Cloudastructure, Inc S-1/A, filed Sep 26, 2024
Cloudastructure, Inc. (CSAI)
Registration No. 333-282038
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________
Amendment No. 1
to
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
_________________________________
Cloudastructure, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 7370 | 87-0690564 | ||
|
(State or other jurisdiction of incorporation or organization) |
(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer Identification Number) |
_________________________________
228 Hamilton Avenue, 3rd
Floor
Palo Alto, California 94301
(650) 644-4160
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)
_________________________________
James McCormick
Chief Executive Officer
Cloudastructure, Inc.
228 Hamilton Avenue, 3rd Floor
Palo Alto, California 94301
(650) 644-4160
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
_________________________________
Copies to:
|
Vanessa Schoenthaler, Esq. Saul Ewing LLP 1270 Avenue of the America, Suite 2800 New York, New York 10020 (212) 980-7208 |
James McCormick Chief Executive Officer Cloudastructure, Inc. 228 Hamilton Avenue, 3rd Floor
(650) 644-4160 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. ☒
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
| Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
_________________________________
Calculation of Registration Fee
| Title of Securities to be Registered | Amount to be Registered | Proposed Maximum Offering Price Per Share |
Proposed Maximum Aggregate Offering Price (1) | Amount of Registration Fee | |||
| Class A common stock, $0.0001 par value per share | Not applicable | $ | [●] |
$ | [●] | ||
| (1) | Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(a) of the Securities Act of 1933, as amended. Given that there is no proposed maximum offering price per share of Class A common stock, the registrant calculates the proposed maximum aggregate offering price, by analogy to Rule 457(f)(2), based on the book value of the Class A common stock the registrant registers, which will be calculated from its unaudited balance sheet as of June 30, 2024. Given that the registrant’s shares of Class A common stock are not traded on an exchange or over-the-counter, the registrant did not use the market prices of its Class A common stock in accordance with Rule 457(c) | ||||||
| _________________________________ | |||||||
| The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. | |||||||
The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
PROSPECTUS
(Subject to Completion)
Dated [●] [●], 2024
[●] Shares of Class A Common Stock
This prospectus relates to the registration of the resale of up to [●] shares of our Class A common stock (our “Class A common stock”) by our stockholders identified in this prospectus (the “Registered Stockholders”), in connection with our direct listing (the “Direct Listing”), on the Nasdaq Capital Market (“Nasdaq”). Unlike an initial public offering, the resale by the Registered Stockholders is not being underwritten on a firm-commitment basis by any investment bank. The Registered Stockholders may, or may not, elect to sell their shares of Class A common stock covered by this prospectus, as and to the extent they may determine. The Registered Stockholders may offer, sell or distribute all or a portion of the shares of Class A common stock hereby registered publicly or through private transactions at prevailing market prices or at negotiated prices. If the Registered Stockholders choose to sell their shares of Class A common stock, we will not receive any proceeds from the sale of shares of Class A common stock by the Registered Stockholders.
[Our board of directors [and our stockholders] have each approved on [●] [●], 2024 a [●]-for-[●] reverse stock split of all classes of our issued and outstanding capital stock (the “Reverse Stock Split”). On [●] [●], 2024, we filed an amended and restated certificate of incorporation with the State of Delaware to immediately effect the Reverse Stock Split. All share and per share information in this prospectus have been adjusted to reflect the Reverse Stock Split, unless otherwise stated.]
No public market for our Class A common stock currently exists, and our shares of Class A common stock have a limited history of trading in private transactions. Based on information available to us, the low and high sales price per share of our Class A common stock for such private transactions during the period from [●] [●], 20[●] through [●] [●], 2024 was $[●] and $[●], respectively. On July 14, 2020, we commenced an offering of units under the exemption from registration provided by Tier 2 of Regulation A under the Securities Act of 1933, as amended (the “Securities Act”). Each unit consisted of two shares of our Class A common stock and one warrant to purchase one share of Class A common stock for a period of 18 months following the date of issuance. Through August 24, 2021, the purchase price of each unit was $1.00 per unit, and the exercise price of each warrant was $0.75 per warrant share. On August 25, 2021, we updated the purchase price of each unit to $1.20 per unit, and the exercise price of each warrant to $0.90 per warrant share. On May 19, 2022, we again updated the purchase price of each unit to $2.00 per unit, and the exercise price of each warrant to $1.50 per warrant share. As of June 30, 2024, we had issued approximately 72.5 million shares of Class A common stock in our Regulation A offering, including shares issued upon exercise of our outstanding warrants, and approximately 214,428 warrants remained outstanding.
Recent purchase prices of our Class A common stock in private transactions may have little or no relation to the opening public price of our shares of Class A common stock on Nasdaq or the subsequent trading price of our shares of Class A common stock on Nasdaq. For more information, see “Sale Price History of Our Capital Stock.” Further, the listing of our Class A common stock on Nasdaq, without a firm-commitment underwritten offering, is a novel method for commencing public trading in shares of our Class A common stock and, consequently, the trading volume and price of shares of our Class A common stock may be more volatile than if shares of our Class A common stock were initially listed in connection with an initial public offering underwritten on a firm-commitment basis.
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On the day that our shares of Class A common stock are initially listed on Nasdaq, Nasdaq will begin accepting, but not executing, pre-opening buy and sell orders and will begin to continuously generate the indicative Current Reference Price (as defined below) on the basis of such accepted orders. The Current Reference Price is calculated each second and, during a 10-minute “Display Only” period, is disseminated, along with other indicative imbalance information, to market participants by Nasdaq on its NOII and BookViewer tools. Following the “Display Only” period, a “Pre-Launch” period begins, during which Maxim Group LLC (the “Advisor”), in its capacity as our financial advisor to perform the functions under Nasdaq Rule 4120(c)(8), must notify Nasdaq that our shares are “ready to trade.” Once the Advisor has notified Nasdaq that our shares of Class A common stock are ready to trade, Nasdaq will calculate the Current Reference Price for our shares of Class A common stock, in accordance with Nasdaq rules. If the Advisor then approves proceeding at the Current Reference Price, Nasdaq will conduct a price validation test in accordance with Nasdaq Rule 4120(c)(8). As part of conducting such price validation test, Nasdaq may consult with the Advisor, if the price bands need to be modified, to select the new price bands for purposes of applying such test iteratively until the validation tests yield a price within such bands. Upon completion of such price validation checks, the applicable orders that have been entered will be executed at such price and regular trading of our shares of Class A common stock on Nasdaq will commence. Under Nasdaq rules, the “Current Reference Price” means: (i) the single price at which the maximum number of orders to buy or sell can be matched; (ii) if there is more than one price at which the maximum number of orders to buy or sell can be matched, then it is the price that minimizes the imbalance between orders to buy or sell (i.e. minimizes the number of shares that would remain unmatched at such price); (iii) if more than one price exists under (ii), then it is the entered price (i.e. the specified price entered in an order by a customer to buy or sell) at which our shares of Class A common stock will remain unmatched (i.e. will not be bought or sold); and (iv) if more than one price exists under (iii), a price determined by Nasdaq in consultation with the Advisor in its capacity as our financial advisor. In the event that more than one price exists under (iii), the Advisor will exercise any consultation rights only to the extent that it can do so consistent with the anti-manipulation provisions of the federal securities laws, including Regulation M, or applicable relief granted thereunder. Neither we nor the Registered Stockholders will be involved in Nasdaq’s price-setting mechanism, including any decision to delay or proceed with trading, nor will we or they control or influence the Advisor in carrying out its role as a financial adviser. The Advisor will determine when our shares of Class A common stock are ready to trade and approve proceeding at the Current Reference Price primarily based on considerations of volume, timing and price. In particular, the Advisor will determine, based primarily on pre-opening buy and sell orders, when a reasonable amount of volume will cross on the opening trade such that sufficient price discovery has been made to open trading at the Current Reference Price. For more information, see “Plan of Distribution” beginning on page 80 of this prospectus.
We have applied to list our Class A common stock on the Nasdaq Capital Market under the symbol “CSAI.” We expect our Class A common stock to begin trading on Nasdaq on or about [●] [●], 2024.
If our Nasdaq application is not approved or we otherwise determine that we will not be able to secure the listing of our Class A common stock on Nasdaq, we will not complete this Direct Listing. This listing is a condition to the offering. No assurance can be given that our Nasdaq application will be approved and that our Class A common stock will ever be listed on Nasdaq. If our listing application is not approved by Nasdaq, we will not be able to consummate the offering and we will terminate this Direct Listing.
We are an “emerging growth company” and a “smaller reporting company” as defined under the federal securities laws and, as such, have elected to comply with certain reduced public company reporting requirements for this prospectus and may elect to do so in future filings. See “Prospectus Summary—Implications of Being an Emerging Growth Company and a Smaller Reporting Company.”
Investing in our Class A common stock involves a high degree of risk. See the “Risk Factors” section beginning on page 6 of this prospectus for the risks and uncertainties you should consider before investing in our Class A common stock.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
Prospectus dated [●] [●], 2024
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You should rely only on the information contained in this prospectus or contained in any free writing prospectus filed with the Securities and Exchange Commission (the “SEC”). Neither we nor any of the Registered Stockholders have authorized anyone to provide any information different from, or in addition to, the information contained in this prospectus and in any free writing prospectuses we have prepared. Neither we nor any of the Registered Stockholders take responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. The Registered Stockholders are offering to sell, and seeking offers to buy, shares of their Class A common stock only under the circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date, regardless of the time of delivery of this prospectus or of any sale of our Class A common stock. Our business, financial condition, results of operations and prospects may have changed since such date.
Through and including [●] [●], 2024 (the 25th day after the listing date of our Class A common stock), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus.
For investors outside the United States: Neither we nor any of the Registered Stockholders have done anything that would permit the use of or possession or distribution of this prospectus or any related free writing prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of our Class A common stock by the Registered Stockholders and the distribution of this prospectus outside the United States.
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This prospectus is a part of a registration statement on Form S-1 that we filed with the Securities and Exchange Commission (the “SEC”), using a “shelf” registration or continuous offering process. Under this process, the Registered Stockholders may, from time to time, sell the Class A common stock covered by this prospectus in the manner described in the section titled “Plan of Distribution.” Additionally, we may provide a prospectus supplement to add information to, or update or change information contained in, this prospectus, including the section titled “Plan of Distribution”. You may obtain this information without charge by following the instructions under the “Where You Can Find Additional Information” section of this prospectus. You should read this prospectus and any prospectus supplement before deciding to invest in our Class A common stock.
This prospectus contains summaries of certain provisions contained in some of the documents described herein, but reference is made to the actual documents for complete information. All of the summaries are qualified in their entirety by the actual documents. Copies of some of the documents referred to herein have been filed or will be filed as exhibits to the registration statement of which this prospectus is a part, and you may obtain copies of those documents as described under “Where You Can Find Additional Information.”
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This summary highlights select information contained elsewhere in this prospectus and does not contain all the information you should consider before making an investment decision. You should read the entire prospectus carefully, including the sections entitled “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the accompanying notes included elsewhere in this prospectus before making an investment decision. Unless otherwise indicated or the context otherwise requires, all references in this prospectus to “we,” “us,” “our,” the “Company,” “Cloudastructure” and similar terms refer to Cloudastructure, Inc.
Overview
Cloudastructure, Inc. (“Cloudastructure,” “we,” “us,” “our” or the “Company”) was formed under the laws of the State of Delaware on March 28, 2003. We provide an award-winning cloud-based artificial intelligence (“AI”) video surveillance and Remote Guarding (as described below) service built on AI and machine learning platforms.
We operated as a small Silicon Valley startup until early 2021 when we raised over $35 million in funding under Regulation A of the Securities Act of 1933, as amended (the “Securities Act”). With these funds we quickly built a sales, marketing and support structure and achieved a degree of early success in the property management space. As of the date of this prospectus, we have contracts in place with five of the top 10 property management companies on the National Multifamily Housing Council’s (“NMHC’s”) 2024 NMCH 50 list (Greystar Real Estate Partners, Avenue5 Residential, LLC, Cushman & Wakefield, BH Management Services, LLC and FPI Management, Inc.). Our cloud-based solutions allow our customers to provide real-time safety and security solutions for their properties, as well as easily manage security across all of their locations. As of the date of this prospectus, we are focused on expanding into more of our existing top tier customer locations, acquiring additional customers in the property management (“proptech”) space, and we anticipate entering into additional markets in 2024/2025.
Our intelligent AI solution works by identifying objects (faces, license plates, animals, guns, etc.) in video footage so that property managers can quickly search for those objects. Additionally, our AI and Remote Guarding services provide a proactive response to crime. Remote guarding combines video surveillance, AI analytics, monitoring centers, and security agents (“Remote Guarding”). Based on internal data comparing the total number of actual threatening activity alerts received by our Remote Guards, against all potentially suspicious and threatening activity alerts received by our Remote Guards, on average, from 2023 to the date of this prospectus, our Remote Guarding services deterred over 97% of all threatening activity for our customers. We believe AI security delivers multiple benefits for many property owners, including, without limitation:
| · | Deterring crime and improving overall safety; |
| · | Improving occupancy rates and rental rates; and |
| · | Reducing onsite guard costs and lowering insurance rates |
As of the date of this prospectus, we are the only seamless, cloud-based, AI surveillance and Remote Guarding solution on the market of which we are aware. We also believe that our solution is more affordable and easier to use than the various solutions that our competitors offer. Our Remote Guarding service bridges the line between AI and human intelligence. AI has the ability to monitor all cameras at the same time and all of the time, a task from which humans would fatigue. When the AI detects an event occurring, the Remote Guards are notified. The Remote Guards can then determine if escalation is required. With real-time human intervention, our Remote Guarding service can turn video surveillance from a forensic tool, used after a crime has been committed, into a real time crime prevention tool. This has the potential to greatly increase value for our customers.
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Summary of Risk Factors
Our business is subject to numerous risks and uncertainties that you should be aware of before making an investment decision, including those highlighted in the section entitled “Risk Factors” in this prospectus. These risks include, but are not limited to, the following:
[●]
Reverse Stock Split
[Our board of directors [and our stockholders] have each approved on [●] [●], 2024 a [●]-for-[●] reverse stock split of all classes of our issued and outstanding capital stock (the “Reverse Stock Split”). On [●] [●], 2024, we filed an amended and restated certificate of incorporation with the State of Delaware to immediately effect the Reverse Stock Split. All share and per share information in this prospectus have been adjusted to reflect the Reverse Stock Split, unless otherwise stated.]
[Adjustments to Authorized Capital Stock
In connection with the Reverse Stock Split, our board of directors and stockholders have also approved reductions in the number of capital stock, and the respective securities constituting our capital stock, we are authorized to issue.
Immediately prior to the Reverse Stock Split, the total number of shares of all classes of capital stock that we were authorized to issue was [●] shares, consisting of (i) [●] shares of Class A common stock and (ii) [●] shares of Class B common stock.
Pursuant to the adjustments to our authorized capital stock, immediately after the Reverse Stock Split, the total number of shares of all classes of capital stock that we are authorized to issue is [●] shares, consisting of (i) [●] shares of voting Class A common stock and (ii) [●]shares of Class B common stock We sometimes refer to the foregoing adjustments in our capital stock in this prospectus as the “Authorized Capital Stock Adjustments.”
Upon consummation of the Direct Listing, after giving effect to the filing and effectiveness of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws, we will be authorized to issue [●] shares of capital stock, which will consist of: (i) [●] shares of Class A common stock, par value $0.001 per share and (ii) [●] shares of Class B common stock, par value $0.001 per share. See “Description of Capital Stock” for additional details.]
Implications of being an emerging growth company and a smaller reporting company
We are an “emerging growth company” as defined in the Securities Act of 1933 (the “Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As such, we are eligible to take, and intend to take, advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies for as long as we continue to be an emerging growth company, including (i) the exemption from the auditor attestation requirements with respect to internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), (ii) the exemptions from say-on-pay, say-on-frequency and say-on-golden parachute voting requirements and (iii) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements.
We will remain an emerging growth company until the earliest of (i) [December 31, 2028], (ii) the last day of the fiscal year in which we have total annual gross revenue of at least $1.235 billion, (iii) the last day of the fiscal year in which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which would occur if the market value of our Class A common stock held by non-affiliates was $700.0 million or more as of the last business day of the second fiscal quarter of such year or (iv) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.
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In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this extended transition period and, as a result, we may adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-public companies instead of the dates required for other public companies.
We are also a “smaller reporting company” as defined in the Exchange Act. We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies until the fiscal year following the determination that our voting and non-voting Class A common stock held by non-affiliates is $250 million or more measured on the last business day of our second fiscal quarter, or our annual revenues are less than $100 million during the most recently completed fiscal year and our voting and non-voting Class A common stock held by non-affiliates is $700 million or more measured on the last business day of our second fiscal quarter.
Corporate Information
We were incorporated under the laws of the State of Delaware on March 28, 2003 under the name Connexed Technologies, Inc. On September 28, 2016, we changed our name to Cloudastructure, Inc. Our principal executive offices are located at 228 Hamilton Avenue, 3rd Floor, Palo Alto, California 94301. Our telephone number is (650) 644-4160 and our website address is www.Cloudastructure.com. Information contained on or that can be accessed through our website is neither a part of, nor incorporated by reference into, this prospectus, and you should not consider information on our website to be part of this prospectus. Our website address is included in this prospectus as an inactive textual reference only.
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SUMMARY FINANCIAL AND OTHER DATA
The summary financial and other data set forth below should be read together with our financial statements and the related notes to those statements, as well as the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this prospectus.
The statements of operations data for the years ended December 31, 2023 and 2022, and the statements of cash flows data for the years ended December 31, 2023 and 2022, have been derived from our audited financial statements included elsewhere in this prospectus. The statements of operations data for the three and six months ended June 30, 2024 and 2023, the statements of cash flows data for the six months ended June 30, 2024 and 2023, and the balance sheet data as of June 30, 2024, have been derived from our unaudited interim financial statements included elsewhere in this prospectus. The unaudited interim financial statements were prepared on a basis consistent with our audited financial statements and include in management’s opinion, all adjustments, consisting of normal recurring adjustments, that we consider necessary for a fair presentation of the financial information set forth in those statements. Our historical results are not necessarily indicative of the results that may be expected in any future period, and our interim results are not necessarily indicative of our expected results for the year ending December 31, 2024.
All share numbers and per share amounts in the tables below have been adjusted to reflect the Reverse Stock Split.
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An investment in our Class A common stock involves a high degree of risk. You should carefully consider the following risks and uncertainties, together with all of the other information contained in this prospectus, including our financial statements and related notes appearing elsewhere in this prospectus, before deciding whether to invest in our Class A common stock. The occurrence of one or more of the events or circumstances described in these risk factors, alone or in combination with other events or circumstances, may have a material adverse effect on our business, reputation, revenue, financial condition, results of operations and future prospects, in which event you could lose all or part of your investment. The risks and uncertainties described below are not intended to be exhaustive and are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. This prospectus also contains forward-looking statements that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements.” Our actual results could differ materially and adversely from those anticipated in these forward-looking statements as a result of certain factors, including those described below.
Risks Related to Our Business
Our technology continues to be developed, and it is unlikely that we will ever develop our technology to a point at which no further development is required.
We are developing complex technology that requires significant technical and regulatory expertise to develop, commercialize and update to meet evolving market and regulatory requirements. If we are unable to successfully develop and commercialize our technology and products, it could have a material adverse effect on our business operations and financial condition.
If our security measures are breached or unauthorized access to individually identifiable biometric or other personally identifiable information is otherwise obtained, our reputation may be harmed, and we may incur significant liabilities.
In the ordinary course of our business, we may collect and store sensitive data, including personally identifiable information (“PII”), owned or controlled by ourselves or our customers, and other parties. We communicate sensitive data electronically, and through relationships with multiple third-party vendors and their subcontractors. These applications and data encompass a wide variety of business-critical information, including commercial information, and business and financial information. We face a number of risks relative to protecting this critical information, including loss of access risk, inappropriate use or disclosure, inappropriate modification, and the risk of our being unable to adequately monitor, audit, and modify our controls over our critical information. This risk extends to the third-party vendors and subcontractors we use to manage this sensitive data. As a custodian of this data, we therefore inherit responsibilities related to this data, exposing ourself to potential threats. Data breaches occur at all levels of corporate sophistication (including at companies with significantly greater resources and security measures than our own) and the resulting fallout stemming from these breaches can be costly, time-consuming, and damaging to a company’s reputation. Further, data breaches need not occur from malicious attacks or phishing only. Often, employee carelessness can result in sharing PII with a much wider audience than intended. Consequences of such data breaches could result in fines, litigation expenses, costs of implementing better systems, and the damage of negative publicity, all of which could have a material adverse effect on our business operations and financial condition.
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Our collection, processing, use and disclosure of individually identifiable biometric or other personally identifiable information is subject to evolving and expanding privacy and security regulations.
Data privacy remains an evolving landscape, with new regulations coming into effect at both the domestic and international level. For example, various states, such as California, Massachusetts, and others, have implemented similar privacy laws and regulations, such as the California Consumer Privacy Act, which took effect January 1, 2020 (the “CCPA”), and creates new data privacy rights for users. The CCPA requires covered businesses that process personal information of California residents to disclose their data collection, use and sharing practices. Further, the CCPA provides California residents with new data privacy rights (including the ability to opt out of certain disclosures of personal data), imposes new operational requirements for covered businesses, provides for civil penalties for violations as well as a private right of action for data breaches and statutory damages (which is expected to increase data breach class action litigation and result in significant exposure to costly legal judgements and settlements). Aspects of the CCPA and its interpretation and enforcement remain uncertain. In addition, the California Privacy Rights Act of 2020 (the “CPRA”), which took effect January 1, 2023, expanded the CCPA. The CPRA, among other things, gives California residents the ability to limit use of certain sensitive personal information, further restricts the use of cross-contextual advertising, establishes restrictions on the retention of personal information, expands the types of data breaches subject to the CCPA’s private right of action, provides for increased penalties for CPRA violations concerning California residents under the age of 16, and establishes a new California Privacy Protection Agency to implement and enforce the CPRA. The CCPA and other similar laws could impact our business activities depending on how they are interpreted. New legislation proposed or enacted in various other states will continue to shape the data privacy environment nationally. For example, Virginia recently passed its Consumer Data Protection Act, and Colorado recently passed the Colorado Privacy Act, both of which differ from the CPRA and became effective in 2023. Additional states have since also passed comprehensive privacy laws with additional obligations and requirements on businesses. Certain state laws may be more stringent or broader in scope, or offer greater individual rights, with respect to confidential, sensitive and personal information than federal, international or other state laws, and such laws may differ from each other, which may complicate compliance efforts.
Additionally, all U.S. states and the District of Columbia have enacted breach notification laws that may require that we notify customers, employees or regulators in the event of unauthorized access to or disclosure of personal or confidential information experienced by us or our service providers. These laws are not consistent, and compliance in the event of a widespread data breach is difficult and may be costly. Moreover, states have been frequently amending existing laws, requiring attention to changing regulatory requirements. We also may be contractually required to notify customers of a security breach. Although we may have contractual protections with our service providers, any actual or perceived security breach could harm our reputation and brand, expose us to potential liability or require us to expend significant resources on data security and in responding to any such actual or perceived breach. Any contractual protections we may have from our service providers may not be sufficient to adequately protect us from any such liabilities and losses, and we may be unable to enforce any such contractual protections. In addition to government regulation, privacy advocates and industry groups have and may in the future propose self-regulatory standards from time to time. These and other industry standards may legally or contractually apply to us, or we may elect to comply with such standards.
Our success is highly dependent on our ability to attract and retain highly skilled executive officers and employees.
To succeed, we must recruit, retain, manage and motivate qualified technical and management personnel, and we face significant competition for experienced personnel. We are highly dependent on the principal members of our management. If we do not succeed in attracting and retaining qualified personnel, particularly at the management level, it could adversely affect our ability to execute our business plan and harm our operating results. In particular, the loss of one or more of our executive officers could be detrimental to us if we cannot recruit suitable replacements in a timely manner. We could in the future have difficulty attracting experienced personnel to our company and may be required to expend significant financial resources in our employee recruitment and retention efforts.
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Many of the other technology companies that we compete against for qualified personnel have greater financial and other resources, different risk profiles and a longer operating history than we do. They also may provide more diverse opportunities and better prospects for career advancement. Some of these characteristics may be more appealing to high-quality candidates than what we have to offer. If we are unable to continue to attract and retain high-quality personnel, the rate and success at which we develop and commercialize our products and services could be limited and our potential for successfully growing our business could be harmed.
Privacy and data security laws and regulations could require us to make changes to our business, impose additional costs on us and reduce the demand for our software solutions.
