STARTENGINE CROWDFUNDING, INC. The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited financial statements and related notes for the year endedDecember 31, 2021 included in our most recent amendment to our Registration Statement on Form 10. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors. We discuss certain factors that we believe could cause or contribute to these differences below and elsewhere in this Quarterly Report on Form 10-Q.
Our Company
StartEngine Crowdfunding, Inc. was incorporated onMarch 19, 2014 in theState of Delaware . The company was originally incorporated asStartEngine Crowdsourcing, Inc. , but changed to the current name onMay 8, 2014 . The company's revenue-producing activities commenced in 2015 with the effectiveness of the amendments to Regulation A under the Securities Act adopted in response to Title IV of the JOBS Act. Operations expanded in 2016, as Regulation Crowdfunding, adopted in response to Title III of the JOBS Act, went into effect. OnJune 10, 2019 , our subsidiary,StartEngine Primary LLC , was approved for membership as a broker-dealer withFINRA .
Business and Trends
For Regulation A offerings, our broker-dealer subsidiary is permitted to charge commissions to the companies that raise funds on our platform. Regulation A offerings are subject to a commission ranging between 4% and 7% and usually include warrants to purchase shares of the company or the securities that are the subject of the offering. The amount of commission is based on the risks and other factors associated with the offering. Since StartEngine Primary became a broker-dealer, we have also been permitted to charge commissions on Regulation D offerings hosted on our platform. We received a minimal amount of revenues from services related to Regulation D offerings in the periods under discussion. In Regulation Crowdfunding offerings, our funding portal subsidiary is permitted to charge commissions to the companies that raise funds on our platform. We typically charge 6% to 10% for Regulation Crowdfunding offerings on our platform. In addition, we charge additional fees to allow investors to use credit cards. We also generate revenue from services, which include a consulting package called StartEngine Premium priced at$10,000 to help companies who raise capital with Regulation Crowdfunding, digital advertising services branded under the name StartEngine Promote for an additional fee, as well as transfer agent services marketed as StartEngine Secure. The company discontinued the digital advertising service of StartEngine Promote as ofJanuary 1, 2022 . We additionally charge a$1,000 fee for certain amendments we file on behalf of companies raising capital under Regulation Crowdfunding as well as fees to run the required bad actor checks for companies utilizing our services. The company also receives revenues from other programs such as the StartEngine OWNers bonus program and StartEngine Secondary. InOctober 2020 , we started selling annual memberships of the StartEngine OWNers bonus program for$275 per year. We launched StartEngine Secondary onMay 18, 2020 and generate revenues by charging trade commissions to the sellers of the shares. To date, StartEngine Secondary has a limited operating history. In the first half of 2021, the company itself was the only one quoted on this platform. Additional companies were quoted on the platform beginning inAugust 2021 .
Trend Information
We are operating in a relatively new industry and there is a level of
uncertainty about how fast the volume of activity will increase and how future
regulatory requirements may change the landscape. We continue to innovate and
introducing new products to include in our current mix as well as continuing to
improve our current services such as providing liquidity for our investors and
issuers.
As we are a financial services company, our business, results of operations, and
reputation are directly affected by elements beyond our control, such as
economic and political conditions including unemployment rates, inflation and
tax and interest rates, financial market volatility (such as we experienced
during the COVID-19 pandemic), broad trends in business and finance, and changes
in the markets in which such transactions occur (such as the bear markets that
developed for equities in the second and third quarter of 2022), we might be
disproportionately affected by declines in investor confidence caused by adverse
economic conditions.
