Education
About Us
Working with TipRanks
Follow Us
SHF Holdings (SHFS)
NASDAQ:SHFS
Risk Overview Q2, 2023
Risk Distribution
61% Finance & Corporate
18% Legal & Regulatory
9% Production
9% Ability to Sell
2% Tech & Innovation
2% Macro & Political
Finance & Corporate - Financial and accounting risks. Risks related to the execution of corporate activity and strategy
This chart displays the stock's most recent risk distribution according to category. TipRanks has identified 6 major categories: Finance & corporate, legal & regulatory, macro & political, production, tech & innovation, and ability to sell.
Risk Change Over Time
S&P500 Average
Sector Average
Risks removed
Risks added
Risks changed
SHF Holdings Risk Factors
New Risk (0)
Risk Changed (0)
Risk Removed (0)
No changes from previous report
The chart shows the number of risks a company has disclosed. You can compare this to the sector average or S&P 500 average.
The quarters shown in the chart are according to the calendar year (January to December). Businesses set their own financial calendar, known as a fiscal year. For example, Walmart ends their financial year at the end of January to accommodate the holiday season.
The quarters shown in the chart are according to the calendar year (January to December). Businesses set their own financial calendar, known as a fiscal year. For example, Walmart ends their financial year at the end of January to accommodate the holiday season.
Risk Highlights Q2, 2023
Main Risk Category
Finance & Corporate
With 35 Risks
Finance & Corporate
With 35 Risks
Number of Disclosed Risks
57
No changes from last report
S&P 500 Average: 31
57
No changes from last report
S&P 500 Average: 31
Recent Changes
0Risks added
0Risks removed
0Risks changed
Since Jun 2023
0Risks added
0Risks removed
0Risks changed
Since Jun 2023
Number of Risk Changed
0
No changes from last report
S&P 500 Average: 3
0
No changes from last report
S&P 500 Average: 3
See the risk highlights of SHF Holdings in the last period.
Risk Word Cloud
The most common phrases about risk factors from the most recent report. Larger texts indicate more widely used phrases.
Risk Factors Full Breakdown - Total Risks 57
Finance & Corporate
Total Risks: 35/57 (61%)Above Sector Average
Share Price & Shareholder Rights16 | 28.1%
Share Price & Shareholder Rights - Risk 1
The JOBS Act permits "emerging growth companies" like us to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies.Share Price & Shareholder Rights - Risk 2
Our Second Amended and Restated Certificate of Incorporation provides that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for certain stockholder litigation matters, which could limit our stockholder's ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or stockholders.Our Second Amended and Restated Certificate of Incorporation provides, to the fullest extent permitted by law, that internal corporate claims may be brought only in the Court of Chancery in the State of Delaware (or, if the Court of Chancery does not have, or declines to accept, jurisdiction, another state court or a federal court located within the State of Delaware). In addition, our Second Amended and Restated Certificate of Incorporation provides that the federal district courts of the United States will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. This forum selection provision does not apply to claims brought to enforce a duty or liability created by the Exchange Act. Any person or entity purchasing or otherwise acquiring or holding any interest in our stock shall be deemed to have notice of and consented to the forum provision in our Second Amended and Restated Certificate of Incorporation.
This choice of forum provision may limit a stockholder's ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, other employees or stockholders, which may discourage lawsuits with respect to such claims. Alternatively, if a court were to find the choice of forum provision contained in our Second Amended and Restated Certificate of Incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, operating results and financial condition. For example, under the Securities Act, federal courts have concurrent jurisdiction over all suits brought to enforce any duty or liability created by the Securities Act, and investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder. Accordingly, there is uncertainty as to whether a court would enforce such a forum selection provision as written in connection with claims arising under the Securities Act.
Share Price & Shareholder Rights - Risk 3
Anti-takeover provisions contained in our Second Amended and Restated Certificate of Incorporation and bylaws, as well as provisions of Delaware law, could impair a takeover attempt, which could limit the price investors might be willing to pay in the future for our common stock.Our Second Amended and Restated Certificate of Incorporation contains provisions that may discourage unsolicited takeover proposals that stockholders may consider to be in their best interests. We are also subject to anti-takeover provisions under Delaware law, which could delay or prevent a change of control. Together, these provisions may make more difficult the removal of management and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our securities. These provisions include:
- a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;- a denial of the right of stockholders to call a special meeting;- a vote of 66 2/3% required to approve certain amendments to the Second Amended and Restated Certificate of Incorporation and the bylaws; and - the designation of Delaware as the exclusive forum for certain disputes.
Share Price & Shareholder Rights - Risk 4
Warrants are exercisable for Class A Common Stock, and the exercise of such Warrants would increase the number of shares eligible for resale in the public market and result in dilution to our stockholders.As part of our business combination, there are warrants outstanding to purchase 5,750,000 shares of Class A Common Stock and Private Placement Warrants issued to NLIT's sponsor to purchase 264,088 shares of Class A Common Stock at $11.50 per share, and we also issued the PIPE Warrants to the PIPE Investors to purchase 1,022,500 shares of Class A Common Stock at $11.50 per share. The shares of Class A Common Stock issued upon exercise of our warrants will result in dilution to the then existing holders of Class A Common Stock and increase the number of shares eligible for resale in the public market. Sales of substantial numbers of such shares in the public market could adversely affect the market price of our Class A Common Stock or public warrants.
The Private Placement Warrants are identical to the warrants sold as part of the units issued in NLIT's IPO except that, so long as they are held by NLIT's sponsor or its permitted transferees, (i) they will not be redeemable by us, (ii) they (including the Class A Common Stock issuable upon exercise of these warrants) may not, subject to certain limited exceptions, be transferred, assigned or sold by NLIT's sponsor until 30 days after the completion of an initial business combination, (iii) they may be exercised by the holders on a cashless basis and (iv) are subject to registration rights.
Share Price & Shareholder Rights - Risk 5
We have not registered the shares of Class A Common Stock issuable upon exercise of the warrants under the Securities Act or any state securities laws at this time, and such registration may not be in place when an investor desires to exercise warrants, thus precluding such investor from being able to exercise its warrants except on a cashless basis and potentially causing such warrants to expire worthless.We have not registered the shares of Class A Common Stock issuable upon exercise of the warrants under the Securities Act or any state securities laws at this time. While under the terms of the warrant agreement we have agreed to use our best efforts to file a registration statement under the Securities Act covering such shares and maintain a current prospectus relating to the Class A Common Stock issuable upon exercise of the warrants, until the expiration of the warrants in accordance with the provisions of the warrant agreement, we cannot assure you that we will be able to do so. For example, if any facts or events arise which represent a fundamental change in the information set forth in such registration statement or prospectus, the consolidated financial statements contained or incorporated by reference therein are not current or correct or the SEC issues a stop order, such registration will likely not be available. If the shares issuable upon exercise of the warrants are not registered under the Securities Act, holders have the right to exercise their warrants on a cashless basis for unregistered shares of Class A Common Stock in accordance with Section 3(a)(9) of the Securities Act or another exemption. However, no such warrant will be exercisable and we will not be obligated to issue any shares to holders seeking to exercise their warrants, unless the issuance of the shares upon such exercise is registered or qualified under the securities laws of the state of the exercising holder or an exemption from state registration is available. Notwithstanding the above, if our Class A Common Stock is at the time of any exercise of a warrant not listed on a national securities exchange such that it satisfies the definition of a "covered security" under Section 18(b)(1) of the Securities Act, we may, at our option, require holders of warrants who exercise their warrants to do so on a "cashless basis" in accordance with Section 3(a)(9) of the Securities Act and, in the event we so elect, we will not be required to file or maintain in effect a registration statement, but we will be required to use our best efforts to register the shares under applicable blue sky laws to the extent an exemption is not available. We will not be required to settle any warrant in cash or issue securities or other compensation in exchange for the warrants if we are unable to register or qualify the shares underlying the warrants under applicable state securities laws and there is no exemption available. If the issuance of the shares upon exercise of the warrants is not so registered or qualified or exempt from registration or qualification, the holder of such warrant shall not be entitled to exercise such warrant and such warrant may have no value and expire worthless. In such event, holders who acquired their warrants as part of a purchase of units will have paid the full unit purchase price solely for the shares of Class A Common Stock included in the units. If and when the warrants become redeemable by us, we may exercise our redemption right even if we are unable to register or qualify the underlying shares of Class A Common Stock for sale under all applicable state securities laws.