Our business model contemplates that we will transmit a significant amount of PII through our platform. Privacy and data security have become significant issues in the United States and in other jurisdictions where we may offer our video surveillance solutions. The regulatory framework relating to privacy and data security issues worldwide is evolving rapidly and is likely to remain uncertain for the foreseeable future. Federal, state and foreign government bodies and agencies have in the past adopted, or may in the future adopt, laws and regulations regarding the collection, use, processing, storage and disclosure of personal or identifying information obtained from customers and other individuals. In addition to government regulation, privacy advocates and industry groups may propose various self-regulatory standards that may legally or contractually apply to our business. Because the interpretation and application of many privacy and data security laws, regulations and applicable industry standards are uncertain, it is possible that these laws, regulations and standards may be interpreted and applied in a manner inconsistent with our existing privacy and data management practices. As we expand into new jurisdictions or verticals, we will need to understand and comply with various new requirements applicable in those jurisdictions or verticals.
To the extent applicable to our business or the businesses of our customers, these laws, regulations and industry standards could have negative effects on our business, including by increasing our costs and operating expenses, and delaying or impeding our deployment of new core products or services. Compliance with these laws, regulations and industry standards requires significant management time and attention, and failure to comply could result in negative publicity, subject us to fines or penalties or result in demands that we modify or cease existing business practices. In addition, the costs of compliance with, and other burdens imposed by, such laws, regulations and industry standards may adversely affect our customers’ ability or desire to collect, use, process and store PII using our products and services, which could reduce overall demand for them. Even the perception of privacy and data security concerns, whether or not valid, may inhibit market acceptance of our products and services in certain verticals. In particular, some regulatory bodies have recently become more interested in technologies that we employ including artificial intelligence (“AI”) and face recognition. Any of these outcomes could adversely affect our business and operating results.
If our products and services do not achieve broad acceptance both domestically and internationally, we will not be able to achieve our anticipated level of growth. Our revenues are primarily derived from a cloud-based services model for our products and technology. We also receive some hardware revenue as well as revenue for remote guarding services. We cannot accurately predict the future growth rate or the size of the market for our products and services. The expansion of the market for our solutions depends on a number of factors, such as:
| · | the cost, performance and reliability of our products and services and the solutions offered by our competitors; |
| · | customers’ perceptions regarding the benefits of cloud-based video surveillance solutions; |
| · | public perceptions regarding the intrusiveness of these solutions and the manner in which organizations use biometric and other identity information collected; |
| · | public perceptions regarding the confidentiality of private information; |
| · | proposed or enacted legislation related to privacy of information; |
| · | customers’ satisfaction regarding our cloud-based video surveillance system; and |
| · | marketing efforts and publicity regarding our video surveillance solutions. |
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Even if our products and services gain wide market acceptance, our solutions may not adequately address market requirements and may not continue to gain market acceptance. If cloud-based video surveillance solutions generally or our solutions specifically do not gain wide market acceptance, we may not be able to achieve our anticipated level of growth and our revenues and results of operations would suffer.
We operate in a highly competitive industry that is dominated by multiple very large, well-capitalized market leaders and is constantly evolving. New entrants to the market, existing competitor actions, or other changes in market dynamics could adversely impact us.
The level of competition in the security industry is high, with multiple exceptionally large, well-capitalized competitors holding a majority share of the market, such as Avigilon (a subsidiary of Motorola Solutions, Inc.) Tyco Integrated Security (a business unit of Johnson Controls International plc), Stealth Monitoring, GardaWorld Security Corporation (doing business as ECAMSECURE), EyeQ Monitoring and Watchtower. Many of the companies in the video surveillance market have longer operating histories, larger customer bases, significantly greater financial, technological, sales, marketing, and other resources than we do. At any point, these companies may decide to devote their resources to creating a competing solution which will impact our ability to maintain or gain market share in this industry. Further, such companies will be able to respond more quickly than we can to new or changing opportunities, technologies, standards, or client requirements, more quickly develop new products or devote greater resources to the promotion and sale of their products and services than we can. Likewise, their greater capabilities in these areas may enable them to better withstand periodic downturns in the video surveillance industry and compete more effectively on the basis of price and production. In addition, new companies may enter the markets in which we compete, further increasing competition in the video surveillance industry.
We believe that our ability to compete successfully depends on a number of factors, including the type and quality of our products and services and the strength of our brand names, as well as many factors beyond our control. We may not be able to compete successfully against current or future competitors, and increased competition may result in price reductions, reduced profit margins, loss of market share and an inability to generate cash flows that are sufficient to maintain or expand the development and marketing of new products or services, any of which would adversely impact our results of operations and financial condition.
Successful infringement claims against us could result in significant monetary liability or prevent us from selling some of our products.
We believe our products and services may be highly disruptive to a very large and growing market. Our competitors are well capitalized with significant intellectual property protection and resources, and they (or patent trolls) may initiate infringement lawsuits against us. Such litigation could be expensive, time-consuming and could prevent us from selling our products and services, which would significantly harm our ability to grow our business as planned.
We rely on other companies to provide certain hardware and software solutions for our products.
We depend on certain third-party suppliers and subcontractors to meet our contractual obligations to our customers and conduct our business. While we are not dependent on any one supplier for any of our hardware or software solutions, our ability to meet our obligations to our customers may be adversely affected if one or more suppliers or subcontractors does not provide the agreed-upon supplies or perform the agreed-upon services in compliance with customer requirements and in a timely and cost-effective manner. Likewise, the quality of our products and services may be adversely impacted if companies to whom we delegate manufacture of major components or subsystems for our products, or from whom we acquire such items, do not provide major components and subsystems which meet required specifications and perform to our and our customers’ expectations. If we encounter problems with one or more of these parties and they fail to perform to expectations, it could have a material adverse effect on our business operations and financial condition.
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We plan to implement new lines of business or offer new products and services within existing lines of business.
We plan on introducing new computer vision algorithms, or improving existing ones, such as face recognition and object detection, that must be executed at sustainable computational costs. We also plan on introducing machine learning algorithms that combine information from our video surveillance system . There are substantial risks and uncertainties associated with these efforts, both in the development of these new products and services, as well as the execution and delivery of these products and services to our customers. We may invest significant time and resources into these endeavors, and there is no guarantee we will be successful in our development or launch of such products and services. Initial timetables for the introduction and development of such new products or services may not be achieved and price and profitability targets may not prove feasible. We may not be successful in introducing these new products and services in response to industry trends or developments in technology, or those new products may not achieve market acceptance. As a result, we could lose business, be forced to price products and services on less advantageous terms to retain or attract clients or be subject to cost increases. As a result, our business, financial condition or results of operations may be adversely affected.
Certain acquisitions could adversely affect our financial results.
We may pursue strategic acquisitions as part of our business strategy. There is no assurance that we will be able to find suitable acquisition candidates or be able to complete acquisitions on favorable terms, if at all. We may also discover liabilities or deficiencies associated with any companies acquired that were not identified in advance, which may result in unanticipated costs. The effectiveness of our due diligence review and ability to evaluate the results of such due diligence may depend upon the accuracy and completeness of statements and disclosures made or actions taken by the target companies or their representatives. As a result, we may not be able to accurately forecast the financial impact of an acquisition transaction, including tax and accounting charges. In addition, we may not be able to successfully integrate acquired businesses and may incur significant costs to integrate and support acquired companies. Any of these factors could adversely affect our financial results.
Our business may be adversely impacted by additional leverage in connection with acquisitions.
As stated above, we may pursue strategic acquisitions as part of our business strategy. If we are able to identify acquisition candidates, such acquisitions may be financed with a substantial amount of additional indebtedness. Although the use of leverage presents opportunities to increase our profitability, it has the effect of potentially increasing losses as well. If income and appreciation from acquisitions acquired through debt are less than the cost of the debt, the total return will decrease. Accordingly, any event which adversely affects the value of an acquisition will be magnified to the extent we are leveraged and we could experience losses substantially greater than if we did not use leverage.
Increased indebtedness could also make it more difficult for us to satisfy our obligations with respect to any other debt agreements, increase our vulnerability to general adverse economic and industry conditions and require that a greater portion of our cash flow be used to pay indebtedness, which would reduce the availability of cash available for other purposes, and limit our flexibility in planning for, or reacting to, changes in our business and our industry. Our failure to comply with any covenants under such indebtedness could result in an event of default that, if not cured or waived, could result in an acceleration of repayment of other existing indebtedness, which in turn could materially and adversely affect our business and results of operations.
We will incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives. We will be subject to financial reporting and other requirements for which our accounting and other management systems and resources may not be adequately prepared.
As a public company, and particularly after we are no longer an emerging growth company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the federal securities laws, including the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and rules and regulations subsequently implemented by the SEC and Nasdaq have imposed various requirements on public companies, including requirements to file annual, quarterly, and event driven reports with respect to their business and financial condition, and to establish and maintain effective disclosure and financial controls and corporate governance practices. These rules and regulations will increase our legal and financial compliance costs, make certain activities more time-consuming and costly, and require our management and other personnel to devote a substantial amount of time to compliance initiatives. We also expect that these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance.
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Pursuant to Section 404 of the Sarbanes-Oxley Act, we will be required to furnish a report by our management on our internal control over financial reporting, including an attestation report on internal control over financial reporting issued by our independent registered public accounting firm, beginning with the first full year after we become a public company. 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 of the Sarbanes-Oxley Act, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. We will need to continue to dedicate internal resources, potentially engage outside consultants, 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 neither we, nor our independent registered public accounting firm will be able to conclude within the prescribed time frame that our internal control over financial reporting is effective as required by Section 404 of the Sarbanes-Oxley Act. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. We could also become subject to investigations by the SEC or other regulatory authorities, which could require additional financial and management resources.
As a public company, we will also be required to maintain disclosure controls and procedures. Disclosure controls and procedures means our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC. We do not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. We believe a control system, no matter how well-designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected.
Intellectual property rights do not necessarily address all potential threats to our competitive advantage.
The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations, and may not adequately protect our business or permit us to maintain our competitive advantage. For example:
| · | others may be able to develop products and services that are similar to our product candidates but that are not covered by the claims of the patents that we own or license; |
| · | we or our licensors or future collaborators might not have been the first to make the inventions covered by the issued patents or pending patent applications that we own or license; |
| · | we or our licensors or future collaborators might not have been the first to file patent applications covering certain of our inventions; |
| · | others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights; |
| · | it is possible that our licensors’ pending patent applications will not lead to issued patents; |
| · | issued patents that we own or license may be held invalid or unenforceable, as a result of legal challenges by our competitors; |
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| · | our competitors might conduct research and development activities in countries where we do not have patent rights and then use the information learned from such activities to develop competitive products for sale in our major commercial markets; |
| · | we may not develop additional proprietary technologies that are patentable; |
| · | we cannot predict the scope of protection of any patent issuing based on our patent applications, including whether the patent applications that we own or in-license will result in issued patents with claims that cover our product candidates or uses thereof in the United States or in other foreign countries; |
| · | the claims of any patent issuing based on our patent applications may not provide protection against competitors or any competitive advantages, or may be challenged by third parties; |
| · | if enforced, a court may not hold that our patents are valid, enforceable and infringed; |
| · | we may need to initiate litigation or administrative proceedings to enforce and/or defend our patent rights which will be costly whether we win or lose; |
| · | we may choose not to file a patent application in order to maintain certain trade secrets or know-how, and a third party may subsequently file a patent application and obtain an issued patent covering such intellectual property; |
| · | we may fail to adequately protect and police our trademarks and trade secrets; and |
| · | the patents of others may have an adverse effect on our business, including if others obtain patents claiming subject matter similar to or improving that covered by our patents and patent applications. |
Should any of these events occur, they could significantly harm our business, results of operations and prospects.
Intellectual property litigation may lead to unfavorable publicity that harms our reputation and causes the market price of our common shares to decline.
During the course of any intellectual property litigation, there could be public announcements of the initiation of the litigation as well as results of hearings, rulings on motions, and other interim proceedings in the litigation. If securities analysts or investors regard these announcements as negative, the perceived value of our existing product candidates, programs or intellectual property could be diminished. Such announcements could also harm our reputation or the market for our future product candidates, which could have a material adverse effect on our business.
If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.
In addition to the protection afforded by other types of intellectual property, we rely on the protection of our trade secrets, including unpatented know-how, technology and other proprietary information to maintain our competitive position. Although we have taken steps to protect our trade secrets and unpatented know-how, including entering into confidentiality agreements with third parties (including, but not limited to, contractors, collaborators, and outside scientific advisors), and confidential information and inventions agreements with employees, consultants, licensors and advisors, we cannot provide any assurances that all such agreements have been duly executed, and any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. We require our employees to enter into written confidentiality agreements that assign to us any inventions, developments, creative works and useful ideas of any description that are conceived of, reduced to practice or developed in the course of their employment. In addition, we require our third-party contractors to enter into a written non-disclosure agreement that requires the third party to not disclose certain of our confidential information in any manner or for any purpose other than as necessary and/or appropriate in connection with their obligations for a defined period of time, subject to certain exclusions. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. We may need to share our proprietary information, including trade secrets, with our current and future business partners, collaborators, contractors and others located in countries at heightened risk of theft of trade secrets, including through direct intrusion by private parties or foreign actors, and those affiliated with or controlled by state actors.
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Moreover, third parties may still obtain this information or may come upon this or similar information independently, and we would have no right to prevent them from using that technology or information to compete with us. If any of these events occurs or if we otherwise lose protection for our trade secrets, the value of this information may be greatly reduced and our competitive position would be harmed. If we or our licensors do not apply for patent protection prior to such publication or if we cannot otherwise maintain the confidentiality of our proprietary technology and other confidential information, then our ability to obtain patent protection or to protect our trade secret information may be jeopardized.
We may be subject to claims that we have wrongfully hired an employee from a competitor or that we or our employees have wrongfully used or disclosed alleged confidential information or trade secrets of their former employers.
Risks Related to Our Financial Condition and Capital Requirements
We have a limited operating history, which may make it difficult for you to evaluate our current business and predict our future success and viability.
Our Company was incorporated under the laws of the State of Delaware on March 28, 2003, as Connexed Technologies Inc. The likelihood of our creation of a successful business must be considered in light of the problems, expenses, difficulties, complications, and delays frequently encountered in connection with the growth of a business, operation in a competitive industry, and the continued development of our technology and products. We anticipate that our operating expenses will increase for the near future, and there is no assurance that we will be profitable in the near future. You should consider our business, operations, and prospects in light of the risks, expenses and challenges faced as an emerging growth company.
We have historically operated at a loss, which has resulted in an accumulated deficit.
For the fiscal years ended December 31, 2023 and December 31, 2022, we incurred net losses of approximately $7.04 and approximately $11.4 million, respectively. There can be no assurance that we will ever achieve profitability. Even if we do, there can be no assurance that we will be able to maintain or increase profitability on a quarterly or annual basis. Failure to do so would continue to have a material adverse effect on our accumulated deficit, would affect our cash flows, would affect our efforts to raise capital and is likely to result in a decline in the value of your investment in our Company.
We anticipate sustaining operating losses for the foreseeable future.
It is anticipated that we will sustain operating losses until for the foreseeable future as we expand our team, continue with research and development, and strive to gain customers and gain market share in our industry. Our ability to become profitable depends on our ability to expand our customer base. There can be no assurance that this will occur. Unanticipated problems and expenses are often encountered in offering new products which may impact whether the Company is successful. Furthermore, we may encounter substantial delays and unexpected expenses related to development, technological changes, marketing, regulatory requirements and changes to such requirements or other unforeseen difficulties. There can be no assurance that we will ever become profitable. If the Company sustains losses over an extended period of time, it may be unable to continue in business.
We will require substantial additional capital to finance our operations. If we are unable to raise such capital when needed, or on acceptable terms, we may be forced to delay, reduce and/or eliminate one or more of our research and drug development programs or future commercialization efforts.
Our operations have consumed substantial amounts of cash since inception, and we expect our expenses to increase in connection with our ongoing activities. The Company will continue to invest in building out its sales and marketing teams as well as maintain a robust engineering and development team. General and administrative expenses will increase as the cost of maintaining a public company is significantly higher than maintaining a privately held company. Accordingly, we will need to obtain substantial additional funding in order to maintain our continuing operations.
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As of the six months ended June 30, 2024, we had approximately $1,701 million of cash on hand and approximately $1,777 million of working capital, and our anticipated operating requirements for the next twelve months, assuming the maintenance of our current operations, exceed our available capital resources. Our estimate as to how long we expect our existing capital to be able to continue to fund our operations is based on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. Changing circumstances, some of which may be beyond our control, could cause us to consume capital significantly faster than we currently anticipate, and we may need to seek additional funds sooner than planned.
Our future funding requirements will depend on many factors, including, but not limited to:
| · | the initiation, progress, timeline, cost and results of our products; |
| · | the cost and timing of manufacturing activities; |
| · | the effect of competing technological and market developments; |
| · | the payment of licensing fees, potential royalty payments and potential milestone payments; |
| · | the cost of general operating expenses; and |
| · | the costs of operating as a public company. |
Advancing the development of our product will require a significant amount of capital. In order to fund all of the activities that are necessary to complete the development of our product, we will be required to obtain further funding through equity offerings, debt financings, collaborations and licensing arrangements or other sources, which may dilute our stockholders or restrict our operating activities. Adequate additional funding may not be available to us on acceptable terms, or at all.
Our failure to raise capital as and when needed or on acceptable terms would have a negative impact on our financial condition and our ability to pursue our business strategy, and we may have to delay, reduce the scope of, suspend or eliminate one or more of our research-stage programs, clinical trials or future commercialization efforts, grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves, obtain funds through arrangement with collaborators on terms unfavorable to us or pursue merger or acquisition strategies, all of which could adversely affect the holdings or the rights of our stockholders.
Raising additional capital may cause dilution to our existing stockholders.
We may seek additional capital through a variety of means, including through equity, debt financings, or other sources. We may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms may include liquidation or other preferences and anti-dilution protections that adversely affect your rights as a stockholder.
Such financing may also result in imposition of debt covenants, increased fixed payment obligations or other restrictions that may adversely affect our ability to conduct our business. If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates, or grant licenses on terms that are not favorable to us.
We may not be able to continue as a going concern without additional financing, and if such financing is not available to us or is not available to us on acceptable terms, we may be forced to cease operations.
We have a limited operating history and have incurred recurring losses from operations. As of June 30, 2024, we have an accumulated deficit of approximately $37,890,000, and stockholders’ equity of approximately $1,879,000. For the three months ended June 30, 2024 and 2023, we incurred a net loss of approximately $1,852,000 and approximately $2,209,000, respectively. Additionally, for the fiscal years ended December 31, 2023 and 2022, we incurred a net loss of approximately $9,007,000 and approximately $11,626,000, respectively. Our failure to generate sufficient revenues, effectively manage expenses or raise additional capital could adversely affect our ability to achieve our intended business objectives. These matters, among others, raise substantial doubt about our ability to continue as a going concern.
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We have funded our operations primarily through a series of Regulation A offerings. We cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact our ability to conduct business. If we are not able to raise additional capital when required or on acceptable terms, we may have to: (i) significantly delay, scale back or discontinue the development or commercialization of new products; (ii) seek collaborators for further development and commercialization of our products; or (iii) relinquish or otherwise dispose of some or all of our rights to technologies or the products that we would otherwise seek to develop or commercialize.
We have a substantial customer concentration, with a limited number of customers accounting for a substantial portion of our revenue.
We derive a significant portion of our revenues from a few major customers. For the year ended December 31, 2023, three customers accounted for 18%, 13%, and 9% of our total revenue, respectively. As of June 30, 2024, three customers accounted for 19%, 17%, and 10% of our total revenue, respectively. There are inherent risks whenever a large percentage of total revenue is derived from a limited number of customers. It is not possible for us to predict the future level of demand for our products and services that will be generated by these customers. If we experience declining or delayed sales from these customers due to market, economic or competitive conditions, we could be pressured to reduce our prices or our customers could decrease the purchase quantity of our products and services, which could have an adverse effect on our margins and financial position and could negatively affect our revenues and results of operations. If any one of our largest customers terminates the purchase of our products and services, such termination would materially negatively affect our revenues, results of operations and financial condition. Moreover, our reliance on a limited number of customers may limit our bargaining power and ability to negotiate favorable terms in future contracts. If we are unable to diversify our customer base and reduce our dependence on a small number of customers, our business, operating results, and financial condition could be adversely affected by any negative developments involving these key customers. To mitigate these risks, we are actively seeking to expand our customer base and reduce our reliance on a few significant customers. However, there can be no assurance that we will be successful in these efforts, and our financial performance may continue to be significantly influenced by our key customers.
Risks Related to This Offering and Ownership of Our Class A common stock
The direct listing process differs from an initial public offering underwritten on a firm-commitment basis.
This is not an underwritten initial public offering of Class A common stock. This listing of our Class A common stock on Nasdaq differs from an underwritten initial public offering in several significant ways, which include, but are not limited to, the following:
| · | There are no underwriters engaged on a firm-commitment basis. Consequently, prior to the opening of trading on Nasdaq, there will be no traditional book building process and no price at which underwriters initially sold shares to the public to help inform efficient and sufficient price discovery with respect to the opening trades on Nasdaq. Therefore, buy and sell orders submitted prior to and at the opening of trading of our Class A common stock on Nasdaq will not have the benefit of being informed by a published price range or a price at which the underwriters initially sold shares to the public, as would be the case in an initial public offering underwritten on a firm-commitment basis. Moreover, there will be no underwriters engaged on a firm-commitment underwritten basis assuming risk in connection with the initial resale of shares of our Class A common stock. In an initial public offering underwritten on a firm-commitment basis, the underwriters may engage in “covered” short sales in an amount of shares representing the underwriters’ option to purchase additional shares. To close a covered short position, the underwriters purchase shares in the open market or exercise the underwriters’ option to purchase additional shares. In determining the source of shares to close the covered short position, the underwriters typically consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the underwriters’ option to purchase additional shares. Purchases in the open market to cover short positions, as well as other purchases underwriters may undertake for their own accounts, may have the effect of preventing a decline in the market price of shares. Given that there will be no underwriters’ option to purchase additional shares and no underwriters engaging in stabilizing transactions, there could be greater volatility in the public price of our Class A common stock during the period immediately following the listing. See also “—Our shares of Class A common stock have no prior public market. An active trading market may not develop or continue to be liquid and the market price of our shares of Class A common stock may be volatile.” |
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| · | There is not a fixed number of shares of Class A common stock available for sale. Therefore, there can be no assurance that any Registered Stockholders or other existing stockholders will sell any or all of their Class A common stock and there may initially be a lack of supply of, or demand for, our Class A common stock on Nasdaq. Alternatively, we may have a large number of Registered Stockholders or other existing stockholders who choose to sell their Class A common stock in the near term resulting in an oversupply of our Class A common stock, which could adversely impact the public price of our Class A common stock once listed on Nasdaq and thereafter. |
| · | None of our Registered Stockholders or other existing stockholders have entered into contractual lock-up agreements or other contractual restrictions on transfer. In a firm-commitment underwritten initial public offering, it is customary for an issuer’s officers, directors, and most of its other stockholders to enter into a 180-day contractual lock-up arrangement with the underwriters to help promote orderly trading immediately after such initial public offering. Consequently, any of our stockholders, including our directors and officers who own our Class A common stock and other significant stockholders, may sell any or all of their Class A common stock at any time (subject to any restrictions under applicable law), including immediately upon listing. If such sales were to occur in a significant volume in a short period of time following our listing, it may result in an oversupply of our Class A common stock in the market, which could adversely impact the public price of our Class A common stock. |
| · | We will not conduct a traditional “roadshow” with underwriters prior to the opening of trading on Nasdaq. Instead, we intend to host an investor day, as well as engage in certain other investor education meetings. In advance of the investor day, we will announce the date for such day over financial news outlets in a manner consistent with typical corporate outreach to investors. We will prepare an electronic presentation for this investor day, which will have content similar to a traditional roadshow presentation, and make one version of the presentation publicly available, without restriction, on a website. There can be no guarantees that the investor day and other investor education meetings will have the same impact on investor education as a traditional “roadshow” conducted in connection with a firm-commitment underwritten initial public offering. As a result, there may not be efficient price discovery with respect to our Class A common stock or sufficient demand among investors immediately after our listing, which could result in a more volatile public price of our Class A common stock. |
Such differences from a firm-commitment underwritten initial public offering could result in a volatile trading price for our Class A common stock and uncertain trading volume, which may adversely affect your ability to sell any Class A common stock that you may purchase.
Our Class A common stock currently has no public market. An active trading market may not develop or continue to be liquid and the market price of shares of our Class A common stock may be volatile.
