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LuxUrban Hotels (LUXHQ) Risk Analysis
Risk Overview Q3, 2024
Source: the company's latest filing for the period ended Sep 30, 2024, filed Nov 19, 2024
Risk Change Over Time
- Share Price & Shareholder Rights - Risk 1Our management members, including our Chairman of the Board and Co-Chief Executive Officer, own, in the aggregate, a significant portion of our outstanding common stock.
Our management members, including our Chairman of the Board and Co-Chief Executive Officer, Brian Ferdinand, have beneficial ownership of approximately 40% of our outstanding common stock in the aggregate and, as a result, have the ability to materially influence the outcome of any vote on any matter put to our stockholders for a vote. Further, our bylaws provide that any member of our board may be removed with or without cause by the majority of our outstanding voting power, these stockholders could influence the removal and election of directors. This concentration of ownership and decision making may make it more difficult for other stockholders to effect substantial changes in our company and may also have the effect of delaying, preventing or expediting, as the case may be, a change in control of our company.
- Share Price & Shareholder Rights - Risk 2We have granted registration rights to holders of significant amounts of our outstanding common stock and warrants exercisable into shares of our common stock and the selling into the market of all or a portion of such shares would likely have a material adverse impact on the market price of our common stock.
We have granted registration rights to certain holders of our common stock and warrants that are exercisable for the purchase of shares of our common stock. In the aggregate, we are required to register a significant number of shares of our common stock for issuance or resale prior to June 30, 2024. The selling of all or a portion of such shares into the market during a short period of time would likely have a material adverse impact on the market price of our common stock.
- Share Price & Shareholder Rights - Risk 3A holder of Series A Preferred Stock has extremely limited voting rights.
The voting rights for a holder of Series A Preferred Stock are limited. Our common stock is the only class of our securities that carry full voting rights. Mr. Ferdinand, our Chairman of the Board and Co-Chief Executive Officer, controls a substantial portion of voting power of our outstanding common stock, and exercises a significant level of control over all matters requiring stockholder approval, including the election of directors, amendment of our certificate of incorporation, and approval of significant corporate transactions. This control could have the effect of delaying or preventing a change of control of our company or changes in management and will make the approval of certain transactions difficult or impossible without his support, which in turn could reduce the price of our Series A Preferred Stock. Voting rights for holders of the Series A Preferred Stock exist primarily with respect to the ability to elect, voting together with the holders of any other series of our preferred stock having similar voting rights, two additional directors to our board of directors in the event that eighteen monthly dividends (whether or not consecutive) payable on the Series A Preferred Stock are in arrears, and with respect to voting on amendments to our certificate of incorporation, including the certificate of designations relating to the Series A Preferred Stock, that materially and adversely affect the rights of the holders of Series A Preferred Stock or authorize, increase or create additional classes or series of our capital stock that are senior to the Series A Preferred Stock.
- Share Price & Shareholder Rights - Risk 4The market price of the Series A Preferred Stock could be substantially affected by various factors.
The market price of the Series A Preferred Stock depends on numerous factors, some of which are beyond our control and may not relate directly to our operating performance. These factors include, but are not limited to, the following: - prevailing interest rates, increases in which may have an adverse effect on the market price of the Series A Preferred Stock;- trading prices of similar securities;- our history of timely dividend payments;- the annual yield from dividends on the Series A Preferred Stock as compared to yields on other financial instruments;- general economic and financial market conditions;- government action or regulation;- the financial condition, performance and prospects of us and our competitors;- changes in financial estimates or recommendations by securities analysts with respect to us or our competitors in our industry;- our issuance of additional preferred equity or debt securities; and - actual or anticipated variations in quarterly operating results of us and our competitors.
- Share Price & Shareholder Rights - Risk 5The Series A Preferred Stock ranks junior to all our indebtedness and other liabilities.
