Jefferson Capital, Inc. (JCAP) Risk Analysis

The JV Agreement provides that if we experience a change in control, which is defined as (i) the sale of all or substantially all of our assets (excluding the assets of the SL1 Venture), (ii) any merger, reorganization, share exchange, recapitalization, restructuring, or consolidation or similar transaction, which would result in a change in ownership of more than a majority of our outstanding common stock,(iii) the acquisition by any person of an aggregate of a majority of the beneficial ownership of our common stock unless current directors or directors who are selected, nominated or approved by our current directors or future approved directors continue to comprise a majority of the Board of Directors of the Company following such acquisition, (iv) the replacement of a majority of our current directors or directors who are selected, nominated or approved by our current directors or future approved directors, (v) the de-registration of our common stock, or (vi) our bankruptcy or insolvency, then Heitman may either remove and replace us as managing member of the SL1 Venture or cause the SL1 Venture to sell all of its assets. If we are removed as managing member of the SL1 Venture, then the relationship between the SL1 Venture and the developer/borrowers under the development property investments held by the SL1 Venture could be adversely affected, prompting such developer/borrowers to prematurely sell assets at less than optimal value. Further, if we are removed as the managing member upon an event of default (as defined in the JV Agreement) or a change in control, we will lose any reimbursement or fees earned during or attributable to the period prior to our removal and we only will be entitled to promote distributions, if any, based on the fair market value of the assets as of the date of our removal. The sale of assets of the SL1 Venture at a time prior to the Developer Equity Interests underlying the development property investments fully maturing could have a material adverse effect on us.

The capital and credit markets have recently experienced a period of extreme volatility and disruption. The market price and liquidity of the market for shares of our common stock may be significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance. Some of the factors that could negatively affect the market price of our common stock include: - our actual or projected operating results, financial condition, cash flows and liquidity, or changes in business strategy or prospects;- actual or perceived conflicts of interest with individuals, including our executives;- equity issuances by us, including issuances of our Series B Preferred Stock, or share resales by our stockholders, or the perception that such issuances or resales may occur;- our payment of the redemption price for the Series B Preferred Stock, upon either a redemption at our option on or after July 26, 2024 or, in the event of certain change of control events affecting us, at the option of the holders of the Series B Preferred Stock;- loss of a major funding source, including the inability to access our Credit Facility, sell senior participations, or A notes, in certain of our investments, or otherwise;- actual or anticipated accounting problems;- publication of negative research reports about us, the self-storage sector or the real estate industry;- changes in market valuations of similar companies;- adverse market reaction to any indebtedness we incur in the future;- additions to or departures of key personnel;- speculation in the press or investment community;- increases in market interest rates, which may lead investors to demand a higher distribution yield for our common stock and would result in increased interest expenses on our debt;- limitations on our ability to pay dividends at historical rates, or at all;- failure to maintain our REIT qualification or exemption from the 1940 Act;- price and volume fluctuations in the overall stock market from time to time;- general market and economic conditions, and trends including inflationary concerns, the current state of the credit and capital markets;- significant volatility in the market price and trading volume of securities of publicly traded REITs or other companies in our sector, which are not necessarily related to the operating performance of these companies;- changes in law, regulatory policies or tax guidelines, or interpretations thereof, particularly with respect to REITs;- changes in the value of our portfolio due to increases in capitalization rates, deceleration of rental rates or other factors affecting real estate values, in general, and self-storage properties, in particular;- any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts;- operating performance of companies comparable to us;- short-selling pressure with respect to shares of our common stock or REITs generally;- uncertainty surrounding the U.S. economy and increases in interest rates;- uncertainty related to and the impact of the results of the upcoming U.S. elections;- health and safety concerns such as the recent coronavirus outbreak; and - concerns regarding global economic conditions. As noted above, market factors unrelated to our performance could also negatively impact the market price of our common stock. One of the factors that investors may consider in deciding whether to buy or sell our common stock is our distribution rate as a percentage of our stock price relative to market interest rates. If market interest rates increase, prospective investors may demand a higher distribution rate or seek alternative investments paying higher dividends or interest. As a result, interest rate fluctuations and conditions in the capital markets can affect the market value of our common stock. For instance, if interest rates rise, it is likely that the market price of our common stock will decrease as market rates on interest-bearing securities increase. Additionally, in the past, securities class action litigation has often been instituted against companies following periods of volatility in the price of their common stock. This type of litigation could result in substantial costs and divert our management's attention and resources, which could have an adverse effect on our financial condition, results of operations, cash flow and per-share trading price of our common stock.