We expect our Class A common stock to be listed and traded on Nasdaq. Prior to the listing on Nasdaq, there has not been a public market for any of our securities, and an active market for our Class A common stock may not develop or be sustained after the listing, which could depress the market price of shares of our Class A common stock and could affect the ability of our stockholders to sell our Class A common stock. In the absence of an active public trading market, investors may not be able to liquidate their investments in our Class A common stock. An inactive market may also impair our ability to raise capital by selling shares of our Class A common stock, our ability to motivate our employees through equity incentive awards and our ability to acquire other companies, products or technologies by using shares of our Class A common stock as consideration.
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In addition, we cannot predict the prices at which our Class A common stock may trade on Nasdaq following the listing of our Class A common stock, and the market price of our Class A common stock may fluctuate significantly in response to various factors, some of which are beyond our control. In particular, as this listing is taking place through a novel process that is not a firm-commitment underwritten initial public offering, there will be no traditional book building process and no price at which traditional underwriters initially sold shares to the public to help inform efficient price discovery with respect to the opening trades on Nasdaq. On the day that our shares of Class A common stock are initially listed on Nasdaq, Nasdaq will begin accepting, but not executing, pre-opening buy and sell orders and will begin to continuously generate the indicative Current Reference Price on the basis of such accepted orders. The Current Reference Price is calculated each second and, during a 10-minute “Display Only” period, is disseminated, along with other indicative imbalance information, to market participants by Nasdaq on its NOII and BookViewer tools. Following the “Display Only” period, a “Pre-Launch” period begins, during which the Advisor, in its capacity as our financial advisor to perform the functions under Nasdaq Rule 4120(c)(8), must notify Nasdaq that our shares are “ready to trade.” Once the Advisor has notified Nasdaq that our shares of Class A common stock are ready to trade, Nasdaq will calculate the Current Reference Price for our shares of Class A common stock, in accordance with Nasdaq rules. If the Advisor then approves proceeding at the Current Reference Price, Nasdaq will conduct a price validation test in accordance with Nasdaq Rule 4120(c)(8). As part of conducting such price validation test, Nasdaq may consult with the Advisor, if the price bands need to be modified, to select the new price bands for purposes of applying such test iteratively until the validation tests yield a price within such bands. Upon completion of such price validation checks, the applicable orders that have been entered will be executed at such price and regular trading of shares of our Class A common stock on Nasdaq will commence. The Advisor will determine when our shares of Class A common stock are ready to trade and approve proceeding at the Current Reference Price primarily based on considerations of volume, timing and price. In particular, the Advisor will determine, based primarily on pre-opening buy and sell orders, when a reasonable amount of volume will cross on the opening trade such that sufficient price discovery has been made to open trading at the Current Reference Price. If the Advisor does not approve proceeding at the Current Reference Price (for example, due to the absence of adequate preopening buy and sell interest), the Advisor will request that Nasdaq delay the open until such a time that sufficient price discovery has been made to ensure a reasonable amount of volume crosses on the opening trade. For more information, see “Plan of Distribution.”
Additionally, prior to the opening trade, there will not be a price at which underwriters initially sold shares of Class A common stock to the public as there would be in a firm-commitment underwritten initial public offering. The absence of a predetermined initial public offering price could impact the range of buy and sell orders collected by Nasdaq from various broker-dealers. Consequently, upon listing on Nasdaq, the public price of our Class A common stock may be more volatile than in a firm-commitment underwritten initial public offering and could decline significantly and rapidly.
Furthermore, because of our novel listing process on Nasdaq, Nasdaq’s rules for ensuring compliance with its initial listing standards, such as those requiring a valuation or other compelling evidence of value, are untested. In the absence of a prior active public trading market for our Class A common stock, if the price of our Class A common stock or our market capitalization falls below those required by Nasdaq’s eligibility standards, we may not be able to satisfy the ongoing listing criteria and may be required to delist.
In addition, because of our novel listing process and the potential consumer awareness and brand recognition of Cloudastructure, individual investors, retail or otherwise, may have greater influence in setting the opening public price and subsequent public prices of our Class A common stock on Nasdaq and may participate more in our initial trading than is typical for a firm-commitment underwritten initial public offering. These factors could result in a public price of our Class A common stock that is higher than other investors (such as institutional investors) are willing to pay, which could cause volatility in the trading price of our Class A common stock and an unsustainable trading price if the price of our Class A common stock significantly rises upon listing and institutional investors believe our Class A common stock is worth less than retail investors, in which case the price of our Class A common stock may decline over time. Further, if the public price of our Class A common stock is above the level that investors determine is reasonable for our Class A common stock, some investors may attempt to short our Class A common stock after trading begins, which would create additional downward pressure on the public price of our Class A common stock. To the extent that there is a lack of consumer awareness among retail investors, such a lack of consumer awareness could reduce the value of our Class A common stock and cause volatility in the trading price of our Class A common stock.
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The public price of our Class A common stock following the listing also could be subject to wide fluctuations in response to the risk factors described in this prospectus and others beyond our control, including:
| · | changes in the industries in which we operate; |
| · | variations in our operating performance and the performance of our competitors in general; |
| · | actual or anticipated fluctuations in our quarterly or annual operating results; |
| · | publication of research reports by securities analysts about us or our competitors or our industry; |
| · | the public’s reaction to our press releases, our other public announcements and our filings with the SEC; |
| · | our failure or the failure of our competitors to meet analysts’ projections or guidance that we or our competitors may give to the market; |
| · | additions and departures of key personnel; |
| · | changes in laws and regulations affecting our business; |
| · | commencement of, or involvement in, litigation involving us; |
| · | changes in our capital structure, such as future issuances of securities or the incurrence of additional debt; |
| · | the volume of shares of our Class A common stock available for public sale; and |
| · | general economic and political conditions such as recessions, interest rates, fuel prices, foreign currency fluctuations, international tariffs, social, political and economic risks and acts of war or terrorism. |
In addition, securities exchanges have experienced price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. Stock prices of many companies have fluctuated in a manner often unrelated to the operating performance of those companies. These fluctuations may be even more pronounced in the trading market for our Class A common stock shortly following the listing of our Class A common stock on Nasdaq as a result of the supply and demand forces described above. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business and harm our business, results of operations and financial condition.
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Future sales of Class A common stock by our Registered Stockholders and other existing stockholders could cause our share price to decline.
We currently expect our Class A common stock to be listed and traded on Nasdaq. Prior to listing on Nasdaq, there has been no public market for our Class A common stock and there has not been a sustained history of trading in our Class A common stock in “over-the-counter” markets. While our Class A common stock may be sold after our listing on Nasdaq by the Registered Stockholders pursuant to this prospectus or by our other existing stockholders in accordance with Rule 144 under the Securities Act, unlike a firm-commitment underwritten initial public offering, there can be no assurance that any Registered Stockholders or other existing stockholders will sell any of their shares of Class A common stock and there may initially be a lack of supply of, or demand for, Class A common stock on Nasdaq. As described herein, certain shares of our Class A common stock outstanding as of the date hereof will be registered under this registration statement. There can be no assurance that the Registered Stockholders and other existing stockholders will not sell all of their shares of Class A common stock, resulting in an oversupply of our Class A common stock on Nasdaq. In the case of a lack of supply of our Class A common stock, the trading price of our Class A common stock may rise to an unsustainable level. Further, institutional investors may be discouraged from purchasing our Class A common stock if they are unable to purchase a block of our Class A common stock in the open market due to a potential unwillingness of our existing stockholders to sell a sufficient amount of Class A common stock at the price offered by such institutional investors and the greater influence individual investors have in setting the trading price. If institutional investors are unable to purchase our Class A common stock, the market for our Class A common stock may be more volatile without the influence of long-term institutional investors holding significant amounts of our Class A common stock. In the case of a lack of market demand for our Class A common stock, the trading price of our Class A common stock could decline significantly and rapidly after our listing. Therefore, an active, liquid and orderly trading market for our Class A common stock may not initially develop or be sustained, which could significantly depress the public price of our Class A common stock and/or result in significant volatility, which could affect your ability to sell your shares of Class A common stock.
We have [●] shares of Class B common stock with super voting rights.
Our capital stock as of the date hereof consists of Class A common stock and Class B common stock. Our Class B common stock is entitled to 20 votes per share. See “Description of Capital Stock—Class B common stock” for additional information regarding our Class B common stock and “Principal and Registered Stockholders” for ownership information regarding our Class B common stock.
In addition to the dilutive effect on the voting power and value of our Class A common stock, the foregoing structure of our capital stock may render our Class A common stock ineligible for inclusion in certain securities market indices, and thus adversely affect the price and liquidity of, and public sentiment regarding, our Class A common stock or other securities. The existence of, and voting rights associated with, our Class B common stock, either alone or in conjunction with certain of the other provisions of our amended and restated certificate of incorporation could also have the effect of delaying, deterring or preventing a change in our control or make the removal of our management more difficult.
You may be diluted by future issuances of preferred stock or additional Class A common stock in connection with our incentive plans, acquisitions or otherwise; future sales of such shares in the public market, or the expectations that such sales may occur, could lower our stock price.
Prior to the effectiveness of the registration statement of which this prospectus forms a part, we will adopt an amended and restated certificate of incorporation which will authorize us to issue shares of Class A common stock and options, rights, warrants and appreciation rights relating to our Class A common stock for the consideration and on the terms and conditions established by our board of directors in its sole discretion. We could issue a significant number of shares of Class A common stock in the future in connection with investments or acquisitions. Any of these issuances could dilute our existing stockholders, and such dilution could be significant. Moreover, such dilution could have a material adverse effect on the market price for the shares of our Class A common stock.
The future issuance of shares of preferred stock with voting rights may adversely affect the voting power of the holders of shares of our Class A common stock, either by diluting the voting power of our Class A common stock if the preferred stock votes together with the Class A common stock as a single class, or by giving the holders of any such preferred stock the right to block an action on which they have a separate class vote, even if the action were approved by the holders of our shares of our Class A common stock.
The future issuance of shares of preferred stock with dividend or conversion rights, liquidation preferences or other economic terms favorable to the holders of preferred stock could adversely affect the market price for our Class A common stock by making an investment in the Class A common stock less attractive. For example, investors in the Class A common stock may not wish to purchase Class A common stock at a price above the conversion price of a series of convertible preferred stock because the holders of the preferred stock would effectively be entitled to purchase Class A common stock at the lower conversion price, causing economic dilution to the holders of Class A common stock.
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Because we have no current plans to pay cash dividends on our Class A common stock, you may not receive any return on investment unless you sell your Class A common stock for a price greater than that which you paid for it.
We currently intend to retain all available funds and any future earnings to fund the development, commercialization and growth of our business, and therefore we do not anticipate declaring or paying any cash dividends on our Class A common stock in the foreseeable future. Any future determination to declare dividends will be made at the discretion of our board of directors and will depend on our financial condition, operating results, capital requirements, general business conditions and other factors that our board of directors may deem relevant. Our future ability to pay cash dividends on our Class A common stock may also be limited by the terms of any future debt securities or credit facility. As a result, capital appreciation, if any, of the Class A common stock you purchase in this offering will be your sole source of gain for the foreseeable future.
We are an emerging growth company and a smaller reporting company, and the reduced disclosure requirements applicable to emerging growth companies and smaller reporting companies may make our Class A common stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of certain exemptions and relief from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including (i) not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, (ii) having the option of delaying the adoption of certain new or revised financial accounting standards, (iii) reduced disclosure obligations regarding executive compensation in this prospectus and our periodic reports and proxy statements and (iv) exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We may take advantage of these exemptions until such time that we are no longer an emerging growth company. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock. Further, pursuant to Section 107 of the JOBS Act, we have elected to take advantage of the extended transition period for complying with new or revised accounting standards until those standards would otherwise apply to private companies. As a result, our operating results and financial statements may not be comparable to the operating results and financial statements of other companies who have adopted the new or revised accounting standards.
We will remain an emerging growth company until the earliest of (i) [December 31, 2028], (ii) the last day of the fiscal year in which we have total annual gross revenue of at least $1.235 billion, (iii) the last day of the fiscal year in which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our Class A common stock held by non-affiliates was $700.0 million or more as of the last business day of the second fiscal quarter of such year or (iv) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.
We are also a “smaller reporting company” as defined in the Exchange Act. We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies until the fiscal year following the determination that our voting and non-voting Class A common stock held by non-affiliates is $250 million or more measured on the last business day of our second fiscal quarter, or our annual revenues are less than $100 million during the most recently completed fiscal year and our voting and non-voting Class A common stock held by non-affiliates is $700 million or more measured on the last business day of our second fiscal quarter.
It is possible that some investors will find our Class A common stock less attractive as a result of the foregoing, which may result in a less active trading market for our Class A common stock and higher volatility in our stock price.
Our amended and restated certificate of incorporation, in each case, which will become effective in connection with the effectiveness of the registration statement, of which this prospectus forms a part, will provide for an exclusive forum in the Court of Chancery of the State of Delaware for certain disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
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Our amended and restated certificate of incorporation will provide that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware and, to the extent enforceable, the federal district courts of the United States of America will be the exclusive forums for certain disputes between us and our stockholders, which could limit our stockholders’ ability to choose the judicial forum for disputes with us or our directors, officers or employees.
Our amended and restated certificate of incorporation, which will become effective in connection with the effectiveness of the registration statement, of which this prospectus forms a part, will provide that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, the federal district court for the District of Delaware) shall, to the fullest extent permitted by law, be the sole and exclusive forum for: (i) any derivative action or proceeding brought on our behalf; (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders; (iii) any action arising pursuant to any provision of the Delaware General Corporation Law, our certificate of incorporation or our bylaws; or (iv) any action asserting a claim governed by the internal affairs doctrine. This choice of forum provision would not apply to suits brought to enforce a duty or liability created by the Exchange Act or the Securities Act or any other claim for which the federal courts of the United States have exclusive jurisdiction.
Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our amended and restated certificate of incorporation will provide that the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act and the Exchange Act. While the Delaware courts have determined that such choice of forum provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provisions of our amended and restated certificate of incorporation, but there can be no assurance that the provisions will be enforced by a court in those other jurisdictions.
Any person or entity purchasing or otherwise acquiring any interest in any of our securities shall be deemed to have notice of and consented to these provisions. These exclusive-forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum of its choosing for disputes with us or our directors, officers or other employees, which may discourage lawsuits against us and our directors, officers and other employees. If a court were to find either exclusive-forum provision in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving the dispute in other jurisdictions, which could harm our results of operations.
The public price of our shares of Class A common stock, upon listing on Nasdaq, may have little or no relationship to the historical sales prices of our shares of Class A common stock in private transactions.
Prior to listing on Nasdaq, there has been no public market for our shares of Class A common stock. Our Class A common stock has a limited history of trading in private transactions. We sold units to the public in a series of Regulation A offerings. Each unit consisted of two shares of our Class A common stock and one warrant to purchase one share of Class A common stock for a period of 18 months following the date of issuance at an exercise price equal to 75% of the unit price. The unit prices that were sold were $1.00, $1.20, and $2.00. However, this information may have little or no relation to broader market demand for our shares of Class A common stock and thus the initial public price of our shares of Class A common stock on Nasdaq once trading begins. As a result, you should not place undue reliance on these historical sales prices as they may differ materially from the opening public prices and subsequent public prices of our shares of Class A common stock on Nasdaq. For additional details about how the initial listing price on Nasdaq will be determined, see “Plan of Distribution.”
The uncertainty associated with the fact that few companies have undertaken direct listings to date may lead to increased volatility and pricing challenges for our Class A common stock.
Few companies have conducted direct listings, and the process by which shares of our Class A common stock will be listed on Nasdaq is a novel process. The absence of a traditional underwritten offering may result in a less orderly market for our Class A common stock, increased volatility in the trading price, and potential difficulties in achieving a stable market price. Unlike an initial public offering, there is no firm-commitment underwritten offering to help inform efficient and sufficient price discovery. Consequently, the public price of our Class A common stock may be more volatile than it would be if shares were initially listed in connection with a firm-commitment underwritten initial public offering. In addition, the trading volume and price of shares of our Class A common stock may be more volatile and subject to greater fluctuations due to the direct listing method.
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The direct listing process differs from an initial public offering underwritten on a firm-commitment basis and the impact of awareness of our brand and investor recognition of our Company on the demand for our Class A common stock is unpredictable and our marketing and brand development efforts may not be successful.
We will not conduct a traditional “roadshow” with underwriters prior to the opening of trading of our Class A common stock on Nasdaq. Instead, we may engage in certain investor presentations and educational meetings to enhance our brand awareness and investor recognition of our Company. In advance of any investor presentation or educational meeting, we will announce the date for such presentation or meeting through financial news outlets in a manner consistent with typical corporate outreach to investors. We will prepare an electronic presentation for any investor presentation or educational meeting that we hold, and will make the presentation publicly available, without restriction, on a website.
There can be no assurance that any investor presentations or other educational meetings that we hold will have the same impact on awareness of our brand and investor recognition of our Company as a traditional “roadshow” conducted in connection with a firm-commitment underwritten initial public offering. As a result, there may not be efficient price discovery with respect to our Class A common stock or sufficient demand among investors immediately following our listing, which could result in a more volatile public price of our Class A common stock.
We have not agreed to indemnify the Registered Stockholders for claims arising in connection with sales of our Class A common stock in this offering, however, claims for indemnification by our directors and officers may reduce the amount of money available to us.
We have not agreed to indemnify the Registered Stockholders for claims arising in connection with sales of our Class A common stock under this prospectus. However, our amended and restated certificate of incorporation provides that our directors and officers will be indemnified by us to the fullest extent permitted by Delaware law. In addition, as permitted by Section 145 of the Delaware General Corporation Law, our amended and restated certificate of incorporation and any indemnification agreements that we enter into with our directors and officers following the effectiveness of the registration statement of which this prospectus forms a part:
| · | we will indemnify our directors and officers for serving us in those capacities or for serving other business enterprises at our request, to the fullest extent permitted by Delaware law; | |
| · | Delaware law provides that a corporation may indemnify such person if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal proceeding, had no reasonable cause to believe such person’s conduct was unlawful; | |
| · | we may, in our discretion, indemnify employees and agents in those circumstances where indemnification is permitted by applicable law; |
| · | we are required to advance expenses, as incurred, to our directors and officers in connection with defending a proceeding, except that such directors or officers shall undertake to repay such advances if it is ultimately determined that such person is not entitled to indemnification; | |
| · | we are authorized to enter into indemnification agreements with our directors, officers, employees, and agents and to obtain insurance to indemnify such persons; and | |
| · | we may not retroactively amend our amended and restated certificate of incorporation provisions to reduce our indemnification obligations to directors, officers, employees, and agents. |
While we have procured directors’ and officers’ liability insurance policies, such insurance policies may not be available to us in the future at a reasonable rate, may not cover all potential claims for indemnification, and may not be adequate to indemnify us for all liability. Large indemnity payments to our directors and officers in excess of any available insurance would materially adversely affect our business, financial condition, and results of operations.
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General Risks
Reports published by analysts, including projections in those reports that differ from our actual results, could adversely affect the price and trading volume of our Class A common stock.
Securities research analysts may establish and publish their own periodic projections for our Company. These projections may vary widely and may not accurately predict the results we actually achieve. The price of our Class A common stock may decline if our actual results do not match the projections of these securities research analysts. Similarly, if one or more of the analysts who write reports on us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price could decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, our stock price or trading volume could decline.
Our internal computer systems, or those of any of our manufacturers, contractors, consultants, collaborators or potential future collaborators, may fail or suffer security or data privacy breaches or other unauthorized or improper access to, use of, or destruction of our proprietary or confidential data, employee data or personal data, which could result in additional costs, loss of revenue, significant liabilities, harm to our brand and material disruption of our operations.
Despite the implementation of security measures, our internal computer systems and those of our current and any future manufacturers, contractors, consultants, collaborators and third-party service providers, are vulnerable to damage from computer viruses, cybersecurity threats, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failure. Because the techniques used to obtain unauthorized access to, or to sabotage, systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures. We may also experience security breaches that may remain undetected for an extended period. Some of the federal, state and foreign government requirements include obligations of companies to notify individuals of security breaches involving particular personally identifiable information, which could result from breaches experienced by us or by our vendors, contractors or organizations with which we have formed strategic relationships. Notifications and follow-up actions related to a security breach could impact our reputation, cause us to incur significant costs, including legal expenses and remediation costs. We also rely on third parties for certain portions of our manufacturing process, and similar events relating to their computer systems could also have a material adverse effect on our business. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data, or inappropriate disclosure of confidential or proprietary information, we could be exposed to litigation and governmental investigations, the further development and commercialization of our product candidates could be delayed, and we could be subject to significant fines or penalties for any noncompliance with certain state, federal and/or international privacy and security laws.
Our insurance policies may not be adequate to compensate us for the potential losses arising from any such disruption, failure or security breach. In addition, such insurance may not be available to us in the future on economically reasonable terms, or at all. Further, our insurance may not cover all claims made against us and could have high deductibles in any event, and defending a suit, regardless of its merit, could be costly and divert management attention.
Our operations are vulnerable to interruption by fire, severe weather conditions, power loss, telecommunications failure, terrorist activity and other events beyond our control, which could harm our business.
Our facility is located in a region which experiences severe weather from time to time. We have not undertaken a systematic analysis of the potential consequences to our business and financial results from a major tornado, flood, fire, earthquake, power loss, terrorist activity or other disasters and do not have a recovery plan for such disasters. In addition, we do not carry sufficient insurance to compensate us for actual losses from interruption of our business that may occur, and any losses or damages incurred by us could harm our business. The occurrence of any of these business disruptions could seriously harm our operations and financial condition and increase our costs and expenses
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that can involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial position, business plan and strategy, future revenue, timing and likelihood of success, plans and objectives of management for future operations, future results of anticipated products and prospects, plans and objectives of management are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” or “would” or the negative of these terms or other similar expressions, although not all forward-looking statements contain these words. Forward-looking statements contained in this prospectus include, but are not limited to, statements about:
| · | the implementation of our business model and our strategic plans for our business, product, services and technology; | |
| · | our commercialization and marketing capabilities and strategy; | |
| · | our ability to establish or maintain collaborations or strategic relationships or obtain additional funding; | |
| · | our competitive position; | |
| · | the scope of protection that we able to establish and maintain for intellectual property rights covering our products, services and technology; | |
| · | developments and projections relating to our competitors and our industry; | |
| · | our estimates regarding expenses, future revenue, capital requirements and needs for additional financing; | |
| · | the period over which we estimate our existing cash and cash equivalents will be sufficient to fund our future operating expenses and capital expenditure requirements; and | |
| · | the impact of new or existing laws and regulations on our business and strategy. |
We have based these forward-looking statements largely on our current expectations and projections about our business, the industry in which we operate and financial trends that we believe may affect our business, financial condition, results of operations and prospects, and these forward-looking statements are not guarantees of future performance or development. These forward-looking statements speak only as of the date of this prospectus and are subject to a number of risks, uncertainties and assumptions, including, but not limited to, those described in the section titled “Risk Factors” and elsewhere in this prospectus. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein until after we distribute this prospectus, whether as a result of any new information, future events or otherwise.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this prospectus, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and you are cautioned not to unduly rely upon these statements.
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This prospectus includes estimates regarding market and industry data. Unless otherwise indicated, information concerning our industry and the markets in which we operate, including our general expectations, market position, market opportunity, and market size, are based on our management’s knowledge and experience in the markets in which we operate, together with currently available information obtained from various sources, including publicly available information, industry reports and publications, surveys, our customers, trade and business organizations, and other contacts in the markets in which we operate. Certain information is based on management estimates, which have been derived from third-party sources, as well as data from our internal research.
In presenting this information, we have made certain assumptions that we believe to be reasonable based on such data and other similar sources and on our knowledge of, and our experience to date in, the markets in which we operate. While we believe the estimated market and industry data included in this prospectus is generally reliable, such information is inherently uncertain and imprecise. Market and industry data is subject to change and may be limited by the availability of raw data, the voluntary nature of the data gathering process, and other limitations inherent in any statistical survey of such data. In addition, projections, assumptions, and estimates of the future performance of the markets in which we operate are necessarily subject to uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.” These and other factors could cause results to differ materially from those expressed in the estimates made by third parties and by us. Accordingly, you are cautioned not to place undue reliance on such market and industry data or any other such estimates.
