our performance to date has been and will continue to be largely
dependent on the talents, efforts and performance of our senior management and
key technical personnel. It is anticipated that our executive officers will
enter into employment agreements. However, while it is customary to use
employment agreements as a method of retaining the services of key personnel,
these agreements do not guarantee us the continued services of such employees.
In addition, we have not entered into employment agreements with most of our key
personnel. The loss of our executive officers or our other key personnel,
particularly with little or no notice, could cause delays on projects and could
have an adverse impact on our client and industry relationships, our business,
operating results or financial condition.
We rely on highly skilled and qualified personnel, and if
we are unable to continue to attract and retain such qualified personnel it
will adversely affect our businesses.
Our success depends to a significant extent on our ability to
identify, attract, hire, train and retain qualified creative, technical and
managerial personnel. We expect competition for personnel with the specialized
creative and technical skills needed to provide our services will continue to
intensify. We often hire individuals on a project-by-project basis, and
individuals who work on one or more projects for us may not be available to
work on future projects. If we have difficulty identifying, attracting, hiring,
training and retaining such qualified personnel, or incur significant costs in
order to do so, our business and financial results could be negatively
impacted.
If we are unable to effectively manage organizational
productivity and global supply chain efficiency and flexibility, then our
business could be adversely affected.
We need to continually evaluate our organizational productivity
and supply chains and assess opportunities to reduce costs. We must also
enhance quality, speed and flexibility to meet changing and uncertain market
conditions. Our success also depends in part on refining our cost structure and
supply chains so that we have flexibility and are able to respond to market
pressures to protect profitability and cash flow or ramp up quickly and
effectively to meet demand. Failure to achieve the desired level of quality,
capacity or cost reductions could adversely affect our financial results.
Despite our efforts to control costs and increase
efficiency in our facilities, increased competition could still cause us to
realize lower operating margins and profitability.
Our operating results may fluctuate significantly, which
may cause the market price of our common stock to decrease significantly.
Our operating results may fluctuate as a result of a number of
factors, many of which are outside of our control. As a result of these
fluctuations, financial planning and forecasting may be more difficult and
comparisons of our operating results on a period-to-period basis may not
necessarily be meaningful. Accordingly, you should not rely on our annual and
quarterly results of operations as any indication of future performance. Each
of the risk factors described in this “Risks Related to Our Business” section,
and the following factors, may affect our operating results:
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our ability to continue to attract clients for our services and
products;
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the amount and timing of operating costs and capital
expenditures related to the maintenance and expansion of our businesses,
operations and infrastructure;
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our focus on long-term goals over short-term results;
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the results of our investments in high risk products;
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general economic conditions and those economic conditions
specific to our industries;
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changes in business cycles that affect the markets in which we
sell our products and services; and
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geopolitical events such as war, threat of war or terrorist
actions.
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In response to these fluctuations, the value of our common stock
could decrease significantly in spite of our operating performance. In
addition, our business, and the alcoholic beverage business, has historically
been cyclical and seasonal in nature, reflecting overall economic conditions as
well as client budgeting and buying patterns. The cyclicality and seasonality
in our business could become more pronounced and may cause our operating
results to fluctuate more widely.
We have a history of losses, have generated limited revenue
to date, and may continue to suffer losses in the future.
We have a history of losses and have generated limited revenue to
date. We expect to continue to incur losses for the foreseeable future. If we
cannot become profitable, our financial condition will deteriorate, and we may
be unable to achieve our business objectives, including without limitation,
having to cease operations due to a lack of capital.
We will require substantial additional funding, which may
not be available to us on acceptable terms, or at all, and, if not available
may require us to delay, scale back or cease our marketing or product
development activities and operations.
We will require substantial additional capital in order to
continue the marketing of our existing products and complete the development of
our contemplated products. Raising funds in the current economic climate may be
difficult and additional funding may not be available on acceptable terms, or
at all.
The amount and timing of our future funding requirements, both
near- and long-term, will depend on many factors, including, but not limited
to:
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the number and characteristics of investments or products that
we pursue;
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our potential need to expand operations, including the hiring of
additional employees;
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the costs of licensing, acquiring or investing in complimentary
businesses, products and technologies;
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the effect of any competing technological or market
developments;
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the need to implement additional internal systems and
infrastructure, including financial and reporting systems; and
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the economic and other terms, timing of and success of our
co-branding, licensing, collaboration or marketing relationships into which
we have entered or may enter in the future.