We cannot predict the effect, if any, of future sales of our common stock, or the availability of shares for future sales, on the market price of our common stock. Sales of substantial amounts of common stock or the perception that such sales could occur may adversely affect the prevailing market price for our common stock. We may issue additional shares in subsequent public offerings or private placements to make new investments or for other purposes. We are not required to offer any such shares to existing stockholders on a preemptive basis. Therefore, it may not be possible for existing stockholders to participate in such future share issuances, which may dilute the existing stockholders' interests in us. The holders of our Series A Preferred Stock are entitled to receive a cumulative, quarterly dividend, payable in-kind in shares of our common stock or in shares of our Series A Preferred Stock, at their election. Furthermore, holders of our Series B Preferred Stock have the right to convert their shares into shares of our common stock upon the occurrence of a Change of Control (as defined in the articles supplementary governing our Series B Preferred Stock). In addition, as of the date of this Annual Report on Form 10-K, we have 1,877,398 OC Units outstanding and we may issue additional OC Units from time to time under our Second Amended and Restated 2015 Equity Incentive Plan, in connection with property acquisitions or otherwise. OC Units may be tendered by redemption by the holder thereof for cash, or at our option, a number of shares of common stock equal to the number of OC Units tendered, beginning on the first anniversary of the date of issuance. In addition, pursuant to the Purchase Agreement, if either (a) the Company's common stock trades at or above a daily volume weighted average price of $25.00 per share for at least 30 days during any 365-day period prior to December 31, 2024 or (b) there is a change of control of the Company (as defined in the Purchase Agreement) prior to December 31, 2024 that is approved by the Company's board of directors and the common stockholders of the Company, the Operating Company will issue an additional 769,231 OC Units to the Manager. Parties who receive OC Units in connection with the internalization transaction have registration rights with respect to the resale of shares of our common stock issuable upon redemption of such OC Units. We cannot predict the effect, if any, of future sales of the common stock issuable upon redemption of the OC Units issuable in the internalization on the market price of our common stock. Sales of substantial amounts of common stock or the perception that such sales could occur may adversely affect the prevailing market price for our common stock. The trading price of our common stock may decline significantly when we register the shares of our common stock issuable upon redemption of the OC Units issuable in connection with the internalization transaction. We cannot predict whether future issuances or sales of shares of our common stock, including shares of our common stock issued as dividends to the holders of Series A preferred stock, or the availability of shares for resale in the open market will decrease the per-share trading price of our common stock.

The holders of shares of our Series A Preferred Stock and Series B Preferred Stock have rights and preferences generally senior to those of the holders of our common stock. The existence of these senior rights and preferences may have a negative effect on the value of shares of our common stock. These rights are more fully set forth in the articles supplementary governing our Series A Preferred Stock and Series B Preferred Stock, and include, but are not limited to: (i) the right to receive a liquidation preference, prior to any distribution of our assets to the holders of our common stock; and (ii) the right to convert into shares of our common stock upon the occurrence of a Change of Control (as defined in the articles supplementary governing the respective series of preferred stock), which may be adjusted as set forth therein. In addition, the Series A Preferred Stock and the Series B Preferred Stock rank senior to our common stock with respect to priority of such dividend payments, which may limit our ability to make distributions to holders of our common stock.

Upon the occurrence of a change of control as defined in the articles supplementary defining the terms of our Series B Preferred Stock, holders of our Series B Preferred Stock will have the right, subject to certain limitations, to convert some or all of their Series B Preferred Stock into our common stock (or equivalent value of alternative consideration). The Change of Control conversion features of our Series B Preferred Stock, as well as the mandatory redemption option conferred to holders of our Series A Preferred Stock upon certain events constituting a change of control under the Series A Preferred Stock, may have the effect of discouraging a third party from making an acquisition proposal for our company or of delaying, deferring or preventing certain change of control transactions of our company under circumstances that otherwise could provide the holders of our common stock and Series B Preferred Stock with the opportunity to realize a premium over the then-current market price or that stockholders may otherwise believe is in their best interests.

As of the date of this Annual Report on Form 10-K, we owned 93% of the outstanding OC Units in our Operating Company. We may issue additional OC Units of one or more classes in connection with our acquisition of properties, as compensation or otherwise. Such issuances would reduce our ownership percentage in our Operating Company and could affect the amount of distributions made to us by our Operating Company and, therefore, the amount of distributions we can make to our stockholders. Our common stockholders do not have any voting rights with respect to any such issuances or other Operating Company activities.

