Insiders ranked by realized 90-day signed return on their open-market trades at Mdb Capital Holdings, LLC. Minimum 3 scored trades. Returns are signed - a sale followed by a rally counts against the insider.
Real-time Form 4 intelligence. Smarter insider tracking.
YoY shift: Lean -
Year-over-year tone shift - average net-tone change across Risk Factors and MD&A vs the prior 10-K. This filing is -0.23pp more bearish than last year's.
Why YoY instead of absolute: the LM lexicon has ~6.6× more negative words than positive (legal/risk-disclosure language is heavy on hedging), so every 10-K reads bearish on raw tone. Year-over-year change strips that bias and surfaces the actual shift in management's framing.
Tone shift by section
The two components the gauge averages: how Risk Factors and MD&A each shifted in net tone versus last year's 10-K. The headline above is their average, so a green needle over a soft section just means the other section carried it.
Risk Factors
-0.23pp
Flat
Net-tone change vs last year's 10-K.
MD&A
-
Not scored
Net-tone change vs last year's 10-K.
Per-snippet highlights
Sentence-level sentiment highlighting with category and subcategory filters is coming once the snippet-scoring pipeline lands. For now, dig into the actual section text on the Sections tab.
Language change vs prior 10-K
Risk Factors (Item 1A) - words with the biggest YoY frequency increase
Negative rising
conflict+8
disruption+3
inefficiencies+2
loss+1
failure+1
Positive rising
favorable+1
Risk Factors (Item 1A)
18,992 words
Item 1A. Risk Factors
Risks Relating to Holding Company Taxation
You may be subject to U.S. federal income tax on your share of our taxable income, regardless of whether you receive any cash distributions from us.
The Class A Common Shares are securities issued by a limited liability company and represent limited liability interests.
Under current law, so long as certain conditions are satisfied, we should be treated, for U.S. federal income tax purposes, as a partnership and not as a corporation. As such, MDB will generally not be subject to U.S. federal income tax. Instead, each shareholder of MDB will be required to take into account its allocable share of each item of MDB’s income, gain, loss, deduction or credit, whether or not MDB distributes any cash to it, including distributions or dividends MDB receives from its corporate entities (i.e., in partner companies). Consequently, it is possible that in any year, a shareholder’s tax liability arising from MDB could exceed the distributions made to him, her or it by MDB. Thus, there may be years in which a shareholder’s tax liability exceeds its share of distributed cash from MDB. If this were to occur, a shareholder would have to use funds from other sources to satisfy his, her or its tax liability.
No section text extracted for this filing. The 10-K may use a non-standard template that the parser doesn't recognize - the original doc is still linked in the Stats tab.
You may be subject to state, local and other taxes, depending on your own particular circumstances.
In addition to U.S. federal income taxes, each shareholder may incur income tax liabilities under the state or local income tax laws of certain jurisdictions in which MDB will operate, as well as in the jurisdiction of that shareholder’s residence or domicile. State and local income tax laws vary from one location to another, and federal, state and local income tax laws are both complex and subject to change. The income tax aspects of an investment in MDB are complicated, and each shareholder should review them with his, her or its own professional advisors familiar with the shareholder’s own income tax situation and with the income tax laws and regulations applicable to the shareholder.
Allocations of income and loss may be re-determined by the IRS.
A shareholder’s distributive share of MDB income, gains, losses, deductions and credits for U.S. federal income tax purposes is generally determined as set forth in the limited liability company agreement governing our company, which we refer to as the operating agreement, unless such items are allocated in a manner that has no “substantial economic effect.” If it is determined that the allocations in the operating agreement do not possess substantial economic effect, then the IRS might seek to allocate MDB related items in a different manner.
MDB may provide delayed final Schedules K-1.
MDB may not be able to provide final Schedules K-1 to shareholders for any given fiscal year until after April 15 of the following year. The board of directors will endeavor to provide shareholders with final Schedules K-1 or with estimates of the taxable income or loss allocated to their shares on or before April 15, but final Schedules K-1 may not be available until MDB has received tax–reporting information necessary to prepare final Schedules K-1. Shareholders may be required to obtain extensions of time to file their U.S. federal, state, and local income tax returns (which do not provide taxpayers with an extension of time to pay any tax that may be due on such tax returns). Each prospective shareholder should consult with its own advisor as to the advisability and tax consequences of an investment in MDB.
If we are treated as a corporation for U.S. federal income tax purposes, the value of the shares could be materially adversely affected.
The value of the Class A Common Shares of MDB that you hold will depend in part on MDB being treated as a partnership for U.S. federal income tax purposes. We intend to manage our affairs so that, upon becoming a “publicly traded partnership” within the meaning of Section 7704 of the Internal Revenue Code of 1986, as amended (the “Code”), we will not be taxable as a corporation because 90% or more of our gross income in each taxable year will be “qualifying income”. However, there is no assurance or guarantee that we will meet on an ongoing basis the applicable requirements to be taxable as a partnership and, as discussed below, current law may change so as to cause, in either event, MDB to be treated as a corporation for U.S. federal income tax purposes. If we were treated as a corporation for U.S. federal income tax purposes, then, among other things, (i) we would become subject to corporate income tax and (ii) distributions to our shareholders would be taxable as dividends for U.S. federal income tax purposes to the extent of our earnings and profits. In addition, because a tax would be imposed upon MDB as a corporation, its cash available for distribution would be substantially reduced. We have not requested, and do not plan to request, a ruling from the IRS on this or any other tax matter affecting us.
Our structure involves complex provisions of U.S. federal and state income tax law for which no clear precedent or authority may be available. Our structure is also subject to potential legislative, judicial or administrative change and differing interpretations, possibly on a retroactive basis.
The U.S. federal income tax treatment of holders of our common shares, including the Class A Common Shares representing limited liability interests, depends in some instances on determinations of fact and interpretations of complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available. You should be aware that the U.S. federal and state income tax rules are constantly under review by persons involved in the legislative process, the IRS and the U.S. Treasury Department, and state governments frequently resulting in revised interpretations of established concepts, statutory changes, revisions to regulations and other modifications and interpretations. The IRS pays close attention to the proper application of tax laws to partnerships and entities taxed as partnerships. The present U.S. federal income tax treatment of an investment in our shares may be modified by administrative, legislative or judicial interpretation at any time, and any such action may affect investments and commitments previously made.
Complying with certain tax-related requirements may cause us to forego otherwise attractive business or investment opportunities or enter into acquisitions, borrowings, financings or arrangements we may not have otherwise entered into.
In order for us to be treated as a partnership for U.S. federal income tax purposes, and not as a publicly traded partnership taxable as a corporation, we expect that at least 90% of our gross income in each taxable year will need to be “qualifying income” on a continuing basis and we must not be, if we were a corporation, required to register as an investment company under the Investment Company Act. In order to obtain such treatment, we (or our subsidiaries) may decide to foregoattractive business or investment opportunities. This may cause us to incur additional tax liabilities and/or adversely affect our ability to operate solely to maximize our cash flow.
Shareholders may be subject to restrictions on deductibility of expenses and other losses.
The ability of the shareholders to utilize any tax losses generated by an investment in MDB may be subject to a number of limitations under the Code, including the basis limitations, the passive activity losslimitations, the “at-risk” limitations, and the excess business losslimitations.
Future legislative or regulatory action could significantly change the tax aspects of an investment in our shares.
The discussion of tax aspects contained in this filing is based on law currently in effect and certain proposed Treasury Regulations. Nonetheless, shareholders should be aware that new administrative, legislative or judicial action could significantly change the tax aspects of an investment in our shares. Any such change may be retroactive with respect to transactions entered into or contemplated before the effective date of such change and could have a material adverse effect on the tax consequences of your investment in MDB.
Risks Relating to Our General Business Operations
Although our partner company model has been successful in the past, there is no assurance that we will continue to be successful in selecting our partner companies or that these partner companies will generate income returns at the same or similar levels as those of our prior partner companies.
There is no assurance that MDB will continue to be as successful as when our broker-dealer business was operating as a single, stand-alone business. As a reorganized holding company, we have a limited operating history. We believe that because of the reorganization of our Company, we are subject to some or all of the risks inherent in the establishment of a new enterprise. Some of the risks may arise from the absence of a significant consolidated operating history, the addition of management responsibilities as a public company, including the production of K-1 tax documents for owners of the Company’s shares, and lack of experience in complying with reporting and other obligations associated with being a publicly traded company listed on Nasdaq. If our business plan, operating as a holding company, turns out to be unsuccessful, investors may lose some or all of their investment in MDB.
Investors in MDB are cautioned that the past successes of the management as executed via their privately held broker-dealer business are no assurance that the newly re-reorganized company will continue to have the same successes or result in same value creation.
We might require additional capital to support operations and business growth and to fund our partner companies; this capital might not be available on terms favorable to us, or all, when needed.
We have funded MDB operations since inception in 2022 primarily through equity financings and revenue generated by the services provided through Public Ventures. We cannot be certain when or if our operations will generate sufficient cash to fully fund our ongoing operations or the growth of our business. We intend to continue to make investments in our business, particularly in our partner companies, to respond to business opportunities and challenges, including developing new products and services, enhancing our operating infrastructure, expanding our operations, and acquiring complementary businesses and technologies. All of the foregoing may require us to secure additional funds. Additional financing may not be available on terms favorable to us, if at all. If we incur additional debt, or issue preferred equity securities, the holders of these debt or preferred security holders would have rights senior to holders of our equity to make claims on our assets, and the terms of any debt could restrict our operations, including our ability to make distributions on our equity. Because our decision to raise capital in the future will depend on numerous considerations, including factors beyond our control, we cannot predict or estimate the amount, timing, dilutive effect or nature of any future issuances of securities. As a result, our equity holders bear the risk that future issuances of debt or equity securities could reduce the value of our Class A Common Shares and dilute their interests. Our inability to obtain adequate financing or financing on terms satisfactory to us, when we require it, could significantly limit our ability to continue supporting our business growth and responding to business opportunities and challenges.
Our business depends upon our ability to make good decisions regarding the deployment of capital into new or existing partner companies and, ultimately, the performance of our partner companies, both of which are uncertain.
If we make poor decisions regarding the deployment of capital into new or existing partner companies, our business model will not succeed. Our success as a holding company ultimately depends on our ability to choose the right partner companies, develop these companies, such that these partner companies are operationally successful. If one or more of our partner companies does not succeed, the value of our assets could be significantly reduced resulting in substantial impairments or write-offs, which could cause the results of our operations and the price of our Class A Common Shares to decline.