Share Price & Shareholder Rights - Risk 6
If securities or industry analysts do not publish or cease publishing research or reports about the post-combination company, its business, or its market, or if they change their recommendations regarding the Class A Common Stock of the post-combination company adversely, then the price and trading volume of the Class A Common Stock of the post-combination company could decline.The trading market for our Class A Common Stock or public warrants will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market, or our competitors. Securities and industry analysts do not currently, and may never, publish research on us. If no securities or industry analysts commence coverage of the post-combination company, the stock price and trading volume of our Class A Common Stock and public warrants would likely be negatively impacted. If any of the analysts who may cover the post-combination company change their recommendation regarding our stock adversely, or provide more favorable relative recommendations about our competitors, the price of our Class A Common Stock and public warrants would likely decline. If any analyst who may cover the Company were to cease coverage of us or fail to regularly publish reports on it, we could lose visibility in the financial markets, which could cause the stock price or trading volume of our Class A Common Stock and public warrants of the post-combination company to decline.
Share Price & Shareholder Rights - Risk 7
The Company may issue additional shares of common or preferred stock under the Equity Incentive Plan or otherwise, any one of which would dilute the interest of the Company's stockholders and likely present other risks.The Company's Second Amended and Restated Certificate of Incorporation authorizes the issuance of up to 130,000,000 shares of Class A Common Stock and 1,250,000 shares of preferred stock, par value $0.0001 per share. There are currently 111,249,088 authorized but unissued shares of Class A Common Stock available for issuance, which amount does not take into account shares reserved for issuance upon exercise of outstanding warrants. There are currently 20,450 shares of preferred stock issued and outstanding. The Company may issue additional shares of common or preferred stock to under the Equity Incentive Plan or as needed for working capital or other purposes.
The issuance of additional shares of common or preferred stock:
- may significantly dilute the equity interest of existing investors; - may subordinate the rights of holders of common stock if preferred stock is issued with rights senior to those afforded the Company's common stock; - could cause a change in control if a substantial number of common stock is issued, which may affect, among other things, the Company's ability to use its net operating loss carry forwards, if any, and could result in the resignation or removal of the Company's present officers and directors; and - may adversely affect prevailing market prices for the Company's Class A Common Stock, Warrants, or both.
Share Price & Shareholder Rights - Risk 8
The grant of registration rights to PCCU in connection with the Business Combination pursuant to the Unit Purchase Agreement, and to the PIPE Investors in connection with the Amended and Restated Securities Purchase Agreement, may adversely affect the market price of our Class A Common Stock.In connection with the closing of the Business Combination pursuant to the Unit Purchase Agreement, we entered into a registration rights agreement with PCCU and the seller in which we will agree to file a registration statement to register the resale of the Class A Common Stock to be issued to the seller. In addition, we entered into a registration rights agreement with the PIPE Investors, pursuant to which, among other things, we are obligated to file a registration statement to register the resale of the shares of Class A Common Stock issuable upon conversion of the PIPE Shares and the shares of Class A Common Stock issuable upon exercise of the PIPE Warrants. The existence of these shares available for resale pursuant to one or more registration statements could also have an adverse impact on the market prices of our Class A Common Stock.
Share Price & Shareholder Rights - Risk 9
A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our Class A Common Stock or public warrants to drop significantly, even if the Company's business is doing well.Sales of a substantial number of shares of our Class A Common Stock or public warrants in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our Class A Common Stock or public warrants. Following the Business Combination, NLIT sponsor and the initial officers and directors ("Northern Lights Restricted Stockholders") hold approximately 18.2% of our Class A Common Stock. Pursuant to the IPO Registration Rights Agreement, the Northern Lights Restricted Stockholders are entitled to registration of the shares of Class A Common Stock into which the shares of Class B Common Stock automatically converted at the time of the consummation of the Business Combination. In addition, holders of our Private Placement Warrants and their permitted transferees can demand that we register the Private Placement Warrants and the shares of Class A Common Stock issuable upon exercise of the Private Placement Warrants and holders of warrants that may be issued upon conversion of the Working Capital Loan may demand that we register such warrants or the Class A Common Stock issuable upon exercise of such warrants. The holders of these securities are entitled to make up to three demands, excluding short form demands, that the Company register such securities. These holders also have certain "piggy-back" registration rights with respect to registration statements filed subsequent to the consummation of the initial business combination.
The Northern Lights Restricted Stockholders entered into a letter agreement pursuant to which, they agreed that, with certain limited exceptions, the shares of Class B Common Stock (which were converted into shares of Class A Common Stock at the Closing of the Business Combination) may not be transferred until 150 days after the closing of the Business Combination. We also entered into the Lock-Up Agreement at the Closing of the Business Combination, with each of the seller and PCCU, substantially in the form attached as Annex C. In addition, given that the lock-up period on the shares of Class A Common Stock into which the shares of Class B Common Stock converted is potentially shorter than most other blank check companies, these shares may become registered and available for sale sooner than comparable shares in such other companies.
Share Price & Shareholder Rights - Risk 10
The Company is a "controlled company" within the meaning of the applicable rules of Nasdaq and, as a result, may qualify for exemptions from certain corporate governance requirements. If the Company relies on these exemptions, its stockholders will not have the same protections afforded to stockholders of companies that are subject to such requirements.Following the Closing of the Business Combination, PCCU controls a majority of the voting power of the Company's Class A Common Stock, and, accordingly, the Company is considered a "controlled company" within the meaning of applicable rules of Nasdaq, which provide that a company of which more than 50% of the voting power for the election of directors is held by an individual, group or another company is a "controlled company" and may elect not to comply with certain corporate governance requirements, including the requirements:
- that a majority of the board consists of independent directors; - for an annual performance evaluation of the nominating and corporate governance and compensation committees; - that the controlled company has a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee's purpose and responsibilities; and - that the controlled company has a compensation committee that is composed entirely of independent directors with a written charter addressing the committee's purpose and responsibility.
While the Company does not intend to rely on these exemptions, the Company may use these exemptions now or in the future. As a result, the Company's stockholders may not have the same protections afforded to stockholders of companies that are subject to all of the Nasdaq corporate governance requirements.
Share Price & Shareholder Rights - Risk 11
The market for our securities has been volatile and may continue to be volatile, which would adversely affect the liquidity and price of our securities.The price of our securities may fluctuate significantly due to the market's reaction to sales of our shares Class A Common Stock issued to the holders of our convertible preferred stock upon the conversion thereof, and to general market and economic conditions. An active trading market for our securities may never develop or, if developed, it may not be sustained. In addition, the price of our securities can vary due to general economic conditions and forecasts, our general business condition and the release of our financial reports. Additionally, if our securities become delisted from Nasdaq because we are unable to regain compliance with Nasdaq's minimum bid price requirement or for any reason, and are quoted on the OTC Bulletin Board or OTC Pink, an inter-dealer automated quotation system for equity securities that is not a national securities exchange, the liquidity and price of our securities may be more limited than if we were quoted or listed on Nasdaq or another national securities exchange. You may be unable to sell your securities unless a market can be established or sustained.
