Item 1A. Risk Factors
Investing in our common stock involves a high degree of risk. A summary of material risks include those set forth below. You should carefully consider the following risks and all other information contained in this Annual Report on Form 10-K, including our consolidated financial statements and the related notes, before investing in our common stock. The risks and uncertainties described below are not the only ones we face but include the most significant factors currently known by us that make investing in our securities speculative or risky. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, also may become important factors that affect us. If any of the following risks materialize, our business, financial condition and results of operations could be materially harmed. In that case, the trading price of our common stock could decline, and you may lose some or all of your investment.
Risk Factor Summary
Risks Related to Our Business and Industry
• The COVID-19 pandemic has had and will likely continue to have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.
• Fluctuations in interest rates could negatively affect transaction volume and our finance charges.
• We operate in an industry that is rapidly evolving. Failure to keep up with changes and developments in the non-prime lending industry could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.
• Our most recent annual revenue declined from the prior year and we may not be able to maintain consistent profitability or grow in the future.
• Regulators and payment processors are scrutinizing certain online lenders’ access to the Automated Clearing House system to disburse and collect loan proceeds and repayments, and any interruption or limitation on our ability to access this critical system would have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.
• Failure to effectively identify, manage, monitor and mitigate fraud risk on a large scale from incomplete or incorrect information provided to us by customers or other third parties could cause us to incur substantial losses, and our operating results, brand and reputation could be harmed.
• Because of the non-prime nature of our customers, we have historically experienced a high rate of net charge-offs as a percentage of revenues, and our ability to price appropriately in response to this and other factors is essential. We rely on our proprietary credit and fraud scoring models in the forecasting of loss rates. If we are unable to effectively forecast loss rates, it may have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.
• We depend on debt financing and our business could be adversely affected by a lack of sufficient financing at acceptable prices or disruptions in the credit markets, which could reduce our access to credit.
• We rely on relationships, which are generally non-exclusive and subject to termination, with marketing affiliates and other third parties to identify potential customers for our loans, and the growth of our customer base could be adversely affected if any such relationships are terminated or the number of referrals we receive is reduced.
• Our success and future growth depend on our successful marketing efforts, and if such efforts are not successful, our business, prospects, results of operations, financial condition or cash flows may be harmed.
• The failure of third parties to continue to provide certain key services to us in the current manner and at the current rates may have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.
• The profitability of our Bank-Originated Products could be adversely affected by policy or pricing decisions made by the originating lenders.
• A decline in economic conditions could result in decreased demand for our loans or cause our customers’ default rates to increase, harming our operating results.
• We operate in a highly competitive environment and face competition from a variety of traditional and new lending institutions, including other online lending companies, and such competition could adversely affect our business, prospects, results of operations, financial condition or cash flows.
• Our business depends on the uninterrupted operation of our systems and business functions, including our information technology, as well as the ability of such systems to support compliance with legal and regulatory requirements.
• We are subject to cybersecurity risks and security breaches and may incur increasing costs in an effort to minimize those risks and to respond to cyber incidents, and we may experience harm to our reputation and liability exposure from security breaches.
• To date, we have derived our revenues from a limited number of products and markets. Our efforts to expand our market reach and product portfolio may not succeed or may put pressure on our margins.
• Our allowance for loan losses may not be adequate to absorb such losses, and if we experience rising credit or fraud losses, our results of operations would be adversely affected.
• The determination of the fair values of our loan and credit card receivables portfolio involves unobservable inputs that can be highly subjective and may prove to be materially different that the actual economic outcome.
• Increased customer acquisition costs and/or data costs would reduce our margins.
• If we are not able to attract and retain qualified officers and key employees, or if such officers or employees are temporarily unable to fully contribute to our operations, our business could be materially adversely affected.
• Our loan business is seasonal in nature, which causes our revenues and earnings to fluctuate.
• We may be unable to protect our proprietary technology and analytics or keep up with that of our competitors.
• We are subject to intellectual property disputes from time to time, and such disputes may be costly to defend.
• Current and future litigation or settlements or regulatory proceedings could cause management distraction, harm our reputation and have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.
• We may be unable to use some or all of our net operating loss carryforward, which could have a material adverse effect on our results of operations, financial condition or cash flows.
Other Risks Related to Compliance and Regulation
• We, our marketing affiliates, our third-party service providers, and our bank partners are subject to complex federal, state and local lending and consumer protection laws, and if we fail to comply with applicable laws, regulations, rules and guidance, our business could be adversely affected.
• The regulatory landscape in which we operate is continually changing due to new CFPB rules, regulations and interpretations, as well as various legal actions that have been brought against others in marketplace lending. If litigation on similar theories were brought against us when we work with a federally insured bank that makes loans, rather than making loans ourselves and were such an action to be successful, our business, prospects, results of operations, financial condition or cash flows will be materially adversely affected.
• We use third-party collection agencies to assist us with debt collection. Their failure to comply with applicable debt collection regulations could subject us to fines and other liabilities, which could harm our reputation and business.
• Our business is subject to complex and evolving laws and regulations regarding privacy, data protection, and other matters, which could result in claims, changes to our business practices, monetary penalties, increased cost of operations, or declines in user growth or engagement, or otherwise harm our business.
Risks Related to the Securities Markets and Ownership of Our Common Stock
• The price of our common stock may be volatile, and the value of your investment could decline.
• We do not intend to pay dividends for the foreseeable future.
• Anti-takeover provisions in our charter documents and Delaware law may delay or prevent an acquisition of us.
• Our amended and restated certificate of incorporation designates the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.
We attempt to mitigate the foregoing risks. However, if we are unable to effectively manage the impact of these and other risks, our ability to meet our objectives would be substantially impaired and any of the foregoing risks could materially adversely affect our financial condition, results of operations, cash flows, our ability to make distributions to our stockholders, or the market price of our common stock.
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
The COVID-19 pandemic has had and will likely continue to have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.
The COVID-19 pandemic and the governmental responses to the pandemic have resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the U.S. and globally, including the markets that we serve. Governmental responses to the pandemic have included orders closing businesses not deemed essential and shelter in place orders. These actions, together with responses to the pandemic by businesses and individuals, have resulted in rapid decreases in commercial and consumer activity, rapid increases in unemployment, market downturns and volatility, disruptions to global supply chains and changes to consumer's behavior.
The effects of the pandemic on us could be exacerbated given that the pandemic, and preventative measures taken to contain or mitigate COVID-19 and any future variants, may increasingly have significant negative effects on consumer discretionary spending and demand for and repayment of our products. Further, many of our customers are experiencing layoffs, slowdowns, work stoppages and other changes in work and financial circumstances, diminishing their demand for loans, eligibility for loans and ability to repay loans. In addition, efforts we took in response to the pandemic, such as expanding our payment flexibility programs, or to mitigate the effects of the pandemic, such as implementing underwriting changes to address credit risk associated with originations during the economic crisis created by the COVID-19 pandemic, have had and may continue to have other effects on our business and results of operations, such as by reducing loan origination volume, or may not be successful or may have other effects on our business and results of operations such as, for example, decreasing the average annual percentage rate ("APR") of our products or an impact on the fair value of the loan portfolio.
Additionally, while we have successfully transitioned our employee base to a remote working environment, normal operations may be difficult to maintain, and our resources may be constrained. Similarly, the operations of our business partners and third-party service providers may be constrained, reducing the effectiveness of collections, credit bureau reporting, marketing or other aspects of our operations.
The extent to which the COVID-19 pandemic will continue to impact our business will depend on future developments that are highly uncertain and cannot be predicted at this time, including, but not limited to, the actions taken and restrictions imposed to prevent the spread of COVID-19 and any future variants, the availability, acceptance, and effectiveness of vaccines, the duration and severity of any future outbreaks and the impacts on consumers, businesses and the global economy. An extended period of economic disruption as a result of the COVID-19 pandemic could have a material negative impact on our business, financial condition and results of operations, though the full extent and duration is uncertain. To the extent the COVID-19 pandemic continues to adversely affect our business and financial results, it is likely to also have the effect of heightening many of the other risks described in this "Risk Factors" section.
Fluctuations in interest rates could negatively affect transaction volume and our finance charges.
Our funding facilities are variable rate in nature and tied to either a base rate of the greater of the 3-month LIBOR rate, the five-year LIBOR swap rate or 1% at the borrowing date for Rise and Elastic, or for the Today Card facility, the Wall Street Journal ("WSJ") Prime Rate with a floor of 3.25%. Thus, any increase in the 3-month LIBOR rate or the WSJ Prime Rate could result in an increase in our net interest expense. Interest rate changes may also adversely affect our business forecasts and expectations and are highly sensitive to many macroeconomic factors beyond our control, such as inflation, recession, the state of the credit markets, changes in market interest rates, global economic disruptions, unemployment and the fiscal and monetary policies of the federal government and its agencies. This would reduce profit margins unless there was a commensurate reduction in losses. Any material reduction in our interest rate spread could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows. In the event that the spread between the rate at which we lend to our customers and the rate at which we borrow from our lenders decreases our business, prospects, results of operations, financial condition or cash flows will be .