The risks relating to our partner companies include:
● most of our partner companies have a history of operating losses and a limited operating history;
● the new technologies that our partner companies attempt to develop and launch commercially may never be developed or may never adequately developed to be commercial or even if commercially developed, may not be accepted in the marketplace;
● the new technologies that our partner companies develop may not be accepted quickly enough or broadly enough resulting in additional need funding to sustain the partner company or the decision to abandon the business at a loss;
● intensifying competition affecting the products and services that our partner companies offer could adversely affect their businesses, financial condition, results of operations, cash flows and prospects for growth;
● technologies of our partner companies that are subject to regulatory examination, testing and approval, may not be approved by any required regulatory authorities;
● inability to adapt to the rapidly changing marketplaces;
● inability to manage growth;
● the need for additional capital to fund partner company operations, which we may not be able to fund or which may not be available from third parties on acceptable terms, if at all;
● inability to protect partner company intellectual property rights and/or the costs and limitations that partner companies infringe on the intellectual property rights of others;
● inability to put into place, monitor and maintain appropriate compliance programs related to employees, safety or other regulatory requirements which could result in legal liability, bad press and significant additional costs to investigate, address and remediate such issues;
● certain of our partner companies could face legal liabilities from claims made against them based upon their operations, products or work;
● the impact of economic downturns on their operations, results and growth prospects;
● inability to attract and retain qualified personnel; and
● government regulations and legal uncertainties may place financial burdens on the businesses of our partner companies.
Our business model does not rely upon the receipt of operating cash flows from our partner companies.
Our public venture business model does not rely upon the receipt of operating cash flows from our partner companies. We anticipate that our partner companies, while we own them and they are developing their businesses, will not generate revenues or positive cash flow. To the extent that our partner companies generate any cash from operations, they will retain the funds to develop their own businesses. Our overall day to day operations will rely on cash on hand, dividends from the operation of Public Ventures and PatentVest, and our ability to generate capital from capital raising activities to finance our overall operations and fund the partner companies. If we need capital to fund current and new partner companies, we will seek to raise additional capital. If we are unable to find ways of monetizing our holdings or to raise additional capital on attractive terms, we may face liquidity issues that will require us to curtail our new business efforts, constrain our ability to execute our business strategy, and limit our ability to provide financial support to our existing partner companies. We may also finance our partner companies through their securities offerings or selling, licensing, or joint venturing their businesses. There is no assurance that we will be able to raise any such funding or funding in sufficient amounts to support the early stages of development of our partner companies.
Our success depends, in part, on the successful development of our partner companies.
At this time, we cannot identify the various specific risks that our partner companies will face other than the challenges typically faced by early-stage companies, as well as risks related to general regulatory issues, general technology and product development issues, meeting capital requirements, and market approach and penetration issues that all such early stage and development companies will face in their evolution. To the extent that any of our partner companies fail during the development phase or experience delay until they reach a point where they are able to successfully market their technologies or products in a financially sustainable way, our investment in those partner companies and your investment in MDB will be impaired, and you may sustain a loss in your investment and return on investment.
To be successful, we will need to grow the current businesses and grow the overall size of MDB and, more particularly, the number and businesses of partner companies. Our success will depend on finding and nurturing early-stage companies and transforming them into successful companies through our managerial and funding resources, including sources of external funding. Expanding the number of partner companies will impose significant added responsibilities on members of management, including the need to identify, recruit, maintain, motivate and integrate additional employees at the MDB (parent) level and at the partner company level. In addition, our management may have to divert a disproportionate amount of its attention away from our day-to-day activities and devote a substantial amount of time to managing these growth activities at our partner companies. Our future financial and business performance and our ability to compete effectively will depend, in part, on our ability to effectively manage our future growth.
Our partner companies are expected to be early-stage development companies, which will make it difficult to judge and evaluate their businesses and their future success.
The partner companies are and will continue to be early-stage companies, none of which, it is anticipated, initially will have any finalized products or well-defined development, intellectual property, marketing or distribution plans. Because of these factors and the absence of an operating history, it will be difficult for potential investors to fully evaluate the planned technologies and prospective operations and future potential of our partner companies. As early-stage companies, they will be subject to all the risks inherent in the initial organization, financing, expenditures, complications and delays associated with new businesses. Investors should evaluate an investment in us in light of all of the risks inherent and uncertainties encountered by early-stage companies operating in competitive environments. There can be no assurance that our efforts to finance and nurture our partner companies will be successful or that any of our partner companies will ultimately develop their products to a point where the companies reach profitability.
One of our subsidiaries, Public Ventures, is subject to Securities and Exchange Commission and FINRA regulation, DTC participant requirements, and settlement bank agreements, and, if not compliant with those regulations, may be subject to fines, limitations on activity and financial impairment.
One of our subsidiaries is a securities broker-dealer, subject to a wide range of regulations under the oversight of the Securities and Exchange Commission, FINRA and state securities regulators, and other financially-oriented governmental authorities. To conduct its clearing operations, it is subject to DTCC participant requirements and the terms of its settlement bank agreements. Public Ventures is currently subject to regulations related to its status as a broker-dealer and is subject to all the regulatory requirements of the Securities and Exchange Commission applicable to our securities clearing operations. As is common in the securities industry, we are subject to regular reviews of and investigations into our operations, some of which progress to regulatory actions that may result in fines, censures, and limitations on activity. Currently, we are the subject of a review of past broker-dealer activities, which may be either resolved or escalated. We do not know at this time whether this review will be escalated to regulatory action, and if it is, what the regulatory assertions would be and what the resolution of such assertions might be. Any adverse result may impair the value of the overall company and a loss of investment value in MDB.
Our partner companies are likely to be operating in businesses that are subject to extensive regulation, which if not compliant with those regulations may be subject to fines, limitations on activity and financial impairment.
Our partner companies will likely be subject to a large range of regulations, especially if they are engaged in development of medical or pharmaceutical therapies, medical devices and technologies subject to export and import controls. The failure to adhere to any applicable laws or regulations relating to their business conduct may result in investigations, fines, limitations on activities and recalls. The partner company subject to these kinds of sanctions, and possibly MDB, also could suffer from development, marketing, financial and reputational damage. There may be consequential impairment of the value of the overall company and a loss of investment value in the Company.
We plan to operate as a company not regulated under the Investment Company Act of 1940. We may have to buy, sell or retain assets when we would otherwise not wish to do so in order to avoid registration under the Investment Company Act.
We believe our operations are not subject to the Investment Company Act of 1940 (the “Investment Company Act”). We do not hold ourselves out as conducting the business of investing, reinvesting or trading in securities. Rather, we found, own and operate our partner companies to help them develop their businesses. We will have control of our partner companies through a majority ownership position, by being actively engaged on the board of directors and by being involved in the certain management decision processes of the partner companies. We are actively engaged in the development of these companies including creation of the business strategy and path to value creation.
The Investment Company Act regulates companies that are engaged in the business of investing, reinvesting, owning, holding or trading in securities. Under the Investment Company Act, a company may be deemed to be an investment company if it owns investment securities with a value exceeding 40% of the value of its total assets (excluding government securities and cash items) on an unconsolidated basis, unless an exemption or safe harbor applies. We refer to this test as the “40% Test.” Securities issued by companies other than majority-owned partner companies are generally considered “investment securities” for the purpose of the Investment Company Act, unless other circumstances exist, such as the holding company management being actively involved in the management of the underlying company. Additionally, there may be other exemptions that we might be eligible to use to avoid regulation under the Investment Company Act. As a company that builds value by cofounding early-stage technology and life sciences companies, we believe we are not engaged in the business of investing, reinvesting or trading in securities. Consequently, we do not believe that we are not now and will not be an investment company under the Investment Company Act.
We are monitoring our compliance with the 40% Test and conduct our business activities to comply with this test and other exemptions such that we are exempt from the Investment Company Act. It is not feasible for us to be regulated as an investment company because the Investment Company Act rules are inconsistent with our strategy of actively helping our partner companies in their efforts to build value. We may need to take various actions, however, that we would otherwise not pursue in order to remain in compliance with the 40% Test. For example, we may need to retain a majority interest in a partner company that we no longer consider strategic, we may not be able to acquire an interest in a company unless we are able to obtain a majority ownership interest in the company, or we may be limited in the manner or timing in which we sell or distribute our interests in a partner company. Our ownership levels also may be affected if our partner companies are acquired by third parties or if our partner companies issue stock which dilutes our majority ownership. The actions may require us to take actions to avoid application of the Investment Company Act of 1940 so as to maintain compliance with the 40% Test that could adversely affect our ability to create and realize value at our partner companies. The Company’s Broker-Dealer subsidiary is excluded from the Investment Company Act of 1940, and therefore all securities held by the Broker-Dealer are excluded from the asset calculation.
Our ability to retain our senior professionals and recruit additional professionals is critical to the success of our business, and our failure to do so may adversely affect our reputation, business, results of operations, cash flows and financial condition.
Our people are one of our most valuable resources. Our ability to source attractive technologies and companies to deploy our capital depends upon the reputation, judgment, and execution skills of our senior professionals, particularly our directors and senior management. Despite our efforts to retain valuable employees, members of our management team may terminate their employment with us on short notice. The loss of the services of any of our executive officers or other key employees could potentially harm our business, operating results, cash flows or financial condition. Currently, we do not maintain key man insurance policies with respect to any of our executive officers or employees.
Potential Adverse Impact of U.S. and Nicaraguan Political and Regulatory Environments on Our Operations.
Our business operations are subject to risks associated with the political, economic, and regulatory environments in both the United States and Nicaragua, where we conduct business. Any changes in government policies, regulations, or political instability in either country could have a material adverse effect on our ability to operate effectively and profitably.
In the United States, shifts in trade policies, foreign relations, and regulatory frameworks may impact our ability to do business in Nicaragua. Additionally, any restrictions on international trade, sanctions, or policy changes affecting business dealings with Nicaragua could increase costs or limit our ability to operate within the country.
In Nicaragua, political instability, civil unrest, or changes in government leadership could lead to policy shifts, economic uncertainty, or regulatory changes that impact our business. Potential risks include:
Changes in the list of sanctioned countries where U.S. businesses and individuals are restricted or prohibited from engaging in trade, investment, or other business activities. These restrictions are primarily enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) and are based on economic sanctions, national security concerns, and foreign policy objectives.
