NATURE OF OPERATIONS

12 Months Ended

Dec. 31, 2023

NATURE OF OPERATIONS

NATURE OF OPERATIONS

NOTE 1 – NATURE OF OPERATIONS

StartEngine Crowdfunding, Inc. was formed on March 19, 2014 (“Inception”) in the State of Delaware. The Company was originally incorporated as StartEngine Crowdsourcing, Inc. and changed to the current name on May 8, 2014. The consolidated financial statements of StartEngine Crowdfunding, Inc. (the “Company”) are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The Company’s headquarters are located in Burbank, California.

The Company aims to revolutionize the startup financing model by helping both accredited and non-accredited investors invest in private companies on a public platform. StartEngine Crowdfunding Inc. has wholly-owned subsidiaries, StartEngine Capital LLC, StartEngine Secure LLC, StartEngine Assets LLC and StartEngine Primary LLC. StartEngine Capital LLC is a funding portal registered with the US Securities and Exchange Commission (SEC) and a member of the Financial Industry Regulatory Authority (FINRA), StartEngine Secure LLC is a transfer agent registered with the SEC. StartEngine Assets LLC was formed in 2020 to buy, hold and manage assets in various asset classes such as real estate, automobiles, luxury goods and royalty-producing intangible assets. StartEngine Primary LLC was formed in October 2017 and received approval to operate as a registered broker-dealer in July 2019. On April 16, 2020, StartEngine Primary LLC received approval to operate as an alternative trading system. The Company’s mission is to empower thousands of companies to raise capital and create significant amounts of jobs over the coming years.

Stock Split

On July 7, 2021, StartEngine Crowdfunding Inc. split its designated “Common Stock” and “Preferred Stock” on a 3 for 1 basis. The total number of shares of Common Stock that the Company is authorized to issue was increased to 75,000,000 shares after the split. The total number of shares of Preferred Stock that the Company is authorized to issue was increased to 25,950,000 after the split. Accordingly, all share and per share amounts for all periods presented in the consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect this stock split.

The Company intends to split its designated “Common Stock” and “Preferred Stock” on a 20 for 1 basis as of May 4, 2024.

Business Condition

The Company’s revenue producing activities commenced in 2015 with the approved start of Title IV of the JOBS Act, which created new rules for Regulation A, and increased since then with the start of Regulation Crowdfunding under Title III of the JOBS Act. Because this is a relatively new industry, there is a level of uncertainty about how fast the volume of activity will increase and how future regulatory requirements may change the landscape. Because there is a level of uncertainty and because we are still in the early stages of these new regulations, the Company is expected to incur losses until such time that the volume of Regulation A and Regulation Crowdfunding campaigns and the investments in those campaigns is sufficient for revenues derived from those campaigns to cover its costs. These factors could indicate substantial doubt about the Company’s ability to continue as a going concern.

The Company has cash and cash equivalents of approximately $13 million, which its managements believes will cover losses for the foreseeable future. The Company’s management believes that any substantial doubt about the Company’s ability to continue as a going concern has been alleviated.

Restatement

During preparation for financial reporting related to the year ended December 31, 2023, the Company discovered certain errors in previously reported financial statements for the year ended December 31, 2022. The Company’s management conducted an investigation with the Company’s independent auditors. As a result of this investigation, the Company determined that several accounts required correction to be in accordance with US GAAP. In addition, certain footnotes to such financial statements were required as a result of such changes. Accordingly, the Company made certain corrections to previously reported financial statements for the year ended December 31, 2022, as more fully described below.

The restatement also includes corrections for other errors identified as immaterial, individually and in the aggregate, to our consolidated financial statements.

Descriptions of Misstatements

a. Impairment of warrant compensation: While reviewing the Company’s warrant assets, it was determined that the value of the warrants received as compensation had not been subjected to a Black-Scholes analysis and valuation. The Company had been impairing the warrants at a flat rate, which was not compliant with GAAP. In reviewing the warrants using Black-Scholes modeling, the company determined that an additional impairment based on a Black Scholes analysis was necessary as the value of the warrants at year end 2022 was overstated. Additionally, an intercompany transaction for the transfer of assets between entities was reversed.

b. Gross up and impairment of stock compensation: The company had historically performed a flat 33% impairment of shares received as compensation. In reviewing the stock assets, however, it was determined that the certain stocks held had increased in value based on subsequent raises hosted by the Company on its proprietary site. Using the updated offer price per share, the company adjusted the prior raise stock value to the new market value of the stock. Additionally, the Company performed a more comprehensive analysis of the impairment to stock assets held and adjusted the impairment to be in line with the 33% estimated impairment for stocks that did not host an additional capital raise with the Company.