Under the MGCL, "business combinations" between a Maryland corporation and an "interested stockholder" or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as: (a) any person who beneficially owns 10% or more of the voting power of the then-outstanding voting stock of the corporation; or (b) an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then-outstanding stock of the corporation. A person is not an interested stockholder under the statute if the Board of Directors approved in advance the transaction by which the person otherwise would have become an interested stockholder. However, in approving a transaction, the Board of Directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the Board of Directors. After the expiration of the five-year period described above, any business combination between the Maryland corporation and an interested stockholder must generally be recommended by the Board of Directors of the corporation and approved by the affirmative vote of at least: - 80% of the votes entitled to be cast by holders of the then-outstanding shares of voting stock of the corporation; and - two-thirds of the votes entitled to be cast by holders of voting stock of the corporation, other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected, or held by an affiliate or associate of the interested stockholder. These supermajority vote requirements do not apply if the corporation's common stockholders receive a minimum price, as defined under the MGCL, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares. The MGCL also permits various exemptions from these provisions, including business combinations that are exempted by the Board of Directors before the time that the interested stockholder becomes an interested stockholder. Pursuant to the statute, our Board of Directors has adopted a resolution exempting any business combination with our Manager or any of its affiliates. Consequently, the five-year prohibition and the supermajority vote requirements will not apply to business combinations between us and our Manager or any of its affiliates. As a result, our Manager or any of its affiliates may be able to enter into business combinations with us that may not be in the best interest of our stockholders, without compliance with the supermajority vote requirements and the other provisions of the statute. The business combination statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.

Our Board of Directors determines our major policies, including with regard to financing, growth, debt capitalization, REIT qualification and distributions. Our Board of Directors may amend or revise these and other policies without a vote of the stockholders. Under our charter and the MGCL, our stockholders generally have a right to vote only on the following matters: - the election or removal of directors;- the amendment of our charter, except that our Board of Directors may amend our charter without stockholder approval to: o change our name;o change the name or other designation or the par value of any class or series of stock and the aggregate par value of our stock;o increase or decrease the aggregate number of shares of stock that we have the authority to issue;o increase or decrease the number of our shares of any class or series of stock that we have the authority to issue; and o effect certain reverse stock splits. - our liquidation and dissolution; and - our being a party to a merger, consolidation, sale or other disposition of all or substantially all of our assets or statutory share exchange. All other matters are subject to the discretion of our Board of Directors.

Our charter authorizes us to issue up to 500 million shares of common stock and 100 million shares of preferred stock without stockholder approval. In addition, our Board of Directors may, without stockholder approval, amend our charter from time to time to increase or decrease the aggregate number of shares of our stock or the number of shares of stock of any class or series that we have authority to issue and classify or reclassify any unissued shares of common or preferred stock and set the preferences, rights and other terms of the classified or reclassified shares. As a result, our Board of Directors may establish a class or series of shares of common or preferred stock that could delay or prevent a merger, third-party tender offer or similar transaction or a change in incumbent management that might involve a premium price for shares of our common stock or otherwise be in the best interest of our stockholders. Furthermore, the Earn Out Units are issuable upon a change in control, which will increase the costs associated with a change in control. The existence of the Earn Out Units could delay or prevent a merger, third-party tender offer or similar transaction or a change in incumbent management that might involve a premium price for shares of our common stock or otherwise be in the best interest of our stockholders.

The MGCL provides that a director has no liability in such capacity if he performs his duties in good faith, in a manner he reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. A director who performs his or her duties in accordance with the foregoing standards should not be liable to us or any other person for failure to discharge his or her obligations as a director. In addition, our charter provides that our directors and officers will not be liable to us or our stockholders for monetary damages unless the director or officer actually received an improper personal benefit or profit in money, property or services, or is adjudged to be liable to us or our stockholders based on a finding that his or her action, or failure to act, was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding. Our charter also requires us, to the maximum extent permitted by Maryland law, to indemnify and, without requiring a preliminary determination of the ultimate entitlement to indemnification, pay or reimburse reasonable expenses in advance of final disposition of a proceeding to any individual who is a present or former director or officer and who is made or threatened to be made a party to the proceeding by reason of his or her service in that capacity or any individual who, while a director or officer and at our request, serves or has served as a director, officer, partner, trustee, member or manager of another corporation, REIT, limited liability company, partnership, joint venture, trust, employee benefit plan or other enterprise and who is made or threatened to be made a party to the proceeding by reason of his or her service in that capacity. With the approval of our Board of Directors, we may provide such indemnification and advance for expenses to any individual who served a predecessor of us in any of the capacities described above and any employee or agent of us or a predecessor of us. We also are permitted, and intend, to purchase and maintain insurance or provide similar protection on behalf of any directors, officers, employees and agents against any liability asserted which was incurred in any such capacity with us or arising out of such status. This may result in us having to expend significant funds, which will reduce the available cash for distribution to our stockholders.