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Some of these factors are outside of our control. We will require
an additional capital infusion in order to get back to as an operating
technology-focused company that design,
manufacture, install and sell Bank, Fintec or Digital Currency , Power Controls,
Battery Technology, Wireless Technology, and Residential utility meters and
remote, mission-critical devices mostly engineered through Artificial
Intelligence, Machine Learning and Robotic technologies. In addition, we
cannot guarantee that future financing will be available in sufficient amounts
or on terms acceptable to us, if at all. If we are unable to raise additional
capital when required or on acceptable terms, we may be required to
significantly delay, scale back or discontinue the development or marketing of
one or more of our products or product candidates or curtail our operations,
which will have a Material Adverse Effect on our business, operating results
and prospects.
We may sell additional equity or debt securities or enter
into other arrangements to fund our operations, which may result in dilution to
our stockholders and impose restrictions or limitations on our business.
We may seek additional funding through a combination of equity
offerings, debt-financings, or other third party funding or other
collaborations, strategic alliances or licensing arrangements. These financing
activities may have an adverse impact on our stockholders’ rights as well as
our operations. For instance, any debt financing may impose restrictive
covenants on our operations or otherwise adversely affect the holdings or the
rights of our stockholders. In addition, if we seek funds through arrangements
with partners, these arrangements may require us to relinquish rights to some
of our technologies, products or product candidates or otherwise agree to terms
unfavorable to us.
Acquisitions we pursue in our industry and related
industries could result in operating difficulties, dilution to our stockholders
and other consequences harmful to our business.
As part of our growth strategy, we may selectively pursue
strategic acquisitions in our industry and related industries. We may not be
able to consummate such acquisitions, which could adversely impact our growth.
If we do consummate acquisitions, integrating an acquired company, business or
technology may result in unforeseen operating difficulties and expenditures,
including:
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increased expenses due to transaction and integration costs;
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potential liabilities of the acquired businesses;
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potential adverse tax and accounting effects of the
acquisitions;
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diversion of capital and other resources from our existing
businesses;
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diversion of our management’s attention during the acquisition
process and any transition periods;
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loss of key employees of the acquired businesses following the
acquisition; and
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inaccurate budgets and projected financial statements due to
inaccurate valuation assessments of the acquired businesses.
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Foreign acquisitions also involve unique risks related to
integration of operations across different cultures and languages, currency
risks and the particular economic, political and regulatory risks associated
with specific countries.
Our evaluations of potential acquisitions may not accurately
assess the value or prospects of acquisition candidates, and the anticipated
benefits from our future acquisitions may not materialize. In addition, future
acquisitions or dispositions could result in potentially dilutive issuances of
our equity securities, including our common stock, the incurrence of debt,
contingent liabilities or amortization expenses, or write-offs of goodwill, any
of which could harm our financial condition.
Interruption or failure of our information technology
systems could impair our ability to effectively and timely provide our services
and products, which could damage our reputation and have an adverse impact on
our operating results.
Our systems are vulnerable to damage or interruption from
earthquakes, hurricanes, terrorist attacks, floods, fires, power loss,
telecommunications failures, computer viruses or other attempts to harm our
systems, and similar events. Our facilities are located in areas with a high
risk of major earthquakes and are also subject to break-ins, sabotage and
intentional acts of vandalism. Some of our systems are not fully redundant, and
our disaster recovery planning cannot account for all eventualities. The
occurrence of a natural disaster or other unanticipated problems at our Santa
Monica, California facility or manufacturing facility located in Orange County,
California could result in lengthy interruptions in our projects and our
ability to deliver services. An error or defect in the software, a failure in
the hardware, a failure of our backup facilities could delay our delivery of
products and services and could result in significantly increased production
costs, hinder our ability to retain and attract clients and damage our brand if
clients believe we are unreliable. Given our reliance on our industry
relationships, it could also result in a decrease in our revenues and otherwise
adversely affect our business and operating results.
Our insurance policies are expensive and only protect us
from some business risks, which will leave us exposed to significant uninsured
liabilities.