Share Price & Shareholder Rights - Risk 12
Sales of our Class A Common Stock, or the perception of such sales, by us or the holders of such shares in the public market or otherwise could cause the market price for our Class A Common Stock to decline.The sale of shares of our Class A Common Stock in the public market or otherwise, or the perception that such sales could occur, could increase the volatility of the market price of our Class A Common Stock or result in a significant decline in the public trading price of our Class A Common Stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that it deems appropriate. Resales of our Class A Common Stock may cause the market price of our securities to drop significantly, even if our business is doing well.
Share Price & Shareholder Rights - Risk 13
Our failure to continue to meet Nasdaq's continued listing standards could have an adverse impact on our stock price.Our shares are currently listed for trading on the Nasdaq. On March 16, 2023, we received a letter from Nasdaq notifying the Company that for the last 30 consecutive business days, the Company did not maintain a minimum closing bid price of $1 per share for its common stock, as required by Nasdaq listing rule 5550(a)(2). The Company has 180 calendar days, or until September 12, 2023, to regain compliance. The notice states that to regain compliance, the closing bid price of the Company's common stock must be at least $1 for a minimum of 10 consecutive business days. If the Company does not regain compliance by September 12, 2023, the Company may be eligible for additional time up to an additional 180 days. In connection with any extension periods, if it appears that the Company will not be able to regain compliance with Nasdaq listing rule 5550(a)(2), or if the Company is not otherwise eligible, the Nasdaq staff will provide notice to the Company that its securities will be subject to delisting. At that time, the Company may appeal any such delisting determination to a Hearings Panel. The Company intends to actively monitor the bid price and may evaluate other available options to resolve the deficiency and regain compliance with the Nasdaq listing rule. While the Company is exercising diligent efforts to maintain the listing of its common stock and warrants on Nasdaq, there can be no assurance that the Company will be able to regain or maintain compliance with other Nasdaq listing standards.
At this time, the Company's common stock and warrants continue to trade on Nasdaq under the symbols "SHFS" and "SHFSW," respectively. Remaining listed for trading on Nasdaq requires us to remain compliant with Nasdaq's current continued listing requirements, which, in addition to the minimum bid price requirement described above, include maintaining minimum levels of shareholders' equity, assets and revenues (depending on the compliance standard being used to demonstrate compliance), and other quantitative standards such as minimum market value of publicly held shares and number of market makers. Although we currently meet the Nasdaq continued listing requirements, there can be no assurances that we will continue to do so in the future.
Share Price & Shareholder Rights - Risk 14
Concentration of ownership among our existing executive officers, directors and their respective affiliates may prevent new investors from influencing significant corporate decisions.Following the Closing of the Business Combination, our affiliates, executive officers, directors and their respective affiliates as a group beneficially own approximately 14.21% of our outstanding Class A Common Stock, as discussed elsewhere in this document. As a result, these stockholders are able to exercise a significant level of control over all matters requiring stockholder approval, including the election of directors, amendment of our Second Amended and Restated Certificate of Incorporation and approval of significant corporate transactions. This control could have the effect of delaying or preventing a change of control of us or changes in management and will make the approval of certain transactions difficult or impossible without the support of these stockholders.
Share Price & Shareholder Rights - Risk 15
Certain of our directors, officers, employees and investors who are not U.S. citizens may face constraints on cross-border travel into the United States.Non-U.S. citizens employed at or investing in companies doing business in the state-legal cannabis industry could face detention, denial of entry or lifetime bans from the United States for their business associations with cannabis businesses. Entry to the United States happens at the sole discretion of the officers on duty of the U.S. Customs and Border Protection, and these officers have wide latitude to ask questions to determine the admissibility of a foreign national. Business or financial involvement in the legal cannabis industry could be grounds for U.S. border guards to deny entry.
Share Price & Shareholder Rights - Risk 16
Failure by the Company's directors, officers or employees to comply with applicable policies, regulations and rules could materially and adversely affect us.The Company has adopted an employee handbook which includes policies and guidelines for its directors, officers and employees. The Company's adoption of these policies and guidelines is not a representation or warranty that all persons subject to such standards are or will be in complete compliance. The failure of a director, officer or employee of the Company to comply with the applicable policies and guidelines may result in liability or other legal consequences, adverse publicity and termination of the relationship, which could materially adversely affect the Company.
Accounting & Financial Operations7 | 12.3%
Accounting & Financial Operations - Risk 1
If the Company fails to implement and maintain an effective system of internal controls, it may not be able to accurately determine its financial results or prevent fraud. As a result, investors could lose confidence in the Company's financial results, which could materially and adversely affect the Company.Accounting & Financial Operations - Risk 2
The accounting for the forward purchase derivative resulting from the forward purchase agreement we entered into in connection with the Business Combination requires us to revalue the derivative at each balance sheet date, which could result in material changes to our balance sheet and statement of operations.The Company accounts for the forward purchase derivative assumed in the Business Combination in accordance with the guidance contained in ASC Topic 815, "Derivatives and Hedging" ("ASC 815"). The Company classifies the forward purchase derivatives as liabilities carried at their fair value and adjusts the forward purchase derivatives to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until the conditions under the forward purchase agreement are exercised or expire, and any change in fair value is recognized in the consolidated statement of operations. As a result, changes in the fair value of this derivative could result in material impacts to our balance sheet and statement of operations.
Accounting & Financial Operations - Risk 3
Changes in accounting rules, assumptions or judgments could materially and adversely affect the Company.Accounting rules and interpretations for certain aspects of the Company's financial reporting are highly complex and involve significant assumptions and judgment. These complexities could lead to a delay in the preparation and dissemination of the Company's consolidated financial statements. Furthermore, changes in accounting rules and interpretations or in the Company's accounting assumptions or judgments, such as asset impairments and contingencies are likely to significantly impact the Company's consolidated financial statements. In some cases, the Company could be required to apply a new or revised standard retroactively, resulting in restating consolidated financial statements from prior period(s). Any of these circumstances could have a material adverse effect on the Company's business, prospects, liquidity, financial condition and results of operations. For additional information, see the consolidated financial statements of the Company and related footnotes included elsewhere in this document.
Accounting & Financial Operations - Risk 4
We may be required to take write-downs or write-offs, restructuring and impairment or other charges that could have a significant negative effect on our financial condition, results of operations and our stock price, which could cause you to lose some or all of your investment.Although we have conducted due diligence on the Company, we cannot assure you that this diligence will surface all material issues that may be present in the Company's business, that it would be possible to uncover all material issues through a customary amount of due diligence, or that factors outside of the Company's business and outside of our and the Company's control will not later arise. As a result of these factors, we may be forced to later write down or write off assets, restructure operations, or incur impairment or other charges that could result in losses. Even if our due diligence successfully identifies certain risks, unexpected risks may arise and previously known risks may materialize in a manner not consistent with our preliminary risk analysis. Even though these charges may be non-cash items and not have an immediate impact on our liquidity, the fact that we report charges of this nature could contribute to negative market perceptions about the post-combination company or its securities. Accordingly, any of our stockholders who chose to remain stockholders following the Business Combination could suffer a reduction in the value of their shares. Such stockholders are unlikely to have a remedy for such reduction in value.