Expropriation or nationalization risks, which could result in asset seizures or limitations on foreign-owned businesses.
Civil unrest or political turmoil that may disrupt workforce availability or local market stability.
If the political or economic environment in either country deteriorates or if new regulations are imposed that negatively impact our ability to conduct business in Nicaragua, our financial condition, results of operations, and growth prospects could be materially and adversely affected. We continue to monitor political developments and assess potential risks to mitigate any significant impacts on our business.
We out-source aspects of our business operations in Nicaragua.
We have engaged an affiliated company, MDB Capital S.A., located in Nicaragua to provide specific services from time to time, on an as out-source, as requested basis. Currently, we believe that the Company, PatentVest and our partner companies will use the service company for various activities. We believe that having services performed on a contract basis in Nicaragua will provide cost benefits for our operations in the United States that will enhance our business operational competitiveness. In order to function effectively and efficiently when engaging companies in Nicaragua, we believe that we will have to help train the persons responsible for our service requests so as to have available when needed knowledgeable staffing for our projects. There can be no assurance that our out-sourcing these contract services in Nicaragua will be at competitive and at cost saving rates or that we will be able to find the services there that are able to carry out the required functions.
Whether or not we will be able to continue to use out-sourcing companies located in Nicaragua will depend on the extent that the United States imposes restrictions on US persons and entities engaging in commerce with companies that employ Nicaraguan persons or are located in Nicaragua. Currently there are Executive Orders in place that restrict immigration of designated groups of individuals into the United States and restrictive sanctions on certain trade-related activities between United States and Nicaragua. In conjunction with the Executive Orders, other departments of the United States government have imposed complimentary sanctions on activities under their jurisdictions to expand the effect of the Executive Orders. The effect and extent of the sanctions, including Executive Order 13851, dated October 24, 2022, is not yet known, but could potentially prohibit both imports from and exports to Nicaragua. Whether these sanctions will be interpreted to include a prohibition on our current and proposed service arrangements to be provided by companies and persons in Nicaragua is yet unknown. But if the sanctions extend to our out-source service arrangements with Nicaraguan persons and entities, we will face disruption obtaining certain services, and we will have to find replacement service providers or personnel. We may have difficulty in finding qualified, competent replacements for those functions fulfilled by our Nicaraguan contract party. If we have to find those kinds of replacements, we also would expect our costs to increase, thereby losing the advantage of our Nicaraguan resources.
Risks related to our significant and concentrated equity investment in eXoZymes.
The Company’s equity investment in eXoZymes represents a significant portion of our total assets and is reported as an equity method investment on our balance sheet. As such, fluctuations in the value of this investment may have a material impact on our financial position and the results of operations.
Since November 2024, eXoZymes has been a publicly traded company and its operational and strategic decisions have been directed by its board and management. As a public company its stock price is determined by the market and investor reaction to its product developmental decisions and performance. The actual performance of eXoZymes will depend on many factors, such as its product discovery and development, its ability to enter into strategic alliances or licensing arrangements, its ability to generate revenues, the maintenance of its financial resources, regulatory compliance and developments that impact its products, and broader economic conditions.
Further, as eXoZymes is in an early stage of its commercial development, its financial performance may be unpredictable, and periods of volatility or underperformance may result in non-cash losses and/or impairment charges on our investment. A sustained decline in the value of our investment could also negatively affect key financial ratios and limit our ability to raise additional capital.
Given the size and concentration of our investment in eXoZymes, any material change in its value—positive or negative—will directly affect our financial statements, potentially causing significant variability in our reported earnings and equity.
As a result, investors should consider the inherent risks associated with holding a large, concentrated, and volatile equity investment when evaluating our financial condition and future prospects and a decision to invest or hold an investment in our company.
There may be securities market risks resulting from owning the equity securities of our partner companies.
Although we are not engaged in the business of investing, reinvesting, or trading in securities, we will own a controlling or other positions in our partner companies pursuant to our business model. We generally will be active in the management and development of our partner companies, as well as actively monitoring their operations to keep abreast of their business development. In time, we anticipate that we will monetize the value we hold in our partner companies. Our monetization process will contemplate the typical forms of merger and acquisition transactions, such as licensing, private and public offerings, asset or company sales and registered common stock distributions. To the extent that any of our partner companies become publicly traded, their value will become subject to market fluctuations. Any fluctuation in the value of our partner companies’ securities, for whatever reason, may affect the value of MDB as a holding company resulting in a partial or total loss of your investment.
We could experience competition from other potential acquirers when we seek to establish partner companies, which may result in not being able to acquire them or having to invest at a higher valuation, thus increasing our risk of loss and reducing potential future gains.
We believe that we will face competition from other capital providers and acquisition-oriented entities as we seek to acquire and develop our partner companies. Some of our competitors have more experience identifying and acquiring companies in various industries and have greater financial and management resources, brand name recognition or industry contacts than we possess. We compete with those firms on a number of factors, including our history and reputation, our ability to partner, encourage and support development of each company, the abilities and experience of our professionals in working with development-stage companies, and our ability to source and perform due diligence on new technologies and companies. In addition, even though we seek to acquire technologies at their very early stages of development, we may still pay higher prices in our acquisitions and partner company creation because of competition from other potential acquirers and higher valuations. This could increase the risk of loss and result in lower gains to the holding company.
We may be limited in our ability to attract and continue to employ personnel engaged by our partner companies.
In order to recruit and retain existing and future personnel for our partner companies, we may need to increase the level of compensation that we pay and have to use equity grants as incentives. As our partner companies are subsidiaries, we may not be able to use the value of the partner company for equity grants and similar compensation arrangements. We may have to deploy other incentives, such as higher salaries, better benefits or equity in MDB. Any of these may adversely affect the value of MDB or increase our consolidated expenses.
We strive to maintain a work environment that reinforces our culture of collaboration, motivation and alignment of interests with investors. The effects of becoming public, including potential changes in our compensation structure, could adversely affect this culture. If we do not continue to develop and implement the right processes and tools to manage our changing enterprise and maintain our culture, our ability to compete successfully and achieve our business objectives could be impaired, which could negatively impact our business, financial condition, results of operations and cash flows.
There is significant competition for the time and capital of our community members and they have no obligation to continue to own MDB member interests, or participate in the development of the partner companies as envisioned by our business model.
We will rely on our community of sophisticated investors that have experience with our public venture approach for partner company formation, development and funding. There is competition for their time and capital. There is no obligation for an investor that is part of our community to continue to participate in our public venture approach or even to hold securities of MDB. As is common, investors will circulate in and out of our community as their interests change over time. The loss of a prominent or an active community participant may diminish the effectiveness of our community and may lead others to change their participation level within the community.
Impact of Ukrainian and Israeli Conflict
Currently, we believe that the conflicts involving the Ukraine and Israel do not have any direct impact on our operations, financial condition or financial reporting. We believe the conflicts will have only a general impact on our operations in the same manner as it is having a general impact on all businesses that have their operations in North America as a result of international sanctions and embargo regulations, possible shortages of goods and goods incorporating parts that may be supplied from the Ukraine, Russia or Israel, supply chain challenges, and the international and US domestic inflationary results of the conflict and government spending for and funding of our country’s response. We do not believe we will be targeted for cyber-attacks in connection with the conflicts, but as a financial institution, we are aware that we may be a general target for cyber-attacks. We have no operations in the countries directly involved in the conflicts or are specifically impacted by any of the sanctions and embargoes, as we principally operate in the United States. Other than general securities market trends, we do not have reason to believe that investors will evaluate the company as having special risks or exposures related to the conflicts.
Impact of the Iran Conflict
Currently, we believe that the ongoing military conflict involving Iran (the “Iran Conflict”), including actions by the United States and Israel, does not have any direct impact on our operations, financial condition or financial reporting. We believe the conflict will have only a general impact on our operations in the same manner as it is having a general impact on all businesses that have their operations in North America as a result of international sanctions and embargo regulations, possible disruptions to global energy supplies and oil prices due to tensions in the Strait of Hormuz and the Middle East region, shortages of goods and supply chain challenges, and the international and US domestic inflationary results of the conflict and government spending for and funding of our country’s response. We do not believe we will be specifically targeted for cyber-attacks in connection with the conflict, but as a financial institution, we are aware that we may be a general target for cyber-attacks, including potentially from state-sponsored actors associated with the conflict. We have no operations in Iran or the countries directly involved in the conflict and are not specifically impacted by any of the sanctions and embargoes, as we principally operate in the United States. Other than general securities market trends, we do not have reason to believe that investors will evaluate the company as having special risks or exposures related to the conflict.
The collection, processing, use, storage, sharing and transmission of personal information and other sensitive data are subject to stringent and changing state, federal and international laws, regulations and standards and policies and could give rise to liabilities as a result of our failure or perceived failure to protect such data, comply with privacy and data protection laws and regulations or adhere to the privacy and data protection practices that we articulate to our clients.
In the course of our operations and the processing of transactions, we collect, process, store, disclose, use, share and/or transmit personal information and other sensitive data from current, past and prospective clients as well as our employees in and across multiple jurisdictions. The regulatory framework for privacy issues worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future. There are federal, state and foreign laws and regulations regarding privacy, data security and the collection, processing, use, storage, protection, sharing and/or transmission of personal information and sensitive data. For example, the Gramm-Leach-Bliley Act (“GLBA”) (along with its implementing regulations) restricts certain collection, processing, storage, use and disclosure of personal information, requires notice to individuals of privacy practices and provides individuals with certain rights to prevent the use and disclosure of certain non-public or otherwise legally protected information. Additionally, many states continue to enact legislation on matters of privacy, information security, cybersecurity, data breach and data breach notification requirements. For example, as of January 1, 2020, the California Consumer Privacy Act (“CCPA”) grants additional consumer rights with respect to data privacy in California. The CCPA, among other things, entitles California residents to know how their personal information is being collected and shared, to access or request the deletion of their personal information and to opt out of certain sharing of their personal information. The CCPA is subject to further amendments pending certain proposed regulations that are being reviewed and revised by the California Attorney General. The CCPA provides for civil penalties for violations, as well as a private right of action for certain data breaches that result in the loss of personal information. This private right of action may increase the likelihood of, and risks associated with, data breachlitigation. We cannot predict the impact of the CCPA on our business, operations or financial condition, but it could result in liabilities and/or require us to modify certain processes or procedures, which could result in additional costs.