We operate in an industry that is rapidly evolving. Failure to keep up with changes and developments in the non-prime lending industry could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.
Although our management team has many years of experience in the non-prime lending industry, we operate in an evolving industry that may not develop as expected. Assessing the future prospects of our business is challenging in light of both known and unknown risks and difficulties we may encounter. Growth prospects in non-prime lending can be affected by a wide variety of factors including:
• Competition from other online and traditional lenders and credit card providers;
• Regulatory limitations that impact the non-prime lending products we can offer and the markets we can serve;
• An evolving regulatory and legislative landscape;
• Developing and implementing new technology-driven products and services;
• Access to important marketing channels;
• Changes in consumer behavior;
• Access to adequate financing;
• Increasingly sophisticated fraudulent borrowing and online theft;
• Challenges with new products and new markets;
• Dependence on our proprietary technology infrastructure and security systems;
• Dependence on our personnel and certain third parties with whom we do business;
• Risks to our business if our systems are hacked or otherwise compromised;
• Evolving industry standards;
• Recruiting and retention of qualified personnel necessary to operate our business;
• Risks to our business relating to natural or man-made catastrophes, such as fires, hurricanes and tornadoes, floods, earthquakes, or other natural disasters, terrorist attacks, computer viruses and telecommunications failures; and
• Fluctuations in the credit markets and demand for credit.
We may not be able to successfully address these factors, which could negatively impact our business, prospects, results of operations, financial condition or cash flows.
Our most recent annual revenue declined from the prior year and we may not be able to maintain consistent profitability or grow in the future .
Our revenue growth rate has fluctuated over the past few years and it is possible that, in the future, even if our revenues continue to increase, our rate of revenue growth could decline, either because of external factors affecting the growth of our business, such as the COVID-19 pandemic, or because we are not able to scale effectively as we grow. In addition, we will need to generate and sustain increased revenues in future periods in order to remain profitable, and, even if we do, we may not be able to maintain or increase our level of profitability. If we cannot manage our growth effectively, it could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.
Regulators and payment processors are scrutinizing certain online lenders’ access to the Automated Clearing House system to disburse and collect loan proceeds and repayments, and any interruption or limitation on our ability to access this critical system would have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.
When making loans in the US, we typically use the Automated Clearing House (“ACH”) system to deposit loan proceeds into our customer accounts and to withdraw authorized payments from those accounts. ACH transactions are processed by banks. It has been reported that US federal regulators have taken or threatened actions, commonly referred to as "Operation Choke Point," intended to discourage banks and other financial services providers from providing access to banking and third-party payment processing services to lenders in our industry. These actions have reduced the number of banks and payment processors who provide ACH payment processing services and could conceivably make it increasingly difficult to find banking partners and payment processors in the future and/or lead to significantly increased costs for these services. If we lost access to the ACH system because our payment processor was unable or unwilling to access the ACH system on our behalf, we would experience a significant reduction in customer loan payments. Although we would notify consumers that they would need to make their loan payments via physical check, debit card or other method of payment a large number of customers would likely go into default because they are expecting automated payment processing. Any or on our ability to access the ACH system would have a material effect on our business, financial condition and results of operations.
Failure to effectively identify, manage, monitor and mitigate fraud risk on a large scale from incomplete or incorrect information provided to us by customers or other third parties could cause us to incur substantial losses, and our operating results, brand and reputation could be harmed.
For the loans we originate through Rise, our growth depends on effective loan underwriting resulting in acceptable customer profitability. This is equally important for the Rise loans, Elastic lines of credit and Today Card credit card receivables originated by third-party banks. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Components of Our Results of Operations—Revenues.” Lending decisions by our originating lenders are made using our proprietary credit and fraud scoring models, which we license to them. Lending decisions are based on information provided by loan applicants and on information provided by consumer reporting agencies, including third-party data providers. Data provided by third-party sources is a significant component of our decision methodology. To the extent that applicants provide inaccurate or unverifiable information or data from third-party providers is incomplete or inaccurate, the credit score delivered by our proprietary scoring methodology may not accurately reflect the associated risk. Additionally, a credit score assigned to a borrower may not reflect that borrower's actual creditworthiness because the credit score may be based on outdated, or consumer reporting data, and we do not verify the information obtained from the borrower's credit report.
Additionally, there is a risk that, following the date of the credit report that we obtain and review, a borrower may have:
• become past due in the payment of an outstanding obligation;
• defaulted on a pre-existing debt obligation;
• taken on additional debt; or
• sustained other adverse financial events.
Our resources, technologies and fraud prevention tools, which are used to originate or facilitate the origination of loans or lines of credit may be insufficient to accurately detect and prevent fraud. Inaccurate analysis of credit data that could result from false loan application information could harm our reputation, business and operating results. If credit and/or fraud losses increased significantly due to inadequacies in underwriting or new fraud trends, new customer originations may need to be reduced until credit and fraud losses returned to target levels, and business could contract.
In addition, our proprietary credit and fraud scoring models use identity and fraud checks analyzing data provided by external databases to authenticate each customer’s identity. The level of our fraud charge-offs and results of operations could be materially adversely affected if fraudulent activity were to significantly increase. Online lenders are particularly subject to fraud because of the lack of face-to-face interactions and document review. If applicants assume false identities to defraud us the related portfolio of loans will exhibit higher loan losses. We have in the past and may in the future incur substantial losses and our business operations could be disrupted if we, or the originating lenders, are unable to effectively identify, manage, monitor and mitigate risk using our proprietary credit and scoring models.
It may be difficult or impossible to recoup funds underlying loans made in connection with inaccurate statements, omissions of fact or fraud. Loan losses are currently the largest cost as a percentage of revenues across our products. High profile fraudulent activity could also lead to regulatory intervention, negatively impact our operating results, brand and reputation and require us, and the originating lenders, to take steps to reduce fraud risk, which could increase our costs.
Any of the above risks could have a material adverse effect on our business, financial condition and results of operations.
Because of the non-prime nature of our customers, we have historically experienced a high rate of net charge-offs as a percentage of revenues, and our ability to price appropriately in response to this and other factors is essential. We rely on our proprietary credit and fraud scoring models in the forecasting of loss rates. If we are unable to effectively forecast loss rates, it may have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.
Our net charge-offs as a percentage of revenues for the years ended December 31, 2021 and 2020 were 39% and 41%, respectively. Because of the non-prime nature of our customers, it is essential that our products are appropriately priced, taking this and all other relevant factors into account. In making a decision whether to extend credit to prospective customers we and the originating lenders rely heavily on our proprietary credit and fraud scoring models. Our proprietary credit and fraud scoring models are based on previous historical experience. Typically, however, our models will become less effective over time and need to be rebuilt regularly to perform optimally. This is particularly true in the context of our preapproved direct mail campaigns. If we are unable to rebuild our proprietary credit and fraud scoring models, or if they do not perform up to target standards the products will experience increasing defaults or higher customer acquisition costs. In addition, any upgrades or planned improvements to our technology and credit models may not be implemented on the timeline that we expect or may not drive improvements in credit quality for our products as anticipated, which may have a material effect on our business, financial condition and results of operations.
Any failure in our proprietary credit and fraud scoring models to adequately predict the creditworthiness of customers, assess prospective customers’ financial ability to repay their loans, or any or all of the other components of the credit decision process described herein fails, higher than forecasted losses may result. Furthermore, if we are unable to access the third-party data used in our proprietary credit and fraud scoring models, or access to such data is limited, the ability to accurately evaluate potential customers using our proprietary credit and fraud scoring models will be compromised. As a result, we may be unable to effectively predict probable credit losses inherent in the resulting loan portfolio, and we, and the originating lender, may consequently experience higher defaults or customer acquisition costs, which could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.
Additionally, any errors in the development and validation of any of the models or tools used to underwrite loans, such loans may result in higher delinquencies and losses. Moreover, if future performance of customer loans differs from past experience, which experience has informed the development of our proprietary credit and fraud scoring models, delinquency rates and losses could increase.
If our proprietary credit and fraud scoring models were unable to effectively price credit to the risk of the customer, lower margins would result. Either our losses would be higher than anticipated due to “underpricing” products or customers may refuse to accept the loan if products are perceived as “overpriced.” Additionally, an inability to effectively forecast loss rates could also inhibit our ability to borrow from our debt facilities, which could further hinder our growth and have a material adverse effect on our business, financial condition and results of operations.
We depend on debt financing and our business could be adversely affected by a lack of sufficient financing at acceptable prices or disruptions in the credit markets, which could reduce our access to credit.
We depend in part on debt financing primarily from Victory Park Management, LLC (“VPC”), an affiliate of Victory Park Capital and Park Cities Asset Management, LLC ("PCAM"). If VPC or PCAM became unwilling or unable to provide debt financing to us at prices acceptable to us, we would need to secure additional debt financing or potentially reduce loan originations. The availability of these financing sources depends on many factors, some of which are outside of our control.