c. Correction of receivable accounts: While testing the balances of receivable accounts, the company determined that balances included in the accounts receivable, advertising loan and other reimbursable expense asset accounts were uncollectible, and the asset accounts were overstated as of year-end 2022.

d. Correction of prepaid expense amortization: While testing the beginning balance of prepaid expenses, it was determined that the expense for purchases were incurred, but not properly expensed to the income statement in 2022, resulting in an overstatement of assets and retained earnings.

e. Correction of liability accounts: While testing the subsequent activity in 2023 for 2022 accounts, it was determined that liability accounts relating to the Company credit card expenses (“Ramp card”), payroll accrual and the bonus payable to employees were not accrued for the correct amount at year end 2022 for the expense incurred in the period. This resulted in an understatement of liability accounts and an overstatement of retained earnings.

f. Reclassification of contra balance accounts: While reviewing the year-end balance sheet accounts, it was determined that several liability accounts incorrectly held debit or “contra liability” balances from items that should have been expensed in 2022. Additionally, an asset account held a credit or “contra asset” balance at year-end 2022. The result of this error was an understatement of liability accounts and an overstatement of equity accounts.

g. Reclassification of Collectible assets: While testing the beginning balance of the StartEngine Collectibles assets held for sale, it was determined that artwork had been incorrectly classified as comics, and Wine assets were overstated, resulting in an overstatement of equity and assets.

Description of Restatement Tables

The following tables present the impact of the restatements on our previously reported consolidated balance sheet, statement of operations, and cash flows for the year ended December 31, 2022. The effects to the consolidated statement of stockholders’ equity has not been presented as such changes are reflected in the totals included in the consolidated balance sheet.

Position and Adjusting Entries

The Company has determined that these transactions are not material in the years they occurred and conclude that prior financial reports can be relied upon. The Company’s determination is based on the following: The adjustments do not cause any changes to the previously reported cash balances as of the end of the period in 2022. The adjustments also do not cause any changes to revenues in the prior period. The Company has determined that the adjustments have had little effect on the trend of earnings over the last three years. The Company reported losses in 2021 and 2022 prior to the adjustments and will maintain a loss position in 2023.

Balance Sheet:

	Year Ended December 31, 2022
	Previously
	Reported		Adjustment		As Restated
Assets:
Cash	$	15,460,469	$	—	$	15,460,469
Marketable Securities		1,856		—		1,856
AR, Net		702,257		(23,585)		678,672	(c)
Other Current Assets		1,953,756		(649,455)		1,304,301	(d) (f)
Total Current Assets	$	18,118,338	$	(673,040)	$	17,445,298
PPE	$	109,141	$	—	$	109,141
Investments - Warrants		1,496,701		(1,289,806)		206,895	(a)
Investments - Stock		6,479,340		1,464,477		7,943,817	(b)
Investment - Collectibles		3,072,227		(87,528)		2,984,699	(g)
Investments - RE		2,136,628		—		2,136,628
Intangible Assets		20,000		—		20,000
Other Assets		66,603		—		66,603
Total Assets	$	31,498,978	$	(585,897)	$	30,913,081
Liabilities:
AP	$	(284,371)	$	—	$	(284,371)
Accrued Liabilities		(1,760,920)		(1,024,580)		(2,785,500)	(e)
Deferred Revenue		(2,715,422)		—		(2,715,422)
Total Current Liabilities	$	(4,760,713)	$	(1,024,580)	$	(5,785,293)
Equity:
Series A Preferred	$	(5,286,667)	$	—	$	(5,286,667)
Series T Preferred		(983,634)		—		(983,634)
Series Seed Preferred		(1,706,756)		—		(1,706,756)
Common Stock		(332)		—		(332)
APIC		(45,639,151)		213,548		(45,425,603)	(f)
NCI		13,251		—		13,251
Retained Earnings		26,865,024		1,396,929		28,261,953
Total Equity	$	(26,738,265)	$	1,610,477	$	(25,127,788)

Statement of Operations:

	Year Ended December 31, 2022
	Previously
	Reported		Adjustment		As Restated
Revenue	$	(24,360,685)	$	—	$	(24,360,685)
Cost of Revenue		6,368,629		682,269		7,050,898	(e)
G&A		8,723,615		881,760		9,605,375	(c) (d)
Sales and Marketing		12,478,887		7,571		12,486,458	(c) (e)
R&D		4,667,593		—		4,667,593
Change in fair value - warrants		169,520		1,289,806		1,459,326	(a)
Impairment - shares		21,863		(1,464,477)		(1,442,614)	(b)
Other Income/Expense		(188,684)		—		(188,684)
Income taxes		63,563	$	—	$	63,563
Net Loss	$	7,944,301		1,396,929		9,341,230