In order for us to qualify as a REIT, no more than 50% in value of our outstanding capital stock may be owned, directly or indirectly, by five or fewer individuals during the last half of any calendar year. "Individuals" for this purpose include natural persons, private foundations, some employee benefit plans and trusts, and some charitable trusts. To preserve our REIT qualification, our charter generally prohibits any person from directly or indirectly owning more than 9.8% in value of the outstanding shares of our capital stock or more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of any class or series of our stock. This ownership limitation could have the effect of discouraging a takeover or other transaction in which holders of our common stock might receive a premium for their shares over the then prevailing market price or which holders might believe to be otherwise in their best interests.

Although outside holders of OC Units do not have voting rights or the power to direct our company's affairs, there could be potential conflicts, conflicts of interest could arise in the future as a result of the relationships between us and our affiliates, on the one hand, and our Operating Company or any partner thereof. Our directors and officers have duties to our company under Maryland law in connection with their management of our company. At the same time, we, as the managing member of our Operating Company, have fiduciary duties and obligations to our Operating Company and any future members of our Operating Company under Delaware law and the Operating Company Agreement in connection with the management of our Operating Company. Our fiduciary duties and obligations as the managing member of our Operating Company may come into conflict with the duties of our directors and officers to our company. These conflicts of interest could lead to decisions that are not in the best interests of our company and its stockholders. Unless otherwise provided for in a limited liability company, Delaware law generally requires a managing member of a Delaware limited liability company to adhere to fiduciary duty standards under which it owes its limited partners the highest duties of good faith, fairness and loyalty and which generally prohibit such general partner from taking any action or engaging in any transaction as to which it has a conflict of interest. The Operating Company Agreement provides that, in the event of a conflict between the interests of the members of our Operating Company, on the one hand, and the separate interests of our stockholders, on the other hand, the we, in our capacity as the managing member of our Operating Company, shall act in the interests of our stockholders and is under no obligation to consider the separate interests of the limited partners of our Operating Company in deciding whether to cause our Operating Company to take or not to take any actions. The Operating Company Agreement further provides that any decisions or actions not taken by us, as managing member, in accordance with the Operating Company Agreement will not violate any duties, including the duty of loyalty, which the general partner, in its capacity as the general partner of our Operating Company, owes to our Operating Company and its partners. Additionally, the Operating Company Agreement provides that we will not be liable to our Operating Company or any partner for monetary damages for losses sustained, liabilities incurred or benefits not derived by our Operating Company or any member unless the we acted in bad faith and the act or omission was material to the matter giving rise to the loss, liability or benefit not derived. Our Operating Company must indemnify us, our directors and officers, officers of our Operating Company and others designated by us from and against any and all claims that relate to the operations of our Operating Company, unless (1) an act or omission of the indemnified person was material to the matter giving rise to the action and either was committed in bad faith or was the result of active and deliberate dishonesty, (2) the indemnified person actually received an improper personal benefit in money, property or services or (3) in the case of a criminal proceeding, the indemnified person had reasonable cause to believe that the act or omission was unlawful. Our Operating Company must also pay or reimburse the reasonable expenses of any such person upon its receipt of a written affirmation of the person's good faith belief that the standard of conduct necessary for indemnification has been met and a written undertaking to repay any amounts paid or advanced if it is ultimately determined that the person did not meet the standard of conduct for indemnification. Our Operating Company will not indemnify or advance funds to any person with respect to any action initiated by the person seeking indemnification without our approval (except for any proceeding brought to enforce such person's right to indemnification under the partnership agreement) or if the person is found to be liable to our Operating Company on any portion of any claim in the action. No reported decision of a Delaware appellate court has interpreted provisions similar to the provisions of the Operating Company Agreement that modify and reduce our fiduciary duties or obligations as the managing member or reduce or eliminate our liability for money damages to our Operating Company and its partners, and we have not obtained an opinion of counsel as to the enforceability of the provisions set forth in the Operating Company Agreement that purport to modify or reduce the fiduciary duties that would be in effect were it not for the Operating Company Agreement.