We do not carry insurance for all categories of risk that our
business may encounter. Some of the policies that we generally maintain include
general liability, automobile and property insurance. We do not know, however,
if we will be able to maintain insurance with adequate levels of coverage. In
addition, we do not know if we will be able to obtain and maintain coverage for
the business in which we engage. No assurance can be given that an insurance
carrier will not seek to cancel or deny coverage after a claim has occurred.
Any significant uninsured liability may require us to pay substantial amounts,
which would adversely affect our business, financial condition and business
results.
Our business is subject to the risks of earthquakes, fires,
floods, power outages and other catastrophic events, and to interruption by
manmade problems such as terrorism. A disruption at our production facility
could adversely impact our results of operations, cash flows and financial
condition.
All of our products are produced in one location, which is located
in Southern California. A significant natural disaster, such as an earthquake,
fire or a flood or a significant power outage could have a material adverse
impact on our business, financial condition or operating results. If there were
a catastrophic failure at our major production
facility, our business would be adversely affected. The loss of a substantial
amount of inventory – through fire, other natural or man-made disaster,
contamination, or otherwise – could result in a significant reduction in supply
of the affected product or products. Similarly, if we experienced a disruption
in the supply of our products, our business could suffer. A consequence of any
of these supply disruptions could be our inability to meet consumer demand for
the affected products for a period of time. In addition, there can be no
assurance that insurance proceeds would cover the replacement value of our
products or other assets if they were to be lost. In addition, if a catastrophe
such as an earthquake, fire, flood or power loss should affect one of the third
parties on which we rely, our business prospects could be harmed. Moreover,
acts of terrorism could cause disruptions in our business or the business of
our third-party service providers, partners, customers or the economy as a
whole.
Future tax law changes and/or interpretation of existing
tax laws may adversely affect our effective income tax rate and the resolution
of unrecognized tax benefits.
We are subject to income taxation in the U.S. It is possible that
future income tax legislation may be enacted that could have a material impact
on our income tax provision. We believe that our tax estimates are reasonable
and appropriate, however, there are inherent uncertainties in these estimates.
As a result, the ultimate outcome from any potential audit could be materially
different from amounts reflected in our income tax provisions and accruals.
Future settlements of income tax audits may have a material effect on earnings
between the period of initial recognition of tax estimates in the financial
statements and the timing of ultimate tax audit settlement.
Potential liabilities and costs from litigation and other
legal proceedings could adversely affect our business.
From time to time we may be subject to various lawsuits, claims,
disputes and investigations in the normal conduct of our operations. These
include, but are not limited to, commercial disputes, including purported class
actions, employment claims, actions by tax and customs authorities, and
environmental matters. Some of these legal proceedings may include claims for
substantial or unspecified damages. It is possible that some of the actions
could be decided unfavorably and could adversely affect our results of
operations, cash flows or financial condition. In addition, because litigation
and other legal proceedings can be costly to defend, even actions that are
ultimately decided in our favor could have a negative impact on our results of
operations and cash flows. If Tara Spencer enforces the Labor Commission
judgment against the Company for the amount owed, this may result in a material
adverse effect on our financial condition.
Historical financial statements may not be reflective of
our future results of operations, cash flows, and financial condition.
Although we believe that you have been provided access to all
material information necessary to make an informed assessment of our assets and
liabilities, financial position, profits and losses and prospects, historical
financial statements do not represent what our results of operations, cash
flows, or financial position will be in the future.
We must expend time and resources addressing potential cybersecurity
risk, and any breach
of our information security safeguards could have a material adverse effect on
the Company.
The
threat of cyber attacks requires additional time and money to be expended in
efforts to prevent any breaches of our information security protocols. However,
we can provide no assurances that we can prevent all such attempts from being
successful, which could result in expenses to address and remediate such breaches as well as potentially losing the
confidence of our customers who depend upon our services to prevent and
mitigate such attacks on their respective business. Should a material breach of
our information security systems occur, it would likely have a material adverse
impact on our business operations, our customer relations, and our current and
future sales prospects, resulting in a significant loss of revenue.
Risks Related to Our Common Stock
There currently is only a minimal public market for our
common stock. Failure to develop or maintain a trading market could negatively
affect the value of our common stock and make it difficult or impossible for
you to sell your shares.