Additionally, the California Privacy Rights Act (“CPRA”) was passed in November 2020 and it will be effective in most material respects starting on January 1, 2023. The CPRA imposes additional obligations on companies covered by the legislation and will significantly modify the CCPA, including by expanding clients’ rights with respect to certain sensitive personal information. The CPRA also creates a new state agency that will be vested with authority to implement and enforce the CCPA and the CPRA. The effects of the CCPA and the CPRA are potentially significant and may require us to modify our data collection or processing practices and policies and to incur substantial costs and expenses in an effort to comply and increase our potential exposure to regulatory enforcement and/or litigation.
We expect more states to enact legislation similar to the CCPA and the CPRA, which provide clients with new privacy rights and increase the privacy and security obligations of entities handling certain personal information of such clients. The CCPA has prompted a number of proposals for new federal and state-level privacy legislation, such as in Virginia and Colorado, both with laws to take effect in 2023. It is anticipated that all such laws will add additional complexity, have variation in requirements, restrictions and potential legal risk, require additional investment of resources in compliance programs, impact strategies and the availability of previously useful data and could result in increased compliance costs and/or changes in business practices and policies.
Additionally, our broker-dealer, Public Ventures is subject to SEC Regulation S-P, which requires that businesses maintain policies and procedures addressing the protection of client information and records. This includes protecting against any anticipated threats or hazards to the security or integrity of client records and information and againstunauthorized access to or use of client records or information. Regulation S-P also requires businesses to provide initial and annual privacy notices to clients describing information sharing policies and informing clients of their rights.
Because the interpretation and application of many privacy and data protection laws are uncertain, it is possible that these laws may be interpreted and applied in a manner that is inconsistent with our existing data management practices or the features of our services and platform capabilities. If so, in addition to the possibility of being subjected to fines, lawsuits and other claims, we could be required to fundamentally change our business activities and practices or modify our platform, which could have an adverse effect on our business. Any violations or perceived violations of these laws, rules and regulations by us, or any third parties with which we do business, may require us to change our business practices or operational structure, including limiting our activities in certain states and/or jurisdictions, addressing investigations or being subjected to legal claims by governmental entities or private actors, sustaining monetary penalties, sustaining reputational damage, expending substantial costs, time and other resources and/or sustaining other harms to our business. Furthermore, our online, external-facing privacy policy and website make certain statements regarding our privacy, information security and data security practices with regard to information collected from our clients or visitors to our website. Failure or perceived failure to adhere to such practices may result in regulatory scrutiny and investigation, complaints by affected clients or visitors to our website, reputational damage and/or other harm to our business. If either we, or the third-party service providers with which we share client data, are unable to address privacy concerns, even if unfounded, or to comply with applicable privacy or data protection laws, regulations and policies, it could result in additional costs and liability to us, damage our reputation, inhibit sales and harm our business, financial condition, results of operations, and cash flows.
Cyberattacks and other security breaches or disruptionssuffered by us or third parties upon which we rely could have a materially adverse effect on our business, harm our reputation and expose us to public scrutiny or liability.
In the normal course of business, we collect, process, use and retain sensitive and confidential information regarding our clients and prospective clients, including data provided by and related to clients and their transactions, as well as other data of the counterparties to their payments. We also have arrangements in place with certain third-party service providers that require us to share client information. Although we devote resources and management focus to ensuring the integrity of our systems through information security and business continuity programs, our facilities and systems, and those of third-party service providers, are vulnerable to actual or threatened external or internal security breaches, acts of vandalism, theft, fraud or misconduct on the part of employees, other internal sources or third parties, computer viruses, phishing attacks, internet interruptions, disruptions or losses, misplaced or lost data, ransomware, unauthorized encryption, denial-of-service attacks, social engineering, unauthorized access, spam or other attacks, natural disasters, fires, terrorism, war, telecommunications or electrical interruptions or failures, programming or human errors or malfeasance and other similar malicious or inadvertentdisruptions or events. We and our third-party service providers from time to time have experienced and may in the future continue to experience such instances. In some cases, the bad actors facilitated unauthorized financial transactions. We also face security threats from malicious third parties that could obtain unauthorized access to our systems and networks, which threats we anticipate will continue to grow in scope and complexity over time. These events could interrupt our business or operations, result in legal claims or proceedings, result in significant legal and financial exposure, supervisory liability under U.S. federal or state, or non-U.S. laws regarding the privacy and protection of information, including personal information, damage to our reputation and a loss of confidence in the security of our systems, products and services. Although the impact to date from these events has not had a material adverse effect on us, no assurance is given that this will be the case in the future.
Information security risks in the financial services industry have increased recently, in part because of new technologies, the use of the internet and telecommunications technologies (including mobile devices) to conduct financial and other business transactions and the increased sophistication and activities of organized criminals, perpetrators of fraud, hackers, terrorists and other malicious third parties. In addition to cyberattacks and other security breaches involving the theft of sensitive and confidential information, hackers, terrorists, sophisticated nation-state and nation-state supported actors and other malicious third parties recently have engaged in attacks that are designed to disrupt key business services, such as consumer-facing websites. We and our third-party service providers may not be able to anticipate or implement effective preventive measures against all security breaches of these types, especially because the techniques used to sabotage or to obtain unauthorized access to our or our third-party service providers’ technology, systems, networks and/or physical facilities in which data is stored or through which data is transmitted change frequently and because attacks can originate from a wide variety of sources. We employ detection and response mechanisms designed to contain and mitigate security incidents. Nonetheless, early detection efforts may be thwarted by sophisticated attacks and malware designed to avoid detection. We also may fail to detect the existence of a security breach related to the information of our clients and to prevent or detect service interruption, system failure or data loss. Further, as a significant number of people work from home, these cybersecurity risks may be heightened by an increased attack surface across our business and those of our clients and third-party service providers. We cannot guarantee that our efforts, or the efforts of those upon whom we rely and partner with, will be successful in preventing any such information security incidents.
The access by unauthorized persons to, or the improper disclosure by us of, confidential information regarding our clients or our proprietary information, software, methodologies and business secrets could interrupt our business or operations, result in significant legal and financial exposure, supervisory liability, damage to our reputation or a loss of confidence in the security of our systems, products and services, all of which could have a material adverse impact on our business. In addition, there recently have been a number of well-publicized attacks or breaches affecting companies in the financial services industry that have heightened concern by clients, which could also intensify regulatory focus, cause clients to lose trust in the security of the industry in general and result in reduced use of our services and increased costs, all of which could also have a material adverse effect on our business.
Most jurisdictions in the United States have enacted laws requiring companies to notify individuals, regulatory authorities and/or others of security breaches involving certain types of data. In addition, our agreements with certain partners and service providers may require us to notify them in the event of a security breach. Such mandatory disclosures are costly, could lead to negative publicity, may cause our clients, partners and service providers to lose confidence in the effectiveness of our security measures and require us to expend significant capital and other resources to respond to and/or alleviate problems caused by the actual or perceived security breach. A security breach of any of our vendors that processes personal information of our clients may pose similar risks.
A security breach may also cause us to breach client contracts. Our agreements with certain partners and service providers may require us to use industry-standard or reasonable measures to safeguard personal information. We also may be subject to laws that require us to use industry-standard or reasonable security measures to safeguard personal information. A security breach could lead to claims by our clients or other relevant stakeholders that we have failed to comply with such legal or contractual obligations. As a result, we could be subject to legal action or our clients could end their relationships with us. There can be no assurance that the limitations of liability in our contracts would be enforceable or adequate or would otherwise protect us from liabilities or damages, and in some cases our client agreements may not limit our remediation costs or liability with respect to data breaches.
Litigation resulting from security breaches may adversely affect our business. Unauthorized access to our technology, systems, networks or physical facilities, or those of our third-party service providers, could result in litigation with our clients or other relevant stakeholders. These proceedings could force us to spend money in defense or settlement, divert management’s time and attention, increase our costs of doing business or adversely affect our reputation. We could be required to fundamentally change our business activities and practices or modify our products and/or technology capabilities in response to such litigation, which could have an adverse effect on our business. If a security breach were to occur, and the confidentiality, integrity or availability of personal information was disrupted, we could incur significant liability, or our technology, systems or networks may be perceived as less desirable, which could negatively affect our business and damage our reputation.
We may not have adequate insurance coverage with respect to liabilities that result from any cyberattacks or other security breaches or disruptionssuffered by us or third parties upon which we rely. The successful assertion of one or more large claimsagainst us that exceeds our available insurance coverage, or results in changes to our insurance policies (including premium increases or the imposition of large deductible or co-insurance requirements), could have an adverse effect on our business. In addition, we cannot be sure that our existing insurance coverage and coverage for errors and omissions will continue to be available on acceptable terms or that our insurers will not deny coverage as to any future claim.
While we take precautions to prevent consumer identity fraud, it is possible that identity fraud may still occur or has occurred, which may adversely affect the performance of our products and services or subject us to scrutiny or penalties.
Risks Pertaining to Partner Companies in General
Based on our business model, some or all of our partner companies likely will need to raise capital from time to time to fund their operations. We may not be able to fund some or all of these amounts, and the amounts may not be available from third parties on acceptable terms, or at all.
We cannot be certain that our partner companies will be able to obtain initial and additional financing on acceptable terms, or at all, when needed. Because our resources and our ability to raise capital are limited and if we do not have funds in reserve for additional capital infusions, we may not be able to provide our partner companies with sufficient capital resources at times when needed to enable them to reach a cash flow positive position. We also may fail to accurately project the capital needs of our partner companies for purposes of our cash flow planning. If our partner companies need to, but are not able to, raise capital from us or other outside sources, then they may need to cease or scale back operations. If our partner companies raise capital from outside sources, the terms of such financings may significantly reduce or eliminate the value of such partner companies. In all such events, our ownership interest in any such partner company could lose some or all of its value.
If we are not successful in attracting and retaining highly qualified personnel, we may not be able to successfully implement our business strategy. In addition, the loss of the services of the founders of our partner companies could adversely impact their business prospects and the value of our ownership of the partner company.
Our ability to properly develop our partner companies and be successful in our business model depends in large part upon our ability to attract and retain at the partner company level and at the MDB level highly qualified managerial, scientific, and technical personnel. We will need to hire additional personnel as we further develop and grow our partner companies. Competition for skilled personnel usually is intense. We may not be able to hire and retain highly qualified personnel on acceptable terms. If we are unable to attract and retain high-quality personnel, especially for our partner companies, the rate and success at which they can develop and commercialize products or succeed at all could be limited.