Accounting & Financial Operations - Risk 5
Our operating results may fluctuate significantly and could fall below the expectations of securities analysts and investors due to seasonality and other factors, some of which are beyond our control, resulting in a decline in our stock price.Our operating results may fluctuate significantly because of several factors, including:
- labor availability and costs for hourly and management personnel; - profitability of our services, especially in new markets and due to seasonal fluctuations; - changes in interest rates; - impairment of long-lived assets; - macroeconomic conditions, both nationally and locally; - negative publicity relating to products we serve; - changes in consumer preferences and competitive conditions; - expansion to new markets; and - fluctuations in commodity prices.
Accounting & Financial Operations - Risk 6
Our internal controls over financial reporting may not be effective and our independent registered public accounting firm may not be able to certify as to their effectiveness, which could have a significant and adverse effect on our business and reputation.As a public company, we are required to comply with the SEC's rules implementing Sections 302 and 404 of SOX, which require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of internal control over financial reporting. To comply with the requirements of being a public company, and we may need to undertake various actions, such as implementing additional internal controls and procedures and hiring additional accounting or internal audit staff. The standards required for a public company under Section 404 of SOX are significantly more stringent than those required of the Company as a privately-held company. Further, as an emerging growth company, our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal controls over financial reporting pursuant to Section 404 until the date we are no longer an emerging growth company. At such time, our independent registered public accounting firm may issue a report that is adverse in the event that it is not satisfied with the level at which the controls of the post-combination company are documented, designed or operating.
Testing and maintaining these controls can divert our management's attention from other matters that are important to the operation of our business. If we identify material weaknesses in the internal control over financial reporting of the Company or are unable to comply with the requirements of Section 404 or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal controls over financial reporting when we no longer qualify as an emerging growth company, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by the SEC or other regulatory authorities, which could require additional financial and management resources.
Accounting & Financial Operations - Risk 7
The Company identified material weaknesses in its internal control over financial reporting for the year ended December 31, 2022. Such material weaknesses could adversely affect the Company's ability to report its results of operations and financial condition accurately and in a timely manner.As noted above, the Company's management is responsible for establishing and maintaining adequate internal control over financial reporting designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America ("GAAP").. The Company's management is likewise responsible for the evaluation of the effectiveness of its internal controls and to disclose any changes and material weaknesses identified through such evaluation of those internal controls. A material weakness is 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 our annual or interim financial statements will not be prevented or detected on a timely basis.
In connection with the audit of the Company's financial statements for the year ended December 31, 2022, the Company has identified four (4) material weaknesses within its internal controls over financial reporting related to its Deferred Tax Asset, Going Concern, Revenue Recognition, and Complex Financial Instruments. Refer to Item 9A of this document for additional details.
The Company has implemented a plan to remediate these material weaknesses, through measures that include the following:
- Deferred Tax Asset: To alleviate this material weakness, the Company has implemented a quarterly control to calculate and review the deferred tax asset, evaluate the necessity for any valuation allowance, and reconcile it to the general ledger. - Going Concern: To alleviate this material weakness, the Company has implemented a quarterly process with enhanced management review controls to perform and review a going concern analysis and the adequacy of disclosures within the consolidated financial statements, as applicable based on the results. - Revenue Recognition: To alleviate this material weakness, the Company will implement a monthly process with enhanced management review controls to perform and review revenue recognition. - Complex Financial Instruments: To alleviate this material weakness, the Company will implement a quarterly process with enhanced management review controls to perform and review complex financial instruments.
With the implementation of our remediation plans for each material weakness, we believe, in subsequent periods, these material weaknesses can be remediated. Completion of remediation does not provide assurance that our remediation or other controls will continue to operate properly. A failure to maintain effective internal controls over financial reporting could result in errors in its financial statements that could require the Company to restate past financial statements, cause the Company to fail to meet its reporting obligations and cause investors to lose confidence in the Company's reported financial information, all of which could materially and adversely affect the Company.
Debt & Financing10 | 17.5%
Debt & Financing - Risk 1
Interest rate volatility could significantly reduce our profitability, business, financial condition, results of operations and liquidity.Debt & Financing - Risk 2
Foreclosure of security interests on loans to CRBs that are in default could result in losses.In general, a foreclose procedure is required to liquidate collateral provided on loans in default. Alternatively, a borrower may be required under the terms of the loan documents to dispose of certain business assets to satisfy the loan commitments. Foreclosure processes and other liquidations of collateral are often lengthy and expensive. Results of foreclosure and liquidation processes may be uncertain, as claims may be asserted by the relevant borrower or by other creditors or investors in such borrower that interfere with the foreclosure or liquidation process, such as claims that challenge the validity or enforceability of the loan or the priority or perfection of the security interests. Borrowers may resist foreclosure actions or may refuse to comply with loan requirements by asserting numerous claims, counterclaims and defenses against our client financial institutions or us, including, without limitation, lender liability claims and defenses, even when the assertions may have no merit, in an effort to prolong the foreclosure action or delay the liquidation of collateral and seek to force us or the financial institution into a modification or buy-out of the loan for less than the amount owed. Additionally, the transfer of certain collateral to us or our financial institution clients may be limited or prohibited by applicable laws, regulations and/or public company listing standards. See "Loans to CRBs secured by properties and assets that are, and will be, subject to extensive regulations, such that if such collateral was foreclosed upon those regulations may result in significant costs and materially and adversely affect the Company's business, financial condition, liquidity and results of operations." For transferable collateral, foreclosure, or other remedies available may be subject to certain laws and regulations, including the need for regulatory disclosure and/or approval of such transfer. If federal law were to change to permit cannabis companies to seek federal bankruptcy protection, the applicable borrower could file for bankruptcy, which would have the effect of staying the foreclosure actions or liquidation processes and delaying the foreclosure or liquidation processes and potentially result in reductions or discharges of debt owed. Foreclosure or forced liquidation may create a negative public perception of the collateral property, resulting in a diminution of its value. Moreover, the liquidation proceeds upon sale of the underlying real estate may not be sufficient to repay the loan in full. Any costs or delays involved in the foreclosure or a liquidation of the underlying property will reduce the net proceeds realized and, thus, increase the potential for loss. In the event a borrower defaults on any of its loan obligations and such debt obligations are equitized, neither the Company nor its financial institution clients will hold such equity interests, which may result in additional losses on loans to such entity.
Debt & Financing - Risk 3
Certain assets of CRB borrowers may not be used as collateral or transferred due to applicable state laws and regulations governing the cannabis industry, and such restrictions could negatively impact our profitability.Each state that has legalized cannabis in some form has adopted its own set of laws and regulations that differ from one another. In particular, laws and regulations differ among states and even localities regarding the collateralization or transferability of cannabis-related assets, such as cannabis licenses, cannabis inventory, and ownership interests in licensed cannabis companies. Some state laws and regulations where borrowers operate may prohibit the collateralization or transferability of certain cannabis-related assets. Other states may allow the collateralization or transferability of cannabis-related assets, but with restrictions, such as meeting certain eligibility requirements, utilization of state receiverships, and/or upon approval by the applicable regulatory authority. Prohibitions or restrictions on the ability to take possession of certain cannabis-related assets securing the loans of our borrowers could have a material adverse effect on the Company's business, financial condition, liquidity and results of operations. In addition, because the sales of such assets may be forced upon the borrower when time may be of the essence and available to a limited number of potential purchasers, the sales prices may be less than the prices obtained with more time in a larger market.