There currently is only a minimal public market for shares of our
common stock and an active market may never develop. Our common stock is
currently subject to quotation on the OTC Pink Market operated by the OTC
Market’s Group, Inc. under the symbol “GMPW”. We plan to apply for uplisting
of our Common Stock on the OTCQB. We may not be able to satisfy the listing
requirements for our Common Stock to be listed on the OTCQB which is often more
widely-traded and liquid markets than the OTC Pink Market. Some, but not all,
of the factors which may delay or prevent the listing of our Common Stock on a
more widely-traded and liquid market include the following: our stockholders’
equity may be insufficient; the market value of our outstanding securities may
be too low; our net income from operations may be too low; our common stock may
not be sufficiently widely held; we may not be able to secure market makers for
our common stock; and we may fail to meet the rules and requirements mandated
by OTCQB markets to have our common stock listed.
The market price for our common stock is particularly
volatile given our status as a relatively unknown company with a small and
thinly traded public float, limited operating history and lack of profits which
could lead to wide fluctuations in our share price. You may be unable to sell
your common stock at or above your conversion price, which may result in
substantial losses to you.
The market for our common stock is characterized by significant
price volatility when compared to seasoned issuers, and we expect that our
share price will continue to be more volatile than a seasoned issuer for the
indefinite future. The volatility in our share price is attributable to a
number of factors. First, as noted above, our common stock are sporadically and
thinly traded. As a consequence of this lack of liquidity, the trading of
relatively small quantities of shares by our shareholders may
disproportionately influence the price of those shares in either direction.
The price for our shares could, for example, decline, precipitously or
otherwise, in the event that a large number of our common stock are sold on the
market without commensurate demand, as compared to a seasoned issuer which
could better absorb those sales without adverse impact on its share price.
Secondly, we are a speculative or “risky” investment due to our limited
operating history and lack of profits to date, and uncertainty of future market
acceptance for our potential products and services. As a consequence of this
enhanced risk, more risk-adverse investors may, under the fear of losing all or
most of their investment in the event of negative news or lack of progress, be
more inclined to sell their shares on the market more quickly and at greater
discounts than would be the case with the stock of a seasoned issuer. Many of
these factors are beyond our control and may decrease the market price of our
common stock, regardless of our operating performance. We cannot make any
predictions or projections as to what the prevailing market price for our
common stock will be at any time, including as to whether our common stock will
sustain their current market prices, or as to what effect that the sale of
shares or the availability of common stock for sale at any time will have on the
prevailing market price.
The application of the “penny stock” rules
could adversely affect the market price of our common stock and increase your
transaction costs to sell those shares.
The SEC has adopted rule 3a51-1 which establishes the definition of
a “penny stock,” for the purposes relevant to us, as any equity security that
has a market price of less than $5.00 per share or with an exercise price of
less than $5.00 per share, subject to certain exceptions. For any transaction
involving a penny stock, unless exempt, Rule 15g-9 requires:
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that a broker or dealer approve a person’s account for
transactions in penny stocks, and
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the broker or dealer receives from the investor a written
agreement to the transaction, setting forth the
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identity and quantity of the penny stock to be purchased.
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In order to approve a person’s account for transactions in penny
stocks, the broker or dealer must:
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obtain financial information and investment experience
objectives of the person, and
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make a reasonable determination that the transactions in penny
stocks are suitable for that person and
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the person has sufficient knowledge and experience in financial
matters to be capable of evaluating the risks of transactions in penny
stocks.
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The broker or dealer must also deliver, prior to any transaction
in a penny stock, a disclosure schedule prescribed by the SEC relating to the
penny stock market, which, in highlight form:
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sets forth the basis on which the broker or dealer made the suitability
determination, and
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that the broker or dealer received a signed, written agreement
from the investor prior to the transaction.
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Generally, brokers may be less willing to execute transactions in
securities subject to the “penny stock” rules. This may make it more difficult
for investors to dispose of our common stock and cause a decline in the market
value of our stock.
The application of Rule 144 creates some investment risk to
potential investors; for example, existing shareholders may be able to rely on
Rule 144 to sell some of their holdings, driving down the price of the shares
you purchased.
The SEC adopted amendments to Rule 144 which became effective on
February 15, 2008 that apply to securities acquired both before and after that
date. Under these amendments, a person who has beneficially owned restricted
shares of our common stock for at least six months would be entitled to sell
their securities provided that: (i) such person is not deemed to have been one
of our affiliates at the time of, or at any time during the three months
preceding a sale, (ii) we are subject to the Exchange Act periodic reporting
requirements for at least 90 days before the sale and (iii) if the sale occurs
prior to satisfaction of a one-year holding period, we provide current
information at the time of sale.