Some intellectual property of our partner companies will be funded through government programs, thus being subject to federal regulation such as “march-in” rights, certain reporting requirements and a preference for U.S. industry. Compliance with these regulations may limit exclusive rights, subject the companies to expenditure of resources with respect to reporting requirements, and limit the ability to contract with foreign manufacturers.
When research is funded in part by the U.S. government, the resulting intellectual property is subject to certain federal regulations pursuant to the Bayh-Dole Act of 1980, or the Bayh-Dole Act. In particular, the federal government retains a “nonexclusive, nontransferable, irrevocable, paid-up license” for its own benefit to inventions produced with its financial assistance. The Bayh-Dole Act also provides federal agencies with “march-in rights.” March-in rights allow the government, in specified circumstances, to require the contractor or successors in title to the patent or other intellectual property to grant a “nonexclusive, partially exclusive, or exclusive license” to a “responsible applicant or applicants.” If the intellectual property owner refuses to do so, the government may grant the license itself. Intellectual property discovered under government-funded programs is also subject to certain reporting requirements, compliance with which may require our partner companies or licensors to expend substantial resources. Such intellectual property is also subject to a preference for U.S. industry, which may limit the ability to contract with foreign product manufacturers for products covered by the intellectual property. Moreover, collaboration with academic institutions to accelerate research or development may be limited or create the march in right. Further, the partner companies may choose to license intellectual property in the future that may be subject to government rights pursuant to the Bayh-Dole Act. If, in the future, a partner company co-owns or licenses in technology that is critical to its business that is developed in whole or in part with federal funds subject to the Bayh-Dole Act, its ability to enforce or otherwise exploit patents covering the technology may be adversely affected.
Some of our partner companies may be unable to protect their proprietary rights and may infringe on the proprietary rights of others.
Our partner companies, during their development, will typically assert various forms of intellectual property protection. Intellectual property is likely to constitute an important part of our partner companies’ assets and competitive strengths. Federal law, most typically, copyright, patent, trademark and trade secret laws, generally protects intellectual property rights. State law also addresses property rights. Although we expect that our partner companies will take reasonable efforts to protect the rights to their intellectual property, the complexity of United States, individual state and international trade secret, copyright, trademark and patent law, coupled with the limited resources of these partner companies and the demands of quick delivery of products and services to market, create a risk that their efforts will prove inadequate to prevent misappropriation of our partner companies’ technology, third parties may develop similar technology independently, or they will otherwise be unable to adequately protected their trade secrets.
Some of our partner companies also license intellectual property from third parties, and it is possible that they could become subject to infringement actions based upon their use of the intellectual property licensed from those third parties. Our partner companies generally obtain representations as to the origin and ownership of such licensed intellectual property; however, this may not adequately protect them. Any claimsagainst our partner companies’ proprietary rights, with or without merit, could subject our partner companies to costlylitigation and the diversion of their technical and management personnel from other business concerns. If our partner companies incur costlylitigation and their personnel are not effectively deployed, the expenses and losses incurred by our partner companies will increase.
Where our partner companies enter into intellectual property license agreements, if they fail to adhere to their obligations thereunder, they may lose the ability to continue the license. Such a loss may be materially adverse to the business and future of a partner company.
Third parties have and may assert infringement or other intellectual property claimsagainst our partner companies based on their patents or other intellectual property claims. Even though we believe our partner companies’ products do not infringe any third-party’s patents, they may have to pay substantial legal fees to defendagainst such claims as well as damages, possibly including treble damages, if it is ultimately determined that such claims have merit. They may have to obtain a license to sell their products if it is determined that their products infringe another person’s intellectual property. Our partner companies might be prohibited from selling their products before they obtain a license, which, if available at all, may require them to pay substantial royalties. Even if infringementclaimsagainst our partner companies are without merit, defending these types of lawsuits takes significant time, may be expensive and may divert management attention from other business concerns.
Our partner companies have limited foreign intellectual property rights and may not be able to protect their intellectual property rights throughout the world.
Currently, our partner companies have limited intellectual property rights outside the United States. Filing, prosecuting and defending patents in all countries throughout the world would be prohibitively expensive, and intellectual property rights in some countries outside the United States can be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as do federal and state laws in the United States. Consequently, our partner companies may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions. Many countries have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In addition, many countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of such patent. If our partner companies or any of their licensors are forced to grant a license to third parties with respect to any patents relevant to their business, their competitive position may be impaired, and their business, financial condition, results of operations and prospects may be adversely affected. Also, competitors may use the technologies in jurisdictions where our partner companies have not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where there is patent protection but where enforcement is not as strong as that in the United States. These products may compete with the products of our partner companies in jurisdictions where they do not have any issued patents and patent claims or other intellectual property rights may not be effective or sufficient to prevent them from competing.
Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets and other intellectual property protection, particularly those relating to biopharmaceutical products, which could make it difficult for our partner companies to stop the infringement of patents or marketing of competing products by third parties in violation of proprietary rights generally. Proceedings to enforce patent and other intellectual property rights in foreign jurisdictions could result in substantial costs and divert management efforts and attention from other aspects of business operations, could put the patents at risk of being invalidated or interpreted narrowly and patent applications at risk of not issuing and could provoke third parties to assert claimsagainst our partner companies. The intellectual property holder may not prevail in any lawsuits that are initiated and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, efforts by our partner companies to enforce their intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that they develop or license.
Our partner companies may incur substantial costs as a result of litigation or other proceedings relating to intellectual property, including patents, and they may be unable to protect their rights to their products and technology.
If our partner companies or their licensors choose to go to court to stop a third party from using the inventions claimed in their owned or in-licensed patents, that third party may ask the court to rule that the patents are invalid and/or should not be enforced against that third party. These lawsuits are expensive and would consume time and other resources even if our partner companies were successful in stopping the infringement of these patents. In addition, there is a risk that the court will decide that these patents are not valid and that our partner companies do not have the right to stop others from using the inventions. There is also the risk that, even if the validity of these patents is upheld, the court will refuse to stop the third party on the ground that such third party’s activities do not infringe our owned or in-licensed patents.
Patent terms may be inadequate to protect a competitive position for an adequate amount of time.
Patents have a limited lifespan. In the United States, if all maintenance fees are timely paid, the natural expiration of a patent is generally 20 years from its earliest U.S. non-provisional filing date. Various extensions, such as patent term adjustments and/or extensions, may be available, but the life of a patent, and the protection it affords, is limited. Even if patents covering a product are obtained, once the patent life has expired, our partner companies may be open to competition from competitive products. Given the amount of time required for the development, testing and regulatory review of new products, patents protecting new products might expire before or shortly after such products are commercialized. As a result, a patent portfolio may not provide sufficient rights to exclude others from commercializing products similar or identical to those of the partner companies.
Our efforts to maintain and protect our intellectual property rights through means in addition to registration may not be sufficient to protect our business.
The patents that our partner companies and we have are important assets. Our partner companies and we also rely on our unpatented proprietary technology, trade secrets, processes and know-how. Generally, protection of intellectual property rights will be through filed patents, registered trademarks and registered copyrights. Other proprietary information will be protected through a combination of trade secret laws and confidentiality, non-disclosure and assignment of invention agreements with employees, contractors, collaborators, vendors, consultants, advisors and third parties. Despite these measures, intellectual property rights could be challenged, invalidated, circumvented or misappropriated. To pursue enforcement of these kinds of agreements could involve significant expense, potentially hinder or limit use of intellectual property rights, or potentially result in the inability to use the intellectual property rights in question. If an alternative cost-effective solution were not available, there may be an adverse effect on our financial position and performance.
Enforcing intellectual property rights against one or more third parties can be expensive and time-consuming, and an adverse result in any proceeding could put the intellectual property rights at risk of being invalidated or narrowed in scope of coverage. Patent and trademark challenges would increase the cost of development, engineering and marketing our products. There may not be adequate resources available to enforce any of the intellectual property rights. In addition, the ability to enforce intellectual property rights depends on the ability to detect infringement, and the ability to obtain evidence of infringement. Where enforcement is sought, a claim may not prevail or the damages, if any, may not be commercially meaningful.
If trademarks and trade names are not adequately protected, then our partner companies may not be able to build name recognition in the markets of interest and their business may be adversely affected.
A trademark or trade name may be challenged, infringed, circumvented or declared generic or determined to be infringing on other marks. Our partner companies may not be able to protect their rights to their trademarks and trade names or may be forced to stop using their names. At times, competitors may adopt trade names or trademarks similar to those of our partner companies, thereby impeding their ability to build brand identity and possibly leading to market confusion. In addition, there could be potential trade name or trademark infringementclaims brought by owners of other registered trade names or trademarks that incorporate variations of our unregistered trade names or trademarks. If the partner companies are unable to establish name recognition based on our trademarks and trade names, they may not be able to compete effectively and our business may be adversely affected.
Collaborations of various sorts, by our partner companies, such as with respect to research, testing, clinical trials, manufacturing and distribution, will be important to their respective businesses. Their inability to enter into collaboration arrangements as needed, or if such collaborations are not successful, may adversely impact their respective businesses.
Our partner companies will likely seek to collaborate with third parties to engage in product research, clinical trials, marketing, manufacturing, and distribution as part of its strategy. If our partner companies fail to enter into or maintain collaboration arrangements, as needed and on reasonable terms, their ability to develop their business could be delayed, or the costs of development and commercialization increased beyond what would be reasonable and ultimately hindered to the point of business cessation. Furthermore, our partner companies may need to obtain the use of intellectual property rights held by third parties in order to develop their products. As a result, the growth of a particular business or product may depend in part on the ability to acquire or in-license these intellectual property rights.