The source of certain statistical data, estimates, and forecasts contained in this prospectus are the following independent industry publications or reports:
| · | MarkNtel Advisors, Global Video Surveillance Market Research Report: Forecast (2024-2029) (“GVS Market Research Report”) | |
| · | Fortune Business Insights, PropTech Market Size, Share & Industry Analysis, By Solution (Integrated Platform/Software and Standalone Software), By Deployment (Cloud and On-premise), By Property Type (Residential and Commercial), By End-user (Real Estate Agents, Housing Associations, Property Investors, and Others), and Regional Forecast, 2024 – 2032 (Report ID: FBI108634) (“PropTech Market Report”) | |
| · | National Multifamily Housing Council (“NMHC”), 2024 NMCH 50 Largest Apartment Managers (April 2024) | |
| · | Other publicly available reports |
The content of the above sources, except to the extent specifically set forth in this prospectus, does not constitute a portion of this prospectus and is not incorporated herein.
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TRADEMARKS, SERVICE MARKS AND TRADENAMES
We own or otherwise have rights to the trademarks, including those mentioned in this prospectus, used in conjunction with the operation of our business. This prospectus includes our own trademarks, which are protected under applicable intellectual property laws, as well as trademarks, service marks and tradenames of other entities, which are the property of their respective owners. Solely for convenience, trademarks, trade names and service marks referred to in this prospectus may appear without the ®, TM or SM symbols, but such references are not intended to indicate, in any way, that the applicable licensor will not assert, to the fullest extent under applicable law, its rights to these trademarks, service marks and tradenames. We do not intend our use or display of other entities’ trademarks, service marks or tradenames to imply a relationship with, or endorsement or sponsorship of us by, any other entities.
The Registered Stockholders may, or may not, elect to sell shares of our Class A common stock covered by this prospectus. To the extent any Registered Stockholder chooses to sell shares of our Class A common stock covered by this prospectus, we will not receive any proceeds from any such sales of our Class A common stock. See “Principal and Registered Stockholders.”
We have never declared or paid dividends on our Class A common stock. We currently intend to retain all available funds and any future earnings to fund the development, commercialization and growth of our business, and therefore we do not anticipate declaring or paying any dividends on our Class A common stock in the foreseeable future. Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors. Any such determination will also depend upon our business prospects, operating results, financial condition, capital requirements, general business conditions and other factors that our board of directors may deem relevant. Our future ability to pay dividends on our Class A common stock may also be limited by the terms of any future debt securities or credit facility.
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The following table sets forth our cash and cash equivalents and capitalization as of June 30, 2024, as follows.
| · | on an actual basis (after giving effect to the Reverse Stock Split); | |
| · | [on a pro forma basis to give effect to conversion, without any consideration, of all outstanding shares of our Class B common stock on a one-for-one basis, into an aggregate of 4,046,785 shares of Class A common stock (after giving effect to the Reverse Stock Split), which as effective [●] [●], 2024.] | |
| · | The share numbers in the table below have been adjusted to reflect the Reverse Stock Splits. | |
| · | This table should be read in conjunction with, and is qualified in its entirety by reference to, our financial statements and related notes appearing elsewhere in this prospectus. |
| As of June 30, 2024 | ||||||||
| Actual | Pro Forma | |||||||
| (in thousands, except per share numbers) | ||||||||
| Cash and cash equivalents | $ | 1,701 | $ | 1,701 | ||||
| Stockholders’ equity: | ||||||||
| Common stock, Class A, $0.0001 par value per share; 250,000,000 shares authorized, actual and pro forma; and 83,528,681 shares issued and outstanding, actual; [●] shares issued and outstanding, pro forma | 84 | [●] | ||||||
| Common stock, Class B, $0.0001 par value per share; 100,000,000 shares authorized, actual and pro forma; and 4,046,785 shares issued and outstanding, actual; [no] shares issued and outstanding, pro forma | 4 | – | ||||||
| Additional paid-in capital | 39,461 | [●] | ||||||
| Accumulated deficit | (37,890 | ) | [●] | |||||
| Total stockholders’ equity | $ | 1,879 | $ | [●] | ||||
| Total capitalization | $ | 2,357 | $ | [●] | ||||
The number of shares of our common stock reflected in our actual and pro forma information set forth in the table above excludes:
| · | [●] shares of Class A common stock issuable upon exercise of warrants outstanding as of June 30, 2024, with a weighted-average exercise price of $[●] per share; and |
| · | [●] shares of Class A common stock reserved for issuance under our [Amended 2014 Stock Option Plan]. |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes and other financial information appearing elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this prospectus, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
Cloudastructure, Inc. (“Cloudastructure,” “we,” “us,” “our” or the “Company”) was formed under the laws of the State of Delaware on March 28, 2003. We provide an award-winning cloud-based artificial intelligence (“AI”) video surveillance and Remote Guarding (as described below) service built on AI and machine learning platforms.
We operated as a small Silicon Valley startup until early 2021 when we raised over $35 million in funding under Regulation A of the Securities Act of 1933, as amended (the “Securities Act”). With these funds we quickly built a sales, marketing and support structure and achieved a degree of early success in the property management space. As of the date of this prospectus, we have contracts in place with five of the top 10 property management companies on the National Multifamily Housing Council’s (“NMHC’s”) 2024 NMCH 50 list (Greystar Real Estate Partners, Avenue5 Residential, LLC, Cushman & Wakefield, BH Management Services, LLC and FPI Management, Inc.). Our cloud-based solutions allow our customers to provide real-time safety and security solutions for their properties, as well as easily manage security across all of their locations. As of the date of this prospectus, we are focused on expanding into more of our existing top tier customer locations, acquiring additional customers in the property management (“proptech”) space, and we anticipate entering into additional markets in 2024/2025.
Our intelligent AI solution works by identifying objects (faces, license plates, animals, guns, etc.) in video footage so that property managers can quickly search for those objects. Additionally, our AI and Remote Guarding services provide a proactive response to crime. Remote guarding combines video surveillance, AI analytics, monitoring centers, and security agents (“Remote Guarding”). Based on internal data comparing the total number of actual threatening activity alerts received by our Remote Guards, against all potentially suspicious and threatening activity alerts received by our Remote Guards, on average, from 2023 to the date of this prospectus, our Remote Guarding services deterred over 97% of all threatening activity for our customers. We believe AI security delivers multiple benefits for many property owners, including, without limitation:
| · | Deterring crime and improving overall safety; |
| · | Improving occupancy rates and rental rates; and |
| · | Reducing onsite guard costs and lowering insurance rates |
As of the date of this prospectus, we are the only seamless, cloud-based, AI surveillance and Remote Guarding solution on the market of which we are aware. We also believe that our solution is more affordable and easier to use than the various solutions that our competitors offer. Our Remote Guarding service bridges the line between AI and human intelligence. AI has the ability to monitor all cameras at the same time and all of the time, a task from which humans would fatigue. When the AI detects an event occurring, the Remote Guards are notified. The Remote Guards can then determine if escalation is required. With real-time human intervention, our Remote Guarding service can turn video surveillance from a forensic tool, used after a crime has been committed, into a real time crime prevention tool. This has the potential to greatly increase value for our customers.
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Components of Results of Operations
Net Revenues.
Our net revenues primarily consist of revenues generated from subscriptions to our core business services (cloud video surveillance and remote guarding), revenues generated from hardware sales, and revenue generated from installation services.
We recognize revenue when a customer obtains control of promised goods or services. Typically, our customers pay up front annually for our services and sign subscription and remote guarding agreements governing the terms of service. In those instances, revenue is recognized ratably over the period that commences on the subscription start date and ending on the date the subscription term expires. Some of our customers require monthly billing arrangements, in which case revenue is recognized on a monthly basis. Revenue generated from sales of hardware is generally recognized at time of delivery. Revenue generated from door and video services is generally recognized at the completion of the professional services.
Cost of Goods Sold.
Cost of goods sold primarily consists of hosting costs, the costs of equipment sold, installation costs and the costs of the operations department.
Operating Expenses.
Operating expenses consist of general and administrative expenses, which are primarily salaries, professional fees, consulting costs and expenses related to the administrative functions of the Company, research and development expenses, which consist primarily of product development costs and salaries, and sales and marketing expenses, which represent public relations, advertising and direct marketing costs, as well as the associated personnel costs.
Results of Operations
Comparison of the three months ended June 30, 2024 to the three months ended June 30, 2023
Net Revenues
Total revenue during the three months ended June 30, 2024 increased by 214% compared to the same period in 2023. This increase is due to our signing 230% more new customers during the three months ended June 30, 2024 compared to the same period in 2023.
The majority of our net revenues for the six months ended June 30, 2024 were comprised of subscription revenue generated from our core business services (cloud video surveillance and remote guarding) and hardware sales. Total revenue increased $319,946, or approximately 150%, from $213,508 for the six months ended June 30, 2023 compared to $533,454 for the six months ended June 30, 2024. This increase is attributed to our sales department signing more new and larger customers. Cloud video surveillance subscriptions increased by approximately 57%, remote guarding increased by approximately 710%, and hardware increased by approximately 267% over the same period in 2023.
The following table summarizes our revenue by service line:
| Three Month Ended June 30, | Six Month Ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Cloud Video Surveillance | $ | 64,296 | $ | 38,635 | $ | 120,287 | $ | 82,494 | ||||||||
| Remote Guarding | 39,808 | 1,944 | 94,585 | 11,677 | ||||||||||||
| Hardware | 91,153 | 1,487 | 138,341 | 37,683 | ||||||||||||
| Other (installation, door subscriptions, etc.) | 41,420 | 33,209 | 171,241 | 81,653 | ||||||||||||
| $ | 236,677 | $ | 75,275 | $ | 533,454 | $ | 213,508 | |||||||||
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Cost of Goods Sold.
Our cost of goods sold increased $109,853, or approximately 33%, from $331,964 for the six months ended June 30, 2023 compared to $441,817 for the six months ended June 30, 2024. This increase was the result of increased sales and more installation projects completed in the first six months of 2024 compared to the first six months of 2023, which led to increased sales costs (such as the costs of equipment sold, installation costs and the costs of our operations department). The following table summarizes our cost of goods sold by line:
| Three Month Ended June 30, | Six Month Ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Hosting and Data Center Bandwidth | $ | 65,928 | $ | 125,972 | $ | 151,133 | $ | 268,231 | ||||||||
| Remote Guarding Costs | 25,350 | 19,697 | 46,713 | 22,822 | ||||||||||||
| Hardware Costs | 20,889 | 11,644 | 69,724 | 20,403 | ||||||||||||
| Installation and Labor Costs | 76,418 | 17,252 | 174,247 | 20,509 | ||||||||||||
| $ | 188,586 | $ | 174,565 | $ | 441,817 | $ | 331,964 | |||||||||
Operating Expenses.
Our operating expenses for the six months ended June 30, 2024 and 2023 were as follows:
| Three Month Ended June 30, | Six Month Ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| General and Administrative | $ | 729,487 | $ | 885,236 | $ | 1,210,993 | $ | 1,428,730 | ||||||||
| Research and Development | 499,554 | 645,836 | 807,840 | 1,174,295 | ||||||||||||
| Sales and Marketing | 622,584 | 645,388 | 1,436,285 | 1,693,594 | ||||||||||||
| $ | 1,851,625 | $ | 2,176,460 | $ | 3,455,118 | $ | 4,296,619 | |||||||||
General and administrative expenses decreased by approximately 15% for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. This decrease was primarily due to a decrease of approximately $182,000 in professional and consulting services, approximately $16,000 in travel and entertainment expenses and approximately $17,000 in facilities costs.
Research and development (“R&D”) expenses also decreased by approximately 31% for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. As part of the refocus on our core business we continued to reduce the number of our R&D personnel and consultants, which led to a decrease in personnel costs of approximately $133,000, and an approximately $32,000 decrease in fees related to consulting services.
Sales and marketing expenses decreased by approximately 15% for the six months ended June 30, 2024 compared to the sales and marketing expenses incurred during the six months ended June 30, 2023. The decrease in sales and marketing expenses was due to a decrease of approximately $14,000 in consulting costs, and a decrease of approximately $319,000 in marketing expenditures.
Net Loss
As a result of the foregoing, the Company suffered a net loss of $3,569,372 for the six months ended June 30, 2024, compared to net loss of $4,408,534 for the six months ended June 30, 2023, an improvement of approximately 19% for the current period compared to the prior period.
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Comparison of the year ended December 31, 2023 to the year ended December 31, 2022
Net Revenues
Our net revenues for the year ended December 31, 2023 were approximately $607,000 compared to approximately $489,000 for the year ended December 31, 2022, an increase of approximately $119,000 or 124%. This increase in revenue is the result of expanding our customer base in 2023.
| Year Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Cloud Video Surveillance | $ | 219,120 | $ | 111,718 | ||||
| Remote Guarding | 56,128 | 5,781 | ||||||
| Hardware | 97,361 | 81,921 | ||||||
| Other (installation, door subscriptions, etc.) | 234,527 | 289,282 | ||||||
| $ | 607,135 | $ | 488,701 | |||||
Cost of Goods Sold
| Year Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Hosting and Data Center Bandwidth | $ | 433,009 | $ | 458,464 | ||||
| Remote Guarding Costs | 60,516 | – | ||||||
| Hardware Costs | 119,942 | 148,628 | ||||||
| Installation and Labor Costs | 111,959 | 167,273 | ||||||
| $ | 725,426 | $ | 774,366 | |||||
Our cost of goods sold for the year ended December 31, 2023 were approximately $725,000 compared to approximately $774,000 for the year ended December 31, 2022, a slight decrease of approximately $49,000 or approximately 6%. This decrease was primarily a result of cost saving measures adopted by the Company, such as a reduction in the use of outside consultants, and a reduction in the Company’s workforce in 2023. As a result, our gross losses for the year ended December 31, 2023 were approximately $118,000 compared to approximately $286,000 for the year ended December 31, 2022, and improvement of approximately $168,000 or approximately 59%.
Operating Expenses.
| Year Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| General and Administrative | $ | 2,365,000 | $ | 3,901,000 | ||||
| Research and Development | 2,014,000 | 3,663,000 | ||||||
| Sales and Marketing | 2,541,000 | 3,580,000 | ||||||
| Goodwill impairment loss | 1,674,000 | – | ||||||
| $ | 8,594,000 | $ | 11,144,000 | |||||
Our operating expenses for the year ended December 31, 2023 were approximately $8,594,000 compared to approximately $11,144,000 for the year ended December 31, 2022, a decrease of approximately $2,550,000 or approximately 23%.
The largest component of our operating expenses were sales and marketing expenses, which were approximately $2,541,000 for the year ended December 31, 2023 compared to approximately $3,580,000 for the year ended December 31, 2022, a decrease of approximately $1,039,000 or approximately 29%. This decrease in sales and marketing expenses was primarily due to a decrease in payroll for our internal sales and marketing staff of approximately $281,000, a decrease in fees related to recruiting services of approximately $235,000, and a decrease in trade show and corporate event expenses and content creation services from third-party marketing service providers of approximately $83,000.
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The second largest component of our operating expenses were general and administrative expenses, which were approximately $2,365,000 for the year ended December 31, 2023 compared to approximately $3,901,000 for the year ended December 31, 2022, a decrease of approximately $1,536,000 or approximately 39%. This decrease in general and administrative expenses was primarily due to decreases in professional services of approximately $546,000, payroll of approximately $427,000, consulting fees of approximately $169,000, and other general operating expenses of approximately $394,000.
The remainder of our operating expenses were primarily comprised of engineering and development expenses, which were approximately $2,014,000 for the year ended December 31, 2023 compared to approximately $3,663,000 for the year ended December 31, 2022, a decrease of approximately $1,649,000 or approximately 45%. This decrease in engineering and development expenses was due to a decrease in payroll as a result of a reduction of headcount in our engineering and development workforce of approximately $424,000, a decrease in consulting fees of approximately $298,000 and $482,000 decrease in Gearbox and operations expenses.
As a part of our reductions in payroll, in July 2023, all of our senior management agreed to decrease their compensation as a group by $180,000 (annualized) for the remainder of the year ended December 31, 2023, and going forward as the Company works towards becoming cash flow positive.
We did an analysis of our goodwill and determined that it had been impaired and recorded an impairment loss of goodwill of $1,674,000 in 2023.
Net Loss
As a result of the foregoing, net loss for the year ended December 31, 2023, was approximately $7,333,000 compared to approximately $11,616,000 for the year ended December 31, 2022, a decrease of approximately $4,283,000 or approximately 37%.
Off-Balance Sheet Arrangements
As of the date of this prospectus we have no off-balance sheet arrangements that are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Liquidity and Capital Resources
Overview
From inception we have funded our operations principally through the net proceeds from sales of our capital stock and to a lesser extent from cash flows generated from operating activities.
Summary of Cash Flows
The following table summarizes our cash flows for the years ended December 31, 2023 and 2022.
| Year Ended December 31, | ||||||||
| (in thousands) | 2023 | 2022 | ||||||
| Net cash (used in) operating activities | $ | (5,716 | ) | $ | (10,922 | ) | ||
| Net cash (used in) investing activities | (43 | ) | (1,805 | ) | ||||
| Net cash provided by financing activities | 387 | $ | 8,494 | |||||
| Cash and cash equivalents at end of period | $ | 4,042 | $ | 9,414 | ||||
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The following table summarizes our cash flows for the six months ended June 30, 2024 and 2023.
| Six Month Ended June 30, | ||||||||
| (in thousands) | 2023 | 2022 | ||||||
| Net cash (used in) operating activities | $ | (2,274 | ) | $ | (3,314 | ) | ||
| Net cash (used in) investing activities | (16 | ) | (6 | ) | ||||
| Net cash (used in) provided by financing activities | (51 | ) | 395 | |||||
| Cash and cash equivalents at end of period | $ | 1,701 | $ | 6,489 | ||||
Operating Activities.
We continue to experience negative cash flows from operations as we expand our business. Our cash flows from operating activities are significantly affected by our cash investments to support the growth of our business in areas such as product and service development and selling, general and administrative. Our operating cash flows are also affected by our working capital needs to support growth and fluctuations in personnel-related expenditures, accounts payable and other current assets and liabilities.
Net cash used in operating activities for the year ended December 31, 2023 was approximately $5,716,000 which reflects our net loss of $9,006,699 and increases in accounts receivable of $49,597 and deferred revenue of $144,074. Accounts payable decreased by $118,789 and the rest was offset by non-cash activities including stock based compensation of $1,154,222 and impairment of goodwill of $1,673,933.
Net cash used in operating activities for the six months ended June 30, 2024 was approximately $2,274,000, which reflects our net loss of $3,569,372 and a decrease in accounts receivable of $151,818, a decrease in inventory of $83,042 and decrease of $75,784 in deferred revenue, which were offset by an increase in accounts payable of $28,449 and non-cash stock based compensation of $817,561.
Investing Activities
Our investing activities have consisted primarily of business combinations and the purchases of assets and equipment. We have invested in assets and equipment to support our headcount growth.
Net cash used in investing activities for the year ended December 31, 2023 was approximately $43,000, which was entirely attributable to purchases of fixed assets.
Net cash used in investing activities for the six months ended June 30, 2024, was approximately $16,000, also entirely attributable to purchases of fixed assets.
Financing Activities
On July 16, 2019, we completed the offer and sale of $388,340 in net proceeds of simple agreements for future equity (“2019 SAFEs”) pursuant to Regulation Crowdfunding under the Securities Act (“Regulation CF”). The 2019 SAFEs had no interest rate or maturity date and were convertible at our election upon completion an equity financing in which we raised at least $1,000,000 in net proceeds (a “Qualified Financing”) at a conversion price equal to the lesser of: (i) a 20% discount to the price paid in the Qualified Financing; and (ii) the price implied by a $7,000,000 valuation cap divided by our capitalization (as defined in the 2109 SAFEs) immediately prior to the Qualified Financing.
On November 1, 2019, we commenced a second offering pursuant to Regulation CF (the “2020 CF Offering”) in which we raised $313,482 in net proceeds from the offer and sale of SAFEs (the “2020 SAFEs” and, together with the 2019 SAFEs, the “SAFEs”). The 2020 SAFEs had no interest rate or maturity date and were convertible upon completion of an equity financing in which we issued shares of preferred stock at a fixed pre-money valuation (a “Preferred Stock Financing”) at a conversion price equal to the lesser of: (i) a 20% discount to the price paid in the Preferred Stock Financing; and (ii) the price implied by a $9,000,000 valuation cap for the first $100,000 raised and thereafter a $10,000,000 valuation cap divided by our capitalization (as defined in the 2020 SAFEs) immediately prior to the Preferred Stock Financing.
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On July 9, 2020, we commenced an offer and sale of up to $50,000,000 in units under pursuant to Regulation A under the Securities Act (“Regulation A”). Each unit consisted of two shares of our Class A common stock and one warrant to purchase one share of Class A common stock. The warrants were immediately exercisable and expired 18 months from the date of issuance. In May of 2021, we filed a post-qualification amendment to our Regulation A offering statement to increase the maximum offering amount to $75,000,000.
Through August 24, 2021, the purchase price of each unit in our offering was $1.00 per unit, and the exercise price of each warrant was $0.75 per warrant share. On August 25, 2021, we filed a supplement to our offering circular and increased the purchase price of each unit to $1.20 per unit, and the exercise price of each warrant to $0.90 per warrant share. On February 21, 2022, we terminated the offering having closed on aggregate gross proceeds of approximately $34.4 million.
On May 19, 2022, we commenced a second Regulation A offering for the offer and sale of up to approximately $58.1 million in units. Each unit consisted of two shares of our Class A common stock and one warrant to purchase one share of Class A common stock. The warrants were immediately exercisable and expired 18 months from the date of issuance. The purchase price of each unit in the offering was $2.00 per unit, and the exercise price of each warrant was $1.50 per warrant share. We raised additional aggregate gross proceeds of approximately $4.5 million in our second Regulation A offering through the Disqualification Event (as hereinafter defined).
On July 10, 2023, we received a “Wells Notice” from the enforcement staff the SEC alleging violations of Sections 17(a)(1), 17(a)(2), and 17(a)(3) of the Securities Act, and Section 10(b) of the Exchange Act, and Rules 10b-5(a), (b) and (c) under the Exchange Act. On September 27, 2023, without admitting or denying the findings, we submitted an offer of settlement to the SEC and agreed to the imposition of an order (the “Order”) which, among other things, states that we violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Section 17(a) of the Securities Act. We also agreed to pay a penalty of $558,071, which has been paid in full.
As a result of the Order (the “Disqualification Event”), we have been disqualified from relying on certain exemptions from registration under the Securities Act for offers and sales of our securities for a period of five years, including the exemption provided by Regulation A.
Our net cash provided by financing activities for the year ended December 31, 2023 was approximately $387,000 compared to approximately $8,494,000 for the year ended December 31, 2022, an decrease of approximately $8,107,000 or 95%. This decrease in cash provided by financing activities is principally the result of the Disqualification Event and our inability to continue our second Regulation A offering. In addition, we converted our SAFEs into shares of Class A Common Stock as part of non-cash items in the year ended December 31, 2022, we had no comparable non-cash items in the year ended December 31, 2023.
Our net cash used in financing activities for the six months ended June 30, 2024 was approximately $51,000 compared to net cash provided by financing activities of approximately $395,000 for the six months ended June 30, 2023, an decrease of approximately $446,000 or 112%. This decrease in cash provided by financing activities is the result of the Disqualification Event and our inability to continue our second Regulation A offering and initial expenses of approximately $51,000 incurred in connection with the registration statement of which this prospectus forms a part.
The following table summarizes our financing activities for the years ended December 31, 2023 and 2022.
| Year Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Proceeds from issuance of Class A common stock | $ | 387 | $ | 8,663 | ||||
| Non-cash: notes and interest paid; converted into Class A common stock | – | (169 | ) | |||||
| $ | 387 | $ | 8,494 | |||||
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The following table summarizes our financing activities for the six months ended June 30, 2024 and 2023.
| Six Month Ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Proceeds from issuance of Class A common stock | $ | – | $ | 394 | ||||
| Registration Statement related costs | (51 | ) | – | |||||
| Non-cash: notes and interest paid; converted into Class A common stock | – | – | ||||||
| $ | (51 | ) | $ | 394 | ||||
Funding Requirements
We anticipate incurring additional losses for the foreseeable future, and we may never become profitable. Furthermore, while we have decreased our operating expenses by reducing our personnel and consultant expenditures, reducing salaries for our executives and employees, and reducing our overall spending, we nevertheless expect expenses to increase in connection with our ongoing activities, particularly as we continue development of our existing and new products and services. In addition, we expect to incur further costs and expenses associated with being a public company.
Our financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Our ability to continue as a going concern is dependent on our ability to further implement our business plan, raise capital, and generate revenues. Our financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty. We have incurred operating losses and negative cash flows from operations since inception. As of June 30, 2024, we had an accumulated deficit of approximately $37,890,000. Management expects to continue to incur operating losses and negative cash flows for the foreseeable future.