Debt & Financing - Risk 4
If the Company's allowance for loan losses is not sufficient to cover actual loan losses for loans held in the Company's portfolio or for which it was otherwise responsible, the Company's results of operations and financial condition will be negatively affected.In the event loan customers do not repay their loans according to their terms and the proceeds of liquidating the collateral securing these loans is insufficient to satisfy any remaining loan balance, the Company may experience significant indemnity losses associated with these loans. Such credit risk is inherent in the lending business, and failure to adequately assess such credit risk could have a material adverse effect on our financial condition and results of operations. The Company will be required to establish loan loss reserves for all loans for which it is the lender, for all the Company originated loans made by PCCU to CRB customers, and in other instances where it may be contractually liable to indemnify a lender for loan losses. The determination of the appropriate level of the allowance for loan losses involves a high degree of subjectivity and judgment and will require the Company to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Although we have agreed with PCCU in the Loan Servicing Agreement that we will maintain or have access to sufficient liquidity to satisfy our indemnity obligations to PCCU under the Loan Servicing Agreement, we cannot be certain that our loan loss reserves will be adequate over time to cover losses in PCCU-funded loans or loans funded by other funding sources in the Company's portfolio because of unanticipated adverse changes in the economy, market conditions or events adversely affecting specific customers, industries or markets, or borrowers repaying their loans. If the Company's loan loss reserves are not adequate, our business, financial condition, including our liquidity and capital, and results of operations could be materially adversely affected. In addition, charge-offs of defaulted loans in future periods that exceed the related reserves may require us to add to our loan loss reserves, which would result in a decrease in net income and capital, and could have a material adverse effect on our financial condition and results of operations.
Debt & Financing - Risk 5
The Company intends to focus its lending to CRBs on commercial loans, which could increase the risk in the Company's loan portfolio, resulting in higher provisions for loan losses and adversely affecting the Company's results of operations.The Company intends to focus its lending efforts on commercial loans to CRBs, including commercial real estate loans, commercial business secured by other assets such as equipment or accounts receivable, and unsecured loans. Historically, these loans have had higher risks than other types of loans, such as loans secured by residential real estate. For example, repayment of commercial real estate loans and commercial business loans are dependent on income being generated by the rental property or business in amounts sufficient to cover operating expenses and debt service. If the borrowers of these types of loans default, the collateral may not be liquidated as easily and may involve expensive workout techniques. Commercial lending may also involve large balances of loans to single borrowers or related groups of borrowers. If these loans become nonperforming, The Company may have to increase its reserves for loan losses, which would negatively affect its results of operations.
In addition, loans secured by commercial real estate may deteriorate in value during the time the credit is extended. Real estate values and the real estate markets are generally affected by a variety of factors including, but not limited to, changes in economic conditions, fluctuations in interest rates, the availability of credit, changes in tax laws and other statutes, regulations, and policies, and acts of nature. Weakening of the real estate market could result in an increase loan defaults and a reduction in the value of the collateral securing those loans, which in turn could adversely affect our profitability and asset quality. If the collateral securing a loan is liquidated to satisfy the debt during a period of reduced real estate values, our earnings and capital could be adversely affected.
Debt & Financing - Risk 6
The Company's loan program is currently substantially dependent on PCCU, currently the largest funding source for the Company's loans, which may limit the types, terms and amounts of loans that we may offer.The Company's loan program currently depends on PCCU as the Company's largest funding source for new loans to CRBs. To date, with the exception of one $500,000 loan funded directly by the Company during April 2022, all of the Company's loans have been funded by PCCU. Under PCCU's loan policy for loans to CRBs, PCCU's board has approved aggregate lending limits at the lesser of 1.3125 times PCCU's net worth or 65% of total CRB deposits. Concentration limits for the deployment of loans are further categorized as (i) real estate secured, (ii) construction, (iii) unsecured and (iv) mixed collateral with each category limited to a percentage of PCCU's net worth. As of December 31, 2022, PCCU's net worth was $133.23 million and CRB-related deposits were $161.14 million. As of December 31, 2021, PCCU's net worth was $61.9 million and CRB-related deposits were $146.3 million. In addition, loans to any one borrower or group of associated borrowers are limited by applicable NCUA regulations to the greater of $100,000 or 15% of PCCU's net worth. As a result, our ability to expand our loan program will be limited by PCCU's growth unless we are able to expand our capacity to make loans directly or find other financial institutions and lenders willing to make loans to CRBs. In addition, even if we are able to identify additional lenders, we may not be able to negotiate comparable terms.
Debt & Financing - Risk 7
The Company has only recently begun its loan program, which may make it more difficult for the Company to compete with other lenders, brokers and servicers.The Company, through its predecessor entity, began offering loan services through PCCU to CRBs in 2020. As a result, the Company's loan program may be subject to factors inherent in a start-up business, such as competing with existing entities who have been offering loans and other lending-related services for longer than the Company has, ensuring that the Company's systems are compliant with applicable laws and regulations, and ensuring that the Company's systems and personnel are able to handle the anticipated pipeline of loan applications. The time to fully ramp-up the Company's lending and loan servicing operations may be more difficult for the Company to compete against lenders and brokers that have been lending to CRBs for a longer period of time.
Debt & Financing - Risk 8
We may be unable to obtain additional financing to fund our operations and growth.We may require additional financing to fund our operations or growth in future periods. The failure to secure additional financing could have a material adverse effect on the continued development or growth of the post-combination company. None of our officers, directors or stockholders is required to provide any financing to us.
Debt & Financing - Risk 9
The terms of our PIPE financing completed in conjunction with the business Combination has had, and could continue to have an adverse impact of the trading prices of the Class A Common Stock.Concurrently with entering into the Unit Purchase Agreement, the Company entered into the Original Securities Purchase Agreement with the PIPE Investors, pursuant to which, among other things, the Original PIPE Investors agreed to subscribe for and purchase, and the Company agreed to issue and sell to the Original PIPE Investors, the PIPE Shares and the PIPE Warrants. On September 27, 2022, the Company and the PIPE Investors entered into the Amended and Restated Securities Purchase Agreement, which amended the Original Securities Purchase Agreement to, among other matters, reduce the amount of PIPE Shares to be issued from $60 million of Class A Convertible Preferred Stock to $20.45 million of Class A Convertible Preferred Stock. The terms of the PIPE Shares provide for an initial conversion price of $10.00 per share of Class A Common Stock, which conversion price is subject to downward adjustment on each of the dates that are 10 days, 55 days, 100 days, 145 days and 190 days after the effectiveness of a registration statement registering the shares of Class A Common Stock issuable upon conversion of the PIPE Shares to the lower of the Conversion Price and the greater of (i) 80% of the volume weighted average price of the Class A Common Stock for the prior five trading days and (ii) $1.25, which is the adjusted minimum conversion price following receipt of stockholder approval in January 2023 (the "Floor Price"); provided that, so long as a PIPE Investor continues to hold any PIPE Shares, such PIPE Investor will be entitled to receive the aggregate shares of Class A Common Stock that would be issuable based upon its initial purchase of PIPE Shares at the adjusted Conversion Price. However, so long as the PIPE Investor continues to hold any PIPE Shares, such PIPE Investor will be entitled to receive the aggregate shares of Class A Common Stock that would be issuable based upon its initial purchase of PIPE Shares at the adjusted conversion price. The conversion price is also subject to other customary adjustments for stock dividends, stock splits and similar corporate actions.