Future collaboration arrangements between partner companies and third parties may pose a number of risks, including, but not limited to, the following:
(i) collaborators have significant discretion in determining the efforts and resources that they will apply;
(ii) collaborators may not perform their obligations as expected;
(iii) collaborators may elect not to continue or renew development or commercialization programs or license arrangements;
(iv) collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with products of our partner companies or products the collaborators have may be viewed as competitive with product of our partner companies causing them to cease to devote resources to the commercialization of our partner company products;
(v) collaborators may fail to comply with applicable regulatory requirements regarding the development, manufacture, distribution or marketing of a product candidate or product;
(vi) collaborators may not commit sufficient resources to the marketing and distribution of our partner company product or products;
(vii) disagreements with collaborators, including disagreements over proprietary rights, contract interpretation or the preferred course of development, might cause delays or terminations of the research, development or commercialization of products, might lead to additional responsibilities for our partner companies, or might result in litigation or arbitration, any of which would be time- consuming and expensive;
(viii) collaborations may be terminated by the collaborator, and, if terminated, our partner companies may require more capital to pursue further development or commercialization of the applicable product; and
(ix) collaborations may not be negotiated on a timely basis or acceptable terms, if at all, or they may require substantial additional capital so as to be able to pursue and fund a collaboration.
If collaborations do not result in the successful discovery, development and commercialization of product candidates or if one of the collaboratorsterminates its agreement, our partner companies may not receive any future research funding or milestone or royalty payments under such collaboration. If a collaboratorterminates its agreement, the partner company may find it more difficult to attract new collaborators, and the perception of the product or the business and financial condition of our partner company could be adversely affected.
Risks Related to M1
M1 has a limited operating history on which to evaluate its ability to achieve its operating objectives.
M1 was founded in 2024, has a limited operating history, and only has incurred losses to date. Therefore, there can be no assurance that the efforts of M1 to develop the M1 Platform will produce a commercial product, market acceptance or revenues that will sustain its business. With a limited operating history and no commercialized products at this time, it will be difficult for investors to make predictions about its future success or viability and any predictions may not be as accurate as they could be if it had a longer operating history or a company history of successfully developing, commercializing and generating revenue from pharmaceutical products for a mass market.
M1 may not be successful in its efforts to advance from the pre-clinical development stage and to fully develop a small molecule senescence platform.
A key element of M1’s strategy is to develop the M1 Platform, which is intended to be comprised of pharmaceutical drugs or other products designed to aid in longevity and to inhibit certain forms of age-related diseases. The focus of the M1 Platform is to treat senescent cells, which are dysfunctional cells that have permanently stopped dividing, have been implicated in the aging process and the development of chronic low-grade inflammation. This chronic inflammation has been linked to a variety of age-related diseases, including multiple fibrotic conditions that have limited treatment options and poor prognoses. Although its R&D (research and development) efforts to date, which have been focused on pre-clinical development, have resulted in what is believed to be potential pipeline of products, M1 may not be successful in finalizing the development of products to the stage of commercial viability or be able to continue to identify and develop other pipeline products. Even if M1 is successful in continuing to build its product pipeline, not all potential pipeline products it identifies will be suitable for development as pharmaceutical drugs or as other commercial products. Although management believes its efforts to develop the M1 Platform will demonstrate commercial success and deliver on the promise of aiding in longevity and inhibiting certain age-related diseases, if M1 is unsuccessful in these efforts, the value of M1 will be significantly impaired or fully lost, and our holding company investors may sufferloss in relation to the investment in M1. Further, in such an event, M1 may have to curtail or cease its business.
Risks Related to PatentVest
If PatentVest does not identify the full range of patent opportunities relevant to clients’ intellectual property portfolio, its reputation will be harmed and it may be liable for service failure.
One of the primary services that PatentVest provides its clients is an analysis of their intellectual property portfolio and how the portfolio may be protected and expanded through additional patent and other IP protection opportunities. We believe that its ability to attract and retain clients depends on its ability to identify actual and potential patent assets for clients. Although there is no guarantee that we will be able to identify all potential patent opportunities, if we miss a patent opportunity or fail to provide the services contracted by clients in a workmanlike manner, then the reputation of PatentVest will be harmed, and it may be liable for damages due to providing its services negligently.
If clients do not agree that the patents opportunities identified in the PatentVest reports are relevant to their businesses, PatentVest will have difficulty retaining and attracting new clients, which could harm its operating results.
The clients of PatentVest use the services to help them analyze their existing and potential intellectual property. If the clients perceive that the analysis and the opportunities are not relevant to their business requirements, then they will not find value in its reports and services. This may harm its reputation and make it difficult to retain a client and attract new clients, with an adverse consequence to operating results.
PatentVest is dependent on relationships with third parties, including public sources, to provide it with data, information and other services; if any of these relationships change, its business could be adversely affected.
The PatentVest reports and services are developed using data, information or services obtained from third-party providers and public sources. The commercial relationships with third-party providers whose capabilities complement those of PatentVest, may also be competitors which might make PatentVest vulnerable to unpredictable price increases and unfavorable licensing terms. If public sources of data that are relied upon were to begin competing with PatentVest directly, or if they were to increase the cost that PatentVest pays to access their data, otherwise prohibit if from collecting and synthesizing the data they provide, or cease existing altogether, PatentVest may not be able to perform its services and operating results could be adversely impacted.
PatentVest might not be able to scale its business as fast as it believes can be done or be able to maintain the quality of its services and reports.
PatentVest has operated, to date, on a small scale, and it has not yet proven its ability to commercialize services on a large scale. In order to do this successfully, it may have to make additional technology and relationship investments that could delay or limit its ability to develop its client base and commercialize its reports and consultative services. The reports may be found to be ineffective, unreliable or otherwise unsatisfactory to potential clients as there may be unforeseencomplications in the processes of scaling. These complications could delay or limit the ability of PatentVest to provide client services or reports, could increase the cost of its consultative and report products, prevent it from implementing processes of the appropriate quality and completeness, and thereby cause the business to suffer. Moreover, PatentVest needs to grow sales, marketing and support staff or make appropriate arrangements with strategic partners to market, sell and support its clients and service and report products. If PatentVest is not able to compete effectively with others while scaling commercially on a timely basis, in sufficient quantities or on commercially reasonable terms, it will suffer a loss of business reputation and clients.
We believe patent analysis is a highly competitive business, and if PatentVest fails to develop widespread brand awareness in a cost-effective manner, the business may suffer.
The services and reports offered by PatentVest compete with many other providers of similar services, such as other companies performing intellectual property analytics, law firms, and patent filing firms. The services provided are subject to technological changes and evolving client demands. We believe that in order for PatentVest to achieve market acceptance and to maintain and grow a client base, it is critical to develop and maintain the quality of its services and reports and to increase the awareness of the brand. If we fail to provide what the client requires, and it fails to promote and maintain its brand successfully, it may fail to attract or retain clients to the extent necessary to realize a sufficient return on its brand-building efforts and to sustain the business.
PatentVest is licensed to offer legal services under Arizona law, and it plans to offer legal services as part of its package of intellectual property service offerings. As a result, PatentVest must comply with the ethical and legal provisions, licensing responsibilities and obligations of a law firm under the laws of the State of Arizona.
PatentVest has obtained a license from the State of Arizona to provide legal services, and it will provide legal and related services in order to enhance the overall package of the PatentVest intellectual property related service and report products. Being licensed to provide legal services will likely impact the non-legal aspects of PatentVest’s business as it must comply with the regulatory responsibilities and ethical obligations of operating a law firm as dictated by Arizona law and ethical standards. In respect of those services provided to clients that constitute providing legal advice, PatentVest will have to abide by the many obligations that must be observed by attorneys, including (i) complying with confidentiality obligations towards its legal clients, (ii) discharging attorney-client privilege obligations, (iii) adhering to legal compliance, ethical and regulatory standards of Arizona, (iv) avoiding conflicts of interest, (v) handling of client funds, if any, and (vi) acting in the best interests of the client. There may be instances when the legal rights of a client of the PatentVest law group must take precedence over a business interest of PatentVest and may limit its ability to provide advice or business services to others with respect to intellectual property matters, scope of claims and pursuit of patent claims or require PatentVest to cease providing intellectual property advice and strategy to a particular client altogether. The failure to operate the legal business in compliance with the responsibilities and ethical requirements placed by Arizona on law firms will subject the PatentVest law practice to sanctions by regulators and the bar association and may result in malpractice liability for PatentVest. Additionally, the legal regulatory authorities of Arizona may require PatentVest to cease operation of this aspect of our overall business altogether.
Risks related to Public Ventures
Public Ventures conducts offerings where we will act as a placement agent or an underwriter, and thus we are subject to underwriter and similar liability.
As part of our business, as it has been conducted over the last 28 or so years through Public Ventures, we expect to act as an underwriter and placement agent in a number of capacities. We may be a single underwriter or placement agent of a securities offering or a co-underwriter or placement agent participating in a securities offering. There are other types of offering where Public Ventures may be characterized as an underwriter. In each of these instances, it will bear a liability dictated by Section 11(a) of the Securities Act of 1933, as amended (“Securities Act”). Under the Securities Act, an underwriter is liable at law or in equity if any part of the registration statement or offering documentation used in the offering of securities, in which we participate as an “underwriter” as generally interpreted by the securities laws, “contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading….” What constitutes an offering document with respect to underwriter liability applies to any manner of offering materials. This liability also extends to private offerings of securities and their documentation, where Public Ventures may act as a placement agent. In determining materiality, a court will not inquire into limitations on the underwriter’s or placement agent’s ability to conduct its due diligence investigation and assessment of the offeror, but will instead assess whether the statements, taken together and in context, would have misled a reasonable investor about the nature of the investment. Section 11(b) of the Securities Act provides two affirmative defenses to Section 11(a) liability: the expert defense and the non-expert defense, which are collectively known as the due diligence defense. Although we conduct due diligence for all of our transactions, there is no assurance that the level of due diligence will uncover any failings in the materials used by investors, or that it will uncoverdeliberatemisstatements. Therefore, for any offering of securities, Public Ventures may become liable as an underwriter or placement agent. Such a liability will have a significant impact on our overall business in terms of monetary cost and also on our reputation.
Public Ventures self-clearing capabilities facilitate its operations.
At the start of 2024, Public Ventures began self-clearing U.S equity securities. As part of this process, in addition to the broker-dealer regulation described above, Public Ventures will be subject to regulation directed to self-clearing operations and must demonstrate that its financial, operational and systems capacities are able to perform this business while complying with regulations, including those of the SEC, FINRA, Depository Trust Clearing Corporation (“DTCC”), and National Securities Clearing Corporation (“NSCC”). To operate the self-clearing activity, we must meet different capitalization requirements than those of an introducing broker-dealer, maintaining a capital structure with various cash and cash equivalent assets and retaining access to necessary lines of credit that can assure our ability to comply with changing deposit requirements. We expect that these regulations will continue to undergo substantial changes and may require additional capital as settlement operations move T+0 settlement in the future.