The Elastic product, which is originated by a third-party lender, has a loan participation interest sold to Elastic SPV, Ltd. (“Elastic SPV”), a Cayman Islands entity. Elastic SPV has a loan facility with VPC in order to fund the loan participation purchases, for which we provide credit support, and we have entered into a credit default protection agreement with Elastic SPV that provides protection for loan losses. Similarly, the Rise loans originated by FinWise and CCB, have a loan participation interest sold to EF SPV, Ltd. (“EF SPV”) and EC SPV, Ltd. ("EC SPV"), both Cayman Islands entities. EF SPV and EC SPV have a loan facility with VPC in order to fund the loan participation purchases, for which we provide credit support, and we have entered into credit default protection agreements with both EF SPV and EC SPV that provide protection for loan losses. The Today Card product, which is originated by CCB, has a participation interest sold to Today SPV, LLC ("TSPV"). The TSPV Facility, which was entered into among TSPV and Today Card, LLC ("TC LLC"), both wholly-owned subsidiaries of the Company, and PCAM, is used to fund the loan participation purchases. Any voluntary or involuntary halt to these existing programs could result in the originating lenders halting further loan originations until an additional financing partner could be identified.
We may also experience the occurrence of events of default or breaches of financial or performance covenants under our debt agreements, which are currently secured by all our assets. Any such occurrence or breach could result in the reduction or termination of our access to institutional funding or increase our cost of funding. Certain of these covenants are tied to our customer default rates, which may be significantly affected by factors, such as economic downturns or general economic conditions beyond our control and beyond the control of individual customers. In particular, loss rates on customer loans may increase due to factors such as prevailing interest rates, the rate of unemployment, the level of consumer and business confidence, commercial real estate values, energy prices, changes in consumer and business spending, the number of personal bankruptcies, disruptions in the credit markets and other factors. We have covenants that are tied to our available cash and cash equivalents. We have cash commitments in 2022, as described in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Commitments and Contractual Obligations", that may decrease our cash and cash equivalents during the year. If we any such covenant, we likely would seek to obtain a waiver from the applicable lender. While we have received such waivers in the past, we can provide no assurance that an affected lender would provide a waiver in the future. A reduction or of funding from our existing lenders could result in increases in our cost of capital, which would reduce our net profit margins.
In the future, we may seek to access the debt capital markets to obtain capital to finance growth. However, our future access to the debt capital markets could be restricted due to a variety of factors, including a deterioration of our earnings, cash flows, balance sheet quality, or overall business or industry prospects, adverse regulatory changes, a disruption to or deterioration in the state of the capital markets or a negative bias toward our industry by market participants. If adequate funds are not available, or are not available on acceptable terms, we may not have sufficient liquidity to fund our operations, make future investments, take advantage of acquisitions or other opportunities, or respond to competitive challenges and this, in turn, could have a material adverse effect on our business, financial condition and results of operations.
We rely on relationships, which are generally non-exclusive and subject to termination, with marketing affiliates and other third parties to identify potential customers for our loans and the growth of our customer base could be adversely affected if any such relationships are terminated or the number of referrals we receive is reduced.
We rely on strategic marketing affiliate relationships with certain companies for referrals of some of the customers to whom we issue loans, and our growth depends in part on the growth of these referrals. Additionally, we rely on preapproved marketing lists purchased from credit bureaus for our direct mailings and electronic offers. Many of our marketing affiliate relationships do not contain exclusivity provisions that would prevent such marketing affiliates from providing customer referrals to competing companies. In addition, the agreements governing these partnerships, generally, contain termination provisions, including provisions that in certain circumstances would allow our partners to terminate if convenient, that, if exercised, would terminate our relationship with these partners. These agreements do not contain a requirement that a marketing affiliate refer us any minimum number of customers. There can be no assurance that these marketing affiliates and other third parties will not terminate our relationship or continue referring business to us in the future, and a termination of any of these relationships or reduction in customer referrals to us could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.
Our success and future growth depend on our successful marketing efforts, and if such efforts are not successful, our business, prospects, results of operations, financial condition or cash flows may be harmed.
We intend to continue to dedicate significant resources to marketing efforts. Our ability to attract qualified borrowers depends in large part on the success of these marketing efforts and the success of the marketing channels we use to promote our products. Our marketing channels include social media and the press, online affiliations, search engine optimization, search engine marketing, offline partnerships, preapproved direct mailings and television advertising. If any of our current marketing channels become less effective, if we are unable to continue to use any of these channels, if the cost of using these channels were to significantly increase or if we are not successful in generating new channels, we may not be able to attract new borrowers in a cost-effective manner or convert potential borrowers into active borrowers. If we are unable to recover our marketing costs through increases in website traffic and in the number of loans made by visitors to product websites, or if we discontinue our broad marketing campaigns, it could have a material effect on our business, financial condition and results of operations.
The failure of third parties to continue to provide certain key services to us in the current manner and at the current rates may have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.
We are dependent on third parties to provide services to facilitate lending, loan underwriting, payment processing, customer service, collections and recoveries, as well as to support and maintain certain of our communication and information systems.
The loss of the relationship with any of these third parties, an inability to replace them or develop new relationships, or the failure of any of these third parties to provide its products or services, to maintain its quality and consistency or to have the ability to provide its products and services, could have a material adverse effect on our business, financial condition and results of operations. Our revenues and earnings could also be adversely affected if any of those third-party providers make material changes to the products or services that we rely on or increase the price of their products or services.
The profitability of our Bank-Originated Products could be adversely affected by policy or pricing decisions made by the originating lenders.
We do not originate and do not ultimately control the pricing or functionality of our products originated by our bank partners (collectively the "Bank-Originated Products"). Each bank partner has licensed our technology and underwriting services and makes all key decisions regarding the marketing, underwriting, product features and pricing. We generate revenues from these products through marketing and technology licensing fees paid by the bank partners, and through our credit default protection agreements. If the bank partners were to change their pricing, underwriting or marketing of our Bank-Originated Products in a way that decreases revenues or increases losses, then the profitability of each loan, line of credit or credit card issued could be reduced. Although this would not reduce the revenues that we receive for marketing and technology licensing services, it would reduce the revenues that we receive from our credit default protection agreements with the bank partners and could have a material adverse effect on our business, financial condition and results of operations.
A decline in economic conditions could result in decreased demand for our loans or cause our customers’ default rates to increase, harming our operating results.
Uncertainty and negative trends in general economic conditions in the US and abroad, including significant tightening of credit markets and a general decline in the value of real property, historically have created a difficult environment for companies in the lending industry. Many factors, including factors that are beyond our control, may impact our consolidated results of operations or financial condition or affect our borrowers’ willingness or capacity to make payments on their loans. These factors include: unemployment levels, housing markets, rising living expenses, inflation, energy costs and interest rates, as well as major medical expenses, divorce or death that affect our borrowers. If the US economy experiences a downturn, or if we become affected by other events beyond our control, we may experience a significant reduction in revenues, earnings and cash flows, difficulties accessing capital and a deterioration in the value of our investments.
Credit quality is driven by the ability and willingness of customers to make their loan payments. If customers face rising unemployment or reduced wages, defaults may increase. Similarly, if customers experience rising living expenses (for instance due to rising gas, energy, or food costs) they may be unable to make loan payments. An economic slowdown could also result in a decreased number of loans being made to customers due to higher unemployment or an increase in loan defaults in our loan products. The underwriting standards used for our products may need to be tightened in response to such conditions, which could reduce loan balances, and collecting defaulted loans could become more difficult, which could lead to an increase in loan losses. If a customer defaults on a loan, the loan enters a collections process where, including as a result of contractual agreements with the originating lenders, our systems and collections teams initiate contact with the customer for payments owed. If a loan is subsequently charged off, the loan is generally sold to a third-party collection agency and the resulting proceeds from such sales comprise only a small fraction of the remaining amount payable on the loan.
There can be no assurance that economic conditions will remain favorable for our business or that demand for loans or default rates by customers will remain at current levels. Reduced demand for loans would negatively impact our growth and revenues, while increased default rates by customers may inhibit our access to capital, hinder the growth of the loan portfolio attributable to our products and negatively impact our profitability. Either such result could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.
We operate in a highly competitive environment and face competition from a variety of traditional and new lending institutions, including other online lending companies and such competition could adversely affect our business, prospects, results of operations, financial condition or cash flows.
We have many competitors. Our principal competitors are consumer loan companies, Credit Services Organizations ("CSO"), online lenders, credit card companies, consumer finance companies, pawnshops and other financial institutions that offer similar financial services. Other financial institutions or other businesses that do not now offer products or services directed toward our traditional customer base could begin doing so. Significant increases in the number and size of competitors for our business could result in a decrease in the number of loans that we fund, resulting in lower levels of revenues and earnings in these categories. Many of these competitors are larger than us, have significantly more resources and greater brand recognition than we do, and may be able to attract customers more effectively than we do.