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OnJune 10, 2019 , our subsidiary,StartEngine Primary LLC , was approved for membership as a broker-dealer withFINRA . During 2021, we experienced increased costs for payroll and training that will increase relative to our revenue. We anticipate that this trend will continue into 2022. In addition, inApril 2020 we received approval to operate an ATS. StartEngine Primary launched its ATS, branded as "StartEngine Secondary" onMay 18, 2020 . As ofDecember 31, 2021 , four additional issuers were quoted on the platform. Currently, for StartEngine Secondary, we generate revenues by charging trade commissions to the sellers of the shares and we intend to generate revenues by charging a 5% commission to the seller. We expect increased costs due to technology and operations related to the operation of our ATS. We anticipate operating the ATS will initially increase our overall expenses by$50,000 per month. Further, we anticipate receiving increased revenue related to offerings under Regulation A. InJune 2022 , we became a reporting company, as a result of which we anticipate higher internal costs related to the increased administrative burden as well as higher professional fees.
We additionally anticipate having to engage and train additional compliance
personnel, to better ensure continued compliance with
Operating Results
Three Months Ended
The following table summarizes the results of our operations for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 . Three-Months Three-Months Ended September 30, Ended September 30, 2022 2021 $ Change
Regulation Crowdfunding platform fees $ 1,984,061 $ 3,037,163$ (1,053,102) Regulation A commissions 1,369,730
1,878,292 (508,562)
StartEngine Premium 452,500 465,000 (12,500)
StartEngine Secure 384,468 391,558 (7,090)
StartEngine Promote 0 57,379 (57,379)
OWNers Bonus revenue 1,018,939 581,217 437,722
Other service revenue 19,462 81,181 (61,719)
Total revenues $ 5,229,159 $ 6,491,789 $ (1,262,630)
Revenues
Our revenues during the three months ended September 30, 2022 were $5,229,159 ,
which represented a decrease of $1,262,630 or 19%, from revenues in the same
period in 2021. The following are the major components of our revenues during
the three months ended September 30, 2022 and 2021:
The decrease in total revenues in three months ended
Decrease in Regulation Crowdfunding platform fees of
? to lower amounts raised by issuers in Regulation Crowdfunding offerings.
Specifically, in Q3 2022, the company raised approximately
issuers compared with Q3 2021 raising approximately
Decrease in Regulation A commissions of
amounts raised in of Regulation A offerings as well as lower amount of
? offerings which provided stock or warrants to the company as compensation.
Specifically, in Q3 2022, the company raised approximately
issuers compared with Q3 2021 raising approximately
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Decrease in revenues of
? previous year's quarter including revenue for services rendered earlier in the
year that were not billed in Q3 2021. As at
companies compared with 387 companies as at
Decrease in StartEngine Premium revenue of
? in campaign launches where premium was recognized compared to the previous
period - which included 43 issuers in Q3 2022 where StartEngine Premium
revenues were recognized during the period compared with 47 in Q3 2021.
? Decrease in revenues from StartEngine Promote, a marketing service that the
company ceased offering as of
Increase in StartEngine OWNers Bonus revenue of
? increased sales for that service at the end of Q4 2021 in which partial revenue
was recognized in Q3 2022.
Decrease in other service revenue of
? revenue from StartEngine Secondary which did not have any trades in Q3 2022, as
well as revenue from material amendments.
*Offerings can span multiple periods and the amount raised during the period is based on the amounts closed on during that period.
Cost of Revenues
Our cost of revenues during the three months endedSeptember 30, 2022 was$1,753,004 , which represented an increase of$596,184 , or 52%, from the amounts during the same period in 2021 due to increased costs related to due diligence on new issuers. Our gross margin in the second quarter of 2022 decreased to 66% compared to 82% in 2021. This decrease is due to an increase in employee headcount for further diligence on our issuers and investors, as well as higher transaction costs including escrow fees which the company bears the cost on behalf of issuers.
Operating Expenses
Our total operating expenses during the three months endedSeptember 30, 2022 amounted to$6,631,946 , which represented an increase of$2,001,566 , or 43%, from the expenses in the same period in 2021. The increase in operating expenses is primarily due to the following:
Increase in general and administrative expenses of
? increased payroll expenses of approximately
fees of$38,462 related to new initiatives and increased compliance and regulatory costs.