Self-clearing requires us to finance transactions and maintain margin deposits at clearing organizations. Self-clearing exposes our business to operational risks, including business and technology disruption; operational inefficiencies; liquidity, financing and regulatory risks; and potentially increased expenses. We have in the past and may in the future also encounter difficulties with self-clearing that lead to operating inefficiencies, technology issues, dissatisfaction amongst our client base, disruption in the infrastructure that supports the business, inadequate liquidity, increased margin requirements with clearing organizations and third-party settlement agents who provide financing with respect to transactions, reductions in available borrowing capacity and financial loss. Any such delay, disruption, expense or failure could adversely affect our ability to effect transactions and manage our exposure to risk. Moreover, any of these events could have a material adverse effect on our business, financial condition, operating results and cash flows.
As a broker-dealer, Public Ventures will have to expend considerable resources on maintaining adequate compliance practices. The failure to be in regulatory compliance may result in fines, sanctions and the possible curtailment of operations.
Both the broker-dealer operations and the self-clearing operations are subject to extensive regulation. In addition, regulators perceive that engaging in business with “small and micro-cap” companies (those with market capitalizations of $300 million and under) and “penny” stocks (stocks with market prices of less than $1.00) is an especially high-risk activity, and therefore extensively review and supervise such business activities. Public Ventures focuses on this niche as we believe it offers a significant opportunity for clients of Public Ventures and other persons to gain value on their securities holdings, and we believe that such companies need access to capital. By focusing on this business, however, Public Ventures will likely increase the potential for regulatory oversight and the potential for regulatory action against the firm. Certain aspects of the regulatory regime, including the Know Your Client (KYC) and Anti Money Laundering (AML) requirements. The ability to oversee KYC and AML requirements is critical to its ability to expand our client networks and increase the volume of transactions the firm performs as required by its business model. If Public Ventures is not able to fulfill its regulatory obligations, it may be fined, have to change its business at greater cost, or be required to cease its business.
In addition to the direct employees of Public Ventures, other persons in our overall corporate structure may be considered subject to FINRA review and subject to the supervision by the broker-dealer. Therefore, the Company must maintain a structure that ensures all of the parts of the Company will strictly adhere to FINRA rules so as to avoid any fines, limitations on the ability to conduct business or actual business closure. The loss or curtailment of the business of Public Ventures would result in a significant loss of business opportunity and revenues to the Company, and would result in a significant impairment to our reputation.
We may be exposed to more cybersecurity threats as we expand our business.
With the expansion in the business to include clearing services, the Company handles increased amounts of sensitive financial and other information about investors and company clients’ holdings and transactions that can be targeted by cybercriminals. We will need to have in place an adequate internal security infrastructure to protect clients’ information and assets and minimize potential liabilities for the business. In addition, as cybersecurity threats become more and more sophisticated, we will have to continually expend funds to upgrade and expand our security measures, maintain insurance and overall be vigilant to protect our operations and clients.
The clearing operations of Public Ventures will require contractual arrangements with several key industry entities, which, if not followed, will require it to terminate that portion of its business.
To establish and to operate a clearing business, Public Ventures has entered into contractual arrangements with the Depository Trust Company, National Securities Clearing Corporation and a settlement bank. These are complex sets of arrangements that must be strictly adhered to, otherwise Public Ventures will not be able to use their services. Without these services, Public Ventures will not be able to clear trades for clients. Not only does Public Ventures require these agreements, but as a result of them it will need to maintain systems and interaction platforms with them and other parties in the settlement process. Information technology implemented include a core clearing system, an order management system, and a corporate communications system, amongst others. These many activities happen in parallel and require significant effort to successfully implement and maintain. Failure to maintain any of the individual systems would prevent Public Ventures from conducting its self-clearing business. Part of the risk the firm faces includes its vendors’ continuous capacity to fulfill the service levels promised to Public Ventures. Public Ventures has chosen novel providers with excellent technology but lesser track records. Assuring these suppliers will continue to deliver their promised services is necessary for the successful maintenance of the technological platform the business requires to operate. The failure in any of the many aspects described above may prevent our operations from being performed or possibly require us to terminate our business.
Public Ventures will have to maintain adequate capitalization levels to conduct its broker-dealer and clearing businesses.
To operate the broker-dealer and self-clearing operations, Public Ventures must meet different capitalization requirements in the Company. To do this, it will have to maintain within the capital structure of the various cash and cash equivalent assets and retain access to necessary lines of credit that can assure its ability to comply with changing deposit requirements of the SEC and of the Depositary Trust Clearing Company (“DTCC”), and the National Securities Clearing Corporation (“NSCC”). It is expected that these regulations will undergo substantial changes, from time to time, which could require additional capital as settlement operations move to T+1 (one day after the settlement date) and T+0 settlement in the future. Without the required capital at any time, Public Ventures will not be able to operate its business.
Settlement bank services are difficult to arrange, without which Public Ventures will not be able to operate a clearing business.
There are only a limited number of banks currently offering settlement services to clearing firms. Public Ventures could be unable to continue providing clearing services if it is unable to maintain a settlement bank arrangement, or if its current settlement bank decides to exit this business.
Hiring and organizing personnel for the clearing operations.
To be able to operate its self-clearing activities, Public Ventures must hire and retain the human talent capable of handling the operational activities and fulfilling the compliance requirements of the business. Trading and settlement and compliance personnel are necessary to manage the operations. Further expertise in financial matters and obligations for self-clearing are also required. Although it has a conservative approach to launching the business and onboarding clients to cause less stress on the organization, the firm’s ability to perform going forward nonetheless depends on successfully recruiting, training and retaining new personnel. As part of these recruitment and retention efforts, the firm must ensure that it can maintain an adequate supervising and leadership structure capable of supporting the successful development of its business model.
Where permitted by regulation, Public Ventures will use an overseas out-source provider for some of the self-clearing operation activities although political and social instability and the threat of sanctions by countries, including the United States, may disrupt or hinder the delivery of such services and result in increased costs.
We have a contract with a Nicaraguan company to provide, on an out-sourced, as requested basis, certain back-office services that support our broker dealer activities and patent related services and other requirements. We plan to expand and use this service facility, where permitted, for certain aspects of the self-clearing operations that Public Ventures engages in. We believe that these operations provide a competitive advantage to the Company and facilitate developing this new business in an efficient and profitable manner, as human resources and technological infrastructure in Nicaragua allows local companies to provide quality service at the level expected by US clients at a fraction of the cost. Any disruption to social and political stability in Nicaragua could affect the contractor’s capacity to achieve its goals. The current political environment in Nicaragua is unsettled due to a political crisis that erupted in 2018, which has yet to be resolved. Continued or escalated political instability and the possibility of sanctions from other countries, including the United States, could disrupt local business and may hinder or disrupt the delivery of services to our United States operations. The United States has several Executive Orders in force which impose sanctions regarding immigration of certain groups of persons and imposing wider sanctions in respect of certain trading activities. We constantly monitor the situation and have a business continuity strategy in place to assure consistent operations and activities in the United States. To the extent we are prohibited from contracting with entities in Nicaragua, our expenses may increase, and there may be disruption in our workforce that will have to be replaced.
Risks Related to Being a Public Company and Owning Our Class A Common Shares
Control by management may limit your ability to influence the outcome of director elections and other transactions requiring shareholder approval.
Two persons, Anthony DiGiandomenico and Christopher Marlett, own all the Class B Common Shares. The Class A Common Shares have one vote per share, and the Class B Common Shares have five votes per share. The Class A Common Shares and Class B Common Shares vote together as a single class on all matters, including the election of directors. There are 5,000,000 Class B Common Shares issued and outstanding, currently representing 90.8% of the aggregate voting authority of our common shares immediately prior to the date of this filing. Therefore, even if the maximum Class A offered shares, as currently approved by the Board of the Directors, are sold, the Class B Common Shares will continue to be able to dictate the outcome of all matters put before the shareholders. There is no automatic or voluntary conversion of the Class B Common Shares into Class A Common Shares, thus the Class B Common Shares will have control of MDB for an indefinite period of time.
Based on the foregoing, the Class B Common Shares have significant influence over corporate actions requiring shareholder approval, including the following actions:
to determine the composition and to elect the board of directors;
to amend or prevent a change in our operating agreement;
to effect or prevent a merger, sale of assets or other corporate transaction; and
to control the outcome of any other matter submitted to our shareholders for vote.
The existence of the Class B Common Shares may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of MDB, which in turn could reduce our shares price or prevent our Class A Common Shareholders from realizing a premium over our share price.
Future transfers by holders of Class B Common Shares generally will result in those shares converting to Class A Common Shares, subject to limited exceptions, such as certain transfers effected for estate planning purposes. The conversion of Class B Common Shares to Class A Common Shares will have the effect, over time, of increasing the relative voting power of those holders of Class B Common Shares who retain their shares in the long term. As a result, it is possible that the persons or entities continuing to hold our Class B Common Shares could gain significant voting control as other holders of Class B Common Shares sell or otherwise convert their shares into Class A Common Shares.
We are deemed a “controlled company” under the listing rules of Nasdaq because our Class B Common Shares are held by two persons who have more than 50% control of the Company. As a controlled company, MDB will be exempt from certain of the corporate governance obligations that other companies must follow when listing on Nasdaq.
The Class B Common Shares are held by two persons who have control over the operations of the Company. Therefore, MDB is a controlled company under the Nasdaq listing rules and is exempt from certain listing requirements, including having (i) a board comprised of a majority of independent directors, (ii) a compensation committee, and (iii) a director nominations committee. Additionally, we are not be required to hold annual meetings. Management intends to take advantage of these exemptions. Accordingly, shareholders will not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of Nasdaq. Notwithstanding the exemption, currently we have a board that has several independent directors, we are required to have and will have an audit committee, and related party transactions will have to be reviewed by the audit committee. Shareholder approval will be required for stock options or purchase plans, and the financial statements must be audited by an independent public accountant that is registered with the PCAOB.
The dual class structure of our currently issued equity securities may adversely affect the trading market for our Class A Common Shares.