Persons who have beneficially owned restricted shares of our
common stock for at least six months but who are our affiliates at the time of,
or at any time during the three months preceding a sale, would be subject to
additional restrictions, by which such person would be entitled to sell within
any three-month period only a number of securities that does not exceed the
greater of either of the following:
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1% of the total number of securities of the same class then
outstanding (shares of common stock as of the date of this Report); or
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the average weekly trading volume of such securities during the
four calendar weeks preceding the filing of a notice on Form 144 with respect
to the sale;
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Provided, in each case, that we are subject to the Exchange Act
periodic reporting requirements for at least three months before the sale. Such
sales by affiliates must also comply with the manner of sale, current public
information and notice provisions of Rule 144.
Our common stock may experience volatility in trading or loss in value
as a result of the effects of the coronavirus on the US and global economies.
Uncertainties
surrounding the effects of the coronavirus on the US and global economies has resulted
in an increase in volatility and violent drops in the value of publicly traded
securities. While the price of our common stock has not experienced such
volatility or loss in value, we can offer no assurances that the long-term
effects on the overall US economy will not negatively affect us in the future.
Fluctuations in our quarterly revenues may cause the price of our
common stock to decline.
Our
operating results have varied significantly from quarter to quarter in the
past, and we expect our operating results to vary from quarter to quarter in
the future due to a variety of factors, many of which are outside of our
control. Therefore, if revenues are below our expectations, this shortfall is
likely to adversely and disproportionately affect our operating results.
Accordingly, we may not attain positive operating margins in future quarters.
Any of these factors could cause our operating results to be below the
expectations of securities analysts and investors, which likely would
negatively affect the price of our common stock.
Our management and larger stockholders currently exercise significant
control over our Company and will continue to have influence over our Company
after the offering has concluded, and such influence may be in conflict to your
interests.
As
of September 30, 2020, our executive officers and directors beneficially own
approximately 57.32% of our voting power. As a result, these stockholders have
been able to exercise significant control over all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions, including the details of this offering.
We do not intend to pay dividends on our common stock.
We do not anticipate paying any cash dividends on our common stock
in the foreseeable future. We currently anticipate that we will retain all of
our available cash, if any, for use as working capital and for other general
corporate purposes. Any payment of future dividends will be at the discretion
of our Board of Directors and will depend upon, among other things, our
earnings, financial condition, capital requirements, level of indebtedness,
statutory and contractual restrictions applying to the payment of dividends and
other considerations that the Board of Directors deems relevant. Investors must
rely on sales of their common stock after price appreciation, which may never
occur, as the only way to realize a return on their investment. Investors
seeking cash dividends should not purchase our common stock.
Compliance with changing regulations concerning corporate
governance and public disclosure may result in additional expenses.
In recent years, there have been several
changes in laws, rules, regulations and standards relating to corporate
governance and public disclosure, including the Dodd-Frank Wall Street Reform
and Consumer Protection Act (the “Dodd-Frank Act”), the Sarbanes-Oxley Act of
2002 (“Sarbanes-Oxley”) and various other new regulations promulgated by the
SEC and rules promulgated by the national securities exchanges. The Dodd-Frank
Act, enacted in July 2010, expands federal regulation of corporate governance
matters and imposes requirements on publicly-held companies, including us, to,
among other things, provide stockholders with a periodic advisory vote on
executive compensation and also adds compensation committee reforms and
enhanced pay-for-performance disclosures. While some provisions of the
Dodd-Frank Act were effective upon enactment, others will be implemented upon
the SEC’s adoption of related rules and regulations. The scope and timing of
the adoption of such rules and regulations is uncertain and accordingly, the
cost of compliance with the Dodd-Frank Act is also uncertain.
In addition, Sarbanes-Oxley specifically requires, among other
things, that we maintain effective internal control over financial reporting
and disclosure of controls and procedures.