The PIPE Warrants have an exercise price of $11.50 per share of Class A Common Stock to be paid in cash (except if the shares underlying the warrants are not covered by an effective registration statement after the six-month anniversary of the closing date, in which case cashless exercise is permitted), subject to adjustment to a price equal to the greater of (i) 125% of the Conversion Price if at any time there is an adjustment to the Conversion Price and the exercise price after such adjustment is greater than 125% of the Conversion Price as adjusted and (ii) $5.00. The PIPE Warrants are also subject to adjustment for other customary adjustments for stock dividends, stock splits and similar corporate actions. The PIPE Warrants are exercisable for a period of five years following the Closing, or September 28, 2027. After exercise of a PIPE Warrant, the Company may be required to pay certain penalties if it fails to deliver the Class A Common Stock within a specified period of time.
The adjustments to the conversion price and the exercise price of the PIPE Warrants have had, and could have in the future, an adverse effect on the market trading price of our Class A Common Stock.
Debt & Financing - Risk 10
There is no guarantee that the Warrants will be in the money, and they may expire worthless.The exercise price for the Warrants is $11.50 per share of Class A Common Stock, which exceeds the market price of the shares of Class A Common Stock, which was $0.47 per share based on the closing price of the Class A Common Stock on April 5, 2023. There is no guarantee that the Warrants will be in the money at any given time prior to their expiration. If the trading price of Class A Common Stock remains below the exercise price of the Warrants, the Warrants may expire worthless. If all of the Warrants were exercised in full for cash, we would receive an aggregate of approximately $80.92 million. We do not currently expect the holders of the Warrants to exercise their Warrants and therefore, we do not expect to receive cash proceeds from any such exercise, for so long as the Warrants remain out of the money. We can provide no assurances that the trading price of our Class A Common Stock will remain at levels where it would be attractive to exercise our outstanding Warrants until the time that such warrants become exercisable.
Corporate Activity and Growth2 | 3.5%
Corporate Activity and Growth - Risk 1
We may not receive any proceeds from the exercise of Warrants, and if we do we may be unable to invest the portion of the net proceeds from this offering on acceptable terms.Corporate Activity and Growth - Risk 2
If the Business Combination's benefits do not meet the expectations of investors, stockholders or financial analysts, the market price of our securities may decline.If the benefits of the Business Combination do not meet the expectations of investors or securities analysts, the market price of the Company's securities may decline.
In addition, fluctuations in the price of our securities could contribute to the loss of all or part of your investment. Prior to the Business Combination, there was not a public market for our stock and trading in the shares of our Class A Common Stock, public units and public warrants was not active. Accordingly, the valuation ascribed to us and our Class A Common Stock, public units and public warrants in connection with the Business Combination may not be indicative of the price of the post-combination company that will prevail in the trading market. If an active market for our securities develops and continues, the trading price of our securities could be volatile and subject to wide fluctuations in response to various factors, some of which are beyond our control. Any of the factors listed below could have a material adverse effect on your investment in our securities and our securities may trade at prices significantly below the price you paid for them. In such circumstances, the trading price of our securities may not recover and may experience a further decline.
Factors affecting the trading price of our securities may include:
- actual or anticipated fluctuations in our financial results or the financial results of companies perceived to be similar to us;- changes in the market's expectations about our operating results;- the public's reaction to our press releases, our other public announcements and our filings with the SEC;- speculation in the press or investment community;- success of competitors;- our operating results failing to meet the expectation of securities analysts or investors in a particular period; - the impact of changes in valuation of financial derivatives;- changes in financial estimates and recommendations by securities analysts concerning the post-combination company or the market in general;- operating and stock price performance of other companies that investors deem comparable to the post-combination company;- our ability to market new and enhanced products on a timely basis;- changes in laws and regulations affecting our business;- commencement of, or involvement in, litigation involving the post-combination company;- changes in the post-combination company's capital structure, such as future issuances of securities or the incurrence of additional debt;- the volume of shares of the Class A Common Stock and public warrants of the post-combination company available for public sale;- any material change in our Board or management;- sales of substantial amounts of Class A Common Stock by our directors, officers or significant stockholders or the perception that such sales could occur;- the realization of any of the risk factors presented in this document;- additions or departures of key personnel;- failure to comply with the requirements of Nasdaq;- failure to comply with the Sarbanes-Oxley Act of 2002 or other laws or regulations;- actual, potential or perceived control, accounting or reporting problems;- changes in accounting principles, policies and guidelines; and - general economic and political conditions such as recessions, interest rates, fuel prices, international currency fluctuations and acts of war or terrorism.
Broad market and industry factors may materially harm the market price of our securities irrespective of our operating performance. The stock market in general and Nasdaq have experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the particular companies affected. The trading prices and valuations of these stocks, and of our securities, may not be predictable. A loss of investor confidence in the market for the stocks of other companies which investors perceive to be similar to the post-combination company could depress our stock price regardless of our business, prospects, financial conditions or results of operations. A decline in the market price of our securities also could adversely affect our ability to issue additional securities and our ability to obtain additional financing in the future.
In the past, securities class action litigation has often been initiated against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and divert our management's attention and resources, and could also require us to make substantial payments to satisfy judgments or to settle litigation.
Legal & Regulatory
Total Risks: 10/57 (18%)Below Sector Average
Regulation4 | 7.0%
Regulation - Risk 1
Loans to CRBs secured by properties and assets that are, and will be, subject to extensive regulations, such that if such collateral was foreclosed upon those regulations may result in significant costs and materially and adversely affect the Company's business, financial condition, liquidity and results of operations.Regulation - Risk 2
The Company may become subject to regulation in additional states as it expands its operations.The Company was previously considered a credit union service organization ("CUSO") and as a result of its status as a Colorado limited liability company and its relationship with PCCU, a Colorado-chartered credit union, the Company is subject to various Colorado and federal laws, rules and regulations. Although the Company is no longer considered a CUSO following the closing of the Business Combination, the Company may become subject to the laws of additional states as it expands its operations by opening offices, maintaining employees or otherwise establishing a substantial footprint in additional states.
Regulation - Risk 3
Changes in laws, regulations or rules, or a failure to comply with any laws, regulations or rules, may adversely affect our business, investments and results of operations.We are subject to laws, regulations and rules enacted by national, regional and local governments and Nasdaq. In particular, we are required to comply with certain SEC, Nasdaq and other legal or regulatory requirements of businesses providing financial services. Compliance with, and monitoring of, applicable laws, regulations and rules may be difficult, time consuming and costly. These laws, regulations, and rules include, without limitation, the following:
- As a commercial lender making loans to CRBs, we will be subject to various state laws relating to usury that govern or limit interest rates and other fees charged on loans, permitted contractual loan terms, collection practices and creditor remedies. - As an employer, we will be subject to state and federal laws relating to employment practices, health and safety of employees, employee benefits and other employment-related matters. - As a company whose common stock is listed for trading on Nasdaq, we are subject to Nasdaq's continued listing requirements, which include requirements relating corporate governance matters, the size of the public float of our shares, and the minimum bid price of our shares. We are also required to notify Nasdaq of various corporate actions. - We are an SEC reporting company and therefore we are required to comply with the various rules and regulations of the SEC that relate to, among other things, the timing and content of annual, quarterly and current reports, the process to register additional shares for sale to the public or for resale by existing investors, and disclosures in connection with meetings of our stockholders. Changes in these rules and regulations can have a significant impact on us, such as the rules proposed by the SEC on March 30, 2022 regarding the disclosure requirements in connection with business combination transactions involving SPACs.