Certain stock index providers, such as S&P Dow Jones, exclude companies with multiple classes of shares of equity from being added to certain stock indices, including the S&P 500. In addition, several stockholder advisory firms and large institutional investors oppose the use of multiple class structures. As a result, the dual class structure of our currently issued equity may prevent the inclusion of our Class A Common Shares in such indices, may cause stockholder advisory firms to publish negative commentary about our corporate governance practices or otherwise seek to cause us to change our capital structure, and may result in large institutional investors not purchasing shares of our Class A Common Shares. Any exclusion from stock indices could result in a less active trading market for our Class A Common Shares. Any actions or publications by stockholder advisory firms or institutional investors critical of our corporate governance practices or capital structure could also adversely affect the value of our Class A Common Shares.
The existence of our registered broker-dealer subsidiary may delay or prevent takeover attempts of our Company.
A third party attempting to acquire us or a substantial position in our equity securities may be delayed or ultimately prevented from doing so by change in ownership or control regulations to which our regulated broker-dealer subsidiary is subject. FINRA Rule 1017 generally provides that FINRA approval must be obtained in connection with any transaction resulting in a single person or entity owning, directly or indirectly, 25% or more of a member firm’s equity and would include a change of control of a parent company.
Our capital structure may have anti-takeover effect.
The existence of our preferred shares that may be issued at the discretion of the board of directors with the terms it determines may have an anti-takeover effect. The board of directors is authorized to fix the voting rights, if any, designations, powers, preferences, the relative, participating, optional or other special rights and any qualifications, limitations and restrictions thereof, applicable to the preferred shares of each series. The board of directors, without shareholder approval, will be able to issue preferred shares with voting and other rights that could adversely affect the voting power and other rights of the holders of the common shares and could also have anti-takeover effects. The ability of our board of directors to issue preferred shares without shareholder approval could have the effect of delaying, deferring or preventing a change of control of the Company or the removal of existing management. We currently have no preferred shares issued and outstanding as the date hereof. Although we do not currently intend to issue any preferred shares, we cannot assure you that we will not do so in the future.
The fact that the Class B Common Shares have a right to five votes per Class B Common Share on all matters presented for a vote to the shareholders, including in the vote for directors, and the fact that the Class B Common Shares currently have a majority ownership position of all the common shares, means that they have an anti-takeover effect, because it would be difficult for an insurgent to overcome the authority that the Class B Common Shares has in the governance of the Company.
The provisions for shareholder business proposals and director nominations in the operating agreement also could have an anti-takeover effect.
The issuance of securities with voting authority greater than the Class A Common Shares will have a voting and control dilutive effect on outstanding Class A Common Shares.
If the board of directors issues any of the preferred shares or obtains shareholder approval for a new class of common shares with voting rights in excess of the one vote per one Class A Common Share, the holders of Class A Common Shares will suffer a voting dilutive effect, in addition to any other economic dilution resulting from the issuance of those securities.
We may make distributions of the securities of our partner companies, including cash and rights to purchase equity of a partner companies.
An aspect of our business plan is to distribute to our shareholders assets of the parent company, which may include the securities of our partner companies after they go public, rights to purchase the equity of these companies, and/or cash and other property, from time to time. The distribution of a right to purchase the equity of a partner company may come at a time when a recipient does not have the ability to exercise the right, and thereby lose the opportunity that the right affords. Any distribution of securities of a partner company, cash and other property may have an adverse impact on the value of your Class A Common Shares. On the other hand, we do not plan to regularly make any periodic distributions, therefore investors should not look to any distribution that we might make to be a regular income item in an investor’s portfolio.
We incur costs as a result of operating as a public company, and our board of directors is required to devote substantial time to oversight of compliance requirements and corporate governance practices.
As a public company listed in the U.S., we incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of Nasdaq, and other applicable securities rules and regulations impose various requirements on listed public companies, including the establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our board of directors, management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations increase our legal and financial compliance costs and make some activities more time-consuming and costly. However, these rules and regulations are often 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.
Pursuant to Section 404 of the Sarbanes-Oxley Act, or Section 404, we are required to furnish a report by our management on our internal control over financial reporting. However, while we remain an emerging growth company, we will not be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve compliance with Section 404 within the prescribed periods, we will be engaged in a process to document and evaluate our internal controls over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that we will not be able to conclude, within the prescribed timeframe, that our internal controls over financial reporting are effective as required by Section 404. If we identify one or more material weaknesses, it could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.
Even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company” which would allow us to take advantage of many of the same exemptions from disclosure requirements including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in this filing and our periodic reports and proxy statements. We cannot predict if investors will find our Class A Common Shares less attractive because we may rely on these exemptions. If some investors find our Class A Common Shares less attractive as a result, there may be a less active trading market for our Class A Common Shares, and our share price may be lower or more volatile.
We are a smaller reporting company within the meaning of the Securities Act, and if we take advantage of certain exemptions from disclosure requirements available to smaller reporting companies, this could make our securities less attractive to investors and may make it more difficult to compare our performance with other public companies.
Rule 12b-2 of the Exchange Act defines a “smaller reporting company” as an issuer that is not an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent that is not a smaller reporting company and that:
had a public float of less than $250 million as of the last business day of its most recently completed second fiscal quarter, computed by multiplying the aggregate worldwide number of shares of its voting and non-voting common equity held by non-affiliates by the price at which the common equity was last sold, or the average of the bid and asked prices of common equity, in the principal market for the common equity; or
in the case of an initial registration statement under the Securities Act or the Exchange Act for shares of its common equity, had a public float of less than $250 million as of a date within 30 days of the date of the filing of the registration statement, computed by multiplying the aggregate worldwide number of such shares held by non-affiliates before the registration plus, in the case of a Securities Act registration statement, the number of such shares included in the registration statement by the estimated public offering price of the shares; or
in the case of an issuer whose public float as calculated under paragraph (1) or (2) of this definition was zero or whose public float was less than $700 million, had annual revenues of less than $100 million during the most recently completed fiscal year for which audited financial statements are available.
As a smaller reporting company, we are not required to include a Compensation Discussion and Analysis section in our proxy statements; we provided the required two years of financial statements; and provided the table of selected financial data as required for a smaller reporting company. We also have other “scaled” disclosure requirements that are less comprehensive than issuers that are not smaller reporting companies which could make our securities less attractive to potential investors.
We do not have key-man insurance.
We currently do not maintain, nor do we have plans to obtain, key-man insurance for our principal officers. Our business is highly dependent on the continued services of these individuals. The loss of any of their contributions could have a material adverse effect on our operations. Without the financial support typically provided by such insurance to recruit and transition new leadership, we may face challenges in maintaining business continuity and strategic direction.
The price of our Class A Common Shares may be volatile, and could, upon listing on the Nasdaq Capital Market, decline significantly and rapidly. Market volatility may affect the value of an investment in our Class A Common Shares and could subject us to litigation.
The trading price of our Class A Common Shares may fluctuate substantially. The price of our Class A Common Shares in the market on any particular day will depend on many factors including, but not limited to, the following:
price and volume fluctuations in the overall stock market from time to time;
investor demand for our Class A Common Shares;
significant volatility in the market price and trading volume of companies operating in the diverse businesses of our core companies and our partner companies;
variations in our operating results and market conditions specific to our businesses sectors;
the emergence of new competitors or new technologies of our partner companies;
operating and market price performance of other companies that investors deem comparable;
changes or departures of any of our board of directors, senior management or key employees;
commencement of, or involvement in, litigation;
changes in governmental regulations;
actual or anticipated changes in our earnings, and fluctuations in our quarterly operating results; and
general economic conditions and trends.
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. Due to the potential volatility of our share price, we may therefore be the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and resources from our business.
In addition, if the market for equity stocks of companies in our industry or industry segments, or the stock market in general, experiences a loss of investor confidence, the market price of our Class A Common Shares could decline for reasons unrelated to our business, financial condition, or results of operations. If any of the foregoing occurs, it could cause the price of our Class A Common Shares to fall and may expose us to lawsuits that, even if unsuccessful, could be costly to defend and a distraction to our Board of Directors and management.
Certain recent initial public offerings of companies with relatively small public floats have experienced extreme volatility that was seemingly unrelated to the underlying performance of the company. Our Class A Common Shares may potentially experience rapid and substantial price volatility, which may make it difficult for prospective investors to assess the value of our Class A Common Shares.
In addition to the general volatility risks discussed in this filing, our Class A Common Shares may be subject to rapid and substantial price volatility. We may experience extreme stock price volatility unrelated to our actual or expected operating performance, financial condition or prospects, making it difficult for prospective investors to assess the rapidly changing value of our Class A Common Shares. Recently, there have been instances of extreme stock price run-ups followed by rapid price declines and strong stock price volatility with a number of recent initial public offerings, especially among companies with relatively smaller public floats. As a company with a relatively small public float and recent IPO, the Class A Common Shares may experience greater stock price volatility, extreme price run-ups, lower trading volume, large spreads in bid and asked prices, and less liquidity than large-capitalization companies. The aspects of the trading in the Class A Common Shares may be unrelated to our actual or expected operating performance, financial condition or prospects, making it difficult for prospective investors to assess the value of our common stock. Because of the low public float and the absence of any significant trading volume, the reported prices may not reflect the price at which you would be able to sell shares if you want to sell any shares you own or buy shares if you wish to buy share.
If the trading volumes of the Class A Common Shares are low, persons buying or selling in relatively small quantities may easily influence the prices of the Class A Common Shares. A low volume of trades could also cause the price of the Class A Common Shares to fluctuate greatly, with large percentage changes in price occurring in any trading day session. Broad market fluctuations and general economic and political conditions may also adversely affect the market price of the Class A Common Shares. The volatility also could adversely affect the ability of the company to issue additional shares of common stock or other securities and the ability to obtain stock market based financing in the future. No assurance can be given that an active market in our Class A Common Shares will develop or be sustained.
The United States stock markets recently have experienced price and volume fluctuations due to many factors, including federal government policies, inflationary pressures, changing interest rates, and the conflicts in Ukraine and Iran.
The stock market has recently experienced significant price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies, with the financial service and technology sectors more volatile than others. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as federal government policies, inflation, the prospect of a recession, and interest rate changes may negatively impact the market price of our Class A Common Shares. These fluctuations may be even more pronounced in the trading market for our Class A Common Shares shortly following the listing of our Class A Common Shares on the Nasdaq Capital Market as a result of the supply and demand forces described above. If the market price of our Class A Common Shares after our listing does not exceed the opening public price, you may not realize any return on your investment in us and may lose some or all of your investment. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigationagainst us could result in substantial costs and divert our management’s attention from other business concerns, which could harm our business.