As of the six months ended June 30, 2024, we had approximately $1,701 million of cash on hand and approximately $1,777 million of working capital, and our anticipated operating requirements for the next twelve months, assuming the maintenance of our current operations, exceed our available capital resources. We will need to obtain additional financing to fund our operating requirements over the short and long-term and we are working with our investment bankers and financial advisors to obtain bridge financing, which, based on initial feedback from prospective investors, we believe will enable us to fund our operations through at least October 1, 2025, and after which we intend to raise additional capital pursuant to one or more registered offerings of equity or debt securities. If we are unable to raise additional capital or otherwise obtain funding as and when needed or on attractive terms, we could be forced to reduce operations or delay or eliminate new or existing products and services. These factors raise substantial doubt about our ability to continue as a going concern.
We have based the foregoing estimates on assumptions that may prove to be incorrect, and we could use our capital resources sooner than we expect. We have a planning and budgeting process in place to monitor our operating cash requirements, including amounts projected for capital expenditures, which are adjusted as our future funding requirements change. These funding requirements include, but are not limited to, our product and service development, our general and administrative requirements, and the costs of operating as a public company, and are offset by our ability to generate revenue from operations and the availability of equity or debt financing. Furthermore, our balance sheet is currently debt free, which we believe will provide us with additional flexibility in terms of our ability to tap into lines of credit and other types of debt instruments.
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Contractual Obligations and Commitments
In addition to ongoing capital expenditures and working capital needs to fund operations over the next 12 months, our contractual obligations to make future payments primarily relate to our operating lease obligations, capital lease obligations and insurance obligations, all of which are governed by agreements with month-to-month terms, and which are generally terminable after a notice period at any time. We purchase equipment, software and inventory necessary to conduct our operations on an as-needed basis.
During the periods presented we had an outstanding obligation to the SEC pursuant to the terms of a final settlement. See “Business—Legal Proceedings” for additional details regarding the settlement. Our obligation was paid in full on August 9, 2024. We do not have any other long-term debt, capital lease obligations, operating lease obligations or long-term liabilities.
Emerging Growth Company
We are an “emerging growth company,” as defined in the Jump Start Our Business Startups Act of 2012 (“JOBS Act”). As an emerging growth company, we are eligible to take advantage of certain exemptions from various reporting and disclosure requirements that are applicable to public companies that are not emerging growth companies, and we have elected to take advantage of those exemptions. For so long as we remain an emerging growth company, we will not be required to:
| · | have an auditor attestation report on our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”); |
| · | submit certain executive compensation matters to Member advisory votes pursuant to the “say on frequency” and “say on pay” provisions (requiring a non-binding Member vote to approve compensation of certain executive officers) and the “say on golden parachute” provisions (requiring a non-binding Member vote to approve golden parachute arrangements for certain executive officers in connection with mergers and certain other business combinations) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010; or |
| · | disclose certain executive compensation related items, such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation. |
In addition, the JOBS Act provides that an emerging growth company may take advantage of an extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies. This means that an emerging growth company can delay adopting certain accounting standards until such standards are otherwise applicable to private companies. We have elected to take advantage of the extended transition period. Since we will not be required to comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies, our financial statements may not be comparable to the financial statements of companies that comply with public company effective dates. If we were to subsequently elect to comply with these public company effective dates, such election would be irrevocable pursuant to Section 107 of the JOBS Act.
We will remain an emerging growth company for up to five years, or until the earliest of: (i) the last date of the fiscal year during which we had total annual gross revenues of $1.07 billion or more; (ii) the date on which we have, during the previous three-year period, issued more than $1.07 billion in non-convertible debt; or (iii) the date on which we are deemed to be a “large accelerated filer” as defined under Rule 12b-2 under the Exchange Act.
We do not believe that being an emerging growth company will have a significant impact on our business. Also, even once we are no longer an emerging growth company, we still may not be subject to auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act unless we meet the definition of a large accelerated filer or an accelerated filer under Section 12b-2 of the Exchange Act.
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Critical Accounting Estimates
Below is a discussion of the accounting policies that management believes are critical. We consider these policies critical because they involve significant judgments and assumptions and require estimates about matters that are inherently uncertain and because they are important for understanding and evaluating our reported financial results. Our accounting policies have been established to conform with generally accepted accounting principles in the United States of America (“U.S. GAAP”).
Emerging Growth Company Status
We are an “emerging growth company,” as defined in the Jump Start Our Business Startups Act of 2012 (“JOBS Act”). Under Section 107 of the JOBS Act, emerging growth companies are permitted to use an extended transition period provided in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards that have different effective dates for public and private companies. We have elected to use the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we (i) are no longer an emerging growth company, or (ii) affirmatively and irrevocably opt out of the extended transition period provided in Section 7(a)(2)(B). By electing to extend the transition period for complying with new or revised accounting standards, our financial statements may not be comparable to the financial statements of companies that comply with public company effective dates.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in our financial statements and the accompanying notes to the financial statements. Actual results could materially differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash held in major financial institutions, cash on hand and liquid investments with original maturities of three months or less. Cash balances may at times exceed federally insurable limits per institution, however, we deposit our cash and cash equivalents with high credit-quality institutions to minimize credit risk exposure.
Trade Receivables and Credit Policy
We evaluate our trade receivables on a periodic basis to assess whether there are any indicators that the value may be impaired. A trade receivable is considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due from the customer in accordance with the original invoice terms. If a trade receivable is deemed impaired, we are required to establish a reserve for losses in an amount deemed to be both probable and reasonably estimable.
Sales Taxes
Various states impose a sales tax on our sales to non-exempt customers. We collect the sales tax from our customers and remit the entire amount of such sales tax to each respective state. Our accounting policy is to exclude the tax collected and remitted to states from our revenue and cost of sales.
Property and Equipment
Property and equipment are recorded at cost if the expenditure exceeds $2,500. Expenditures for renewals and improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. Expenditures for maintenance and repairs are expensed as incurred. When equipment is retired or sold, the cost and related accumulated depreciation are eliminated from the balance sheet accounts and the resultant gain or loss is reflected in income.
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Depreciation is provided using the straight-line method, based on useful lives of the assets which range from three to fifteen years depending on the asset type.
We review the carrying value of our property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition, and other economic factors.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between marketplace participants at the measurement date under current market conditions (i.e., the exit price).
We categorize our financial instruments, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
Financial assets and liabilities recorded on our balance sheets are categorized based on the inputs to the valuation techniques as follows:
Level 1 – Quoted market prices in active markets for identical assets or liabilities.
Level 2 – Significant other observable inputs (e.g., quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs other than quoted prices that are observable such as interest rate and yield curves, and market-corroborated inputs).
Level 3 – Valuation generated from model-based techniques that use inputs that are significant and unobservable in the market. These unobservable assumptions reflect estimates of inputs that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow methodologies or similar techniques, which incorporate management’s own estimates of assumptions that market participants would use in pricing the instrument or valuations that require significant management judgment or estimation.
Income Taxes
We determine deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
Revenue Recognition
We recognize revenue when a customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services.
To determine revenue recognition for we perform the following steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation.
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Revenue from subscription contracts with customers is recognized ratably over the period that commences on the subscription start date and ending on the date the subscription term expires. Revenue from door and video services is generally recognized at the completion of the professional services. Revenue from sales of controllers and recorders is generally recognized at time of delivery.
Goodwill
Goodwill represents the excess of the purchase price of an acquired business over the fair value of the net tangible and identifiable intangible assets acquired. Goodwill is tested for impairment annually and whenever events or changing circumstances indicate that the carrying amount may not be recoverable.
In assessing goodwill for impairment, we have the option to assess qualitative factors to determine whether events or circumstances indicate that it is more likely than not that the fair value of an asset (or reporting unit) is less than its carrying amount. Performing a qualitative impairment assessment requires an examination of relevant events and circumstances that could have a negative impact on the carrying value of our Company, such as macroeconomic conditions, industry and market conditions, earnings and cash flows, overall financial performance, and other relevant entity-specific events. The estimates of the fair value of our assets (or reporting units) are primarily determined using an income approach based on discounted cash flows. The discounted cash flow methodology requires significant judgment, including estimation of future cash flows, which is dependent on internal forecasts, current and anticipated economic conditions and trends, the estimation of the long-term growth rate of our business, and the determination of our weighted average cost of capital. Changes in the estimates and assumptions incorporated into our impairment assessment could materially affect the determination of fair value and the associated impairment charge.
Recent Accounting Pronouncements
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”). ASU 2023-07 is effective for public entities for fiscal years beginning after December 15, 2023, and interim periods in fiscal years beginning after December 15, 2024, and requires single reporting entities to comply with the expanded reportable segment disclosures outlined in the ASU. The expanded reportable segment disclosures are intended to enhance certain disclosures surrounding significant segment expenses. We are currently evaluating the impact of the new standard on our financial statements.
In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosure” (“ASU 2023-09”). ASU 2023-09 is effective for public entities for fiscal years beginning after December 15, 2024, and interim periods in fiscal years beginning after December 15, 2025, and establishes new income tax requirements in addition to modifying and eliminating certain existing requirements. Under ASU 2023-09, entities must consistently categorize and provide greater disaggregation of information in the rate reconciliation and further disaggregate income taxes paid. We are currently evaluating the impact of the new standard on our financial statements.
In March 2024, the SEC adopted final rules under Release No. 33-11275, The Enhancement and Standardization of Climate-Related Disclosures for Investors (the “Climate Rules”). The Climate Rules require quantitative and qualitative disclosure of certain climate-related information in registration statements and annual reports filed. These disclosures include financial statement footnote disclosure related to the effects of certain severe weather events and other natural conditions. In April 2024, the SEC issued an order staying the Climate Rules pending completion of a judicial review of certain petitions challenging their validity. If the stay is lifted, the effective dates remain unchanged and we remain a smaller reporting company, emerging growth company or non-accelerated filer, the Climate Rules will be effective for our fiscal year ending December 31, 2027. We are currently evaluating the impact of the Climate Rules on our financial statements.
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The JOBS Act
We are an “emerging growth company,” as defined in the Jump Start Our Business Startups Act of 2012 (“JOBS Act”). As an emerging growth company, we are eligible to take advantage of certain exemptions from various reporting and disclosure requirements that are applicable to public companies that are not emerging growth companies, and we intend to take advantage of those exemptions. For so long as we remain an emerging growth company, we will not be required to:
| · | have an auditor attestation report on our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”); |
| · | submit certain executive compensation matters to stockholder advisory votes pursuant to the “say on frequency” and “say on pay” provisions (requiring a non-binding stockholder vote to approve compensation of certain executive officers) and the “say on golden parachute” provisions (requiring a non-binding stockholder vote to approve golden parachute arrangements for certain executive officers in connection with mergers and certain other business combinations) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010; or |
| · | disclose certain executive compensation related items, such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation. |
In addition, the JOBS Act provides that an emerging growth company may take advantage of an extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies. This means that an emerging growth company can delay adopting certain accounting standards until such standards are otherwise applicable to private companies. We intend to take advantage of the extended transition period. Since we will not be required to comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies, our financial statements may not be comparable to the financial statements of companies that comply with public company effective dates. If we were to subsequently elect to comply with these public company effective dates, such election would be irrevocable pursuant to Section 107 of the JOBS Act.
We will remain an emerging growth company for up to five years, or until the earliest of: (i) the last date of the fiscal year during which we had total annual gross revenues of $1.07 billion or more; (ii) the date on which we have, during the previous three-year period, issued more than $1.07 billion in non-convertible debt; or (iii) the date on which we are deemed to be a “large accelerated filer” as defined under Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
We do not believe that being an emerging growth company will have a significant impact on our business. Also, even once we are no longer an emerging growth company, we still may not be subject to auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act unless we meet the definition of a large accelerated filer or an accelerated filer under Section 12b-2 of the Exchange Act.
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Overview
Cloudastructure, Inc. (“Cloudastructure,” “we,” “us,” “our” or the “Company”) was formed under the laws of the State of Delaware on March 28, 2003. We provide an award-winning cloud-based artificial intelligence (“AI”) video surveillance and Remote Guarding (as described below) service built on AI and machine learning platforms.
We operated as a small Silicon Valley startup until early 2021 when we raised over $35 million in funding under Regulation A of the Securities Act of 1933, as amended (the “Securities Act”). With these funds we quickly built a sales, marketing and support structure and achieved a degree of early success in the property management space. As of the date of this prospectus, we have contracts in place with five of the top 10 property management companies on the National Multifamily Housing Council’s (“NMHC’s”) 2024 NMHC’s top 50 list (Greystar Real Estate Partners, Avenue5 Residential, LLC, Cushman & Wakefield, BH Management Services, LLC and FPI Management, Inc.). Our cloud-based solutions allow our customers to provide real-time safety and security solutions for their properties, as well as easily manage security across all of their locations. As of the date of this prospectus, we are focused on expanding into more of our existing top tier customer locations, acquiring additional customers in the property management (“proptech”) space, and we anticipate entering into additional markets in 2024/2025.
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Our intelligent AI solution works by identifying objects (faces, license plates, animals, guns, etc.) in video footage so that property managers can quickly search for those objects. Additionally, our AI and Remote Guarding services provide a proactive response to crime. Remote guarding combines video surveillance, AI analytics, monitoring centers, and security agents (“Remote Guarding”). Based on internal data comparing the total number of actual threatening activity alerts received by our Remote Guards, against all potentially suspicious and threatening activity alerts received by our Remote Guards, on average, from 2023 to the date of this prospectus, our Remote Guarding services deterred over 97% of all threatening activity for our customers. We believe AI security delivers multiple benefits for many property owners, including, without limitation:
| · | Deterring crime and improving overall safety; |
| · | Improving occupancy rates and rental rates; and |
| · | Reducing onsite guard costs and lowering insurance rates |
As of the date of this prospectus, we are the only seamless, cloud-based, AI surveillance and Remote Guarding solution on the market of which we are aware. We also believe that our solution is more affordable and easier to use than the various solutions that our competitors offer. Our Remote Guarding service bridges the line between AI and human intelligence. AI has the ability to monitor all cameras at the same time and all of the time, a task from which humans would fatigue. When the AI detects an event occurring, the Remote Guards are notified. The Remote Guards can then determine if escalation is required. With real-time human intervention, our Remote Guarding service turns video surveillance from a forensic tool, used after a crime has been committed, into a real time crime prevention tool. This has the potential to greatly increase value for our customers.
The Remote Guards follow a series of protocols which may include announcing through a networked speaker “YOU ARE ON VIDEO SURVEILLANCE WITH A LIVE AGENT AND ARE BEING WATCHED AND RECORDED!”. These “talk downs” are so effective that we have found that we rarely have to escalate to law enforcement.
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Our Origin
In 2003, a laptop was stolen from our founder Rick Bentley’s office. He went to the landlord to get the surveillance footage, only to discover a cleaning lady had unplugged the surveillance system to plug in a vacuum cleaner. Dubbing the unsolved theft “The Vacuum Effect,” Rick decided surveillance footage needed to go to the cloud. Our CTO Gregory Rayzman shared this vision for a secure, scalable suite of cloud-based video surveillance, storage, analytics, and monitoring.
Google’s release of Tensorflow, a free and open-source software library for machine learning and artificial intelligence, in 2015 added computer vision, AI, and machine learning to Bentley’s and Rayzman’s vision. Rayzman hand-selected talented engineers in Silicon Valley in the fields of AI, machine learning and user interface, and designed the Cloudastructure platform to scale, and in 2021, the Company raised funding under Regulation A to hire a marketing, sales and implementation team.
Over twenty years later legacy, on-premises video surveillance systems like the system that inspired our founding remain the industry standard. As a result, we believe there is an enormous opportunity to bring innovation and new technology to the field of video surveillance security and eliminate many of the weaknesses of today’s standard surveillance systems.
Our Solutions
Our solutions centralize the management of video surveillance in a collection of servers that host our software and infrastructure and can be accessed over the internet (the “Cloud”). Our Cloud-based model allows customers to scale geographically over multiple locations without complicated or potentially insecure network architectures.
We offer our services and support for a monthly subscription fee, requiring no upfront licensing costs or large capital expenditure budgets. We believe that as we add additional AI capabilities, that we will be able to increase pricing power for our Cloud-based solution.
Our Existing Products and Services
Set forth in the table below is a summary of our existing products and services, their key features and the current target markets that they serve:
| Product / Service | Description and Key Features |
| Cloud Service: Cloud Video Surveillance |
Video surveillance stored in the Cloud with AI Computer Vision built on Machine Learning. Key features include: Secure offsite Cloud storage. AI Computer Vision including face recognition, license plate reading, object detection and more. Multiplatform (e.g., web, phone, tablet) browser-based access. |
| Cloud Service: Remote Guarding |
Browser based Remote Guard call center software, allowing guards to work from any location or time zone. Key features include: customized AI alerts, real time Live View, other AI functions and more. |
| Guard Service: Remote Guards |
Our in-house live agents monitor incoming alerts from the AI, talk down to people onsite through networked speakers, and provide real time notifications to customers or authorities in response to any dangerous or suspicious activity. Customers can use their own guards if desired. |
| Product: Cloud Video Recorder (CVR) |
Our Cloud Video Recorder (“CVR”) is an internet of things (“IoT”) device that securely collects video from cameras and transmits it to our Cloud. The CVR is compatible with most existing or new cameras and stores data even if not connected to the internet. |
| Product: Cameras and Speakers |
We resell networked, IP-based, cameras and speakers. |
| New Product: Mobile Surveillance Trailer |
Our Mobile Surveillance Trailer solution is a solar and battery powered video surveillance tower with wireless broadband that connects to our Cloud Video Surveillance and Remote Guarding services. |
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Select High-Level Product and Service Features
Select high-level features currently available with some of our products and services include:
Tagger
Our Tagger technology generates tags for every object it can identify in a surveillance video. For example, “animal” or “person” or “vehicle.” Enabling our customer search surveillance videos by tag. For example, a customer can search by “person” and see only surveillance videos with people in them.
License Plate Reading
Our License Plate Reading technology reads license plates and then we can search surveillance videos for those license plates.
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Facial Recognition
Our premium feature Facial Recognition technology detects faces and then recognizes those faces. Customers can search for a known person in a database of faces (e.g., conducting a search for an employee named John Doe) or unknown person tagged by the system (e.g., Unknown123). Our system also employs “supervised learning” technologies, which allows our team and the end users to provide feedback on the face recognition. For example, the system can be taught “that’s not Dave, that’s John”, improving accuracy significantly over less advanced systems.
Line Crossing
Our Line Crossing technology can “draw” a virtual line across a camera’s field of view, or a zone around any area (e.g. a door) where a customer wants access restricted. This restriction can be set for specific time periods such as after hours. If the line is crossed or the zone is entered, an alert will be sent to the user and/or remote guards. The technology also possesses directional awareness, so for example, if a customer wishes to only receive an alert when someone enters the pool or enters a parking garage afterhours, they can customize and reduce the number of alerts they receive.
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Remote Guarding
Our cloud-based Remote Guarding solution is seamlessly integrated with our AI surveillance system to make remote guarding more efficient and effective.
| · | Our AI monitors all of the cameras all of the time. |
| · | We are at the forefront of AI and human intelligence, but recognize when humans should be involved. | |
| · | When the AI detects an event requiring human intervention, the Remote Guards are notified. |
| · | Our Remote Guard solution can then verify if there is an issue and escalate as appropriate, for example: |
| o | Communicating to anyone on site through our system’s speakers; |
| o | Escalating the response to customer onsite personnel, if warranted; and |
| o | Calling for emergencies services when required. |
Based on internal data comparing the total number of actual threatening activity alerts received by our Remote Guards, against all potentially suspicious and threatening activity alerts received by our Remote Guards, on average, from 2023 to the date of this prospectus, our Remote Guarding services deterred over 97% of all threatening activity for our customers.
Other Specialized Features
Our products and services employ advanced technology, such as:
| · | AI and machine learning to simultaneously decrease false positives and false negatives, improving overall accuracy; |
| · | Lower light, lower contrast and lower resolution computer vision abilities; |
| · | persistent computer vision, whereby previous and future frames provide context for the analysis of the current frame; |
| · | Increased granularity in search sensitivity on a per object basis; and |
| · | Reducing latency for real time operation like alerts for our Remote Guarding services. |
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Our Product and Service Installation and Delivery Processes
Our typical product and service installation and delivery process is as follows:
First, we install our custom, on-premises CVR, which is configured to work with a customer’s existing video surveillance cameras, is network secure, and simply requires a power source and ethernet connection. The CVR replaces any NVR’s (Network Video Recorder) or other recording devices.
Our CVR then sends all motion viewed by a customer’s surveillance cameras to our Cloud-based systems. Once a customer’s video is on our Cloud, we have a unique advantage over most on-premises solutions in that we can run our customer’s surveillance video through powerful computational devices—e.g., NVIDIA® GPU clusters—which would be impractical and cost-prohibitive for customers to deploy on site. We operate our services through both Cloudastructure owned facilities and third-party facilities (e.g., Amazon Web Services and Google Cloud Platform). Our machine learning software can see across countless cameras more efficiently than humans ever could.
Next, our Cloud-based system indexes objects and faces in a customer’s surveillance video. This means that the video can be searched by tag, for example: “person,” “animal,” “vehicle,” etc. and even by individual faces.
Once our Cloud-based system detects a person, it will attempt to match that person’s face to a face in our database, which allows us to potentially identify a specific person, name, and face.
As part of our product and service installation and delivery process we also provide comprehensive customer onboarding and training to make sure that our customers know how to use our services most effectively.
For customers that also take advantage of our Remote Guarding services, we can set up alerts based on a variety of custom triggers, such as a perimeter being crossed (e.g., someone walking into a restricted area), or movement detection within a designated zone (e.g., tracking to see if anyone enters a swimming pool) with alarms set to any period of the day that our customer would like (e.g., alerts could be set to detect anyone in the pool between 10 PM and 6 AM). Our remote guards monitor customer alarms and warn off intruders in real time (if a speaker is installed) and notify the appropriate response group (law enforcement or otherwise, depending upon the situation) as appropriate. Our Remote Guarding services provide our customers with an opportunity for significant savings when compared to the cost of an on-site physical guard.
Our Business Model
We operate under a Cloud services delivery model. We have found that we can compete most effectively with industry incumbents by pricing our products and services on a per camera per year basis (e.g., $299/year per camera). We believe that under this model we can generate greater recurring revenue than our competitors while simultaneously providing a lower total cost of ownership to our customers. In addition, by leveraging our AI features we are able to achieve security guard-level pricing for our Remote Guarding services (i.e., an additional $816-$1,608/year per camera) which can be 400% or more than we achieve with our surveillance service alone.
We deliver a one-stop security solution to our customers which we believe provides greater quality control over the entire product and service installation and delivery processes. If an installer is required (typically for additional cameras, speakers and conduit/cable), we bundle these services using our trusted partners. In terms of hardware, in addition to our CVR, we also sell cameras and speakers, which are often required at each location.
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Our Market
Our Cloudastructure solutions fall between the intersection of three very large and growing industries AI, Public Cloud, and Security. The worldwide AI market was estimated at $500B in 2023 growing at an annual rate of 19% (Worldwide Semiannual Artificial Intelligence Tracker; February 2022 IDC). According to Gartner Research, the public cloud market was estimated at around $490B in 2023 growing at an annual rate of 20.7% (Gartner Forecasts Worldwide Public Cloud End-User Spending to Reach Nearly $500B in 2023; Gartner, October 31, 2022). The worldwide security market was estimated at $188B in 2023 growing at an annual rate of 11 percent (Gartner Identifies Three Factors Influencing Growth in Security Spending; Gartner October 13, 2022).
We are primarily focused on the multi-family and commercial property markets. According to a 2023 report by Fortune Business Insights, the global proptech market (real estate focused only) is projected to grow from $36.6 billion for 2024 and reach $89.93 billion by 2033, for a compounded annual growth rate of 11.9% during the period (see PropTech Market Report). We believe the rapid advancement of AI, machine learning, and digitization of data is fueling much of this growth.
Additionally, city and county ordinances for mandated surveillance (such as the laws in Prince George County, Maryland, DeKalb County, Georgia, etc., that require multi-family dwellings to install and maintain 24-hour security cameras) are increasing given the availability, affordability and accessibility of advanced security solution.
Cloudastructure contracts with both the ownership and asset management groups of large multi-family properties such as Greystar Real Estate Partners, Avenue5 Residential, LLC, Cushman & Wakefield, BH Management Services, LLC, FPI Management, Inc. and more, each with portfolios of properties in the several hundreds, if not thousands. These groups are looking for cloud-based advanced AI and remote guarding services to increase the security of their properties and improve the overall tenant experience. Security is often one of the most frequently cited problems at multi-family properties as it can lead to higher costs from increased vacancy rates, vandalism, and rising insurance rates.