Increase in sales and marketing expenses of
? market research expense of
compensation of
due to lower quarterly bonus.
Increase in research and development expenses of
? headcount as the company focused on enhancing its platform and technology which
lead to an increase of payroll expenses related to research and development of
$298,155 . Other Expense (Income), net Our other income, net during the three months endedSeptember 30, 2022 amounted to$85,086 , which represented unrealized gain on shares received from customer stock issued during its IPO. During the same period in 2021 our other income, net was$243,462 which primarily represented write off of WeWork payables of$160,804 . Net Loss (Income) Net loss attributable to stockholders totaled$3,075,439 for the three months endedSeptember 30, 2022 , a decrease of$3,979,116 compared to the net income attributable to shareholders of$903,677 recognized during the three months
endedSeptember 30, 2021 . 23 Table of Contents
Nine Months Ended
The following table summarizes the results of our operations for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . Nine-Months Nine-Months Ended September 30, Ended September 30, 2022 2021 $ Change
Regulation Crowdfunding platform fees $ 8,108,518 $ 8,365,060$ (256,542) Regulation A commissions 4,809,052
6,942,032 (2,132,980)
StartEngine Premium 1,634,999 1,207,500 427,499
StartEngine Secure 935,348 704,985 230,363
StartEngine Promote - 284,424 (284,424)
OWNers Bonus revenue 3,592,353 1,879,627 1,712,726
Other service revenue 497,952 467,075 30,877
Total revenues $ 19,578,222 $ 19,850,703 $ (272,481)
Revenues
Our revenues during the nine months ended September 30, 2022 were $19,578,222 ,
which represented decrease of $272,481 , or 1%, from revenues in the same period
in 2021. The following are the major components of our revenues during the
nine-months ended September 30, 2022 and 2021:
The decrease in total revenues in nine-months ended
Decrease in Regulation Crowdfunding platform fees of
lower amounts raised by issuers in Regulation Crowdfunding offerings.
? Specifically, in the first nine months of 2022, the company raised
approximately
2021 raising approximately
Decrease in Regulation A commissions of
amounts raised in of Regulation A offerings for its issuers as well as lower
? amount of offerings which provided stock or warrants to the company as
compensation. Specifically, in the first nine months of 2022, the company
raised approximately$63 million for issuers compared with the first nine-months of 2021 raising approximately$91 million for issuers.*
Increase in revenues of
? price increase for our services from
well as an increase in customers using our services. As at
we had 534 companies compared with 387 companies as at
Increase in StartEngine Premium revenue of
campaign launches compared to the previous period - which included 171 issuers
? in the first nine-months of 2022 where StartEngine Premium revenues were
recognized during the period compared with 124 in the first nine-months of
2021.
? Decrease in revenues from StartEngine Promote, a marketing service that the
company ceased offering as of
Increase in StartEngine OWNers Bonus revenue of
? increased sales at the end of 2021 in which the revenue was partially deferred
to 2022.
*Offerings can span multiple periods and the amount raised during a period is based on the amounts closed on during that period.
Cost of Revenues
Our cost of revenues during the nine months ended
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costs related to due diligence on new issuers. Our gross margin in the nine months endedSeptember 30, 2022 decreased to 72% compared to 83% in 2021. This decrease is due to an increase in employee headcount for further diligence on our issuers and investors, as well as higher transaction costs including escrow fees which the company bears the cost on behalf of issuers.
Operating Expenses
Our total operating expenses during the nine months endedSeptember 30, 2022 amounted to$23,870,771 , which represented an increase of$10,175,364 or 74%, from the expenses in the same period in 2021. The increase in operating expenses is primarily due to the following:
Increase in general and administrative expenses of
payroll and bonus expenses of approximately
headcount and additional options granted in the first nine months of 2022.
Additionally, we incurred a penalty of
? 30, 2022 (see, "Item 1. Legal Proceedings") and legal fees increased
related to new initiatives and increased compliance and regulatory costs.