Competitors of our business may operate, or begin to operate, under business models less focused on legal and regulatory compliance, which could put us at a competitive disadvantage. Additionally, negative perceptions about these models could cause legislators or regulators to pursue additional industry restrictions that could affect the business model under which we operate. To the extent that these models gain acceptance among consumers, small businesses and investors or face less onerous regulatory restrictions than we do, we may be unable to replicate their business practices or otherwise compete with them effectively, which could cause demand for the products we currently offer to decline substantially.
We may be unable to compete successfully against any or all of our current or future competitors. As a result, our products could lose market share and our revenues could decline, thereby affecting our ability to generate sufficient cash flow to service our indebtedness and fund our operations. Any such changes in our competition could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.
Our business depends on the uninterrupted operation of our systems and business functions, including our information technology, as well as the ability of such systems to support compliance with legal and regulatory requirements.
Our business is highly dependent upon customers’ ability to access our website and the ability of our employees and those of the originating lenders, as well as third-party service providers, to perform, in an efficient and uninterrupted fashion, necessary business functions, such as internet support, call center activities and processing and servicing of loans. Problems or errors with the technology platform and software of our systems, or a shut-down of or inability to access the facilities in which our internet operations and other technology infrastructure are based, such as a power outage, a failure of one or more of our information technology, telecommunications or other systems, cyber-attacks on, or sustained or repeated disruptions of, such systems could significantly impair our ability to perform such functions on a timely basis and could result in a deterioration of our ability to underwrite, approve and process loans, provide customer service, perform collections activities, or perform other necessary business functions. Any such could reduce new customer acquisition and impact growth, which would have a material effect on our business, prospects, results of operations, financial condition or cash flows.
In addition, our systems and those of third parties on whom we rely must consistently be capable of compliance with applicable legal and regulatory requirements and timely modification to comply with new or amended requirements. Any systems problems going forward could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.
We are subject to cybersecurity risks and security breaches and may incur increasing costs in an effort to minimize those risks and to respond to cyber incidents, and we may experience harm to our reputation and liability exposure from security breaches.
Our business involves the storage and transmission of consumers’ proprietary information, and security breaches could expose us to a risk of loss or misuse of this information, litigation and potential liability. We are entirely dependent on the secure operation of our websites and systems as well as the operation of the internet generally. While we have incurred no material losses from cyber-attacks or security breaches to date, a number of other companies have disclosed significant cyber-attacks and security breaches, some of which have involved intentional attacks. Attacks may be targeted at us, our customers, or both. Although we devote significant resources to maintain and regularly upgrade our systems and processes that are designed to protect the security of our computer systems, software, networks and other technology assets and the confidentiality, integrity and availability of information belonging to us and our customers, our security measures may not provide absolute security.
Despite our efforts to ensure the integrity of our systems, it is possible that we may not be able to anticipate or to implement effective preventive measures against all security breaches of these types, especially because the techniques used change frequently or are not recognized until launched, and because cyber-attacks can originate from a wide variety of sources, including third parties outside the Company such as persons who are involved with organized crime or associated with external service providers or who may be linked to terrorist organizations or hostile foreign governments. These risks may increase in the future as we continue to increase our mobile and other internet-based product offerings and expand our internal usage of web-based products and applications, expand into new countries, or continue to allow our employee base to work remotely. If an actual or perceived breach of security occurs, customer and/or supplier perception of the effectiveness of our security measures could be harmed and could result in the of customers, suppliers or both. Actual or anticipated attacks and risks may cause us to incur increasing costs, including costs to deploy additional personnel and protection technologies, train employees, and engage third-party experts and consultants.
A successful penetration or circumvention of the security of our systems could cause serious negative consequences, including significant disruption of our operations, misappropriation of our confidential information or that of our customers, or damage to our computers or systems or those of our customers and counterparties, and could result in violations of applicable privacy and other laws, financial loss to us or to our customers, loss of confidence in our security measures, customer dissatisfaction, significant litigation exposure, and harm to our reputation, all of which could have a material adverse effect on us. In addition, our applicants provide personal information, including bank account information when applying for loans. We rely on encryption and authentication technology licensed from third parties to provide the security and authentication to effectively secure transmission of confidential information, including customer bank account and other personal information. in computer capabilities, new discoveries in the field of cryptography or other developments may result in the technology used by us to protect transaction data being or compromised. Data can also occur as a result of non-technical issues.
Our servers are also vulnerable to computer viruses, physical or electronic break-ins, and similar disruptions, including “denial-of-service” type attacks. We may need to expend significant resources to protect against security breaches or to address problems caused by breaches. Security breaches, including any breach of our systems or by persons with whom we have commercial relationships that result in the unauthorized release of consumers’ personal information, could damage our reputation and expose us to a risk of loss or litigation and possible liability. In addition, many of the third parties who provide products, services or support to us could also experience any of the above cyber risks or security , which could impact our customers and our business and could result in a of customers, suppliers or revenues.
In addition, federal and some state regulators are considering promulgating rules and standards to address cybersecurity risks and many US states have already enacted laws requiring companies to notify individuals of data security breaches involving their personal data. In addition, federal regulators, such as the Federal Reserve, OCC and FDIC are considering rules that would require companies to notify their primary federal regulatory of significant cybersecurity incidents immediately. These mandatory disclosures or potentially mandatory disclosures regarding a security breach are costly to implement and may lead to widespread negative publicity, which may cause customers to lose confidence in the effectiveness of our data security measures.
Any of these events could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.
To date, we have derived our revenues from a limited number of products and markets. Our efforts to expand our market reach and product portfolio may not succeed or may put pressure on our margins.
We frequently explore paths to expand our market reach and product portfolio. For example, we have launched or are in the process of launching other non-prime products like bank-originated installment loans, lines of credit and credit cards through our bank partners and the Today Card, a bank-originated credit card. In the future, we may elect to pursue new products, channels, or markets. However, there is always risk that these new products, channels, or markets will be unprofitable, will increase costs, decrease margins, or take longer to generate target margins than anticipated. Additional costs could include those related to the need to hire more staff, invest in technology, develop and support new third-party partnerships or other costs, which would increase operating expenses. In particular, growth may require additional technology staff, analysts in risk management, compliance personnel and customer support and collections staff. Although we outsource most of our customer support and collections staff, additional volumes would lead to increased costs in these areas.
We may elect to pursue aggressive growth over margin expansion in order to increase market share and long-term revenue opportunities. There also can be no guarantee that we will be successful with respect to any new product initiatives or any further expansion beyond the US if we decide to attempt such expansion, which may inhibit the growth of our business and have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.
Our allowance for loan losses may not be adequate to absorb such losses and if we experience rising credit or fraud losses, our results of operations would be adversely affected.
We face the risk that customers will fail to repay their loans in full. We reserve for such losses by establishing an allowance for loan losses, the increase of which results in a charge to our earnings as a provision for loan losses. We have established a methodology designed to determine the adequacy of our allowance for loan losses. While this evaluation process uses historical and other objective information, the classification of loans and the forecasts and establishment of loan losses are also dependent on our subjective assessment based upon our experience and judgment. Actual losses are difficult to forecast, especially if such losses stem from factors beyond our historical experience. As a result, there can be no assurance that our allowance for loan losses will be sufficient to absorb losses or prevent a material adverse effect on our business, financial condition and results of operations. are the largest cost as a percentage of revenues across all of our products.
Fraud and customers not being able to repay their loans are both significant drivers of loss rates. If we experienced rising credit or fraud losses this would significantly reduce our earnings and profit margins and could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.
In June 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 is intended to replace the incurred loss impairment methodology in current US GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates to improve the quality of information available to financial statement users about expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. As of January 1, 2022, we have adopted ASU 2016-13 and its related amendments. As a result of the adoption of ASU 2016-13, our loans receivable will be carried at fair value with changes in fair value recognized directly in earnings going forward. We anticipate that adoption of this new methodology may have a material impact on our financial statements. We also expect that the internal financial controls processes in place for our loan reserve process will be impacted. In addition, if we to accurately forecast the collectability of our loans under this new methodology, we could be required to absorb such additional , which could have a material effect on our business, prospects, results of operations, financial condition or cash flows.
The determination of the fair values of our loan and credit card receivables portfolio involves unobservable inputs that can be highly subjective and may prove to be materially different than the actual economic outcome.
As disclosed in Note 1 to the Consolidated Financial Statements, we began utilizing the fair value option for our loan and finance receivables portfolio effective January 1, 2022. The fair values of our loans and credit card receivables are determined using Level 3 inputs for which changes could significantly impact our fair value measurements. Valuations are highly dependent upon the reasonableness of our assumptions and the predictability of the relationships that drive the results of our valuation methodologies. A variety of factors including, but not limited to, estimated customer default rates, the timing of expected payments, utilization rates on our line of credit accounts, estimated costs to service the portfolio, discount rates, and valuations of comparable portfolios may ultimately affect the fair values of our loans and finance receivables. Modifications to our assumptions due to the passage of time and more information becoming available could result in material changes to our fair value calculations. These changes to fair value could adversely affect our results of operations. Additionally, under the fair value option, these changes are generally recorded directly to statements of operations, which may make our financial statements less comparable to others in the industry that do not record their loan balances under the fair value option.