Although we are primarily focused on the multi-family real estate and commercial property markets, we think it is noteworthy that video surveillance systems can be used in nearly any environment. In our view security and surveillance are necessary for nearly all organizations worldwide. Governments, enterprises, financial institutions and healthcare organizations are all expected or required to have a certain level of security and monitoring measures. As a result, there has been an increase in the demand for security applications, such as video surveillance to monitor and record borders, ports, transportation infrastructure, cities, corporate houses, educational institutes, public places, buildings and others, which is expected to drive the video surveillance market growth globally.
With a technological solutions that use AI, machine learning and digitization of data, Cloudastructure is capitalizing on this growing market need for an end-to-end centralized security system.
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Our Competition
Entities with competing solutions include: Avigilon (a subsidiary of Motorola Solutions, Inc. and our primary competitors in the multi-family space), Milestone Systems A/S (a Canon Inc. subsidiary), Verkada, Inc., Tyco Integrated Security LLC (a business unit of Johnson Controls International plc) and Stealth Monitoring, Inc.. The markets for our products and services are highly competitive, and we are confronted by aggressive competition in all areas of our business. These markets are characterized by frequent product introductions and rapid technological advances that have substantially increased the capabilities and use of AI security and cloud-based video surveillance.
Principal competitive factors important to us include price, product features, relative price/performance, product quality and reliability, design innovation, a strong third-party software and accessories ecosystem, marketing and distribution capability, service and support and corporate reputation.
Our Customer Base
We focus on selling our products and services in the multifamily and commercial property management markets. In our experience, these markets are close-knit and relationship-based, with sales being highly reliant on word-of-mouth recommendations and customer testimonials. Larger property management firms in these markets are very protective of their reputations, and often require a meaningful amount diligence before selecting new, significant vendors. As part of that diligence process, property management firms almost always require references in the form of existing customer interviews, and will likewise generally serve as references to other property management firms for services that they use and enjoy. In our experience, as a newer market entrant, establishing a strong customer list is a critical requirement to ramp up sales, and an important metric used by property management firms when evaluating a prospective vendor. As of the date of this prospectus, we have been vetted through an extensive diligence process by, and signed contracts with, some of the largest property management and ownership groups in the markets in which we operate. Now that we have landed five of the top 10 property management firms (based on National Multifamily Housing Council’s 2024 NMCH 50 list) as clients, as well as many mid-tier property management firms, our strategy is to expand our relationships with these accounts with the goal of becoming the standardized AI security solution across their entire portfolios.
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For the year ended December 31, 2023, SunRoad Enterprises accounted for approximately 18%, and CONAM Management accounted for approximately 9% of our revenues, respectively. As of June 30, 2024, Fairfield Properties accounted for approximately 19%, SunRoad Enterprises accounted for approximately 17%, and CONAM Management accounted for approximately 10% of our revenues, respectively. Other of our customers include the following, with the approximate percentage of revenue generated by each as of June 30, 2024, noted next to their names:
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● Greystar Real Estate Partners* – 2%
● Cushman & Wakefield* – 3%
● FPI Management, Inc.* – 0.05%
● BH Management Services, LLC* – 1.41%
● Avenue5 Residential, LLC*†
● Federal Capital Partners – 7%
● CONAM Management – 10%
● The Wolff Company – 8%
● Second Street Fund†
● The Habitat Company – 1% |
 |
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● American Landmark Apartments – 0.50%
● AJ Capital Partners – 1%
● Fairfield Properties – 19%
● MBK Rental Living – 1%
● The Al Angelo Company – 0.57%
● TruAmerica Multifamily – 7.09%
● The Breeden Company – 6.33%
● PGIM Real Estate – 4.37%
● Gold Crown Management, Inc. – 4.79%
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*Top 10 property management company on the National Multifamily Housing Council’s 2024 NMCH 50 list.
† Avenue 5 Residential, LLC and Second Street Fund are customers of the Company; however, no revenue was generated from these customers during the period ended June 30, 2024, as they were not billed during this period
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Select Customer Accolades
“Our package thefts have disappeared almost
entirely, which is amazing!”
—Zahra Alhisnawi, CONAM
“We are able to stop a crime if it's in
progress!”
—Britney Kalberer, VP Kalberer Properties
“...A gate was damaged multiple times.
With Cloudastructure, we were able to identify the responsible party and recover the funds.”
—Alex Allione, Asset Manager CONAM
"I was able to open the platform on my
laptop at home, see who was there [at the pool] ... and resolve the situation right away. I absolutely love it. Five stars on the whole
thing.”
—Morgan Kottowitz, American Landmark
Typically, our customers pay up front annually for services and sign our subscription and remote guarding agreements which govern the terms of service. Some of our larger customers require monthly billing arrangements. We allow cancellation of our services at any time unless a three-year contract is signed, in which case penalties occur. Specifically for CONAM, our agreements operate on a month-to-month basis and may be terminated by either party upon thirty days’ written notice. Immediate termination is possible under circumstances like non-payment or insolvency. For SunRoad, pricing is structured around an annual commitment, with services prepared and prepaid on an annual basis, and similarly, either party may terminate the agreement upon thirty days’ written notice without penalty. Additionally, we may terminate the agreement if SunRoad fails to pay fees or becomes insolvent. While these agreements are nominally annual contracts that auto-renew, they remain cancellable without penalty, as noted. We do not believe that we are substantially financially dependent on our relationship with any of our customers. Our remote guarding agreements focus on utilizing advanced technology, such as AI-driven surveillance and real-time monitoring, to actively protect property and escalate security incidents to law enforcement. In contrast, our subscription agreements are designed to give customers access to our broader suite of services, including video storage, real-time viewing, and account management features. While both agreements have similar legal structures, the remote guarding agreements are more specialized, emphasizing physical security and monitoring services. Our ideal customer for our solutions is an enterprise business with multiple locations in the multi-family real estate and commercial market space. The material terms of our remote guarding and subscription agreements are summarized below.
Remote Guarding Agreement
The remote guarding agreement includes strict confidentiality provisions, defining “Confidential Information” to encompass all business, financial, and personal details of the customer and related parties, including any recordings made during our services. We agree not to disclose this information without written consent, except as required by law. All intellectual property developed or used under the agreement remains the exclusive property of us and our subcontractors. Late payments incur interest at 1.5% per month, and the customer is responsible for collection costs, including legal fees. We reserve the right to suspend services for non-payment. The agreement operates on a month-to-month basis, terminable by either party with 30 days’ notice. Immediate termination may occur if the customer fails to pay, becomes insolvent, or enters bankruptcy. Liability is limited, with us and our affiliates not responsible for any indirect, incidental, punitive, special, or consequential damages, and total liability is capped at fees paid in the preceding 12 months. We make no warranties whatsoever regarding the services provided, including any implied warranties of merchantability or fitness for a particular purpose. If the customer feels that the service is not meeting agreed-upon levels, they may notify the Company, which will have 30 days to remedy the situation. If unresolved, the customer will not be responsible for fees from the time of notice until the issue is resolved. Disputes are resolved through arbitration in San Francisco under JAMS rules, though provisional remedies may be sought in court.
Subscription Agreement
The terms of our subscription agreement stipulates that any disputes will be resolved through binding arbitration, with both parties waiving the right to a jury trial. Subscribers agree to a subscription service with automatic recurring payments and must ensure payment information is kept current. If a subscriber’s account is delinquent, we reserve the right to suspend access. We grant subscribers a non-transferable license to use our services, subject to compliance with applicable laws and our terms. All intellectual property remains ours, and subscribers are prohibited from unauthorized use or distribution of our materials. Third-party components may be integrated into the service, but we are not responsible for third-party content or software. Prohibited conduct includes unauthorized access, violation of intellectual property rights, and interference with security features. The agreement can be terminated by either party with 30 days’ notice, and we reserve the right to modify or discontinue services without liability for service changes. Subscribers are responsible for indemnifying us for any unauthorized use, while we indemnify subscribers for intellectual property infringement claims. The service is provided “as is,” and we disclaim all implied warranties, limiting our liability to the fees paid in the prior 12 months. We do not assume liability for indirect, consequential, or punitive damages. Additionally, the terms of sale specify that products are sold under FCA (Free Carrier) terms, with title passing upon delivery to the carrier. We retain a security interest in the products until payment is received in full. Subscribers are responsible for complying with U.S. export control laws, sanctions, and anti-corruption regulations, and must not sell or promote our products through unauthorized means, including illegal platforms. Any returns are subject to a 20% restocking charge, and late payments incur interest at a rate of 5% per month.
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Our Employees
As of May 31, 2024, we had 19 full-time employees and two part-time employees. We also use a considerable number of globally-sourced contractors from high-value regions such as India, Brazil and Eastern Europe who are not included in our employee count. None of our employees are represented by labor unions or covered by collective bargaining agreements. We consider the relationship with our employees to be good. We generally enter into agreements with our employees that contain confidentiality provisions to control access to, and invention or work product assignment provisions to clarify ownership of, our proprietary information.
Outsourcing
We currently outsource a number of our key functions to third parties, including some software development, legal and payroll.
In addition, we host our services on cloud platforms provided by Google LLC and Amazon.com, Inc.. There are a number of alternative cloud providers that we could also utilize if necessary. We have been moving more of our services to our own computers in co-location facilities to achieve the same result at lower costs.
Suppliers
We currently utilize third-party suppliers of standard, off-the-shelf computers onto which we install software to turn them into our cloud video recorders. To date, we have bought computers primarily through Amazon.com. Inc., Exxact Corporation, and Newegg Commerce, Inc., but there are a large number of other suppliers from whom we could source these computers should we have to source from alternative providers for any reason. Similarly, we source cameras and speakers primarily from Shenzhen Sunell Technology Corporation, but there are a large number of suppliers from whom we could source for these cameras and speakers should we have to source from alternative providers for any reason.
Strategic Acquisitions
Our core focus is to grow Cloudastructure organically. However, we may selectively evaluate strategic acquisition opportunities that would allow us to expand our footprint, broaden our client base and deepen our product and service offerings. We believe that there are meaningful synergies that result from acquiring small companies that provide unique solutions and opportunities for the Company and our clients. Integrating these solutions into our broader technology and client base and integrating acquisitions into our plan of operations may potentially result in revenues and cost synergies. In 2022, we completed acquisitions of two businesses: Visionful Holding Inc., a company that provided smart parking solutions for transit providers, and Infrastructure Proving Grounds, Inc., an internet-of-things cybersecurity company. However, we are not currently utilizing the assets we acquired from these businesses in our core operations. As of the date of this prospectus, we have not acquired any other businesses, and are not currently pursuing any other acquisitions.
Regulatory Environment
We are subject to a number of U.S. federal and state and foreign laws and regulations that involve matters central to our business. These laws and regulations involve privacy, data protection, intellectual property, competition, consumer protection and other subjects. Although our business is not currently subject to licensing requirements in any of the jurisdictions in which we operate, this does not mean that licensing requirements may not be introduced in one or more jurisdiction in which we operate. Any such licensing requirements, if introduced, could be burdensome and expensive or even impose requirements that we are unable to meet.
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In the ordinary course of business we and customers using our solutions access, collect, store, analyze, transmit and otherwise process certain types of data, including personal information, which subjects us and our customers to certain privacy and information security laws in the United States and internationally, including, for example, the California Consumer Privacy Act (the “CCPA”), which took effect January 1, 2020, and the California Privacy Rights Act (the “CPRA”) which took effect January 1, 2023, and which significantly amended the CCPA, and imposes additional data protection obligations on companies doing business in California, including additional consumer rights processes and opt outs for certain uses of sensitive data and imposes significant data privacy and potential statutory damages related to data protection for the data of California residents.
The CPRA also created a new California data protection agency specifically tasked to enforce the law, which will likely result in increased regulatory scrutiny of California businesses in the areas of data protection and security and may increase our compliance costs and potential liability. In addition to the CCPA, numerous other states’ legislatures have passed or are considering similar laws that will require ongoing compliance efforts and investment. For example, Virginia passed the Virginia Consumer Data Protection Act, and Colorado passed the Colorado Privacy Act, both of which differ from the CPRA and became effective in 2023. Similar laws have been proposed in other states as well and at the federal level. Other international laws are also in place or pending, and such laws may have potentially conflicting requirements that would make compliance challenging.
Under these data protection and privacy laws, we and our customers are required to maintain appropriate technical and organizational measures to ensure the security and protection of personal data and information, and we must comply (either directly or indirectly in support of our customers’ compliance efforts, as may be provided for the agreements we enter into with our customers) with a number of requirements with respect to individuals whose personal data or information we collect and process. Many of these laws and regulations are still evolving and being tested in courts and could be interpreted in ways that could harm our business. In addition, the application and interpretation of these laws and regulations are often uncertain, particularly in the new and rapidly evolving industry in which we operate.
Intellectual Property
We do not have any patents or trademarks on which our business relies. We have engaged intellectual property counsel and pursue intellectual property filings that we and our counsel deem appropriate.
We rely on confidentiality procedures, contractual commitments, and other legal rights to establish and protect our intellectual property. We generally enter into agreements with our employees and consultants that contain confidentiality provisions to control access to, and invention or work product assignment provisions to clarify ownership of, our proprietary information.
Property
Our mailing address is 228 Hamilton Avenue, 3rd Floor, Palo Alto, California 94301, which is a shared office space. The space serves as the location of our corporate headquarters. In August 2022 we signed a two-year lease for space at 655 Skyway Road, San Carlos, California 94070 for $7,368 per month, which serves as our development offices. The lease expires on August 31, 2024.
We believe that our facilities are adequate for our current and anticipated near-term needs and that suitable additional or substitute space would be available if needed.
Legal Proceedings
As previously reported, on September 27, 2023 (the “Order Date”), we reached a final settlement with the SEC relating to alleged violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Section 17(a) of the Securities Act. Without admitting or denying the SEC’s findings, we has consented to: (i) cease and desist from committing or causing any violations and any future violations of Sections 17(a) of the Securities Act and Exchange Act Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; (ii) pay a civil money penalty in the amount of $558,071 to the SEC in the following installments: the first installment of $139,517.75 within ten days of the Order Date; the second installment of $139,517.75 within 120 days of the Order Date; the third installment of $139,517.75 within 240 days of the Order Date; and the last installment of $139,517.75, plus accrued interest, within 365 days of the Order Date. As of the date of this prospectus, the Company has made all required payments under the terms of the settlement.
From time to time, we may be party to litigation arising in the ordinary course of business. Except as described above, as of the date of this prospectus, we are not subject to any material legal proceedings nor, to the best of our knowledge, are any material legal proceedings pending or threatened against us.
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Executive Officers
The following table sets forth certain information, as of the date of this prospectus, concerning our executive officers:
| Name | Age | Position | ||
| James McCormick | 65 | Chief Executive Officer, Director | ||
| Greg Smitherman | 60 | Chief Financial Officer | ||
| Gregory Rayzman | 62 | Chief Technology Officer | ||
| Lauren O’Brien | 59 | Chief Revenue Officer |
The following is a biographical summary of the experience of our executive officers.
James McCormick, Chief Executive Officer, Director
James McCormick has served as a director since November 2021 and was appointed Chief Executive Officer in [June 2024]. Mr. McCormick has over 30 years of experience in finance, operations and administration, primarily in the high tech industry. He has been instrumental in raising over $1 billion in funds for companies in which he was involved, including IPO’s, sales to strategic investors, investments by VC’s and securities sales through the capital markets. He has been involved in numerous M&A activities, both on buy-side and sell-side transactions. His experience has ranged from managing start-up companies to complex, multi-national entities. From May 2019 to present, Mr. McCormick has served as the Chief Operating Officer for LTA Research and Exploration, an aerospace research and development company building experimental and certified manned and remotely piloted airships. From October 2015 to May 2019, Mr. McCormick served as Chief Financial Officer of Global Equipment Services (GES), a company specializing in production process and test equipment design, manufacturing, and global services for the semiconductor and electronics product manufacturing industry. While acting as CFO, Mr. McCormick oversaw the acquisition of GES by Kimball Electronics in an approximately $50 million transaction. He has held CEO, CFO and COO positions at various other public and private companies including Crossing Automation (sold to Brooks Automation (BRKS)), Serious Energy, PodTech, iPrint Technologies (sold to Harland Clarke), Tandem Computers (sold to Hewlett Packard (HPE)) and UB Networks (sold to Alcatel). Mr. McCormick holds a BBA from the University of Toledo and a MBA from the University of Michigan.
Greg Smitherman, Chief Financial Officer.
Greg Smitherman has served as our Chief Financial officer since October 2021. Mr. Smitherman is a hands-on financial executive with over 20 years of M&A and venture capital experience and 10 years of operating experience. Prior to joining the Company, Mr. Smitherman served as Chief Financial Officer of Accelergy Corporation, a producer of specialty chemicals for industrial, food, pharmaceutical, and oil and gas markets, from February 2013 to October 2021. In this position, he managed the company’s financials, and was actively involved in developing and executing on the company’s fundraising strategy and joint venture negotiations, where he oversaw closing on over $20 million in funding. Mr. Smitherman brings extensive tactical, strategic and business planning experience in building and growing companies in multiple industries. He is experienced in successfully managing large and small teams in time-sensitive environments, and has had active roles in M&A transactions, fundraising efforts, and in navigating four companies undergoing IPOs. Mr. Smitherman received his BS in Aerospace Engineering from the University of Michigan, and his MBA from the University of Chicago.
Gregory Rayzman, Chief Technology Officer
Gregory Rayzman has served as our Chief Technology Officer since 2015 and originally joined the Company in 2004. From April 2015 to present, Mr. Rayzman has also served as Chief Technology Officer and Chief Data Architect of SteppeChange, leading various telecom, finance and security projects. Mr. Rayzman is a seasoned technologist and well recognized name in Silicon Valley. His expertise in Big Data and database architecture is sought by several emerging and well-established companies like Apple, where he provided pivotal leadership in designing and developing massively scalable and database backed infrastructures from 2013 to 2015. From May 2010 to March 2015, Mr. Rayzman worked at TheFind, developing a shopping search engine with relevancy and popularity algorithm. TheFind was acquired by Facebook in 2015. Prior to that, Mr. Rayzman served as Chief Data Architect of a forward-looking company NebuAd from 2006 to 2009, where he developed behavior targeting advertising systems based on the aggregate data. He was previously a founding engineer and Chief architect for ITM Software, acquired by BMC. Mr. Rayzman also served as CTO for Claridyne Inc., an IT infrastructure and integration company. Mr. Rayzman was founding engineer and Director of Software Engineering for Annuncio Inc., acquired by PeopleSoft (now Oracle). Mr. Rayzman holds both Bachelor and Master’s degrees in Computer Science from Moscow University and completed his postdoctoral education in Applied Mathematics at the Academy of Science before moving to the United States.
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Lauren O’Brien, Chief Revenue Officer
Lauren O’Brien joined the Company in April 2021 and has served as our Chief Revenue Officer since May 2022. Lauren has over 20 years of executive experience in a variety of sales, sales management, marketing, operations and general management roles. Prior to joining the Company, Lauren most recently served as Chief Operating Officer of VentureBeat, a leading enterprise AI publication. Lauren joined VentureBeat in March 2017, initially serving as VP of Operations, and then as Chief Operating Officer, where she led the company to profitability for the first time in its history while driving sales to double digit growth year over year. Lauren still serves as a Board Advisor to VentureBeat. From 2002 to 2017, she served as Chief Executive Officer of Shift Communications and Consulting, a leading consulting firm providing strategic consulting services to businesses to accelerate growth and improve operations. There, she was directly responsible for driving sales, and delivering strategic consulting services to C-level clients, and often was hired in executive roles for early-stage companies. Ms. O’Brien has extensive experience in sales, marketing and go-to-market strategy building for Cloud-based startups. Ms. O’Brien also led the product strategy team for a $100m CRM company where she was instrumental in securing enterprise sales with the company’s first cloud-based CRM product. Ms. O’Brien has an MBA in Marketing and Finance from University of California, Berkeley and a Bachelor’s Degree from the University of Vermont.
Non-Employee Directors
The following table sets forth certain information, as of the date of this prospectus, concerning our non-employees who serve on our board of directors:
| Name | Age | Position | ||
| Ruba Qashu | 51 | Director | ||
| Jeff Kirby | 60 | Director | ||
| Craig Johnson | 66 | Director |
The following is a biographical summary of the experience of our non-employee directors.
Ruba Qashu, Director
Ruba Qashu has served on our board of directors since April 2023. Ms. Qashu is a partner at Barton LLP, where she has been employed since March 2023. Ms. Qashu serves on Barton LLP’s business and finance team, and her is on capital markets and securities transactions. She has over 20 years of experience as securities counsel for public companies and a substantive history structuring complex transactions and providing strategic counseling. Ms. Qashu’s capital markets experience includes CMPOs, registered direct offerings and PIPEs. Ms. Qashu handles ‘34 Act reporting and advises regarding corporate governance, equity compensation plans and stockholder communications. Prior to joining Barton LLP, she was a Partner at Raines & Feldman. Previously, from 2011 through 2021, she was a Partner at Libertas Law Group. Ms. Qashu holds a B.A. in English Literature from UC Berkeley and a J.D. from Hastings College of Law (now UC Law San Francisco). She is admitted to practice law in the State of California.
Jeff Kirby, Director
Jeff Kirby has served on our board of directors since [June 2024]. Mr. Kirby is the Founder of Resource Management and Development, a real estate investment firm with a seasoned team of commercial real estate service experts founded by Mr. Kirby in 1993. With expertise in master-planned communities and commercial development, Resource Management and Development had roles in developing and managing over 20,000 residential lots in the Northern Nevada market as well as developing over 800,000 square feet of office space in the Reno, Nevada market. Mr. Kirby served as Chief Financial Officer of Avantair from 2004 to 2007. In Mr. Kirby’s more than 25 year-career, he has also consulted on investment and pension fund matters for several prominent trusts and funds, created and managed joint venture partnership business arrangements and involvement in funding and capital generation for private and publicly traded companies, and co-founded North Valley Holdings, the single largest producer of new water rights to municipal markets in Nevada and Northern California. Mr. Kirby received his B.A. in communication and B.S. in psychology from the University of Colorado, Boulder.
Craig Johnson, Director
Craig Johnson has served on our board of directors since June 2024. Mr. Johnson has over 30 years of experience in a variety of Sales Management, Business Development, Marketing, Operations, and General Management positions at large corporations like Honeywell, and various start up organizations. His industry expertise includes Industrial Automation, Building Automation, Technology, and Security. Mr. Johnson earned his Bachelors of Business Administration in Marketing and Management from the University of Wisconsin-Madison and his Masters in Business Administration in Marketing from DePaul University in Chicago. He currently sits on two small company boards, one non-profit board and served as a Reserve Officer in the Armed Forces.
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Family Relationships
There are no family relationships among any of our directors or executive officers.
Board of Directors
Our board of directors currently consists of four directors. Our certificate of incorporation provides that, subject to the rights of holders of any series of our preferred stock to elect directors, the number of directors on our board of directors shall be fixed from time to time solely by resolution of the majority of the total number of authorized directors, whether or not there exist any vacancies in previously authorized directorships. Each of our directors serves a term ending on the next annual meeting of our stockholders following such director’s election or appointment, subject to such director’s earlier death, disqualification, resignation or removal.
Pursuant to our certificate of incorporation, subject to the preferential rights of holders of any series of our preferred stock, any newly created directorship that results from an increase in the number of directors or any vacancy on our board of directors can only be filled by the affirmative vote of a majority of the total number of directors then in office, even if less than a quorum, or by a sole remaining director and cannot be filled by the stockholders. Further, any member of our board of directors or our entire board of directors may only be removed for cause, and then only by the affirmative vote of the holders of at least sixty-six and two-third percent in voting power of our stock.
Under our amended and restated certificate of incorporation, which will become effective in connection with the effectiveness of the registration statement of which this prospectus forms a part, upon the effectiveness of the registration statement of which this prospectus forms a part, our board of directors will be divided into three classes, with directors serving staggered three-year terms.
When considering whether directors have the experience, qualifications, attributes or skills, taken as a whole, to enable our board of directors to satisfy its oversight responsibilities effectively in light of our business and structure, the board of directors focuses primarily on each person’s background and experience as reflected in the information discussed in each of the directors’ individual biographies set forth above. We believe that our directors provide an appropriate mix of experience and skills relevant to the size and nature of our business.
Director Independence
Our board of directors has determined that all members of our board of directors, except James McCormick, are independent directors for purposes of the rules of Nasdaq and the SEC. In making this determination, our board of directors considered the relationships that each non-employee director has with us and all other facts and circumstances that our board of directors deemed relevant, including the beneficial ownership of our Class A common stock and Class B common stock by each non-employee director.