In the event of our bankruptcy, liquidation, dissolution or winding-up of our affairs, our assets will be available to pay obligations on the Series A Preferred Stock only after all our indebtedness and other liabilities have been paid. The rights of holders of the Series A Preferred Stock to participate in the distribution of our assets will rank junior to the prior claims of our current and future creditors and any future series or class of preferred stock we may issue that ranks senior to the Series A Preferred Stock. Also, the Series A Preferred Stock effectively ranks junior to all existing and future indebtedness and to the indebtedness and other liabilities of our existing subsidiaries and any future subsidiaries. Our existing subsidiaries are, and future subsidiaries would be, separate legal entities and have no legal obligation to pay any amounts to us in respect of dividends due on the Series A Preferred Stock. We have incurred and may in the future incur substantial amounts of debt and other obligations that will rank senior to the Series A Preferred Stock. As of December 31, 2023, our total liabilities (excluding contingent consideration) were $286,791,380. If we are forced to liquidate our assets to pay our creditors, we may not have sufficient assets to pay amounts due on any or all the Series A Preferred Stock then outstanding.
- Share Price & Shareholder Rights - Risk 6The Series A Preferred Stock is convertible into Class A Common Stock in certain circumstances, which would dilute ownership of our existing common stockholders.
If we do not redeem our Series A Preferred Stock in connection with a change of control or delisting event, the Series A Preferred Stock is exchangeable into shares of our common stock as prescribed by the Certificate of Designations, Rights and {Preferences governing the Series A Preferred Stock. Such exchanges would serve to dilute the ownership interests of the then existing holders of our common stock.
- Share Price & Shareholder Rights - Risk 7We may redeem our Series A Preferred Stock.
On or after October 26, 2026, we may, at our option, redeem our outstanding Series A Preferred Stock, in whole or in part, at any time or from time to time. We may also redeem our Series A preferred Stock as early as October 26, 2024, if a change of control or prescribed delisting event occurs. We may have an incentive to redeem the Series A Preferred Stock voluntarily if market conditions allow us to issue other preferred stock or debt securities at a rate that is lower than the dividend rate on the Series A Preferred Stock. If we redeem the Series A Preferred Stock, then from and after the redemption date, dividends will cease to accrue on shares of Series A Preferred Stock, the shares of Series A Preferred Stock shall no longer be deemed outstanding and all rights as a holder of those shares will terminate, except the right to receive the redemption price plus accumulated and unpaid dividends, if any, payable upon redemption.
- Accounting & Financial Operations - Risk 8Holders of the Series A Preferred Stock may be unable to use the dividends-received deduction and may not be eligible for the preferential tax rates applicable to "qualified dividend income."
Distributions paid to corporate U.S. holders of the Series A Preferred Stock may be eligible for the dividends-received deduction, and distributions paid to non-corporate U.S. holders of the Series A Preferred Stock may be subject to tax at the preferential tax rates applicable to "qualified dividend income," only if we have current or accumulated earnings and profits, as determined for U.S. federal income tax purposes. Additionally, we may not have sufficient current earnings and profits during future fiscal years for the distributions on the Series A Preferred Stock to qualify as dividends for U.S. federal income tax purposes. If the distributions fail to qualify as dividends, U.S. holders would be unable to use the dividends-received deduction and may not be eligible for the preferential tax rates applicable to "qualified dividend income." If any distributions on the Series A Preferred Stock with respect to any fiscal year are not eligible for the dividends-received deduction or preferential tax rates applicable to "qualified dividend income" because of insufficient current or accumulated earnings and profits, it is possible that the market value of the Series A Preferred Stock might decline.
- Accounting & Financial Operations - Risk 9We may be subject to attempts from time to time by short sellers to create narratives, including narratives based on false statements, that cast doubt on the company as they seek to profit from a decline in the market price of our common stock.