Increased customer acquisition costs and/or data costs would reduce our margins.
If customer acquisition costs or other servicing costs increased, it would reduce our profit margins. Marketing costs would be negatively affected by increased competition or stricter credit standards that would reduce customer fund rates. We could also experience increased marketing costs due to higher fees from credit bureaus for preapproved direct mail lists, search engines for search engine marketing, or fees for affiliates, and these increased costs would reduce our profit margins. Other costs, such as legal costs, may increase as we pursue various company strategic initiatives, which could further reduce our profit margins.
We purchase significant amounts of data to facilitate our proprietary credit and fraud scoring models. If there was an increase in the cost of data, or if we elected to purchase from new data providers, there would be a reduction in our profit margins.
Any such reduction in our profit margins could result in a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.
If we are not able to attract and retain qualified officers and key employees, or if such officers or employees are temporarily unable to fully contribute to our operations, our business could be materially adversely affected.
Our success depends, in part, on our officers, which comprise a relatively small group of individuals. Many members of the senior management team have significant industry experience, and we believe that our senior management would be difficult to replace, if necessary. Because the market for qualified individuals is highly competitive, we may not be able to attract and retain qualified officers or candidates. In addition, increasing regulations on, and negative publicity about, the consumer financial services industry could affect our ability to attract and retain qualified officers.
Our future success also depends on our continuing ability to attract, develop, motivate and retain highly qualified and skilled employees. Qualified individuals are in high demand, and we may incur significant costs to attract and retain them. The loss of any of our senior management or key employees could materially adversely affect our ability to execute our business plan and strategy, and we may not be able to find adequate replacements on a timely basis, or at all. We cannot ensure that we will be able retain the services of any members of our senior management or other key employees. Our officers and key employees may terminate their employment relationship with us at any time, and their knowledge of our business and industry would be extremely difficult to replace. While all key employees have signed non-disclosure, non-solicitation and non-compete agreements, they may still elect to leave us or even retire any time. Loss of key employees could result in delays to critical initiatives and the of certain capabilities and documented intellectual property.
If we do not succeed in attracting and retaining our officers and key employees, our business could be materially and adversely affected.
Our loan business is seasonal in nature, which causes our revenues and earnings to fluctuate.
Our loan business is affected by fluctuating demand for the products and services we offer and fluctuating collection rates throughout the year. Demand for our consumer loan products in the US has historically been highest in the third and fourth quarters of each year, corresponding to the holiday season, and lowest in the first quarter of each year, corresponding to our customers’ receipt of income tax refunds. This results in significant increases and decreases in portfolio size and profit margins from quarter to quarter. In particular, we typically experience a reduction in our credit portfolios and an increase in profit margins in the first quarter of the year. When we experience higher growth in the second quarter through fourth quarters, portfolio balances tend to grow and profit margins are compressed. Our cost of sales for the non-prime loan products we offer in the US, which represents our provision for loan losses, was historically lowest as a percentage of revenues in the first quarter of each year, corresponding to our customers’ receipt of income tax refunds, and increased as a percentage of revenues for the remainder of each year. This seasonality requires us to manage our cash flows over the course of the year. With the adoption of ASU 2016-13, the seasonality of our profit margins may be materially different than our historical experience under the prior guidance. If our revenues or collections were to fall substantially below what we would normally expect during certain periods, our ability to service debt and meet our other liquidity requirements may be affected, which could have a material effect on our business, prospects, results of operations, financial condition or cash flows.
We may be unable to protect our proprietary technology and analytics or keep up with that of our competitors.
The success of our business depends to a significant degree upon the protection of our proprietary technology, including our proprietary credit and fraud scoring models. We protect our intellectual property with non-disclosure agreements and through standard measures to protect trade secrets. However, we may be unable to deter misappropriation of our proprietary information, detect unauthorized use or take appropriate steps to enforce our intellectual property rights. If competitors learn our trade secrets (especially with regard to marketing and risk management capabilities), it could be difficult to successfully prosecute to recover damages. A third party may attempt to reverse engineer or otherwise obtain and use our proprietary technology without our consent. The pursuit of a claim against a third party for infringement of our intellectual property could be , and there can be no guarantee that any such efforts would be . Our to protect our software and other proprietary intellectual property rights or to develop technologies that are as as our competitors could put us at a relative to our competitors. Any such could have a material effect on our business, prospects, results of operations, financial condition or cash flows.
We are subject to intellectual property disputes from time to time, and such disputes may be costly to defend.
We have faced and may continue to face allegations that we have infringed the trademarks, copyrights, patents or other intellectual property rights of third parties, including from our competitors or non-practicing entities. Patent and other intellectual property litigation may be protracted and expensive, and the results are difficult to predict and may require us to stop offering certain products or product features, acquire licenses, which may not be available at a commercially reasonable price or at all, or modify such products, product features, processes or websites while we develop non-infringing substitutes.
In addition, we use open source software in our technology platform and plan to use open source software in the future. From time to time, we may face claims from parties claiming ownership of, or demanding release of, the source code, potentially including our valuable proprietary code, or derivative works that were developed using such software, or otherwise seeking to enforce the terms of the applicable open source license. These claims could also result in litigation, require us to purchase a costly license or require us to devote additional research and development resources to change our platform, any of which could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.
Current and future litigation or settlements or regulatory proceedings could cause management distraction, harm our reputation and have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.
We, our officers and certain of our subsidiaries have been and may become subject to lawsuits that could cause us to incur substantial expenditures, generate adverse publicity and could significantly impair our business, force us to cease doing business in one or more jurisdictions or cause us to cease offering or alter one or more products. We are currently the subject of several pending lawsuits and class action claims with respect to the services we provide to the banks we work with and our lending practices under relevant state law. For more information, including a discussion of our pending legal proceedings see Item 3 — Legal Proceedings and Note 1 4 —Commitments, Contingencies and Guarantees in the Notes to the Consolidated Financial Statements included in this report.
While we disagree that we have violated any state laws and regulations and intend to vigorously defend our position, there can be no assurance that we will be successful or that any relief granted will not be material. A future adverse ruling in or a settlement of any such litigation against us, our executive officers or another lender, could result in significant legal fees that could become material, could harm our reputation, create obligations, forego collection of the principal amount of loans, pay treble or other multiple damages, pay monetary penalties and/or modify or terminate our operations in particular jurisdictions. In accordance with applicable accounting guidance, we establish an accrued liability for litigation, regulatory matters and other legal proceedings when those matters present material contingencies that are both probable and reasonably estimable. Even when an accrual is recorded, however, we may be to in excess of any amounts accrued.
Additionally, we include arbitration provisions in our consumer loan agreements. We take the position that the arbitration provisions in our consumer loan agreements, including class action waivers, are valid and enforceable; however, the enforceability of arbitration provisions is often challenged in court. If those challenges are successful, our arbitration and class action waiver provisions could be unenforceable, which could subject us to additional litigation, including additional class action litigation.
Defense of any lawsuit, even if successful, could require substantial time and attention of our management and could require the expenditure of significant amounts for legal fees, expenditures related to indemnification agreements and other related costs. We and others are also subject to regulatory proceedings, and we could suffer losses as a result of interpretations of applicable laws, rules and regulations in those regulatory proceedings, even if we are not a party to those proceedings. Any of these events could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.
We may be unable to use some or all of our net operating loss carryforward, which could have a material adverse effect on our results of operations, financial condition or cash flows.
At December 31, 2021, our net operating loss carryforward ("NOL") was approximately $84.1 million. We expect that our results from future operations will fully utilize the NOL carryforward. If not utilized, the NOL will begin to expire in 2036. If we do not generate sufficient taxable income, we may not be able to utilize a material portion of our NOL. If we are limited in our ability to use our NOL in future years in which we have taxable income, we will pay more taxes than if we were able to fully utilize our NOL. This could have a material adverse effect on business, prospects, results of operations, financial condition or cash flows.
Under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), our ability to utilize the NOL or other tax attributes, such as research tax credits, in any taxable year may be limited if we experience an “ownership change.” A Section 382 “ownership change” generally occurs if one or more stockholders or groups of stockholders, who own at least 5% of our stock, increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Similar rules may apply u nder state tax laws. We have not completed a Section 382 analysis through December 31, 2021. If we have previously had, or have in the future, one or more Section 382 “ownership changes,” including in connection with our IPO, we may not be able to utilize a material portion of our NOL.
We may be subject to changes in our tax rates, new tax legislation or exposed to additional tax liabilities.
The federal, state, and local tax laws applicable to our business are subject to interpretation and may be subject to significant change. Changes in existing laws, the interpretation of existing laws, or introduction of new laws could have a material impact on our financial condition, results of operations or cash flows. The determination of our provision for income taxes and other tax liabilities involves significant judgment by management and there may be uncertainties regarding the ultimate tax determination. Our tax returns and positions are subject to review and audit by federal, state and local authorities. While we believe that our provisions and accrued liabilities are adequate to cover reasonably expected tax risk, there can be no assurance of any final outcome regarding any tax issue. An unfavorable outcome could have a material adverse impact on our effective tax rate, our financial condition, results of operations or cash flows.