Upon the effectiveness of the registration of which this prospectus forms a part, we expect that the composition and functioning of our board of directors and each of our committees will comply with all applicable requirements of Nasdaq and the rules and regulations of the SEC, subject to applicable phase-in periods for committees.
Staggered Board
In accordance with the terms of our amended and restated certificate of incorporation, which will become effective in connection with the effectiveness of the registration statement of which this prospectus forms a part, our board of directors will be divided into three staggered classes of directors and each will be assigned to one of the three classes. At each annual meeting of our stockholders, a class of directors will be elected for a three-year term to succeed the directors of the same class whose terms are then expiring. The terms of the directors will expire upon the election and qualification of successor directors at the annual meeting of shareholders to be held during the years 2025 for Class I directors, 2026 for Class II directors and 2027 for Class III directors.
| · | Our Class I director will be Ruba Qashu; |
| · | Our Class II director will be Jeff Kirby; and |
| · | Our Class III director will be James McCormick. |
The division of our board of directors into three classes with staggered three-year terms may delay or prevent stockholder efforts to effect a change of our management or a change in our control.
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Board Leadership Structure
Our board of directors is currently chaired by James McCormick. Our corporate governance guidelines further provide the flexibility for our board of directors to modify our leadership structure in the future as it deems appropriate.
Committees of our Board of Directors
Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee, each of which operates pursuant to a charter adopted by our board of directors. Our board of directors may also establish other committees from time to time to assist the board of directors. The composition and functioning of all of our committees complies with all applicable requirements of the Sarbanes-Oxley Act, Nasdaq and SEC rules and regulations. Upon our listing on Nasdaq, each committee’s charter will be available on our website at www.Cloudastructure.com.
Audit Committee
The members of our audit committee are Craig Johnson, Jeff Kirby and Ruba Qashu. Jeff Kirby serves as the chairperson of the committee. Our board of directors has determined that each member of the audit committee is “independent” as that term is defined in Nasdaq rules and has sufficient knowledge in financial and auditing matters to serve on the audit committee. In addition, our board of directors has determined that each member of the audit committee meets the heightened independence requirements for audit committees required under Section 10A of the Exchange Act and related SEC and Nasdaq rules. Our board of directors has determined that Jeff Kirby is an “audit committee financial expert,” as defined under the applicable rules of the SEC. The audit committee’s responsibilities include:
| · | appointing, approving the compensation of and assessing the independence of our independent registered public accounting firm; |
| · | pre-approving auditing and permissible non-audit services, and the terms of such services, to be provided by our independent registered public accounting firm; |
| · | reviewing the overall audit plan with our independent registered public accounting firm and members of management responsible for preparing our financial statements; |
| · | reviewing and discussing with management and our independent registered public accounting firm our annual and quarterly financial statements and related disclosures as well as critical accounting policies and practices used by us; |
| · | coordinating the oversight and reviewing the adequacy of our internal control over financial reporting; |
| · | establishing policies and procedures for the receipt and retention of accounting-related complaints and concerns; |
| · | recommending based upon the audit committee’s review and discussions with management and our independent registered public accounting firm whether our audited financial statements shall be included in our annual report on Form 10-K; |
| · | monitoring the integrity of our financial statements and our compliance with legal and regulatory requirements as they relate to our financial statements and accounting matters; |
| · | preparing the audit committee report required by SEC rules to be included in our annual proxy statement; |
| · | reviewing all related person transactions for potential conflict of interest situations and approving all such transactions; and |
| · | reviewing quarterly earnings releases. |
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Compensation Committee
The members of our compensation committee are Craig Johnson, Jeff Kirby and Ruba Qashu. Ruba Qashu serves as the chairperson of the committee. Our board of directors has determined that each member of the compensation committee is “independent” as that term is defined in Nasdaq rules and is a “non-employee director” under Rule 16b-3 under the Exchange Act. In addition, our board of directors has determined that each member of the compensation committee meets the heightened independence requirements for compensation committee purposes under Section 10C of the Exchange Act and related SEC and Nasdaq rules. The compensation committee’s responsibilities include:
| · | reviewing and approving our philosophy, policies and plans with respect to the compensation of our chief executive officer; |
| · | making recommendations to our board of directors with respect to the compensation of our chief executive officer and our other executive officers; |
| · | reviewing and assessing the independence of compensation advisors; |
| · | overseeing and administering our equity incentive plans; |
| · | reviewing and making recommendations to our board of directors with respect to director compensation; and |
| · | preparing the compensation committee reports required by the SEC, including our “compensation discussion and analysis” disclosure. |
Nominating and Corporate Governance Committee
The members of our nominating and corporate governance committee are Craig Johnson, Jeff Kirby and Ruba Qashu. Craig Johnson serves as the chairperson of the committee. Our board of directors has determined that each member of the nominating and corporate governance committee is “independent” as defined in Nasdaq rules. The nominating and corporate governance committee’s responsibilities include:
| · | developing and recommending to the board of directors criteria for board and committee membership; |
| · | establishing procedures for identifying and evaluating board of director candidates, including nominees recommended by shareholders; |
| · | reviewing the composition of the board of directors to ensure that it is composed of members containing the appropriate skills and expertise to advise us; |
| · | identifying and screening individuals qualified to become members of the board of directors; |
| · | recommending to the board of directors the persons to be nominated for election as directors and to each of the board’s committees; |
| · | developing and recommending to the board of directors a code of business conduct and ethics and a set of corporate governance guidelines; and |
| · | overseeing the evaluation of our board of directors and management. |
Code of Conduct
We have adopted a written code of business conduct and ethics, that applies to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. In connection with the effectiveness of the registration statement of which this prospectus forms a part, a current copy of the code will be posted on our website at www.Cloudastructure.com. If we make any substantive amendments to, or grant any waivers from, the code of business conduct and ethics for any officer or director, we will disclose the nature of such amendment or waiver on our website or in a Current Report on Form 8-K.
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EXECUTIVE AND DIRECTOR COMPENSATION
Executive Compensation
This section discusses the material components of the executive compensation program for our executive officers who are named in the “—2023 Summary Compensation Table” below. For the fiscal year ended December 31, 2023, our “named executive officers” and their positions were as follows:
| · | Richard Bentley, Former Chief Executive Officer and former director; |
| · | Gregory Rayzman, Chief Technology Officer; and |
| · | Greg Smitherman, Chief Financial Officer. |
This discussion may contain forward-looking statements that are based on our current plans, considerations, expectations and determinations regarding future compensation programs. Actual compensation programs that we adopt following the completion of this offering may differ materially from the currently planned programs summarized in this discussion. As an “emerging growth company” and a “smaller reporting company,” each as defined under SEC rules, we are not required to include a compensation discussion and analysis section and have elected to comply with the scaled disclosure requirements applicable to emerging growth companies and smaller reporting companies.
2023 Summary Compensation Table
The following table represents information regarding the total compensation awarded to, earned by or paid to our named executive officers during the fiscal year ended December 31, 2023:
| Name and Principal Position | Year | Salary ($) | Bonus ($) | Option Awards (1) ($) | Total ($) | |||||||||
| Richard Bentley | 2023 | 322,500 | – | 386,379 | 708,879 | |||||||||
| Former Chief Executive Officer and Director | 2022 | 350,000 | 175,000 | 389,568 | 914,568 | |||||||||
| Gregory Rayzman | 2023 | 235,000 | – | 167,309 | 402,309 | |||||||||
| Chief Technology Officer | 2022 | 250,000 | – | 167,963 | 417,963 | |||||||||
| Greg Smitherman | 2023 | 262,500 | – | 192,000 | 454,500 | |||||||||
| Chief Financial Officer | 2022 | 300,000 | – | 192,000 | 492,000 |
| (1) | In accordance with SEC rules, amounts in this column reflect the aggregate grant date fair value of stock options for shares of Class B common stock granted computed in accordance with ASC 718, rather than the amounts paid or realized by the named individual. We provide information regarding the assumptions used to calculate the value of the stock options granted in Note 11 to our audited financial statements included elsewhere in this prospectus | ||||||||||||
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2022 Salaries
In 2022, our named executive officers received an annual base salary to compensate them for services rendered to us. The base salary payable to each named executive officer is intended to provide a fixed component of compensation reflecting the executive’s skill set, experience, role, and responsibilities.
For the fiscal year ended December 31, 2022, Mr. Bentley’s annual base salary was $350,000, Mr. Rayzman’s annual base salary was $250,000 and Mr. Smitherman’s annual base salary was $300,000.
2023 Salaries
In 2023, our named executive officers received an annual base salary to compensate them for services rendered to us. The base salary payable to each named executive officer is intended to provide a fixed component of compensation reflecting the executive’s skill set, experience, role, and responsibilities.
For the fiscal year ended December 31, 2023, Mr. Bentley’s initial annual base salary was $350,000 but was changed to $295,000, Mr. Rayzman’s initial annual base salary was $250,000 but was changed to $220,000 and Mr. Smitherman’s initial annual base salary was $300,000 but was changed to $225,000.
2022 Bonuses
For the fiscal year ended December 31, 2022, Mr. Bentley and Mr. Smitherman were eligible to earn a bonus based on the achievement of goals and milestones, as determined by the Company in its sole discretion. For the fiscal year ended December 31, 2022, Mr. Bentley received a bonus in the amount of $175,000, and Mr. Smitherman did not receive a bonus.
2023 Bonuses
For the fiscal year ended December 31, 2023, Mr. Bentley and Mr. Smitherman were eligible to earn a bonus based on the achievement of goals and milestones, as determined by the Company in its sole discretion. For the fiscal year ended December 31, 2023, Mr. Bentley received a $50,000 bonus, and Mr. Smitherman did not receive a bonus.
Equity Compensation
Our named executive officers each received stock options to purchase shares of Class B common stock that were granted in 2022 and 2023 pursuant to the Company’s Amended 2014 Stock Option Plan. In 2022, Mr. Bentley was awarded stock options to purchase 9,500,000 shares of Class B common stock, Mr. Rayzman was awarded stock options to purchase 4,150,000 shares of Class B common stock and Mr. Smitherman was awarded stock options to purchase 4,800,000 shares of Class B common stock. In 2023, no stock options were awarded to Mr. Bentley, Mr. Rayzman or Mr. Smitherman.
The stock options granted to named executive officers in 2022 and 2023 vest 1/4 on the first anniversary date of employment and 1/48th each month thereafter until fully vested, subject to continued service.
For additional information about the Amended 2014 Stock Option Plan, please see the section titled “—Equity Compensation Plans” below.
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Other Elements of Compensation
Retirement Plans
We participate in Human Capital’s 401(k) retirement savings plan, which is available to all of our employees, including our named executive officers. Our named executive officers are eligible to participate in the Human Capital 401(k) plan on the same terms as other full-time employees. The Company does not provide matching funds to any employee.
Employee Benefits and Perquisites
Health/Welfare Plans. All of our full-time employees, including our named executive officers, are eligible to participate in the Company’s health and welfare plans, including:
| · | medical, dental and vision benefits; |
| · | medical and dependent care flexible spending accounts; |
| · | short-term and long-term disability insurance; and |
| · | life insurance. |
We believe that the employee benefits described above are necessary and appropriate to provide a competitive compensation package to our named executive officers.
Employment Agreements with our Named Executive Officers
James McCormick Employment Agreement
We entered into an employment agreement with Mr. McCormick, dated June 24, 2024, pursuant to which Mr. McCormick serves as our Chief Executive Officer. Mr. McCormick’s employment pursuant to the agreement was “at-will” and was terminable by either party for any reason and with or without notice.
Pursuant to his agreement, Mr. McCormick is entitled to receive an initial base salary of $160,000, which will increase to $295,000 after the Company raises at least $6,000,000. In addition, the agreement provided that Mr. McCormick was eligible to participate in annual performance bonus plans established by the Company from time to time for similarly situated employees, subject to the terms and conditions established by the Company for such bonus plans. Any such bonuses were to be based on the achievement of goals and milestones established by the Company in its sole discretion. The agreement also provided that Mr. McCormick was eligible to participate in Company-sponsored benefits that the Company may offer to similarly situated employees from time to time. All reasonable business expenses that were documented by Mr. McCormick and incurred in the ordinary course of business were to be reimbursed in accordance with the Company’s standard policies and procedures.
Gregory Rayzman Employment Agreement
We have entered into an employment agreement with Mr. Rayzman, dated April 19, 2021, pursuant to which Mr. Rayzman serves as our Chief Technology Officer. Mr. Rayzman’s employment pursuant to the agreement is “at-will” and is terminable by either party for any reason and with or without notice.
Pursuant to his agreement, Mr. Rayzman was entitled to receive an initial base salary of $250,000, which was decreased to $220,000 in 2023. The agreement also provides that Mr. Rayzman was eligible to participate in Company-sponsored benefits that the Company may offer to similarly situated employees from time to time. All reasonable business expenses that are documented by Mr. Rayzman and incurred in the ordinary course of business are to be reimbursed in accordance with the Company’s standard policies and procedures.
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Greg Smitherman Employment Agreement
We have entered into an employment agreement with Mr. Smitherman, dated October 7, 2021, pursuant to which Mr. Smitherman serves as our Chief Financial Officer. Mr. Smitherman’s employment pursuant to the agreement is “at-will” and is terminable by either party for any reason and with or without notice.
Pursuant to his agreement, Mr. Smitherman is entitled to receive an initial base salary of $300,000, which was decreased to $225,000 in 2023. In addition, the agreement provides that Mr. Smitherman is eligible to receive a 25% annual performance bonus upon terms to be negotiated between Mr. Smitherman and the Company. Mr. Smitherman is also eligible to receive equity compensation of approximately 2.5% of the Company. Mr. Smitherman is also eligible to receive severance equal to 3 months’ pay if terminated without cause.
Equity Compensation Plans
The following summarizes the material terms of the Cloudastructure, Inc. Amended 2014 Stock Option Plan.
Amended 2014 Stock Option Plan
On April 16, 2020, our board of directors adopted, and our stockholders approved, our Amended 2014 Stock Option Plan. The Amended 2014 Stock Option Plan provides for the grant of incentive stock options and nonstatutory stock options. The Amended 2014 Stock Option Plan, through the grant of stock awards, is intended to help us secure and retain the services of eligible award recipients, provide incentives for such persons to exert maximum efforts for our success. Through June 30, 2024, we have issued the equivalent of 34,943,500 options with a strike price of the equivalent of $0.004 per share, 27,103,738 options with a strike price of the equivalent of $0.31 per share, 1,098,436 options with a strike price of the equivalent of $0.36 per share, 350,000 options with a strike price of the equivalent of $0.37 per share, and the equivalent of 21,850,000 options with a strike price of the equivalent of $0.45 per share to employees and directors under the Amended 2014 Stock Option Plan. Generally, awards granted by us vest over four years and have an exercise price equal to the estimated fair value of our Class B common stock as determined by our board of directors with consideration given to contemporaneous valuations of our Class B common stock prepared by an independent third-party valuation firm.
As of June 30, 2024, there were the equivalent of 1,354,316 shares available for future issuance under the Amended 2014 Stock Option Plan.
Outstanding Equity Awards at December 31, 2023
The following table presents information regarding outstanding equity awards held by our named executive officers as of December 31, 2023.
| Name | Number of Securities Underlying Unexercised Options Exercisable | Number of Securities Underlying Unexercised Options Unexercisable | Option Exercise Price | Option Expiration Date | |||||
| Richard Bentley | 23,688,583 | 4,947,917 | $ | 0.004-0.31 | April 2029 - January 2032 | ||||
| Gregory Rayzman | 5,915,041 | 2,161,459 | $ | 0.004-0.31 | April 2029 - January 2032 | ||||
| Greg Smitherman | 2,600,000 | 2,200,000 | $ | 0.31 | January 2032 | ||||
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Director Compensation
Non-employee Director Compensation Table
The following table presents the total compensation for each person who served as a non-employee member of our board of directors during the fiscal year ended December 31, 2022. Other than as set forth in the table and described more fully below, we did not pay any compensation, make any equity awards or non-equity awards to, or pay any other compensation to any of the non-employee members of our board of directors in 2022 for their services as members of our board of directors. Richard Bentley, our founder, former Chief Executive Officer and a former director, received no additional compensation for his service as a director. See the section titled “Executive Compensation” for more information on the compensation paid to or earned by Mr. Bentley as an employee for the fiscal year ended December 31, 2022.
| Name | Fees Earned or Paid in Cash ($) | Stock Awards ($) | Option Awards ($) | Total ($) | ||||||||||||
| James McCormick | 100,000 | – | 6,500 | 106,500 | ||||||||||||
| Jeff Karras | 100,000 | – | 6,500 | 106,500 | ||||||||||||
| Jeff Kirby | 100,000 | – | 6,500 | 106,500 | ||||||||||||
The following table presents the total compensation for each person who served as a non-employee member of our board of directors during the fiscal year ended December 31, 2023. Other than as set forth in the table and described more fully below, we did not pay any compensation, make any equity awards or non-equity awards to, or pay any other compensation to any of the non-employee members of our board of directors in 2023 for their services as members of our board of directors. Richard Bentley, our founder, former Chief Executive Officer and a former director, received no additional compensation for his service as a director. See the section titled “Executive Compensation” for more information on the compensation paid to or earned by Mr. Bentley as an employee for the year ended December 31, 2023.
| Name | Fees Earned or Paid in Cash ($) | Stock Awards ($) | Option Awards ($) | Total ($) | ||||||||||||
| James McCormick | 55,250 | – | 6,500 | 61,750 | ||||||||||||
| Ruba Qashu | 7,500 | – | – | 7,500 | ||||||||||||
| Jeff Karras | 37,500 | – | 1,500 | 39,000 | ||||||||||||
| Jeff Kirby | 49,250 | – | 2,500 | 51,750 | ||||||||||||
As of December 31, 2022, the non-employee members of our board of directors held the following aggregate number of unexercised options:
| Name | Number of Securities Underlying Unexercised Options | |||
| James McCormick | 150,000 | |||
| Jeff Karras | 150,000 | |||
| Jeff Kirby | 150,000 | |||
Except as set forth above, no non-employee member of our board of directors held unexercised options or unvested shares of our Class A common stock or Class B Common Stock as of December 31, 2022.
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As of December 31, 2023, the non-employee members of our board of directors held the following aggregate number of unexercised options:
| Name | Number of Securities Underlying Unexercised Options | |||
| James McCormick | 150,000 | |||
| Ruba Qashu | 250,000 | |||
| Jeff Karras | 50,000 | |||
| Jeff Kirby | 56,250 | |||
Except as set forth above, no non-employee member of our board of directors held unexercised options or unvested shares of our Class A common stock or Class B Common Stock as of December 31, 2023.
Non-Employee Director Compensation Policy
Our board of directors has adopted a non-employee director compensation policy that will continue upon the effectiveness of the registration statement of which this prospectus is a part. The policy is designed to enable us to attract and retain, on a long-term basis, highly qualified non-employee directors. Under the policy, each director who is not an employee will be paid cash compensation from and after the completion of this offering as set forth below:
| Position | Annual Retainer | |||
| Non-Employee Director | $ | 12,000 | ||
In addition, the non-employee director compensation policy provides that, upon initial election to our board of directors, each non-employee director will be granted an equity award the equivalent of 500,000 shares of Class A common stock (the “Initial Grant”). Initial Grant will vest over a 4 year period with a 25% vesting at the end of one year and the remaining vesting 1/48th per month.
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CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS
The following is a summary of transactions or series of transactions since inception, or currently proposed transactions or series of transactions, to which we were, or will be, a party, in which the amount involved exceeded, or will exceed, $120,000, and in which any of our directors, executive officers, or to our knowledge, beneficial owners of 5% or more of our capital stock, or any member of the immediate family of, or entities affiliated with, any of the foregoing persons, had, or will have, a direct or indirect material interest.
Aircraft Lease
On September 1, 2023, the Company entered into a dry lease of a Cessna T210N Turbo Centurion plane with Cloud Transport Operations LLC. Richard Bentley, the Company’s former Chief Executive Officer, has an indirect ownership interest in Cloud Transport Operations LLC. This agreement allows the Company to lease the plane for $350 per hour and will cover insurance and maintenance costs.
Additionally, effective September 1, 2023, the Company also entered into a side agreement related to the dry lease agreement with Hydro Hash, Inc., a company of which Mr. Bentley is Chairman and a significant stockholder. Hydro Hash, Inc. agreed, in exchange for use of the plane, to cover 40% of the insurance and maintenance costs for the plane under the dry lease agreement between the Company and Cloud Transport Operations LLC.
Issuance of Shares for Notes Receivable
On February 20, 2020, the Company issued 1,500,000 shares of Class A common stock to Mr. Bentley in exchange for a promissory note receivable for $6,000. The note receivable matures in February 2030 and bears interest at the rate of 1.86% per annum. As of June 30, 2024, this note accrued interest totaling $487.40.
On November 28, 2021, Mr. Bentley exercised options to purchase 3,300,000 shares of Class B common stock. On December 3, 2021, the Company loaned to Mr. Bentley $373,158.84 to pay withholding taxes related to the option exercise. The note representing such loan accrued interest at 2.0% per annum and had a maturity date of December 3, 2022. The note was secured by the 3,300,000 shares of Class B common stock held by Mr. Bentley. On October 13, 2022, Mr. Bentley entered into an agreement with the Company to surrender 1,142,871 shares of his Class B common stock to satisfy the remaining balance of the loan, including interest, in the aggregate amount of $354,289.87, which resulted in this note being repaid in full.
On October 13, 2022, the Company loaned to Mr. Bentley $185,000 to pay income taxes related to the November 28, 2021 option exercise described above. The note representing such loan accrued interest at 3.4% per annum and had a maturity date of October 13, 2023. The note was secured by 2,157,129 shares of Class B common stock held by Mr. Bentley. On October 13, 2023, Mr. Bentley surrendered 614,897 shares of Class B common stock to pay off the remaining balance of the loan, including interest, in the aggregate amount of $190,618.07, which resulted in this note being repaid in full.
Equity and Compensation Arrangements
On April 16, 2020, our board of directors adopted, and our stockholders approved, our Amended 2014 Stock Option Plan. The Amended 2014 Stock Option Plan provides for the grant of incentive stock options and nonstatutory stock options. The Amended 2014 Stock Option Plan, through the grant of stock awards, is intended to help us secure and retain the services of eligible award recipients, provide incentives for such persons to exert maximum efforts for our success. Through June 30, 2024, we have issued the equivalent of 34,943,500 options with a strike price of the equivalent of $0.004 per share, 27,103,738 options with a strike price of the equivalent of $0.31 per share, 1,098,436 options with a strike price of the equivalent of $0.36 per share, 350,000 options with a strike price of the equivalent of $0.37 per share, and the equivalent of 21,850,000 options with a strike price of the equivalent of $0.45 per share to employees and directors under the Amended 2014 Stock Option Plan. Generally, awards granted by us vest over four years and have an exercise price equal to the estimated fair value of our Class B common stock as determined by our board of directors with consideration given to contemporaneous valuations of our Class B common stock prepared by an independent third-party valuation firm.
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PRINCIPAL AND REGISTERED STOCKHOLDERS
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth as of June 20, 2024:
| · | certain information regarding the beneficial ownership of our voting securities (being our Class A common stock and Class B common stock) as of June 30, 2024 by (i) each person or group of affiliated persons known by us to be the beneficial owner of more than 5% of our voting securities, (ii) each of our executive officers, (iii) each of our directors and (iv) all of our directors and executive officers as a group. Except as otherwise indicated, all persons listed below have (i) sole voting power and investment power with respect to their common stock, except to the extent that authority is shared by spouses under applicable law, and (ii) record and beneficial ownership with respect to their common stock; and |
| · | the number of shares of our Class A common stock held by and registered for resale by means of this prospectus for the Registered Stockholders. |
The Registered Stockholders include (i) our affiliates and certain other stockholders with “restricted securities” (as defined in Rule 144 under the Securities Act) who, because of their status as affiliates pursuant to Rule 144 or because they acquired their Class A common stock from an affiliate or us within the prior 12 months, would be unable to sell their securities pursuant to Rule 144 until we have been subject to the reporting requirements of Section 13 or Section 15(d) of the Exchange Act for a period of at least 90 days and (ii) our employees. The Registered Stockholders may, or may not, elect to sell their Class A common stock covered by this prospectus, as and to the extent they may determine. The Registered Stockholders may offer, sell or distribute all or a portion of the shares of Class A common stock hereby registered publicly or through private transactions at prevailing market prices or at negotiated prices. The Registered Stockholders may elect to sell their shares in connection with this Direct Listing and in market transactions following this Direct Listing. As such, we will have no input if and when any Registered Stockholder may, or may not, elect to sell their Class A common stock or the prices at which any such sales may occur. See “Plan of Distribution.”