Smaller-cap companies, such as ours, are often targeted by short sellers due to various factors, including the existence of limited research coverage that could serve to counteract short-selling narratives, limited trading volumes that allow for sudden and material price changes, and material debt repayment obligations in high-interest rate environments that, coupled with such short-selling narratives, could cast doubt on a company's ability to meet its obligations. Short sellers seek to profit by shorting a target company's stock then creating narratives, including narratives containing or based on false statements, about the targeted company through the publication of articles on third-party websites, posts in online forums, and other media activity in order to create downward pressure on the targeted company's stock and then cover the short position. While we have successfully rebutted these types of actions in the past, there is a reasonable likelihood that our company will be subject to these attempts again in the future and there can be no assurance that we can effectively address these attempts in a timely and successful manner and that the prices of our securities will not be harmed in the short and longer terms.
- Debt & Financing - Risk 10Market interest rates may materially and adversely affect the value of the Series A Preferred Stock.
One of the factors that will influence the price of the Series A Preferred Stock is the dividend yield on the Series A Preferred Stock (as a percentage of the market price of the Series A Preferred Stock) relative to market interest rates. Increases in market interest rates may lead prospective purchasers of the Series A Preferred Stock to expect a higher dividend yield (and higher interest rates would likely increase our borrowing costs and potentially decrease funds available for dividend payments). Thus, higher market interest rates could cause the market price of the Series A Preferred Stock to materially decrease.
- Debt & Financing - Risk 11Our hotel operations and continued expansion have required and will continue to require significant working capital resources and the exercise prices of the vast majority of our outstanding warrants will reset for any sales of our common stock at per-share prices below the then current exercise price of such warrants, making any such future equity financing potentially more costly in overall terms.
While our company is still in the relatively early stages of growth, the resources needed for the management and operation of our portfolio of hotels is relatively similar to larger, long-standing, and better-capitalized companies, such as Marriot, Hyatt, and Hilton. To operate our existing portfolio of hotels and continue our expansion of our portfolio of hotel leases in major cities will require substantial capital resources and will require us to utilize our cash flows, and engage in equity or debt transactions, to fund required expenditures. Certain prior financings we have consummated are governed by agreements that contain restrictions on our ability to sell shares of our common stock (and common stock equivalents such as convertible securities and warrants) in private or public offerings at prices below certain defined levels, and the terms of a material portion of our outstanding warrants have exercise price adjustment provisions that effectively lower the exercise price of such warrants should we sell shares of our common stock (or common stock equivalents) in private or public offerings, which limits our ability to consummate various equity offerings. While we obtained a waiver in April 2024 with respect to the minimum per-share price restrictions contained in these agreements with respect to sales by our company from time to time of up to an aggregate of 15 million shares (and while such restrictions terminate absolutely and forever in November 2024), any such sales could still have the effect of triggering the reduction in the exercise prices of the vast majority of our outstanding warrants. Such exercise price reductions would decrease the amount of new capital provided to our company upon the exercise of such warrants and make such warrants more likely to be exercised on a cashless basis. The reduction of the exercise prices of our outstanding warrants as a result of future sales of our common stock at prices below the exercise prices of such warrants would therefore effectively make such future sales more costly to us in absolute terms. The operation of our properties involves unionized labor. Unionized labor provides us with skilled employees that are trained, vetted by their unions, and subject to the performance and conduct codes established by their unions. It also provides us with formal channels to resolve various labor issues. At the same time, with respect to properties utilizing unionized labor, we are subject to labor agreements and requirements applicable to companies of our size and capital profile, including requirements that require us to post deposits or bonds with respect to three-month union employee wages for each such hotel. The funding of these deposits and bonds require substantial capital. Additionally, we are subject to risks related to union disputes, strikes and work stoppages, and could be forced to expend material capital resources in connection with any temporary or prolonged hotel closures resulting from labor stoppages. As part of our growth strategy, we are building out our hotel management teams, led by our new Chief Operating Officer, Robert Arigo. As we build out this segment of our management operations, we will be required to expend material capital resources to hire additional personnel and enhance information and other operating systems. We are currently evaluating certain third-party management companies to operate some of our higher-end hotel properties. Under agreements with such management companies, it is typical that the hotel tenant is required to advance three months of operating expenses to the management company, which includes rents, payroll, insurance, real estate taxes, and other cost items. We expect that excess cash generated by managed hotels, after payment of management company fees and the foregoing expense advances, will be remitted to us by the applicable management company on a monthly or quarterly basis, which would limit or delay our access to our cash flow, which in turn could slow down our ability to deploy same into our operations and growth.