These and other new or changed laws, rules, regulations and
standards are, or will be, subject to varying interpretations in many cases due
to their lack of specificity. As a result, their application in practice may
evolve over time as new guidance is provided by regulatory and governing
bodies, which could result in continuing uncertainty regarding compliance
matters and higher costs necessitated by ongoing revisions to disclosure and
governance practices. Our efforts to comply with evolving laws, regulations and
standards are likely to continue to result in increased general and
administrative expenses and a diversion of management time and attention from
revenue-generating activities to compliance activities. Further, compliance
with new and existing laws, rules, regulations and standards may make it more
difficult and expensive for us to maintain director and officer liability insurance,
and we may be required to accept reduced coverage or incur substantially higher
costs to obtain coverage. Members of our board of directors and our principal
executive officer and principal financial officer could face an increased risk
of personal liability in connection with the performance of their duties. As a
result, we may have difficulty attracting and retaining qualified directors and
executive officers, which could harm our business. We continually evaluate and
monitor regulatory developments and cannot estimate the timing or magnitude of
additional costs we may incur as a result.
Risks Related to Our Bank, Fintec or Digital Currency Business
Acquisition Strategy
We are dependent upon our ability to successfully complete
acquisitions of One-four branch bank or successful execution of a Joint Venture
agreement with an One-four branch bank to grow our business.
We intend to re-launch our technology focused business model
through acquisitions and Joint Ventures (JV) with willing businesses that
source, design, develop, manufacture, install
and distribute Bank, Fintec or Digital Currency , Power Control, Battery
Technology, Wireless Technology, and Residential utility meters and remote,
mission-critical devices mostly engineered through Artificial Intelligence,
Machine Learning and Robotic technologies.
We also intend to pursue and consummate one or more acquisitions
using part of the Offering Proceeds from the sale of our Class B Common Stock
as well as other funding sources, which have not yet been determined, if any,
to fund any cash portion of the consideration we will pay in connection with
those acquisitions. However, such acquisitions may also be subject to conditions
and other impediments to closing, including some that are beyond our control,
and we may not be able to close any of them successfully, in a timely manner.
In addition, our future acquisitions will be required to be closed within
certain timeframes as negotiated between us and the acquisition target, and if
we are unable to meet the closing deadlines for a
given transaction, we may be required to forfeit payments we have made, if any,
be forced to renegotiate the transaction on less advantageous terms and could
fail to consummate the transaction at all.
Further, we may not be able to identify suitable acquisition
candidates, and even if we were to do so, we may only be able to consummate
them on less advantageous terms. In addition, some of the businesses we would
acquire may incur significant losses from operations, which, in turn, could
have a material and adverse impact on our business, results of operations and
financial condition.
We may face unforeseen difficulties in the future in fully-integrating
the operations of One-four branch bank to be acquired using the proceeds from
this offering, or any other businesses we may acquire in the future.
Acquisitions will be an important component of our growth strategy; however, we
will need to integrate these acquired businesses successfully in order for our
growth strategy to succeed and for us to become profitable. We expect that the
management teams of the acquired businesses will adopt our policies, procedures
and best practices, and cooperate with each other in scheduling events, booking
talent and in other aspects of their operations. We may face difficulty with
the integration of One-four branch bank to be acquired using the proceed from
this offering, and any other business we may acquire, such as coordinating
geographically dispersed organizations, integrating personnel with disparate
business backgrounds and combining different corporate cultures, the diversion
of management’s attention from other business concerns, the inherent risks in
entering markets or lines of business in which we have either limited or no
direct experience; and the potential loss of key employees, individual service
providers, customers and strategic partners of acquired companies.
Further, we expect that future target companies may have material
weaknesses in internal controls relating to the proper application of accrual
based accounting under the accounting principles generally accepted in the
United States of America (“GAAP”) prior to our acquiring them. The Public Company
Accounting Oversight Board (the “PCAOB”) defines a material weakness as a
deficiency, or a combination of deficiencies, in internal control over
financial reporting such that there is a reasonable possibility that a material
misstatement of annual or interim financial statements will not be prevented or
detected on a timely basis. We will be relying on the proper implementation of
our policies and procedures to remedy any such material weaknesses and prevent
any potential material misstatements in our financial reporting. Any such
misstatement could adversely affect the trading price of our common stock,
cause investors to lose confidence in our reported financial information, and
subject us to civil and criminal fines and penalties. If our acquired companies
fail to integrate in these important ways, or we fail to adequately understand
the business operations of our acquired companies, our growth and financial
results could suffer.
We may enter into acquisitions and take actions in
connection with such transactions that could adversely affect our business and
results of operations.