OTHER RISKS RELATED TO COMPLIANCE AND REGULATION
The consumer lending industry continues to be subject to new laws and regulations in many jurisdictions that could restrict the consumer lending products and services we offer, impose additional compliance costs on us, render our current operations unprofitable or even prohibit our current operations.
State and federal governments regulatory bodies may seek to impose new laws, direct contractual arrangements with us, regulatory restrictions or licensing requirements that affect the products or services we offer, the terms on which we may offer them, including interest rate caps, and the disclosure, compliance and reporting obligations we must fulfill in connection with our lending business. They may also interpret or enforce existing requirements in new ways that could restrict our ability to continue our current methods of operation or to expand operations, impose significant additional compliance costs and may have a negative effect on our business, prospects, results of operations, financial condition or cash flows. In some cases, these measures could even directly prohibit some or all of our current business activities in certain jurisdictions or render them unprofitable or impractical to continue.
Furthermore, legislative or regulatory actions may be influenced by negative perceptions of us and our industry, even if such negative perceptions are inaccurate, attributable to conduct by third parties not affiliated with us (such as other industry members) or attributable to matters not specific to our industry. Any of these or other legislative or regulatory actions that affect our consumer loan business at the national, state and local level could, if enacted or interpreted differently, have a material adverse effect on our business, financial condition and results of operations and prohibit or directly or indirectly impair our ability to continue current operations. For a discussion of our regulatory environment, see “Item 1. Business—Our Regulatory Environment”.
We, our marketing affiliates, our third-party service providers and our bank partners are subject to complex federal, state and local lending and consumer protection laws, and if we fail to comply with applicable laws, regulations, rules and guidance, our business could be adversely affected.
We, our marketing affiliates, our third-party service providers and our bank partners must comply with US federal, state and local regulatory regimes, including those applicable to consumer credit transactions. Certain US federal and state laws generally regulate interest rates and other charges and require certain disclosures. In particular, we may be subject to laws such as:
• local regulations and ordinances that impose requirements or restrictions related to certain loan product offerings and collection practices;
• state laws and regulations that impose requirements related to loan or credit service disclosures and terms, credit discrimination, credit reporting, debt servicing, privacy and collection;
• the Truth in Lending Act and Regulation Z promulgated thereunder, and similar state laws, which require certain disclosures to borrowers regarding the terms and conditions of their loans and credit transactions and other substantive consumer protections with respect to credit cards, such as an assessment of a borrower's ability to repay obligations and penalty fee limitations;
• Section 5 of the Federal Trade Commission Act, which prohibits unfair and deceptive acts or practices in or affecting commerce, Section 1031 of the Dodd-Frank Act, which prohibits unfair, deceptive or abusive acts or practices in connection with any consumer financial product or service, and similar state laws that prohibit unfair and deceptive acts or practices;
• the Equal Credit Opportunity Act and Regulation B promulgated thereunder and state non-discrimination laws, which generally prohibit creditors from discriminating against credit applicants on the basis of race, color, sex, age, religion, national origin, marital status, the fact that all or part of the applicant’s income derives from any public assistance program or the fact that the applicant has in good faith exercised any right under the federal Consumer Credit Protection Act;
• the Fair Credit Reporting Act (the “FCRA”) as amended by the Fair and Accurate Credit Transactions Act, and similar state laws, which promote the accuracy, fairness and privacy of information in the files of consumer reporting agencies;
• the Fair Debt Collection Practices Act (the “FDCPA”) and similar state and local debt collection laws, which provide guidelines and limitations on the conduct of third-party debt collectors and creditors in connection with the collection of consumer debts;
• the Gramm-Leach-Bliley Act and Regulation P promulgated thereunder and similar state privacy laws, which include limitations on financial institutions’ disclosure of nonpublic personal information about a consumer to nonaffiliated third parties, in certain circumstances require financial institutions to limit the use and further disclosure of nonpublic personal information by nonaffiliated third parties to whom they disclose such information and require financial institutions to disclose certain privacy policies and practices with respect to information sharing with affiliated and nonaffiliated entities as well as to safeguard personal customer information, and other privacy laws and regulations;
• the Bankruptcy Code and similar state insolvency laws, which limit the extent to which creditors may seek to enforce debts against parties who have filed for bankruptcy protection;
• the Servicemembers Civil Relief Act (the "SCRA") and similar state laws, which allow military members and certain dependents to suspend or postpone certain civil obligations, as well as limit applicable rates, so that the military member can devote his or her full attention to military duties;
• the Military Lending Act (the "MLA") and Department of Defense rules, which limit the interest rate and fees that may be charged to military members and their dependents, requires certain disclosures and prohibits certain mandatory clauses among other restrictions;
• the Electronic Fund Transfer Act and Regulation E promulgated thereunder, which provide disclosure requirements, guidelines and restrictions on the electronic transfer of funds from consumers’ asset accounts;
• the Electronic Signatures in Global and National Commerce Act and similar state laws, particularly the Uniform Electronic Transactions Act, which authorize the creation of legally binding and enforceable agreements utilizing electronic records and signatures and, with consumer consent, permits required disclosures to be provided electronically;
• the Bank Secrecy Act, which relates to compliance with anti-money laundering, customer due diligence and record-keeping policies and procedures; and
• the Telephone Consumer Protection Act (the "TCPA") and the regulations of the Federal Communications Commission (the "FCC"), which regulations include limitations on telemarketing calls, auto-dialed calls, prerecorded calls, text messages and unsolicited faxes.
While it is our intention to always be in compliance with these laws, it is possible that we may currently be, or at some time have been, inadvertently out of compliance with some or any such laws. Further, all applicable laws are subject to evolving regulatory and judicial interpretations, which further complicate real-time compliance. Lastly, compliance with these laws is costly, time-consuming and limits our operational flexibility.
Failure to comply with these laws and regulatory requirements applicable to our business may, among other things, limit our or a collection agency’s ability to collect all or part of the principal of or interest on loans. As a result, we may not be able to collect on unpaid principal or interest. In addition, non-compliance could subject us to damages, revocation of required licenses, class action lawsuits, administrative enforcement actions, rescission rights held by investors in securities offerings and civil and criminal liability, which may harm our business and may result in borrowers rescinding their loans.
Where applicable, we seek to comply with state installment, CSO, servicing and similar statutes. In all jurisdictions with licensing or other requirements that we believe may be applicable to us, we comply with the relevant requirements by acquiring the necessary licenses or authorization and submitting appropriate registrations in connection therewith. Nevertheless, if we are found to not have complied with applicable laws, we could lose one or more of our licenses or authorizations or face other sanctions or penalties or be required to obtain other licenses or authorizations in such jurisdiction, which may have an adverse effect on our ability to perform our servicing obligations or make products or services available to borrowers in particular states, which may harm our business.
Our products currently have usage caps and limitations on lending based on internally developed “responsible lending guidelines.” If those policies become more restrictive due to legislative or regulatory changes at the local, state, or federal regulatory level these products would experience declining revenues per customer. In some cases, legislative or regulatory changes at the local, state or federal regulatory level may require us to discontinue offering certain of our products in certain jurisdictions.
The CFPB may have examination authority over our consumer lending business that could have a significant impact on our business.
The CFPB is currently considering rules to define larger participants in markets for consumer installment loans for purposes of supervision. Once this rule and corresponding examination rules are established, we anticipate the CFPB will examine us. The CFPB’s examination authority permits CFPB examiners to inspect the books and records of providers and ask questions about their business practices. The examination procedures include specific modules for examining marketing activities, loan application and origination activities, payment processing activities and sustained use by consumers, collections, accounts in default, consumer reporting activities and third-party relationships. As a result of these examinations, we could be required to change our products, our services or our practices, whether as a result of another party being examined or as a result of an examination of us, or we could be subject to monetary penalties, which could reduce our profit margins or otherwise materially adversely affect us.
Furthermore, the CFPB’s practices and procedures regarding civil investigations, examination, enforcement and other matters relevant to us and other CFPB-regulated entities are subject to further development and change. Where the CFPB holds powers previously assigned to other regulators or may interpret laws previously interpreted by other regulators, the CFPB may not continue to apply such powers or interpret relevant concepts consistent with previous regulators’ practice. This may adversely affect our ability to anticipate the CFPB’s expectations or interpretations in our interaction with the CFPB.
The CFPB also has broad authority to prohibit unfair, deceptive and abusive acts and practices and to investigate and penalize financial institutions that violate this prohibition. In addition to having the authority to obtain monetary penalties for violations of applicable federal consumer financial laws (including the CFPB’s own rules), the CFPB can require remediation of practices, pursue administrative proceedings or litigation and obtain cease and desist orders (which can include orders for restitution or rescission of contracts, as well as other kinds of affirmative relief). Also, where a company is believed to have violated Title X of the Dodd-Frank Act or CFPB regulations implemented thereunder, the Dodd-Frank Act empowers state attorneys general and state regulators to bring civil actions to remedy such violations after consulting with the CFPB. If the CFPB or one or more state attorneys general or state regulators believe that we have any of the applicable laws or regulations, they could exercise their enforcement powers in ways that could have a material effect on our business, prospects, results of operations, financial condition or cash flows.