- Corporate Activity and Growth - Risk 12We believe we need to geographically centralize our operations to enhance operating efficiency.
Historically we have operated on a model that includes nominal central office operations and resources. We believe that as we continue to grow, the complexity of our operations requires enhanced intercompany communications, implementation of institutional knowledge and expertise across all aspects of our company, and more in-person interaction among management and operational personnel. As we currently principally operate within a decentralized structure, our accounting and operational processes are distributed over multiple locations, which could create the risk of certain accruals resulting from decisions made in the field that are not accurately and timely communicated and recorded. We believe our company will be best served by centrally locating our principal operating office and related resources. In the near term, we intend to centralize our principal operations in a single geographic location. It is likely these efforts will take time and will initially result in increased operating costs, which may or may not be offset by improved operating efficiencies.
- Corporate Activity and Growth - Risk 13Our investments are focused in a concentrated segment of the hotel industry.
Our primary business strategy is to continue to acquire long-term leases for quality hotels in our current target markets and other markets with similar characteristics, and thereafter rent the rooms therein to business and vacation travelers and or other short-stay purposes. We are subject to risks inherent in concentrating investments in a single industry and in a specific market segment within that industry. Our business would be adversely affected by a downturn in the hotel industry in general or in our target markets specifically.
Risk Highlights Q3, 2024
Risk Word Cloud
Risk Factors Full Breakdown - Total Risks 91
- Share Price & Shareholder Rights - Risk 1The Series A Preferred Stock ranks junior to all our indebtedness and other liabilities.
In the event of our bankruptcy, liquidation, dissolution or winding-up of our affairs, our assets will be available to pay obligations on the Series A Preferred Stock only after all our indebtedness and other liabilities have been paid. The rights of holders of the Series A Preferred Stock to participate in the distribution of our assets will rank junior to the prior claims of our current and future creditors and any future series or class of preferred stock we may issue that ranks senior to the Series A Preferred Stock. Also, the Series A Preferred Stock effectively ranks junior to all existing and future indebtedness and to the indebtedness and other liabilities of our existing subsidiaries and any future subsidiaries. Our existing subsidiaries are, and future subsidiaries would be, separate legal entities and have no legal obligation to pay any amounts to us in respect of dividends due on the Series A Preferred Stock. We have incurred and may in the future incur substantial amounts of debt and other obligations that will rank senior to the Series A Preferred Stock. As of December 31, 2023, our total liabilities (excluding contingent consideration) were $286,791,380. If we are forced to liquidate our assets to pay our creditors, we may not have sufficient assets to pay amounts due on any or all the Series A Preferred Stock then outstanding.
- Share Price & Shareholder Rights - Risk 2The market price of the Series A Preferred Stock could be substantially affected by various factors.
The market price of the Series A Preferred Stock depends on numerous factors, some of which are beyond our control and may not relate directly to our operating performance. These factors include, but are not limited to, the following: - prevailing interest rates, increases in which may have an adverse effect on the market price of the Series A Preferred Stock;- trading prices of similar securities;- our history of timely dividend payments;- the annual yield from dividends on the Series A Preferred Stock as compared to yields on other financial instruments;- general economic and financial market conditions;- government action or regulation;- the financial condition, performance and prospects of us and our competitors;- changes in financial estimates or recommendations by securities analysts with respect to us or our competitors in our industry;- our issuance of additional preferred equity or debt securities; and - actual or anticipated variations in quarterly operating results of us and our competitors.
