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 quarter of 2022), we might be disproportionately affected by declines in investor confidence caused by adverse economic conditions. 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 21
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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 initial and annual quotation fees. 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.
In
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 endedJune 30, 2022 as compared to the three months endedJune 30, 2021 . Three Months Ended June 30, 2022 2021 $ Change Revenues$ 6,587,906 $ 7,659,640 (1,071,734) Cost of revenues 1,694,339 1,324,040 370,299 Gross profit 4,893,567 6,335,600 (1,442,033) Operating expenses: General and administrative 3,921,287 2,429,575 1,491,712 Sales and marketing 3,961,249 1,771,843 2,189,406 Research and development 1,375,719 705,056 670,663
Change in fair value of warrants received for fees - 129,357 (129,357) Impairment in value of shares received for fees 12,250 314,261 (302,011) Total operating expenses 9,270,505
5,350,092 3,920,413
Operating income (loss) (4,376,938)
985,508 (5,362,446)
Other expense (income), net: Other expense (income), net (71,828) (40,716) (31,112) Total other expense (income), net (71,828)
(40,716) (31,112)
Income (loss) before provision for income taxes (4,305,110)
1,026,224 (5,331,334)
Provision for income taxes 53,010 32,225 20,785
Net income (loss) (4,358,121) 993,999 (5,352,120)Less: net loss attributable to noncontrolling interest - (41,217) 41,217 Net Income (loss) attributable to stockholders (4,358,121)
$ 1,035,216 (5,393,337) 22 Table of Contents Revenues Our revenues during the three months endedJune 30, 2022 were$6,587,906 , which represented a decrease of$1,071,734 , or 13%, from revenues in the same period in 2021. The following are the major components of our revenues during the three months endedJune 30, 2022 and 2021: Three-Months Three-Months Ended June 30, Ended June 30, 2022 2021 $ Change
Regulation Crowdfunding platform fees$ 2,949,197 $ 3,907,784 $ (958,587) Regulation A commissions 1,343,192 1,848,667 (505,476) StartEngine Premium 582,500 372,500 210,000 StartEngine Secure 370,452 166,806 203,646 StartEngine Promote - 118,447 (118,447) OWNers Bonus revenue 1,207,461 642,320 565,141 Other service revenue 135,105
603,115 (468,011)
Total revenues$ 6,587,906 $
7,659,640
The increase in total revenues in three months ended
Decrease in Regulation Crowdfunding platform fees of
? lower amounts raised by issuers in Regulation Crowdfunding offerings.
Specifically, in Q2 2022, the company raised approximately
compared with Q2 2021 raising approximately
Decrease in Regulation A commissions of
? amounts raised by issuers in Regulation A offerings. Specifically, in Q2 2022,
the company raised approximately
approximately
Increase in revenues of
? price increase for our services from
as an increase in customers using our services. As at
companies compared with 385 companies as at
Increase in StartEngine Premium revenue of
campaign launches compared to the previous period - which included 61 issuers
? in Q2 2022 where StartEngine Premium revenues were recognized during the period
compared with 40 in Q2 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 Q2 2022.
Decrease in other service revenue of
? revenue from StartEngine Secondary which did not have any trades in Q2 2022, as
well as revenue from material amendments.
*Offerings can span multiple years and the amount raised during the year is based on the amounts closed on during that year.
Cost of Revenues
Our cost of revenues during the three months endedJune 30, 2022 was$1,694,339 , which represented an increase of$370,299 , or 28%, 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 74% 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. 23 Table of Contents Operating Expenses Our total operating expenses during the three months endedJune 30, 2022 amounted to$9,270,503 , which represented an increase of$3,920,413 , or 73%, from the expenses in the same period in 2021. The increase in operating expenses is primarily due to an increase in general and administrative expenses of$1,432,910 , an increase in sales and marketing expenses of$2,189,406 and an increase in research and development expenses of$670,633 . General and administrative expenses increased primarily due to increased payroll expenses of approximately$251,119 . Additionally, we incurred a penalty of$350,000 for the three months endedJune 30, 2022 (see, "Item 1. Legal Proceedings") and legal fees increased$154,282 related to new initiatives and increased compliance and regulatory costs. Sales and marketing expenses increased primarily due to higher advertising costs for corporate branding of$847,681 as well as increased payroll and bonus expenses of approximately$387,038 due to increased headcount. Research and development expenses increased due to increased 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$504,664 .
Other Expense (Income), net
Our other income, net during the three months endedJune 30, 2022 amounted to$71,828 , which represented cashback earned from our credit cards during the period. During the same period in 2021 our other expenses, net was$40,716 which primarily represented losses on marketable securities during the period of$40,716 .
Net Loss (Income).