Many states, including California, Massachusetts, Maryland and New York, have taken steps to actively enforce consumer protection laws, including through the creation of so-called “mini-CFPBs.”
The FDIC has issued examination guidance affecting our bank partners and these or subsequent new rules and regulations could have a significant impact on our products originated by bank partners.
The Bank-Originated Products are offered by our bank partners using our technology, underwriting and marketing services. The bank partners are supervised and examined by both the states that charter them and the FDIC. If the FDIC or a state supervisory body considers any aspect of the products originated by bank partners to be inconsistent with its guidance, the bank partners may be required to alter the product.
On July 29, 2016, the board of directors of the FDIC released examination guidance relating to third-party lending as part of a package of materials designed to “improve the transparency and clarity of the FDIC’s supervisory policies and practices” and consumer compliance measures that FDIC-supervised institutions should follow when lending through a business relationship with a third party. The proposed guidance, if finalized, would apply to all FDIC-supervised institutions that engage in third-party lending programs, including certain bank products.
If adopted as proposed, the guidance would result in increased supervisory attention of institutions that engage in significant lending activities through third parties, including at least one examination every 12 months, as well as supervisory expectations for a third-party lending risk management program and third-party lending policies that contain certain minimum requirements, such as self-imposed limits as a percentage of total capital for each third-party lending relationship and for the overall loan program, relative to origination volumes, credit exposures (including pipeline risk), growth, loan types, and acceptable credit quality. Comments on the guidance were due October 27, 2016. While the guidance has never formally been adopted, it is our understanding that the FDIC has relied upon it in its examination of third-party lending arrangements.
On July 20, 2020, the FDIC announced that it is seeking the public's input on the potential for a public/private standard-setting partnership and voluntary certification program to promote the effective adoption of innovative technologies at FDIC-supervised financial institutions. Released as part of the FDiTech initiative, the request asks whether the proposed program might reduce the regulatory and operational uncertainty that may prevent financial institutions from deploying new technology or entering into partnerships with technology firms, including "fintechs." For financial institutions that choose to use the system, a voluntary certification program could help standardize due diligence practices and reduce associated costs. At this time, it is unclear what impact this request and potential proposal will have on our operations.
On July 13, 2021, the Federal Reserve, Office of the Comptroller of the Currency, and the FDIC issued proposed guidance on managing risks associated with third-party relationships, including relationships with fintech entities and bank/fintech sponsorship arrangements. The guidance sets forth expectations for managing risk throughout the life cycle of such arrangements, including planning, due diligence and contract negotiation, oversight and accountability, ongoing monitoring, and termination. We will continue to monitor this guidance as it potentially becomes final.
The regulatory landscape in which we operate is continually changing due to new CFPB rules, regulations and interpretations, as well as various legal actions that have been brought against others in marketplace lending. If litigation on similar theories were brought against us when we work with a federally insured bank that makes loans, rather than making loans ourselves and were such an action to be successful our business, prospects, results of operations, financial condition or cash flows will be materially adversely affected.
The case law involving whether an originating lender, on the one hand, or third party vendors, on the other hand, are the “true lenders” of a loan is still developing and courts have come to different conclusions and applied different analyses. The determination of whether a third-party service provider is the “true lender” is significant because third-parties risk having the loans they service becoming subject to a consumer’s state usury limits. If we were re-characterized as a “true lender” with respect to any bank or third party we work with, loans could be deemed to be void and unenforceable in some states, the right to collect finance charges could be affected, and we could be subject to fines and penalties from state and federal regulatory agencies as well as claims by borrowers, including class actions by private plaintiffs.
In 2017, the Colorado Administrator of the Uniform Consumer Credit Code filed complaints in state court against marketplace lenders Marlette Funding LLC and Avant of Colorado LLC. The Administrator asserted that loans to Colorado residents facilitated through the platform were required to comply with Colorado laws regarding interest rates and fees, and that those laws were not preempted by federal laws that apply to loans originated by WebBank, the federally regulated issuing bank who originated loans through Avant’s platform. The matter ultimately settled without a determination of which entity is the “true lender” but created certain safe-harbor transactional structures that the regulator would find indicative of the bank being the “true lender.” The settlement provides a safe harbor for the marketplace lending programs if certain criteria related to oversight, disclosure, funding, licensing, consumer terms, and structure are followed. Only the parties to the litigation are bound by this settlement and further, it only applies to closed-end loans offered by banks in conjunction with non-bank partners or fintechs partnering with banks that involve origination of loans through an online platform.
Additionally, in May 2015, the U.S. Court of Appeals for the Second Circuit issued its decision in Madden v. Midland Funding, LLC, where the court interpreted the scope of federal preemption under the National Bank Act (“NBA”) and held that a nonbank assignee of a loan originated by a national bank was not entitled to the benefits of federal preemption of claims of usury. The Second Circuit’s decision is binding on federal courts located in Connecticut, New York, and Vermont, but the decision could also be adopted by other courts. The Madden decision created some uncertainty as to whether non-bank entities purchasing loans originated by a bank may rely on federal preemption of state usury laws, which created an increased risk of litigation by plaintiffs challenging the interest rates charged in accordance with the terms of loans. The Madden decision, and any decisions with similar findings, may substantially reduce our operating efficiency and/or attractiveness to investors, possibly resulting in a decline in our operating results.
In response to the uncertainty Madden created as to the validity of interest rates of bank-originated loans, both the OCC and FDIC issued final rules to clarify that when a bank sells, assigns or otherwise transfers a loan, the interest permissible prior to the transfer continues to be permissible following the transfer. The OCC final rule was effective on August 3, 2020. The FDIC final rule was effective on August 21, 2020. On July 29, 2020, the attorneys general from California, Illinois and New York filed a lawsuit against the OCC challenging the rule. Then in August 2020, attorneys general from California, Illinois, Massachusetts, Minnesota, New Jersey, New York, North Carolina and D.C. sued the FDIC alleging the core of the rule-making "is beyond the FDIC's power to issue, is contrary to statute, and would facilitate predatory lending through sham 'rent-a-bank' partnerships designed to evade state law."
On October 27, 2020, the OCC issued its final rule to remove uncertainty and determine when a national bank or federal savings association makes a loan and is the "true lender" in the context of a partnership between a bank and a third party. The rule specified that a bank makes a loan and is the "true lender" if, as of the date of origination, it (1) is named as the lender in the loan agreement or (2) funds the loan. The rule became effective December 29, 2020. However, this rule was rescinded through a Congressional Review Act resolution and on June 30, 2021, President Biden signed the resolution to overturn the rule. The repeal of this rule does not directly impact us, as the banks we work with are state banks which are regulated by the FDIC.
In August 2020, eight state attorneys general - from California, Illinois, Massachusetts, Minnesota, New Jersey, New York, North Carolina, and the District of Columbia - filed an action in the U.S. District Court for the Northern District of California challenging the FDIC's valid-when-made rule. The FDIC's final rule clarifies that, under the Federal Deposit Insurance Act, whether interest on a loan is permissible is determined at the time the loan is made and is not affected by the sale, assignment, or other transfer of the loan. On February 8, 2022, the court ruled that the FDIC did not violate the Administrative Procedures Act in issuing the rule, and granted summary judgment in favor of the FDIC. The court also issued a similar ruling in favor of a challenge by the same state attorneys general to the OCC's valid-when-made rule. This is a positive development for the concept of valid-when-made as it relates to bank-issued loans.
If we are deemed to be the “true lender,” then we could be subject to claims by borrowers, as well as enforcement actions by regulators. If a borrower or regulator were to successfully bring claims for violations of state consumer lending laws, including usury and licensing requirements, we could be subject to fines and penalties, including the voiding of loans and repayment of principal and interest to borrowers and investors. We might decide to, among other actions, limit the maximum interest rate and terms on certain loans, might decide to not offer certain products, might decide to not offer products in certain geographic locations, and some regulators could conclude we are subject to state laws, including licensing or registration in connection with services we provide to our bank partners . These actions may substantially reduce our operating efficiency and/or attractiveness to investors, possibly resulting in a decline in operating results, which could in turn affect our business, financial condition and results of operations.
We use third-party collection agencies to assist us with debt collection. Their failure to comply with applicable debt collection regulations could subject us to fines and other liabilities, which could harm our reputation and business.
The FDCPA regulates persons who regularly collect or attempt to collect, directly or indirectly, consumer debts owed or asserted to be owed to another person. Many states impose additional requirements on debt collection communications, and some of those requirements may be more stringent than the federal requirements. Moreover, regulations governing debt collection are subject to changing interpretations that differ from jurisdiction to jurisdiction. We use third-party collections agencies to collect on debts incurred by consumers of our credit products. Regulatory changes could make it more difficult for collections agencies to effectively collect on the loans we originate.