- Share Price & Shareholder Rights - Risk 3A holder of Series A Preferred Stock has extremely limited voting rights.
The voting rights for a holder of Series A Preferred Stock are limited. Our common stock is the only class of our securities that carry full voting rights. Mr. Ferdinand, our Chairman of the Board and Co-Chief Executive Officer, controls a substantial portion of voting power of our outstanding common stock, and exercises a significant level of control over all matters requiring stockholder approval, including the election of directors, amendment of our certificate of incorporation, and approval of significant corporate transactions. This control could have the effect of delaying or preventing a change of control of our company or changes in management and will make the approval of certain transactions difficult or impossible without his support, which in turn could reduce the price of our Series A Preferred Stock. Voting rights for holders of the Series A Preferred Stock exist primarily with respect to the ability to elect, voting together with the holders of any other series of our preferred stock having similar voting rights, two additional directors to our board of directors in the event that eighteen monthly dividends (whether or not consecutive) payable on the Series A Preferred Stock are in arrears, and with respect to voting on amendments to our certificate of incorporation, including the certificate of designations relating to the Series A Preferred Stock, that materially and adversely affect the rights of the holders of Series A Preferred Stock or authorize, increase or create additional classes or series of our capital stock that are senior to the Series A Preferred Stock.
- Share Price & Shareholder Rights - Risk 4The Series A Preferred Stock is convertible into Class A Common Stock in certain circumstances, which would dilute ownership of our existing common stockholders.
If we do not redeem our Series A Preferred Stock in connection with a change of control or delisting event, the Series A Preferred Stock is exchangeable into shares of our common stock as prescribed by the Certificate of Designations, Rights and {Preferences governing the Series A Preferred Stock. Such exchanges would serve to dilute the ownership interests of the then existing holders of our common stock.
- Share Price & Shareholder Rights - Risk 5We may redeem our Series A Preferred Stock.
On or after October 26, 2026, we may, at our option, redeem our outstanding Series A Preferred Stock, in whole or in part, at any time or from time to time. We may also redeem our Series A preferred Stock as early as October 26, 2024, if a change of control or prescribed delisting event occurs. We may have an incentive to redeem the Series A Preferred Stock voluntarily if market conditions allow us to issue other preferred stock or debt securities at a rate that is lower than the dividend rate on the Series A Preferred Stock. If we redeem the Series A Preferred Stock, then from and after the redemption date, dividends will cease to accrue on shares of Series A Preferred Stock, the shares of Series A Preferred Stock shall no longer be deemed outstanding and all rights as a holder of those shares will terminate, except the right to receive the redemption price plus accumulated and unpaid dividends, if any, payable upon redemption.
- Share Price & Shareholder Rights - Risk 6A possible "short squeeze" due to a sudden increase in demand of our common stock that largely exceeds supply may lead to price volatility in our common stock.
Speculation on the price of our common stock may involve long and short exposures. To the extent aggregate short exposure exceeds the number of shares of our common stock available for purchase in the open market, investors with short exposure may have to pay a premium to repurchase our common stock for delivery to lenders of our common stock. Those repurchases may, in turn, dramatically increase the price of our common stock until investors with short exposure are able to purchase additional common stock to cover their short position. This is often referred to as a "short squeeze." A short squeeze could lead to volatile price movements in our common stock that are not directly correlated to the performance or prospects of our common stock and once investors purchase the shares of common stock necessary to cover their short position the price of our common stock may decline.
- Share Price & Shareholder Rights - Risk 7The market prices of our common stock and Series A Preferred Stock may be volatile and may decline regardless of our operating performance, and you may lose all or part of your investments.
