STARTENGINE CROWDFUNDING, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the related notes included elsewhere herein and in our consolidated financial statements.
In addition to our consolidated financial statements, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. See "Forward-Looking Statements" and "Item 1A. Risk Factors" for a discussion of the uncertainties, risks and assumptions associated with these statements. Our CompanyStartEngine 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
Year Ended
The following table summarizes the results of our operations for the fiscal year endedDecember 31, 2022 as compared to the fiscal year endedDecember 31, 2021 . Year Ended December 31, 2022 2021 $Change Revenues$ 24,360,685 $ 29,078,030 (4,717,345) Cost of revenues 6,368,629 5,888,893 479,736 Gross profit 17,992,056 23,189,137 (5,197,081) Operating expenses: General and administrative 8,723,615 8,869,654 (146,039) Sales and marketing 12,478,887 11,832,183 646,704 Research and development 4,667,593 3,132,996 1,534,597
Change in fair value of warrants received for fees 169,520 129,357 40,163 Impairment in value of shares received for fees 21,863 314,261 (292,398) Total operating expenses 26,061,478
24,278,451 1,783,027
Operating income (loss) (8,069,422)
(1,089,314) (6,980,108)
Other expense (income), net: Other expense (income), net (188,684) (113,748) (74,936) Total other expense (income), net (188,684)
(113,748) (74,936)
Income (loss) before provision for income taxes (7,880,738)
(975,566) (6,905,172) Provision for income taxes 63,563 90,863 (27,300) Net income (loss) (7,944,302) (1,066,429) (6,877,873)
Less: net loss attributable to noncontrolling interest (9,124) (35,914) 26,790 Net Income (loss) attributable to stockholders (7,935,178)
$ (1,030,515) (6,904,663) 24 Table of Contents Revenues Our revenues during the fiscal year endedDecember 31, 2022 were$24,360,685 , which represented decrease of$4,717,345 , or 16%, from revenues in the same period in 2021. The following are the major components of our revenues during the years endedDecember 31, 2022 and 2021: Year EndedDecember 31 ,
Year Ended
2022 2021 $ Change
Regulation Crowdfunding platform fees $ 10,278,596 $
14,617,318 $ (4,438,722)
Regulation A commissions 5,421,047 6,054,340 (633,293)
StartEngine Premium 2,289,999 2,023,000 266,999
StartEngine Secure 1,286,483 868,731 417,752
StartEngine Promote - 278,159 (278,159)
OWNers Bonus revenue 4,437,943 4,934,022 (496,079)
Other service revenue 646,617 302,460 344,157
Total revenues $ 24,360,685 $ 29,078,030 $ (4,717,345) The decrease in total revenues in twelve-months ended
Decrease in Regulation Crowdfunding platform fees of
to lower amounts raised by issuers in Regulation Crowdfunding offerings.
Specifically, in 2022, the Company raised approximately
? issuers compared with 2021 raising approximately
addition to lower platform fees, the Company received reduced stock
compensation from issuers in 2022 of approximately
year. Decrease in Regulation A commissions of$633,293 , due primarily to lower
amounts raised in Regulation A offerings for its issuers. Specifically, in
? 2022, the Company raised approximately
2021 raising approximately
however, was partially offset due to receiving more of the platform fees in
cash compensation rather than compensation in stock and warrants.
Increase in revenues of
price increase for our services from
? Q3 2022 as well as an increase in customers using our services. Secure revenue
is deferred and recognized over 12 months. The renewals will occur in Q1 2023.
As at
Increase in StartEngine Premium revenue of
? campaign launches utilizing Premium compared to the previous period - which
included 211 new issuers in 2022 where StartEngine Premium revenues were
recognized during the period compared with 96 new issuers in 2021.
? Decrease in revenues from StartEngine Promote, a marketing service that the
Company ceased offering as of
Decrease in StartEngine OWNers Bonus revenue of
expiration of OWNers Bonus memberships, and decreased renewals, where
? recognition of the deferred revenue outpaced new sales. StartEngine had
increased sales at the end of 2022 in which the revenue was partially deferred
to 2023.
Increase in other service revenue of
? StartEngine Assets. This revenue consists of sourcing fees paid from the
Collectibles offerings in 2022 including wine, watches, trading cards, and
artwork.
*Offerings can span multiple periods and the amount raised during a period is based on the amounts closed on during that period.