Our business is subject to complex and evolving laws and regulations regarding privacy, data protection, and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, changes to our business practices, monetary penalties, increased cost of operations, or declines in user growth or engagement, or otherwise harm our business.
We receive, transmit and store a large volume of personally identifiable information and other sensitive data from customers and potential customers. Our business is subject to a variety of laws and regulations in the US that involve user privacy issues, data protection, advertising, marketing, disclosures, distribution, electronic contracts and other communications, consumer protection and online payment services. The introduction of new products or expansion of our activities in certain jurisdictions may subject us to additional laws and regulations. US federal and state laws and regulations, which can be enforced by private parties or government entities, are constantly evolving and can be subject to significant change.
A number of proposals have recently been implemented or are pending before federal and state legislative and regulatory bodies that could impose obligations in areas such as privacy. For example, the California Consumer Privacy Act (the “CCPA”) came into effect on January 1, 2020. The CCPA broadly defines personal information and provides California consumers increased privacy rights and protections. In August 2020, final implementing regulations were approved to guide covered businesses' implementation of the CCPA, and since that time, the California Attorney General has proposed four sets of modifications to these regulations. With the passage of the California Privacy Rights Act (the “CPRA”) on November 3, 2020, we expect privacy rights of Californians will expand significantly and become more restrictive for companies that do business in California.
Additionally, on October 22, 2020, under the direction of CFPB Director Kraninger, the CFPB issued an advance notice of proposed rulemaking (“ANPR”) soliciting feedback on how the CFPB should develop regulations to implement Section 1033 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). Subject to rules prescribed by the CFPB, Section 1033 requires “covered persons” to make available to a consumer, upon request, information in the control or possession of the covered person concerning the consumer financial product or service that the consumer obtained from such covered person, including information related to any transaction, series of transactions or to the account, including costs, charges and usage data. On July 19, 2021, President Biden issued Executive Order 14036, which called on the CFPB to finalize rules under Section 1033 of the Dodd-Frank Act. At this time, it is difficult to accurately assess the likelihood of the impact that this and any future legislation or rules and regulations implementing Section 1033 could have on our business.
RISKS RELATED TO THE SECURITIES MARKETS AND OWNERSHIP OF OUR COMMON STOCK
The price of our common stock may be volatile, and the value of your investment could decline.
Technology stocks have historically experienced high levels of volatility. The trading price of our common stock may fluctuate substantially depending on many factors, some of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose all or part of your investment in our common stock. Factors that could cause fluctuations in the trading price of our common stock include the following:
• announcements of new products, services or technologies, relationships with strategic partners or acquisitions or changes in the timing of such anticipated events; of the termination of, or material changes to, material agreements; or of other events by us or our competitors;
• changes in economic conditions;
• changes in prevailing interest rates;
• price and volume fluctuations in the overall stock market from time to time;
• significant volatility in the market price and trading volume of technology companies in general and of companies in the financial services industry;
• fluctuations in the trading volume of our shares or the size of our public float;
• actual or anticipated changes in our operating results or fluctuations in our operating results;
• quarterly fluctuations in demand for our loans;
• whether our operating results meet the expectations of securities analysts or investors;
• actual or anticipated changes in the expectations of investors or securities analysts;
• regulatory developments in the US, foreign countries or both and our ability to comply with applicable regulations;
• material litigation, including class action lawsuits;
• major catastrophic events;
• sales of large blocks of our stock;
• entry into, modification of or termination of a material agreement; or
• departures of key personnel or directors.
In addition, if the market for technology and financial services stocks or the stock market in general experiences loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, operating results or financial condition. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. If our stock price is volatile, we may become the target of securities litigation. Securities litigation could result in substantial costs and divert our management’s attention and resources from our business. This could have a material adverse effect on our business, operating results and financial condition.
We may not pay dividends for the foreseeable future.
We have never declared or paid any dividends on our common stock. In addition, pursuant to our financing agreements, we are prohibited from paying cash dividends in certain circumstances, and we may be further restricted in the future by debt or other agreements we enter into. As a result, you may only receive a return on your investment in our common stock if the market price of our common stock increases.
Anti-takeover provisions in our charter documents and Delaware law may delay or prevent an acquisition of us.
Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that may have the effect of delaying or preventing a change in control of us or changes in our management. The provisions, among other things:
• establish a classified Board of Directors so that not all members of our Board of Directors are elected at one time;
• permit only our Board of Directors to establish the number of directors and fill vacancies on the Board;
• provide that directors may only be removed “for cause” and only with the approval of two-thirds of our stockholders;
• require two-thirds approval to amend some provisions in our restated certificate of incorporation and restated bylaws;
• authorize the issuance of “blank check” preferred stock that our Board of Directors could use to implement a stockholder rights plan, or a “poison pill;”
• eliminate the ability of our stockholders to call special meetings of stockholders;
• prohibit stockholder action by written consent, which will require that all stockholder actions must be taken at a stockholder meeting;
• do not provide for cumulative voting; and
• establish advance notice requirements for nominations for election to our Board of Directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings.
These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.
In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law (the “DGCL”) which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us in certain circumstances.
Any provision of our amended and restated certificate of incorporation or amended and restated bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock.
Our amended and restated certificate of incorporation designates the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed to us or our stockholders by any of our directors, officers, employees or agents, (iii) any action asserting a claim against us arising under the DGCL or (iv) any action asserting a claim against us that is governed by the internal affairs doctrine. This choice of forum provision does not preclude or contract the scope of exclusive federal or concurrent jurisdiction for any actions brought under the Securities Act or the Exchange Act. Accordingly, our exclusive forum provision will not relieve us of our duties to comply with the federal securities laws and the rules and regulations thereunder, and our stockholders will not be deemed to have waived our compliance with these laws, rules and regulations. The choice of forum provision in our amended and restated certificate of incorporation may limit our stockholders’ ability to obtain a judicial forum for with us.
GENERAL RISK FACTORS
Customer complaints and/or negative perception could reduce our customer growth and our business could suffer.
Our reputation is very important to attracting new customers to our platform as well as securing repeat lending to existing customers. While we believe that we have a good reputation and that we provide customers with a superior experience, there can be no assurance that we will be able to continue to maintain a good relationship with customers or avoid negative publicity.
In recent years, consumer advocacy groups and some media reports have advocated governmental action to prohibit or place severe restrictions on non-bank consumer loans and bank originated loans for the non-prime consumer. Such consumer advocacy groups and media reports generally focus on the annual percentage rate for this type of consumer loan, which is compared unfavorably to the interest typically charged by banks to consumers with top-tier credit histories. The finance charges assessed by us, the originating lenders and others in the industry can attract media publicity about the industry and be perceived as controversial. If the negative characterization of the types of loans we offer, including those originated through third-party lenders, becomes increasingly accepted by consumers, demand for any or all of our consumer loan products could significantly decrease, which could materially affect our business, prospects, results of operations, financial condition or cash flows. Additionally, if the negative characterization of these types of loans is accepted by legislators and regulators, we could become subject to more restrictive laws and regulations applicable to consumer loan products that could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.
Sales of substantial amounts of our common stock in the public markets, or the perception that it may occur, could reduce the price of our common stock and may dilute your voting power and ownership interest.
Sales of a substantial number of shares of our common stock in the public market, or the perception that these sales could occur, could adversely affect the market price of our common stock and may make it more difficult for you to sell your common stock at a time and price that you deem appropriate.
We may issue our shares of common stock or securities convertible into our common stock from time to time in connection with a financing, acquisition, investments or otherwise. Any such issuance could result in substantial dilution to our existing stockholders and cause the trading price of our common stock to decline.
The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.
As a public company, we are subject to the reporting requirements of the Exchange Act, the NYSE listing standards and other applicable securities rules and regulations. Compliance with these rules and regulations increases our legal and financial compliance costs, makes some activities more difficult, time-consuming or costly, and increases demand on our systems and resources, particularly after we are no longer an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”). Among other things, the Exchange Act requires that we file annual, quarterly and current reports with respect to our business and operating results and maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could harm our business and operating results.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expense and a diversion of management’s time and attention from revenues-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies, regulatory authorities may initiate legal proceedings against us and our business may be harmed.
If we fail to maintain an effective system of disclosure controls and procedures and internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud.
The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) requires, among other things, our management to report on, and, if we cease to be an emerging growth company our independent registered public accounting firm will have to attest to the effectiveness of, our internal control over financial reporting. Our management may conclude that our internal controls over financial reporting are not effective if we fail to cure any identified material weakness or otherwise.
If we fail to achieve and maintain the adequacy of our internal controls over financial reporting, as these standards may be modified, supplemented or amended from time to time, we may be unable to report our financial information on a timely basis, may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with the Sarbanes-Oxley Act, and may suffer adverse regulatory consequences or violations of listing standards.
Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting until after we are no longer an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed, or operating. Any failure to maintain effective disclosure controls and internal control over financial reporting could materially and adversely affect our business, results of operations, and financial condition and could cause a decline in the trading price of our common stock.