The market price of our common stock and Series A Preferred Stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including: - overall performance of the equity markets and/or publicly-listed technology companies;- actual or anticipated fluctuations in our net revenue or other operating metrics;- changes in the financial projections we provide to the public or our failure to meet these projections;- failure of securities analysts to initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet the estimates or the expectations of investors;- the economy as a whole and market conditions in our industry;- political and economic stability in countries in which we operate;- rumors and market speculation involving us or other companies in our industry;- announcements by us or our competitors of significant innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments;- new laws or regulations or new interpretations of existing laws or regulations applicable to our business;- lawsuits threatened or filed against us;- recruitment or departure of key personnel;- other events or factors, including those resulting from war, incidents of terrorism, or responses to these events; and - the expiration of contractual lock-up or market standoff agreements.
- Share Price & Shareholder Rights - Risk 8We have granted registration rights to holders of significant amounts of our outstanding common stock and warrants exercisable into shares of our common stock and the selling into the market of all or a portion of such shares would likely have a material adverse impact on the market price of our common stock.
We have granted registration rights to certain holders of our common stock and warrants that are exercisable for the purchase of shares of our common stock. In the aggregate, we are required to register a significant number of shares of our common stock for issuance or resale prior to June 30, 2024. The selling of all or a portion of such shares into the market during a short period of time would likely have a material adverse impact on the market price of our common stock.
- Share Price & Shareholder Rights - Risk 9Our issuance of additional capital stock in connection with financings, acquisitions, investments, our 2022 Plan, our outstanding warrants, or otherwise will dilute all other stockholders.
We may need to raise additional capital through equity and debt financings in order to fund our operations. If we raise capital through equity financings in the future, our then-existing stockholders would be diluted. We have granted and expect to grant in the future equity awards to employees, directors, and consultants under our 2022 Plan. We also have outstanding warrants which require us to issue shares of our common stock upon exercise. At December 31, 2023, warrants to purchase up to an aggregate of 5,442,000 were issued and outstanding. As part of our business strategy, we may acquire or make investments in complementary companies, products, or technologies and issue equity securities to pay for any such acquisition or investment. Any such issuances of additional capital stock may cause stockholders to experience significant dilution of their ownership interests and the per-share value of our common stock to decline.
- Share Price & Shareholder Rights - Risk 10Nasdaq could delist our common stock or Series A Preferred Stock from quotation on its exchange, which could limit investors' ability to sell and purchase our shares and subject us to additional trading restrictions.
Our common stock and Series A Preferred Stock is listed on the Nasdaq. If our common stock or Series A Preferred Stock is delisted from Nasdaq and not listed on another national securities exchange at any time after the date hereof, we could face significant material adverse consequences, including: - a limited availability of market quotations for our securities;- reduced liquidity with respect to our securities;- a determination that our common stock is "penny stock" which will require brokers trading in our shares to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our common stock;- a limited amount of news and analyst coverage for our company; and - a decreased ability to issue additional securities or obtain additional financing in the future.
- Share Price & Shareholder Rights - Risk 11If our shares become subject to the SEC's penny stock rules, broker-dealers may have trouble in completing customer transactions and trading activity in our securities may be adversely affected.
If at any time our shares become subject to the "penny stock" rules promulgated under the Exchange Act our securities could be adversely affected. Typically, securities trading under a market price of $5.00 per share and that do not meet certain exceptions, such as national market listing or annual revenue criteria, are subject to the penny stock rules. Under these rules, broker-dealers who recommend such securities to persons other than institutional accredited investors must: - make a special written suitability determination for the purchaser;- receive the purchaser's written agreement to the transaction prior to sale;- provide the purchaser with risk disclosure documents which identify certain risks associated with investing in "penny stocks" and which describe the market for these "penny stocks" as well as a purchaser's legal remedies; and - obtain a signed and dated acknowledgement from the purchaser demonstrating that the purchaser has received the required risk disclosure documents before a transaction in a "penny stock" can be completed. If our shares become subject to these rules, broker-dealers may find it difficult to effectuate customer transactions and trading activity in our securities may be adversely affected. As a result, the market price of our shares may be depressed, and you may find it more difficult to sell our securities.