Net loss attributable to stockholders totaled$4,358,121 for the three months endedJune 30, 2022 , an decrease of$5,393,337 compared to the net income attributable to shareholders of$1,035,216 recognized during the three months endedJune 30, 2021 . 24 Table of Contents
Six Months Ended
The following table summarizes the results of our operations for the six months
ended
Six Months Ended June 30,
2022 2021 $ Change
Revenues 14,348,712 $ 13,358,914 989,798
Cost of revenues 3,698,884 2,168,073 1,530,811
Gross profit 10,649,828 11,190,841 (541,013)
Operating expenses:
General and administrative 7,284,585 3,990,321 3,294,264
Sales and marketing 7,329,194 3,493,497 3,835,697
Research and development 2,612,445 1,137,591 1,474,854Change in fair value of warrants received for fees - 129,357 (129,357) Impairment in value of shares received for fees 12,250
314,261 (302,011) Total operating expenses 17,238,474 9,065,027 8,173,447 Operating income (loss) (6,588,646) 2,125,814 (8,714,460) Other expense (income), net: Other expense (income), net (131,118) 356 (131,474) Total other expense (income), net (131,118)
356 (131,474)
Income (loss) before provision for income taxes (6,457,528)
2,125,458 (8,582,986) Provision for income taxes 58,184 32,825 25,359 Net income (loss) (6,515,713) 2,092,633 (8,608,346)
Less: net loss attributable to noncontrolling interest (9,124) - (9,124) Net Income (loss) attributable to stockholders (6,506,589) $
2,092,633 (8,599,222) Revenues Our revenues during the six months endedJune 30, 2022 were$14,348,712 , which represented increase of$989,798 , or 7%, from revenues in the same period in 2021. The following are the major components of our revenues during the six-months endedJune 30, 2022 and 2021: Six-Months Six-Months Ended June 30, Ended June 30, 2022 2021 $ Change
Regulation Crowdfunding platform fees$ 5,654,775 $ 6,938,893 $ (1,284,118) Regulation A commissions 3,908,653
3,575,336 333,318
StartEngine Premium 1,182,500 742,500 440,000
StartEngine Secure 550,880 313,427 237,453
StartEngine Promote - 227,045 (227,045)
OWNers Bonus revenue 2,573,414 923,836 1,649,577
Other service revenue 478,490
637,877 (159,386)
Total revenues $ 14,348,712 $ 13,358,914 $ 989,798
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The increase in total revenues in six months ended
Decrease in Regulation Crowdfunding platform fees of
to lower amounts raised by issuers in Regulation Crowdfunding offerings.
? Specifically, in the first half 2022, the company raised approximately
million compared with the first half of 2021 raising approximately$63 million .*
Increase in Regulation A commissions of
amounts of Regulation A offerings which provided stock or warrants to the
? Company as compensation. Specifically, in the first half 2022, the company
raised approximately$43 compared with the first half of 2021 raising approximately$57 million .*
Increase in revenues of
? price increase for our services from
as an increase in customers using our services. As at
companies compared with 385 companies as at
Increase in StartEngine Premium revenue of
? campaign launches compared to the previous period -- which included 128 issuers
in the first half of 2022 where StartEngine Premium revenues were recognized
during the period compared with 78 in the first half of 2021.
? Increase in StartEngine OWNers Bonus revenue of
increased sales at the end of 2021 in which the revenue was deferred to 2022.
*Offerings can span multiple years and the amount raised during the year is based on the amounts closed on during that year.
Cost of Revenues
Our cost of revenues during the six months endedJune 30, 2022 was$3,698,884 , which represented an increase of$1,530,811 , or 71%, from the amounts during the same period in 2021 due to the increase in the underlying revenue activity as well as increased costs related to due diligence on new issuers. Our gross margin in the first half of 2022 decreased to 74% compared to 84% 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.
Operating Expenses
Our total operating expenses during the six months endedJune 30, 2022 amounted to$17,238,474 , which represented an increase of$8,173,447 or 90%, from the expenses in the same period in 2021. The increase in operating expenses is primarily due to an increase in general and administrative expenses of$3,294,264 , an increase in sales and marketing expenses of$3,835,697 and an increase in research and development expenses of$1,474,854 . General and administrative expenses increased primarily due to increased payroll and bonus expenses of approximately$1,079,608 . Additionally, stock-based compensation increased$1,258,898 . Sales and marketing expenses increased primarily due to higher advertising costs for corporate branding of$897,116 as well as increased payroll and bonus expenses of approximately$891 ,009due to increased headcount and the payment of bonuses related to the improved operating results during 2021. Additionally, stock-based compensation increased$1,888,540 . Research and development expenses increased due to increased 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$1,127,069 .
Other Expense (Income), net
Our other income, net during the six months endedJune 30, 2022 amounted to$131,118 , which represented cashback earned from our credit cards during the period. During the same period in 2021 our other expenses, net was$356 which primarily represented losses on marketable securities during the period of
$356 . 26 Table of Contents Net Loss (Income).
Net loss attributable to shareholders totaled
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. 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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