As our business expands to additional states, we will be required to review and comply with those states' laws that apply to our services and business activities. We will also be required to determine whether we will become subject to additional areas of regulation if we expand the types of activities in which we engage. For example, because we do not hold customer deposits or offer loans for consumer or personal purposes, we are not currently required have a financial institution charter or lending license in the states in which we currently provide services or loans. If we do not identify activities that would require a regulatory application, license or other approval, or if the interpretation and application of the laws to which we are currently subject change, those additional laws, rules, and regulations or changes therein could have a material adverse effect on our business, investments and results of operations. A failure to comply with any applicable laws, regulations or rules, as interpreted and applied, could have a material adverse effect on our business and results of operations.
Regulation - Risk 4
The Company, its financial institution clients and their CRB customers are subject to a variety of laws regarding financial transactions related to cannabis, which could subject their CRB customers to legal claims or otherwise adversely affect our business.The Company, its financial institution clients and their CRB customers are subject to a variety of laws and regulations in the United States regarding financial transactions, including the Bank Secrecy Act, as amended by Title III of the USA Patriot Act. The penalties for violation of these laws and regulations include imprisonment, substantial fines and forfeiture. In complying with these laws and regulations, the Company complies with the FinCEN Guidance. This compliance includes, among other things, extensive due diligence reviews of potential and existing CRB customers of the financial institutions. These reviews may be time-consuming and costly, potentially creating additional barriers to providing financial services and imposing additional compliance requirements on us and our CRB customers. In addition, the Company is, on behalf of its financial institution clients, required to make various filings with FinCEN and the IRS to report certain suspicious transactions or cash transactions of over $10,000. If the filings are not made accurately or promptly, substantial penalties may be imposed that could have a material adverse effect on our business, results of operations and financial condition. In addition, we cannot assure that the Company's strategies and techniques for designing our services and solutions for our clients and CRB customers will operate effectively and efficiently and not be adversely impacted by cannabis regulations. Further, a change in financial services regulations or a change in the position of the financial services industry that permits more financial institutions to directly serve businesses that grow and sell cannabis products may increase competition for us, facilitate new entrants into the industry offering services similar to those that we offer, or otherwise adversely affect our results of operations.
Litigation & Legal Liabilities5 | 8.8%
Litigation & Legal Liabilities - Risk 1
We may have difficulty using bankruptcy courts due to our involvement in the regulated cannabis industry.Litigation & Legal Liabilities - Risk 2
Cannabis businesses may be subject to civil asset forfeiture.Property owned by participants in the cannabis industry used in the course of conducting such business, or that represents proceeds of such business or is traceable to proceeds of such business, could be subject to seizure by law enforcement and subsequent civil asset forfeiture because of the illegality of the cannabis industry under federal law. Even if the owner of the property is never charged with a crime, the property in question could still be seized and subject to an administrative proceeding by which, with minimal due process, it could be subject to forfeiture. Forfeiture of assets of our CRB customers, including if such assets are collateral for loans made or serviced by us, could adversely affect our revenues if it impedes the borrowers' profitability or operations and our CRB customers' ability to continue to use our services.
Litigation & Legal Liabilities - Risk 3
There may be difficulty enforcing certain of our commercial agreements and contracts.Courts may not enforce a contract deemed to involve a violation of law or public policy. Parties to contracts involving the state legal cannabis industry have at times argued that the agreements were void as illegal federally or against public policy. Some courts have accepted this argument in certain cases. While courts have enforced contracts related to activities by state-legal cannabis companies, and the trend is generally to enforce contracts with state-legal cannabis companies and their vendors, there remains some doubt that we will be able to enforce our commercial agreements with our financial institution clients or the CRBs to which they provide banking services in court for this reason. Therefore, we cannot be assured that we will have a remedy for breach of contract in all instances, which could have a material adverse effect on our business.
Litigation & Legal Liabilities - Risk 4
An adverse outcome in litigation to which the Company is or becomes a party could materially and adversely affect us.The Company is not aware of any pending litigation. However, in the future, it may become subject to litigation, including claims relating to its operations, breach of contract, securities offerings, relation to the cannabis industry, or otherwise in the ordinary course of business or otherwise. Some of these claims may result in significant defense costs and potentially significant judgments against the Company, some of which are not, or cannot be, insured against. We cannot be certain of the ultimate outcomes of any claims that may arise in the future. Resolution of these types of matters against the Company may result in significant fines, judgments or settlements, which, if uninsured, or if the fines, judgments and settlements exceed insured levels, could adversely impact the Company's earnings and cash flows, thereby materially and adversely affecting us. Litigation or the resolution of litigation may affect the availability or cost of the Company's insurance coverage, which could materially and adversely impact us.
Litigation & Legal Liabilities - Risk 5
The Company is obligated to indemnify PCCU for all losses resulting from defaults of the CRB loans made by PCCU to the Company's customers.Pursuant to the Company's Loan Servicing Agreement with PCCU, the Company has agreed to indemnify PCCU for all losses resulting from the defaults of loans made by PCCU to CRB customers. This means that the Company will be solely responsible for all costs of negotiating forbearances or refinancing the defaulted loans, loss mitigation, and collection efforts, whether conducted directly or by an affiliate or third party, including realizing the proceeds from any collateral as a result of a sale of collateral by the borrower or through a third party engaged to assist the borrower n the liquidation process. The Company's indemnity is subordinate to PCCU's other means of collecting on the loans including repossession of collateral, recourse against personal and/or corporate guarantors and other default remedies available in the loan agreements. Since borrowers are not parties to the agreement between the Company and PCCU, any indemnity payments do not relieve borrowers of their obligation to PCCU nor would such payments preclude PCCU's right to future recoveries from the borrowers. As a result, we will be required to establish loan loss reserves relating to these loans, even though we are not the funding lender. Because these loans will not be an asset on our balance sheet, the loan loss reserves are anticipated to be reflected as a liability in our financial statements, versus a contra-asset.
Taxation & Government Incentives1 | 1.8%
Taxation & Government Incentives - Risk 1
Service providers to cannabis businesses may be subject to unfavorable U.S. tax treatment.Production
Total Risks: 5/57 (9%)Below Sector Average
Employment / Personnel2 | 3.5%
Employment / Personnel - Risk 1
The Company depends on key management personnel and other experienced employees.Employment / Personnel - Risk 2
The Company is dependent on PCCU for certain administrative services.Pursuant to the Second Amended and Restated Support Services Agreement, PCCU has been providing the Company with certain administrative services, including services relating to information technology and systems, accounting and financial services, human resources and marketing. The Company may also request that certain PCCU employees be available to the Company on a shared basis to perform duties for the Company. For these services, the Company paid PCCU a monthly fee equal to $30.96 per CRB account in addition to reimbursement of direct expenses. Under the Second Amended and Restated Support Services Agreement, PCCU is also entitled to retain 25% of all investment income derived from CRB cash and investments. We are building out our team so that these operational functions will be handled internally. Although we believe the fees due to PCCU under the Second Amended and Restated Support Services Agreement to be reasonable, these fees may result in higher expenses than we would otherwise incur. In addition, we may not be able to bring these functions in-house and, even if we are able to do so, we may continue to rely on third parties for all or part of these functions. Reliance on a third party, including PCCU, may result in significant expenses and operational issues over which we will not have direct control.