- Share Price & Shareholder Rights - Risk 12Our company's ability to raise capital in the future could become impaired; and our stockholders bear the risk of our company's future offerings reducing the market prices of our securities and dilution to such stockholders' interests.
In the future, our company may need to raise additional funds through the issuance of new equity securities, debt, or a combination of both. However, the lapse or waiver of any lock up restrictions or any sale or perception of a possible sale by our stockholders, and any related decline in the market price of our common stock, could impair our ability to raise capital. If adequate funds are not available on acceptable terms, and our company is not able to raise additional funds through the issuance of new equity securities, we may be unable to fund our capital requirements. If our company issues new debt securities, the debt holders would have rights senior to common stockholders to make claims on our assets, and the terms of any debt could restrict our operations, including our ability to pay dividends on our common stock. If we raise additional funds through future issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences, and privileges superior to those of holders of our common stock. In addition, our stockholders will experience additional dilution when option holders exercise their right to purchase common stock under our equity incentive plans, when restricted stock awards vest and settle, when we issue equity awards to our employees under our equity incentive plans, or when we otherwise issue additional equity. Should we require additional funding, we cannot be sure that it will be available to us on reasonable terms, or at all. If we cannot raise additional funds when we need them, our ability to continue to support our business and to respond to business challenges would be significantly limited, and our business, results of operations, and financial condition would be materially adversely affected. The ability to issue securities in any future offering will also depend on market conditions and other factors beyond our control, and accordingly, we cannot predict or estimate the amount, timing, or nature of our company's future offerings. Thus, our stockholders bear the risk of our future securities offerings reducing the market price of our common stock and diluting their interest.
- Share Price & Shareholder Rights - Risk 13Certain provisions currently contained in, or which may be added by amendment in the future to, our certificate of incorporation and bylaws will limit your ability as a stockholder to influence corporate matters and could discourage others from pursuing any change of control transactions that stockholders of our company may view as beneficial.
Our certificate of incorporation and bylaws include governance provisions including the following: - a provision that eliminates the right of stockholders to call special meetings, and provides that special meetings of our stockholders may be called only by the board of directors of our company; and - a provision that requires advance notice of stockholder nominations for the election of directors, and of stockholder proposals of other business, and that such advance notice must be given in the manner and to the extent set forth in the in our bylaws. We may also in the future amend our certificate of incorporation to provide for a classified board of directors, with only one class coming up for election each year, thereby making it more difficult to effect a change to the majority of the board. These and other provisions limit our stockholders' ability to influence our company's operations and may have the effect of discouraging others from pursuing any change of control transactions that stockholders may view as beneficial.
- Share Price & Shareholder Rights - Risk 14Our company's certificate of incorporation provides that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between our company and its stockholders, which could limit its stockholders' ability to obtain a favorable judicial forum for disputes with our company or its directors, officers, or employees.
Our certificate of incorporation provides that, unless our company consents in writing to the selection of an alternative forum, the sole and exclusive forum, to the fullest extent permitted by law, for (a) derivative actions or proceedings brought on our company's behalf, (b) actions asserting a claim of breach of a fiduciary duty owed by any of its directors, officers, employees or agents or its stockholders, (c) any action asserting a claim against our company's or any director or officer arising pursuant to any provision of the DGCL, (d) any action to interpret, apply, enforce or determine the validity of our company's certificate of incorporation or bylaws, or (e) any other action asserting a claim that is governed by the internal affairs doctrine, shall be the Court of Chancery of the State of Delaware or federal court located within the State of Delaware if the Court of Chancery does not have jurisdiction, in all cases subject to the court's having jurisdiction over indispensable parties named as defendants. A complaint asserting a cause of action under the Securities Act may be brought in state or federal court. With respect to the Exchange Act, only claims brought derivatively under the Exchange Act would be subject to the forum selection clause described above. The enforceability of similar choice of forum provisions in other companies' certificates of incorporation and bylaws has been challenged in legal proceedings, and it is possible that, in connection with any action, a court could find the choice of forum provisions contained in our company's certificate of incorporation and bylaws to be inapplicable or unenforceable in such action. Our board of directors believes these provisions benefit our company and stockholders by providing increased consistency in the application of Delaware law for the specified types of actions and proceedings, the provisions may have the effect of discouraging lawsuits against our company's or its directors and officers. Alternatively, if a court were to find the choice of forum provision contained in our company's certificate of incorporation and bylaws to be inapplicable or unenforceable in an action, our company may incur additional costs associated with resolving such action in other jurisdictions, which could harm our company's businesses, financial condition, and operating results. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and consented to this exclusive forum provision but will not be deemed to have waived our company's compliance with the federal securities laws and the rules and regulations thereunder.