Finally, stock-based compensation increased
having a higher valuation in 2022 vs 2021 which causes option grants in 2022 to
have higher expenses than previous grants periods.
Increase in sales and marketing expenses of
market research expense of
expenses of approximately
? of bonuses related to the improved operating results during 2021. Additionally,
stock-based compensation increased
higher valuation in 2022 vs 2021 which causes option grants in 2022 to have
higher expenses than previous grants periods.
Increase in research and development expenses of
headcount as the company focused on enhancing its platform and technology which
lead to an increase of payroll and bonus expenses related to research and
? development of
causes option grants in 2022 to have higher expenses than previous grants
periods. Other Expense (Income), net Our other income, net during the nine months endedSeptember 30, 2022 amounted to$216,204 , which represented cashback earned from our credit cards during the period. During the same period in 2021 our other income, net was$243,106 which primarily represented write of WeWork payables of 160,804.
Net Loss (Income)
Net loss attributable to shareholders totaled$9,581,454 for the nine months endedSeptember 30, 2022 , a decrease of$12,577,764 compared to a net income of$2,996,310 recognized during the nine months endedSeptember 30, 2021 .
Critical Accounting Policies
See Note 2 in the accompanying financial statements.
Use of Estimates
The preparation of financial statements in conformity withU.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, and the reported amount of expenses during the reporting periods. Significant estimates include the value of marketable securities, the value of stock and warrants received as compensation and collectability of accounts receivable. Actual results could materially differ from these estimates. It is reasonably possible that changes in estimates will occur in the near term. 25 Table of Contents A significant portion of the company's assets relate to investments in stock and warrants received as compensation from issuer companies undertaking Regulation Crowdfunding or Regulation A offerings. As described in Note 2, in the accompanying financial statements, stock and warrants require significant unobservable inputs, primarily related to the underlying stock price of the security received which may include marketability discounts. Warrants have further unobservable inputs related to the estimated life, In all cases, there were sales of the stock to the public through Regulation Crowdfunding or Regulation A funding mechanism, but such sales are often not to the level that an active market existed or exists. Once the funding round is concluded it is difficult to ascertain the fair value of the issuer shares or the status of the issuer's financial health, unless additional rounds of financing are undertaken in a public setting, or the issuer reports reliable and regular information publicly. Any change in the underlying shares would impact the valuation of the related investments. Shares held are generally illiquid. Valuations require significant management judgment related to these unobservable inputs. As many of the companies that undertaking Regulation Crowdfunding and Regulation A are considered emerging growth companies, require significant capital to maintain or commence operations, and often contain warnings regarding substantial doubt about the company's ability to continue as a going concern, it is reasonable to conclude that through the passage of time, a significant portion of the stock and warrants held by the company will ultimately be deemed worthless, decline in value, or in the case of warrants, expire without exercise. Similar to traditional venture capital results, it is reasonable to conclude that only a small portion of each investment may ever increase in value.
Collectibles and Real Estate
The company records collectibles and real estate at cost in accordance with the company's policy. These long-lived assets are reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In general, we believe that we purchase these assets in arms-length transactions at fair value and such transactions are evidence of fair market value in the near term. For collectibles, over time, and as trends change and economic factors effect various markets for which we hold assets, the estimation of certain assets that do not trade in a regular market may be difficult to assess for fair value. Certain assets may be subject to market manipulation or overproduction that could effect the underlying value of like or similar items. The quality of authentication bodies may effect future valuation. If there are limited data points to assess fair value, especially for one-of-a-kind collectibles, we may not identify impairments in a timely manor. Many of the collectibles have value that is in the eye of the beholder. Accordingly, there is significant uncertainty to what these assets would be valued at in subsequent arms-length transactions. For real estate assets, there tend to be more relevant data points, including comparable sales in close proximity to held real estate assets. The company can also assess trend information in the overall economy and local economy where such assets may be held. However, sharp changes in economic conditions may make it difficult to estimate fair value and therefore potential impairment.
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