Supply Chain1 | 1.8%
Supply Chain - Risk 1
The conduct of third parties may jeopardize our business and regulatory compliance.Costs2 | 3.5%
Costs - Risk 1
Because we provide services to companies that provide services to CRBs, we may have a difficult time obtaining the various insurances that are desired to operate our business, which may expose us to additional risk and financial liability.Costs - Risk 2
The Company may suffer uninsured losses or suffer material losses in excess of insurance limits.In addition to difficulties with respect to claim assessment and liability and reserve estimation, some types of claims may not be covered by insurance or may exceed applicable coverage limits. The Company may also be responsible for applicable self-insured retentions with respect to its insurance policies. Furthermore, any product liability or warranty claims made against the Company, whether or not they are viable, may lead to negative publicity, which could impact the Company's reputation and future sales.
Because of the uncertainties inherent in litigation, we cannot provide assurance that the Company's insurance coverage, indemnity arrangements and reserves will be adequate to cover liability for any damages, the cost of litigation, or any other related expenses surrounding the current claims to which the Company is subject or any future claims that may arise. Such damages and expenses, to the extent that they are not covered by insurance, could materially and adversely affect our consolidated financial statements and results.
Ability to Sell
Total Risks: 5/57 (9%)Above Sector Average
Competition1 | 1.8%
Competition - Risk 1
The Company may face competition from traditional financial institutions and other lenders and service providers for its lending and other services, which may adversely affect the Company's ability to achieve our business goals and its results of operations.Demand2 | 3.5%
Demand - Risk 1
Substantially all of the Company's CRB customers' deposits are currently held at PCCU, which means that our growth will be restricted until we can enter into agreements with additional financial institutions.Demand - Risk 2
The soundness of our financial institution clients could adversely affect us.Because our clients are other financial institutions, our ability to grow our operations and client base could be adversely affected by the actions and commercial soundness of other financial institutions for whom we provide services or who might seek our services. Financial institutions are interrelated as a result of trading, clearing, counterparty or other relationships. As a result, defaults by, or even rumors or questions about, one or more financial institutions, or the banking and financial services industry generally, have led to market-wide liquidity problems and could lead to losses, defaults or regulatory actions against the financial institutions with which we do business or with whom we may seek to provide services. There can be no assurances that the occurrence of any such losses, defaults or regulatory actions would not materially and adversely affect our results of operations.
Sales & Marketing2 | 3.5%
Sales & Marketing - Risk 1
The Company provides services to financial institutions that provide banking services to businesses in or ancillary to the state licensed cannabis industry, which could expose us to additional liabilities and regulatory compliance cost and adversely impact our business, operations, financial condition, brand and reputation.Sales & Marketing - Risk 2
We may be subject to constraints on marketing our services, which could adversely impact our results of operations and our growth opportunities.Certain of the states in which the Company may operate have strict regulations regarding marketing and sales activities ancillary to cannabis products, which could affect our ability to market our services and the development of our business. If we are unable to effectively market our services and compete for market share, or if the costs of compliance with government legislation and regulation cannot be absorbed through increased fees for our services, this could hamper demand for our services, which could result in a loss of revenue.
Tech & Innovation
Total Risks: 1/57 (2%)Below Sector Average
Cyber Security1 | 1.8%
Cyber Security - Risk 1
An information systems interruption or breach in security of the Company's systems could adversely affect us.Macro & Political
Total Risks: 1/57 (2%)Below Sector Average
Natural and Human Disruptions1 | 1.8%
Natural and Human Disruptions - Risk 1
Actual or threatened public health crises, epidemics, or outbreaks, such as the outbreak of COVID-19, may have a material adverse effect on the Company's business, financial condition, and results of operations.See a full breakdown of risk according to category and subcategory. The list starts with the category with the most risk. Click on subcategories to read relevant extracts from the most recent report.
FAQ
What are “Risk Factors”?
Risk factors are any situations or occurrences that could make investing in a company risky.
The Securities and Exchange Commission (SEC) requires that publicly traded companies disclose their most significant risk factors. This is so that potential investors can consider any risks before they make an investment.
They also offer companies protection, as a company can use risk factors as liability protection. This could happen if a company underperforms and investors take legal action as a result.
It is worth noting that smaller companies, that is those with a public float of under $75 million on the last business day, do not have to include risk factors in their 10-K and 10-Q forms, although some may choose to do so.
How do companies disclose their risk factors?
Publicly traded companies initially disclose their risk factors to the SEC through their S-1 filings as part of the IPO process.
Additionally, companies must provide a complete list of risk factors in their Annual Reports (Form 10-K) or (Form 20-F) for “foreign private issuers”.
Quarterly Reports also include a section on risk factors (Form 10-Q) where companies are only required to update any changes since the previous report.
According to the SEC, risk factors should be reported concisely, logically and in “plain English” so investors can understand them.
How can I use TipRanks risk factors in my stock research?
Use the Risk Factors tab to get data about the risk factors of any company in which you are considering investing.
You can easily see the most significant risks a company is facing. Additionally, you can find out which risk factors a company has added, removed or adjusted since its previous disclosure. You can also see how a company’s risk factors compare to others in its sector.
Without reading company reports or participating in conference calls, you would most likely not have access to this sort of information, which is usually not included in press releases or other public announcements.
A simplified analysis of risk factors is unique to TipRanks.
What are all the risk factor categories?
TipRanks has identified 6 major categories of risk factors and a number of subcategories for each. You can see how these categories are broken down in the list below.
1. Financial & Corporate
- Accounting & Financial Operations - risks related to accounting loss, value of intangible assets, financial statements, value of intangible assets, financial reporting, estimates, guidance, company profitability, dividends, fluctuating results.
- Share Price & Shareholder Rights – risks related to things that impact share prices and the rights of shareholders, including analyst ratings, major shareholder activity, trade volatility, liquidity of shares, anti-takeover provisions, international listing, dual listing.
- Debt & Financing – risks related to debt, funding, financing and interest rates, financial investments.
- Corporate Activity and Growth – risks related to restructuring, M&As, joint ventures, execution of corporate strategy, strategic alliances.
2. Legal & Regulatory
- Litigation and Legal Liabilities – risks related to litigation/ lawsuits against the company.
- Regulation – risks related to compliance, GDPR, and new legislation.
- Environmental / Social – risks related to environmental regulation and to data privacy.
- Taxation & Government Incentives – risks related to taxation and changes in government incentives.
3. Production
- Costs – risks related to costs of production including commodity prices, future contracts, inventory.
- Supply Chain – risks related to the company’s suppliers.
- Manufacturing – risks related to the company’s manufacturing process including product quality and product recalls.
- Human Capital – risks related to recruitment, training and retention of key employees, employee relationships & unions labor disputes, pension, and post retirement benefits, medical, health and welfare benefits, employee misconduct, employee litigation.
4. Technology & Innovation
- Innovation / R&D – risks related to innovation and new product development.
- Technology – risks related to the company’s reliance on technology.
- Cyber Security – risks related to securing the company’s digital assets and from cyber attacks.
- Trade Secrets & Patents – risks related to the company’s ability to protect its intellectual property and to infringement claims against the company as well as piracy and unlicensed copying.
5. Ability to Sell
- Demand – risks related to the demand of the company’s goods and services including seasonality, reliance on key customers.
- Competition – risks related to the company’s competition including substitutes.
- Sales & Marketing – risks related to sales, marketing, and distribution channels, pricing, and market penetration.
- Brand & Reputation – risks related to the company’s brand and reputation.
6. Macro & Political
- Economy & Political Environment – risks related to changes in economic and political conditions.
- Natural and Human Disruptions – risks related to catastrophes, floods, storms, terror, earthquakes, coronavirus pandemic/COVID-19.
- International Operations – risks related to the global nature of the company.
- Capital Markets – risks related to exchange rates and trade, cryptocurrency.