- Share Price & Shareholder Rights - Risk 15If securities or industry analysts cease publishing research or reports about our company, its businesses, or its market, or if they adversely change their recommendations regarding our company's shares, or if our company's results of operations do not meet their expectations, our company's share prices and trading volume could decline.
The trading market for our common stock may be influenced by the research and reports that industry or securities analysts publish about our company, businesses, market and competitors. Our company does not have any control over these analysts. If one or more of these analysts cease coverage of our company or fail to publish reports on our company regularly, our company could lose visibility in the financial markets, which in turn could cause share prices or trading volume to decline. If one or more of the analysts cover our company were to downgrade our company's stock or provide more favorable relative recommendations about our competitors, or if our results of operations do not meet their expectations, the prices or trading volumes of our shares would likely decline.
- Share Price & Shareholder Rights - Risk 16Our management members, including our Chairman of the Board and Co-Chief Executive Officer, own, in the aggregate, a significant portion of our outstanding common stock.
Our management members, including our Chairman of the Board and Co-Chief Executive Officer, Brian Ferdinand, have beneficial ownership of approximately 40% of our outstanding common stock in the aggregate and, as a result, have the ability to materially influence the outcome of any vote on any matter put to our stockholders for a vote. Further, our bylaws provide that any member of our board may be removed with or without cause by the majority of our outstanding voting power, these stockholders could influence the removal and election of directors. This concentration of ownership and decision making may make it more difficult for other stockholders to effect substantial changes in our company and may also have the effect of delaying, preventing or expediting, as the case may be, a change in control of our company.
- Share Price & Shareholder Rights - Risk 17Our Chairman of the Board and co-Chief Executive Officer entered into an offer of settlement with the Securities and Exchange Commission in connection with his role in another public company.
Brian Ferdinand, our current Chairman of the Board and co-Chief Executive Officer, entered into an Offer of Settlement with the Securities and Exchange Commission on April 22, 2020, in connection with allegations that he, as a board member of Liquid Holdings Group Inc., (a) reviewed a Form 10-Q and signed a Form 10-K for the fiscal year 2013 that failed to disclose material facts of Liquid's reliance on a related party entity (a principal customer of Liquid and a company of which Mr. Ferdinand was an owner), and from which Liquid received material subscription fees, and (b) failed to file required Forms 4 and amendments to Schedule 13D to reflect material. changes to his ownership in Liquid's shares of common stock, causing Liquid to violate Section 13(a), 13(d)(2) and 16(a) of the Exchange Act and related rules thereof. Mr. Ferdinand consented, without admitting or denying any findings, to a cease and desist order from any alleged secondary violations of Section 17(a)(2) of the Securities Act and 13(a) of the Exchange Act, which are non-scienter provisions in which negligence is sufficient to establish liability for causing a primary violation; and Section 13(d)(2) and Section 16(a) of the Exchange Act, which are personal security reporting provisions under which strict liability is sufficient to establish a violation. As a result of the settlement, Mr. Ferdinand was also required to pay a fine of $115,000.
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