Our future growth rate depends in part on our selective
acquisition of One-four branch bank or successful execution of a Joint
Venture agreement with an One-four branch banks. We may be unable to
identify suitable targets for acquisition or make further acquisitions at
favorable prices. If we identify a suitable acquisition candidate, our ability
to successfully complete the acquisition would depend on a variety of factors
and may include our ability to obtain financing on acceptable terms and
requisite government approvals. In addition, any credit agreements or credit
facilities that we may enter into in the future may restrict our ability to
make certain acquisitions. In connection with future acquisitions, we could
take certain actions that could adversely affect our business, including:
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using a significant portion of our available cash;
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issuing equity securities, which would dilute current
stockholders’ percentage ownership;
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incurring substantial debt;
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incurring or assuming contingent liabilities, known or unknown;
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incurring amortization expenses related to intangibles; and
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incurring large accounting write-offs or impairments.
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We may also enter into joint ventures, which involve certain
unique risks, including, among others, risks relating to the lack of full
control of the joint venture, potential disagreements with our joint venture
partners about how to manage the joint venture, conflicting interests of the
joint venture, requirement to fund the joint venture and its business not being
profitable.
In addition, we cannot be certain that the due diligence
investigation that we conduct with respect to any investment or acquisition opportunity
will reveal or highlight all relevant facts that may be necessary or helpful in
evaluating such investment opportunity. For example, instances of fraud,
accounting irregularities and other deceptive practices can be difficult to
detect. Executive officers, directors and employees may be named as defendants
in litigation involving a company we are acquiring or have acquired. Even if we
conduct extensive due diligence on a particular investment or acquisition, we
may fail to uncover all material issues relating to such investment, including
regarding controls and procedures of a particular target or the full scope of
its contractual arrangements. We rely on our due diligence to identify
potential liabilities in the businesses we acquire, including such things as
potential or actual lawsuits, contractual obligations or liabilities imposed by
government regulation. However, our due diligence process may not uncover these
liabilities, and where we identify a potential liability, we may incorrectly believe
that we can consummate the acquisition without subjecting ourselves to that
liability. Therefore, it is possible that we could be subject to litigation in
respect of these acquired businesses. If our due diligence fails to identify
issues specific to an investment or acquisition, we may obtain a lower return
from that transaction than the investment would return or otherwise subject
ourselves to unexpected liabilities. We may also be forced to write-down or
write-off assets, restructure our operations or incur impairment or other
charges that could result in our reporting losses. Charges of this nature could
contribute to negative market perceptions about us or our shares of common
stock.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Included
in this annual report are “forward-looking” statements, as well as historical
information. Although we believe that the expectations
reflected in these forward-looking statements are reasonable, we cannot assure
you that the expectations reflected in these forward-looking statements will
prove to be correct. Our actual results could differ
materially from those anticipated in forward-looking statements as a result of
certain factors, including matters described in the section titled “Risk Factors.” Forward-looking
statements include those that use forward-looking terminology, such as the
words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,”
“project,” “plan,” “will,” “shall,” “should” and similar expressions, including
when used in the negative. Although we believe that the
expectations reflected in these forward-looking statements are reasonable and
achievable, these statements involve risks and uncertainties and no assurance
can be given that actual results will be consistent with these forward-looking
statements. Actual results may be materially different than
those described in this annual report. Important factors that
could cause our actual results, performance or achievements to differ from
these forward-looking statements include the factors described in the “Risk
Factors” section and elsewhere in this annual report.
All
forward-looking statements attributable to us are expressly qualified in their
entirety by these and other factors. Except as required by
federal securities laws, we undertake no obligation to update or revise these
forward-looking statements, whether to reflect events or circumstances after
the date initially filed or published, to reflect the occurrence of
unanticipated events or otherwise.
ITEM 1B.
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UNRESOLVED STAFF COMMENTS
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None
We
do not own any property as at the date of filing we have no properties. Our
principal business, executive and registered statutory office is located at 370
Amapola Ave., Suite 200A, Torrance, CA 90501 and our telephone number is (310)
895-1839 and email contact is invest@cbdxfund.com..
ITEM 3.
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LEGAL PROCEEDINGS
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As
of December 31, 2020, we are not involved in any pending or threatened legal
proceedings.
ITEM 4.
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MINE SAFETY DISCLOSURES
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Not
applicable