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Cost of Revenues
Our cost of revenues during the year ended December 31, 2022 was $6,368,629 ,
which represented an increase of $479,736 , or 8%, from the amounts during the
same period in 2021 due to increased costs related to due diligence on new
issuers as well as StartEngine no longer passing through credit card costs to
new issuers as of Q3 2022. Our gross margin in the year ended December 31, 2022
decreased to 74% compared to 80% 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 year ended
Decrease in general and administrative expenses of
employee development expenses such as recruiting and education by approximately
to reduced revenue and headcount, and approximately
was offset by increased payroll and bonus expenses of approximately
due to increased headcount and additional options granted in 2022.
Additionally, the Company incurred a penalty of
?
costs. Software expenses increased
licenses for technology used by the Company. Finally, stock-based compensation
increased
2021 which causes option grants in 2022 to have higher expenses than previous
grants periods as the fair value of the 2022 options were based on the 2022
offering, and the fair value of the 2021 options were based on the 2021 offering.
Increase in sales and marketing expenses of
market research expense of
expenses of approximately
? of bonuses during 2022. Additionally, stock-based compensation increased
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 year endedDecember 31, 2022 amounted to$188,064 , which represented cashback earned from our credit cards during the period. During the same period in 2021 our other income, net was$113,748 which primarily represented write off of WeWork payables of$160,804 .
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 26 Table of Contents
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.
Liquidity and Capital Resources
Statement of Cash Flows
The following table summarizes, for the periods indicated, selected items in our condensed Statements of Cash Flows:
Year Ended
2022 2021 $ Change
Net cash (used in) provided by operating activities $ (7,094,758) $ (942,696) $ (6,152,062)
Net cash (used in) provided by investing activities $ (1,210,525) $ (65,975) $ (1,144,550)
Net cash provided by financing activities $ 2,765,385 $
3,469,655
Our net loss attributable to stockholders during the year ended
Cash used by operating activities for the year endedDecember 31, 2022 was$7,094,757 as compared to cash used by operating activities of$942,696 for the same period in 2021. The increase in cash used by operating activities in 2022 was primarily due to the net loss in the period as well as an increase cash used for deferred revenue$4.8M . These losses were offset by a$1.3M increase in cash provided 27 Table of Contents
from accounts receivable collections,
Cash used in investing activities for the year ended
Cash provided by financing activities was
Balance Sheet
The following table summarizes our assets and liabilities as of
December 31, December 31,
2022 2021
Assets
Current assets:
Cash $ 15,460,469 $ 21,000,367
Marketable securities 1,856 1,856Accounts receivable, net of allowance 702,257 1,477,887 Other current assets
1,953,756 3,483,129
Total current assets 18,118,338 25,963,239
Property and equipment, net 109,141 57,541
Investments - warrants 1,496,701 1,130,133
Investments - stock 6,479,340 3,923,788
Investments - Collectibles 3,072,227 1,926,394
Investments - Real Estate 2,136,628 2,136,628
Intangible assets 20,000 20,000
Other assets 66,603 50,000
Total assets $ 31,498,978 $ 35,207,722
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 284,371 $ 573,840
Accrued liabilities 1,760,920 2,607,420
Deferred revenue 2,715,422 4,111,829
Total current liabilities 4,760,713 7,293,089
Total liabilities 4,760,713 7,293,089
The Company's current assets decreased by$7,844,901 fromDecember 31, 2021 toDecember 31, 2022 . The decrease was primarily driven by a decrease in cash in the amount of$5,539,898 driven by its use in operating activities as well as conversion of cash into collectibles assets.
The Company's long-term assets increased by
? A
for our StartEngine Asset offerings which were started in 2021; and
? A
compensation for raising funds for issuers.
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Current liabilities decreased by $2,532,376 which is primarily due to a decrease
in deferred revenue of $1,396,407 due to recognition of deferred OWNers Bonus
revenue from 2021, as well as lower OWNers Bonus sales than 2021 which would
have increased deferred revenue. Additionally, accrued liabilities decreased
$846,500 due to credit card balance paydown between December 31, 2021 and
December 31, 2022 as well as lower commission and discretionary bonus accrual.
Liquidity and Capital Resources
We do not currently have any significant loans or available credit facilities. As ofDecember 31, 2022 , the Company's current assets were$18,118,338 . To date, our activities have been funded from our revenues, investments from our founders, the previous sale of Series Seed Preferred Shares, Series A Preferred Shares, Series T Preferred Shares, and our Regulation A and Regulation CF offerings. We have no off-balance sheet arrangements, including arrangements that would affect the liquidity, capital resources, market risk support, and credit risk support or other benefits.
The Company currently has no material commitments for capital expenditures.
We believe we have the cash, marketable securities through our open Regulation A offering, other current assets available, revenues, and access to funding that will be sufficient to fund operations until the Company starts generating positive cash flows from normal operations.
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