Information concerning the Registered Stockholders may change from time to time and any changed information will be set forth in supplements to this prospectus, if and when necessary. Because the Registered Stockholders may sell all, some, or none of the Class A common stock covered by this prospectus, we cannot determine the number of Class A common stock that will be sold by the Registered Stockholders, or the amount or percentage of shares of Class A common stock that will be held by the Registered Stockholders upon consummation of any particular sale. In addition, the Registered Stockholders listed in the table below may have sold, transferred, or otherwise disposed of, or may sell, transfer, or otherwise dispose of, at any time and from time to time, our Class A common stock in transactions exempt from the registration requirements of the Securities Act, after the date on which they provided the information set forth in the table below.
The Registered Stockholders are not entitled to any registration rights with respect to our Class A common stock. However, we currently intend to use our reasonable efforts to keep the registration statement effective for a period of 90 days after the effectiveness of the registration statement. We are not party to any arrangement with any Registered Stockholder or any broker-dealer with respect to sales of Class A common stock by the Registered Stockholders. However, we will engage a financial advisor with respect to certain other matters relating to our listing. See “Plan of Distribution.”
In accordance with the rules of the SEC, beneficial ownership includes voting or investment power with respect to securities and includes the Class A common stock issuable pursuant to options and warrants that are exercisable or settled within 60 days of [●] [●], 2024. Shares of Class A common stock issuable pursuant to options and warrants are deemed outstanding for computing the percentage of the class beneficially owned by the person holding such securities but are not deemed outstanding for computing the percentage of the class beneficially owned by any other person. The percentage of beneficial ownership for the following table is based on [●] total shares of Class A common stock outstanding as of [●] [●], 2024.
In the table below, the percentage of beneficial ownership prior to the effectiveness of the registration statement of which this prospectus forms a part is based on, as applicable: (i) [●] shares of our Class A common stock outstanding as of [●] [●], 2024, after giving effect to the Reverse Stock Split; (ii) [●] shares of our Class B common stock outstanding as of [●] [●], 2024, after giving effect to the Reverse Stock Split; and (iii) [●] warrants to purchase shares of our Class A common stock outstanding as of [●] [●], 2024, after giving effect to the Reverse Stock Split.
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Each share of our Class B common stock is entitled to 20 votes per share on all matters submitted to a vote of the stockholders, including the election of directors. The percentage of total voting power in the table below is based on the sum of (i) [●] votes, being the total number of votes associated with the [●] shares of our Class A common stock (with each share of Class A common stock having one vote), (ii) [●] votes, being the total number of votes associated with the [●] shares of Class B common stock (with each share of Class B common stock having 20 votes), and (iii) [●] votes, being the total number of votes associated with the [●] shares of our Class A common stock issuable upon the exercise of outstanding warrants (with each share of Class A common stock having one vote).
The Registered Stockholders have not, nor have they within the past three years had, any position, office, or other material relationship with us, other than as disclosed in this prospectus. See “Management’s Discussion & Analysis of Financial Results and Condition” and “Certain Relationships and Related Party Transactions” for further information regarding the Registered Stockholders. Unless otherwise indicated, the business address of each of the individuals and entities named below is c/o Cloudastructure, Inc., 228 Hamilton Avenue, 3rd Floor, Palo Alto, California 94301.
| Shares Beneficially Owned | ||||||||||||||||||||||||
| Class A Common Stock | Class B Common Stock | Percentage of Total Voting | Shares of Class A Common Stock Being |
|||||||||||||||||||||
| Name of Beneficial Owner | Number | % | Number | % | Power † | Registered | ||||||||||||||||||
| Executive Officers and Directors | ||||||||||||||||||||||||
| James McCormick | – | – | – | [●] | [●] | – | ||||||||||||||||||
| Gregory Rayzman | – | – | – | – | – | – | ||||||||||||||||||
| Greg Smitherman | – | – | 10 | * | – | – | ||||||||||||||||||
| Lauren O’Brien | – | – | – | – | – | – | ||||||||||||||||||
| Ruba Qashu | – | – | – | – | – | – | ||||||||||||||||||
| Jeff Kirby | – | – | – | – | – | – | ||||||||||||||||||
| All executive officers and directors as a group (6 persons) | – | – | 10 | * | * | – | ||||||||||||||||||
| 5% Stockholders | ||||||||||||||||||||||||
| Upward Labs AC/SB LLC(1) | 4,486,465 | 5.37 | – | – | 2.7 | – | ||||||||||||||||||
| Other Registered Stockholders: | ||||||||||||||||||||||||
| Sheldon Bentley (2) | 2,000 | * | 3,042,232 | 75.2 | 37.0 | 1,002,000 | ||||||||||||||||||
| Maxim Partners LLC (3) | 700,000 | * | – | – | * | 700,000 | ||||||||||||||||||
| Code Investment Mgt LLC (4) | 383,280 | * | – | – | * | 383,280 | ||||||||||||||||||
| Ujamaa Ventures II, LLC (5) | ||||||||||||||||||||||||
| Alchemist Accelerator, LLC (6) | 151,598 | * | – | – | * | 151,598 | ||||||||||||||||||
| WAFTT, LLC (7) | 123,738 | * | – | – | * | 123,738 | ||||||||||||||||||
| Arthur J. Dobrzelecki Family Trust (8) | 121,678 | * | – | – | * | 121,678 | ||||||||||||||||||
| OpenDeal Portal LLC (9) | 99,612 | * | – | – | * | 99,612 | ||||||||||||||||||
| James P. Brody (10) | 94,593 | * | – | – | * | 94,593 | ||||||||||||||||||
| Christina Marie Cooley Randolph (11) | ||||||||||||||||||||||||
| Bristow Family Trust (12) | 66,973 | * | – | – | * | 66,673 | ||||||||||||||||||
| Alchemist Accelerator Fund I LLC (13) | 64,970 | * | – | – | * | 64,970 | ||||||||||||||||||
| Ralph Eschenbach (14) | 57,962 | * | – | – | * | 57,962 | ||||||||||||||||||
| M.R.L. KASSOUF Living Trust U/A 03/30/05 (15) | 36,348 | * | – | – | * | 36,348 | ||||||||||||||||||
| Jeffery N. Brown (16) | 35,942 | * | – | – | * | 35,942 | ||||||||||||||||||
| Elizabeth A. Fetter (17) | 20,584 | * | – | – | * | 20,584 | ||||||||||||||||||
| Dennis Leuer (18) | 13,254 | * | – | – | * | 13,254 | ||||||||||||||||||
| Karil Reibold (19) | 7,500 | * | – | – | * | 7,500 | ||||||||||||||||||
| Jim Achugbue (20) | 2,500 | * | – | – | * | 2,500 | ||||||||||||||||||
| Cameron Urban (21) | ||||||||||||||||||||||||
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______________________________________
| * | Represents beneficial ownership of less than 1%. |
| † | The percentage of total voting power represents voting power with respect to all shares of our Class A common stock and Class B common, as one class. Each holder of our Class A common stock is entitled to one vote per share and each holder of our Class B common stock is entitled to 20 votes per share. Holders of our Class A common stock and Class B common stock will vote together as one class on all matters submitted to a vote of our stockholders, except as otherwise expressly provided in our amended and restated certificate of incorporation or required by applicable law. See the section titled “Description of Capital Stock—Voting Rights” for additional information. |
| (1) | Includes 4,486,465 shares of Class A common stock held of record Upward Labs AC/SB LLC. The address for Upward Labs is 115 Broadway, 5th Floor, New York, New York 10006. Shana Schlossber has sole voting and investment power with respect to the Class A common stock held by Upward Labs. |
| (2) | Common stock holdings consist of 2,000 shares of Class A common stock and 3,042,232 shares of Class B common stock. We are registering 1,000,000 Class B shares for conversion into Class A shares, in addition to the 2,000 shares of Class A common stock currently held. The address for Sheldon Bentley is c/o Cloudastructure, Inc. 228 Hamilton Avenue, 3rd Floor, Palo Alto, CA 94301. |
| (3) | The address for Maxim Partners LLC is 300 Park Avenue, 16th Floor, New York, NY 10022. Beny Lee, as an authorized representative of Maxim Partners LLC, may be deemed to have voting and dispositive power over the shares held by Maxim Partners LLC. |
| (4) | The address for Code Investment Management LLC is 2243 Carmelita Drive, San Carlos, CA 94070. Michael Marquez, as an authorized representative of Code Investment Management LLC, may be deemed to have voting and dispositive power over the shares held by Code Investment Management LLC. |
| (5) | The address for Ujamaa Ventures II, LLC is PO Box 3188, Los Altos, CA 94024. Eric Chen, as an authorized representative of Ujamaa Ventures II, LLC, may be deemed to have voting and dispositive power over the shares held by Ujamaa Ventures II, LLC. |
| (6) | The address for Alchemist Accelerator, LLC is 1000 Brickell Avenue, Suite 715 PMB 5087, Miami, FL 33131. Ravi Belani, as an authorized representative of Alchemist Accelerator, LLC, may be deemed to have voting and dispositive power over the shares held by Alchemist Accelerator, LLC. |
| (7) | The address for WAFTT, LLC is 10202 N. Enterprise Drive, Mequon, WI 53092. Todd Sweet, as an authorized representative of WAFTT, LLC, may be deemed to have voting and dispositive power over the shares held by WAFTT, LLC. |
| (8) | The address for the Arthur J. Dobrzelecki Family Trust is c/o Cloudastructure, Inc. 228 Hamilton Avenue, 3rd Floor, Palo Alto, CA 94301. Arthur J. Dobrzelecki, as trustee of the Arthur J. Dobrzelecki Family Trust, may be deemed to have voting and dispositive power over the shares held by the trust. |
| (9) | The address for OpenDeal Portal LLC is 149 5th Avenue, Floor 10, New York, NY 10010. Kristine Rasmussen, as an authorized representative of OpenDeal Portal LLC, may be deemed to have voting and dispositive power over the shares held by OpenDeal Portal LLC. |
| (10) | The address for James P. Brody is c/o Cloudastructure, Inc. 228 Hamilton Avenue, 3rd Floor, Palo Alto, CA 94301. |
| (11) | The address for Christina Marie Cooley Randolph is c/o Cloudastructure, Inc. 228 Hamilton Avenue, 3rd Floor, Palo Alto, CA 94301. |
| (12) | The address for Bristow Family Trust is c/o Cloudastructure, Inc. 228 Hamilton Avenue, 3rd Floor, Palo Alto, CA 94301. Patricia Eileen Bristow, as trustee of the Bristow Family Trust, may be deemed to have voting and dispositive power over the shares held by the trust. |
| (13) | The address for Alchemist Accelerator Fund I LLC is 1000 Brickell Avenue, Suite 715 PMB 5087, Miami, FL 33131. Ravi Belani, as an authorized representative of Alchemist Accelerator Fund I LLC, may be deemed to have voting and dispositive power over the shares held by Alchemist Accelerator Fund I LLC. |
| (14) | The address for Ralph Eschenbach is c/o Cloudastructure, Inc. 228 Hamilton Avenue, 3rd Floor, Palo Alto, CA 94301. |
| (15) | The address for M.R.L. KASSOUF Living Trust U/A 03/30/05 is c/o Cloudastructure, Inc. 228 Hamilton Avenue, 3rd Floor, Palo Alto, CA 94301. Marc Kassouf, as trustee of the M.R.L. KASSOUF Living Trust U/A 03/30/05, may be deemed to have voting and dispositive power over the shares held by the trust. |
| (16) | The address for Jeffery N. Brown is c/o Cloudastructure, Inc. 228 Hamilton Avenue, 3rd Floor, Palo Alto, CA 94301. |
| (17) | The address for Elizabeth A. Fetter is c/o Cloudastructure, Inc. 228 Hamilton Avenue, 3rd Floor, Palo Alto, CA 94301. |
| (18) | The address for Dennis Leuer is c/o Cloudastructure, Inc. 228 Hamilton Avenue, 3rd Floor, Palo Alto, CA 94301. |
| (19) | The address for Karil Reibold is c/o Cloudastructure, Inc. 228 Hamilton Avenue, 3rd Floor, Palo Alto, CA 94301. |
| (20) | The address for Jim Achugbue is c/o Cloudastructure, Inc. 228 Hamilton Avenue, 3rd Floor, Palo Alto, CA 94301. |
| (21) | The address for Cameron Urban is c/o Cloudastructure, Inc. 228 Hamilton Avenue, 3rd Floor, Palo Alto, CA 94301. |
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General
The following description summarizes certain important terms of our capital stock, as they are expected to be in effect in connection with the effectiveness of the registration statement of which this prospectus forms a part. We expect to adopt an amended and restated certificate of incorporation and an amended and restated bylaws that will become effective in connection with the effectiveness of the registration statement of which this prospectus forms a part, and this description summarizes the provisions that are expected to be included in such documents. Because it is only a summary, it does not contain all the information that may be important to you. For a complete description of the matters set forth in this section titled “Description of Capital Stock,” you should refer to our amended and restated certificate of incorporation and our amended and restated bylaws, which are included as exhibits to the registration statement of which this prospectus forms a part, and to the applicable provisions of Delaware law.
Upon consummation of the Direct Listing, after giving effect to the filing and effectiveness of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws, we will be authorized to issue 500,000,000 shares of capital stock, which will consist of: (i) 250,000,000 shares of Class A common stock, par value $0.0001 per share, (ii) 100,000,000 shares of Class B common stock, par value $0.0001 per share and (ii) 150,000,000 shares of preferred stock, par value $0.0001 per share.
Pursuant to our amended and restated certificate of incorporation, our board of directors will have the authority, without stockholder approval except as required by Nasdaq rules, to issue additional shares of our capital stock.
Class A Common Stock
Our amended and restated certificate of incorporation will provide that:
| · | holders of Class A common stock will have voting rights for the election of our directors and all other matters requiring stockholder action, except with respect to amendments to our certificate of incorporation that alter or change the powers, preferences, rights or other terms of any outstanding preferred stock if the holders of such affected series of preferred stock are entitled to vote on such an amendment; |
| · | holders of Class A common stock will be entitled to one vote per share on matters to be voted on by stockholders and also will be entitled to receive such dividends, if any, as may be declared from time to time by our board of directors in its discretion out of funds legally available therefor; |
| · | the payment of dividends, if any, on the Class A common stock will be subject to the prior payment of dividends on any outstanding preferred stock; |
| · | upon our liquidation or dissolution, the holders of Class A common stock will be entitled to receive pro rata all assets remaining available for distribution to stockholders after payment of all liabilities and provision for the liquidation of any shares of preferred stock outstanding at that time; and |
| · | our stockholders have no conversion, preemptive or other subscription rights and there are no sinking fund or redemption provisions applicable to the Class A common stock. |
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Class B Common Stock
Our amended and restated certificate of incorporation will provide that:
| · | holders of Class B common stock will have voting rights for the election of our directors and all other matters requiring stockholder action, except with respect to amendments to our certificate of incorporation that alter or change the powers, preferences, rights or other terms of any outstanding preferred stock if the holders of such affected series of preferred stock are entitled to vote on such an amendment; |
| · | holders of Class B common stock will be entitled to 20 votes per share on matters to be voted on by stockholders and also will be entitled to receive such dividends, if any, as may be declared from time to time by our board of directors in its discretion out of funds legally available therefor; |
| · | the payment of dividends, if any, on the Class B common stock will be subject to the prior payment of dividends on any outstanding preferred stock; |
| · | upon our liquidation or dissolution, the holders of Class B common stock will be entitled to receive pro rata all assets remaining available for distribution to stockholders after payment of all liabilities and provision for the liquidation of any shares of preferred stock outstanding at that time; and |
| · | our stockholders have no conversion, preemptive or other subscription rights and there are no sinking fund or redemption provisions applicable to the Class A common stock. |
Voting Rights
Under Delaware law, holders of our Class A common stock or Class B common stock are entitled to vote as a separate class on any proposed amendment to our amended and restated certificate of incorporation that would increase or decrease the aggregate number of authorized shares of such class, increase or decrease the par value of the shares of such class, or alter or change the powers, preferences, or special rights of the shares of such class in a manner that would adversely affect them. Consequently, in these specific circumstances, holders of a majority of our Class A common stock could defeat any proposed amendment to our amended and restated certificate of incorporation. For instance, if an amendment proposed that the Class A common stock rank junior to the Class B common stock with respect to (i) dividends or distributions, (ii) distribution of proceeds in the event of acquisition, or (iii) any other rights, Delaware law would require a separate vote by our Class A common stockholders. In this scenario, the holders of a majority of our Class A common stock could reject the proposed amendment.
Preferred Stock
Our amended and restated certificate of incorporation will provide that shares of preferred stock may be issued from time to time in one or more series. Our board of directors will be authorized to fix the voting rights, if any, designations, powers, preferences, the relative, participating, optional or other special rights, if any, and any qualifications, limitations and restrictions thereof, applicable to the shares of each series. Our board of directors will be able to, without stockholder approval, issue preferred stock with voting and other rights that could adversely affect the voting power and other rights of the holders of the Class A common stock and could have anti-takeover effects. The ability of our board of directors to issue preferred stock without stockholder approval could have the effect of delaying, deferring or preventing a change of our control or the removal of our existing management.
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Anti-Takeover Effects of our Certificate of Incorporation, Bylaws and Delaware Law
Classified Board
Our amended and restated certificate of incorporation will require our board of directors to be divided into three classes serving staggered three-year terms, with one class elected each year. The classification of directors has the effect of making it more difficult for stockholders to change the composition of our board of directors.
Stockholder Actions by Written Consent
Our amended and restated certificate of incorporation will require that, any action required or permitted to be taken by our stockholders must be effected at a duly-called annual or special meeting of our stockholders and may not be effected by written consent in lieu of a meeting.
Advance Notice Requirements
Our amended and restated bylaws will establish advance notice procedures with regard to stockholder proposals relating to the nomination of candidates for election as directors or new business to be brought before meetings of our stockholders. These procedures will specify that notice of stockholder proposals must be timely given in writing to our corporate secretary prior to the meeting at which the action is to be taken, and define what is considered timely. Our amended and restated bylaws will also specify the requirements as to form and content of all stockholder notices. These requirements may preclude stockholders from bringing matters before the stockholders at an annual or special meeting.
Director Removal and Vacancies
Our amended and restated certificate of incorporation will require that, a member of our board of directors or our entire board may only be removed for cause, and then only by the affirmative vote of the holders of at least sixty-six and two-thirds percent in voting power of our stock entitled to vote on such removal. In addition, our amended and restated certificate of incorporation will require that, any newly created directorship that results from an increase in the number of directors or any vacancy on our board of directors, must be filled solely by the affirmative vote of a majority of the total number of directors then in office, even if less than a quorum, or by a sole remaining director and may not be filled by the stockholders.
Undesignated Preferred Stock
Our amended and restated certificate of incorporation will provide for authorized shares of preferred stock. The existence of authorized but unissued shares of preferred stock may enable our board of directors to discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise. For example, if in the due exercise of its fiduciary obligations, our board of directors were to determine that a takeover proposal is not in the best interests of our shareholders, our board of directors could cause shares of preferred stock to be issued without shareholder approval in one or more private offerings or other transactions that might dilute the voting or other rights of the proposed acquirer or insurgent shareholder or shareholder group. In this regard, our amended and restated certificate of incorporation will grant our board of directors broad power to establish the rights and preferences of authorized and unissued shares of preferred stock. The issuance of shares of preferred stock could decrease the amount of earnings and assets available for distribution to holders of shares of Class A common stock. The issuance may also adversely affect the rights and powers, including voting rights, of these holders and may have the effect of delaying, deterring or preventing a change in our control.
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Exclusive Forum
Our amended and restated certificate of incorporation will provide that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, the federal district court for the District of Delaware) shall, to the fullest extent permitted by law, be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (iii) any action arising pursuant to any provision of the DGCL, our certificate of incorporation or our bylaws, or (iv) any action asserting a claim governed by the internal affairs doctrine. This choice of forum provision would not apply to suits brought to enforce a duty or liability created by the Exchange Act or the Securities Act or any other claim for which the federal district courts of the United States of America shall be the exclusive jurisdiction.
Notwithstanding the foregoing, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce a duty or liability created by the Securities Act or the rules and regulations thereunder and our amended and restated certificate of incorporation will provide that, unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States of America will, to the fullest extent permitted by law, be the sole and exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. While the Delaware courts have determined that such choice of forum provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provisions of our amended and restated certificate of incorporation, but there can be no assurance that the provisions will be enforced by a court in those other jurisdictions.
Moreover, Section 27 of the Exchange Act creates exclusive federal jurisdiction over all claims brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder and our amended and restated certificate of incorporation will provide that the exclusive forum provision does not apply to suits brought to enforce any duty or liability created by the Exchange Act. Accordingly, actions by our stockholders to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder must be brought in federal court.
Any person or entity purchasing or otherwise acquiring or holding any interest in shares of our capital stock shall be deemed to have notice of and consented to the forum provision in our amended and restated certificate of incorporation. Our choice of forum provision may impose additional litigation costs on stockholders in pursuing claims and may limit a stockholder’s ability to bring a claim in a judicial forum that it believes to be favorable for disputes with us or any of our directors, officers or other employees, which may discourage lawsuits with respect to such claims.
Limitation of Liability and Indemnification of Directors and Officers
Our amended and restated certificate of incorporation will provide that our directors and officers will be indemnified by us to the fullest extent authorized by Delaware law.
These provisions may discourage stockholders from bringing a lawsuit against our directors for breach of their fiduciary duty. These provisions also may have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit us and our stockholders. Furthermore, a stockholder’s investment may be adversely affected to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions. We believe that these provisions and insurance are necessary to attract and retain talented and experienced directors and officers. In addition, in connection with the effectiveness of the registration statement of which this prospectus forms a part, we intend to enter into separate indemnification agreements with each of our directors and executive officers.
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Section 203 of the DGCL
As a Delaware corporation, we will be subject to the provisions of Section 203 of the DGCL. This statute prevents certain Delaware corporations, under certain circumstances, from engaging in a “business combination” with an “interested stockholder.” In general, Section 203 defines an “interested stockholder” as an entity or person who, together with the person’s affiliates and associates, beneficially owns 15% or more of the outstanding voting stock of the corporation.
A “business combination” includes a merger or sale of more than 10% of our assets. However, the above provisions of Section 203 of the DGCL do not apply if:
| · | the business combination takes place more than three years after the interested stockholder became an “interested stockholder;” |
| · | our board of directors approves the transaction that made the stockholder an “interested stockholder” prior to the date of the transaction; |
| · | after the completion of the transaction that resulted in the stockholder becoming an interested stockholder, that stockholder owned at least 85% of our voting stock outstanding, other than statutorily excluded shares of Class A common stock; or |
| · | on or subsequent to the date of the transaction, the business combination is approved by our board of directors and authorized at a meeting of our stockholders, and not by written consent, by an affirmative vote of at least two-thirds of the outstanding voting stock not owned by the interested stockholder. |
Listing
We have applied to list our Class A common stock on the Nasdaq Capital Market under the symbol “CSAI”.
Transfer Agent and Registrar
The transfer agent and registrar for our Class A common stock is [●]. The transfer agent and registrar’s address is [●]. The transfer agent and registrar can be contacted by phone at: [●].
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to the listing of our Class A common stock on Nasdaq, there has been no public market for our Class A common stock. Sales of a substantial number of shares our Class A common stock in the public market following our listing on Nasdaq, or the perception that such sales could occur, could adversely affect the public price of our Class A common stock and may make it more difficult for you to sell your shares at a time and price that you deem appropriate. We will have no input if and when any Registered Stockholders may, or may not, elect to sell their shares or the prices at which any such sales may occur.
After the Direct Listing, a total of [●] shares of our Class A common stock will be outstanding, including [●] shares of our Class A common stock registered for resale under the registration statement of which this prospectus forms a part. Any shares not registered hereunder will be “restricted securities,” as that term is defined in Rule 144 under the Securities Act. These restricted securities are eligible for public sale only if they are registered under the Securities Act, including, but not limited to, the shares registered hereunder, or if they qualify for an exemption from registration, including under Rules 144 or 701 under the Securities Act, which are summarized below. Restricted securities also may be sold outside of the United States to non-U.S. persons in accordance with Rule 904 of Regulation S. With the exception of shares owned by our directors, officers and certain stockholders, substantially all of our Class A common stock may be sold after our initial listing on Nasdaq, either by the Registered Stockholders pursuant to this prospectus or by our other existing stockholders in accordance with Rule 144 of the Securities Act.
Rule 144
In general, under Rule 144 as currently in effect, once we have been subject to and in compliance with public company reporting requirements of Section 13 or Section 15(d) of the Exchange Act for at least 90 days, an eligible shareholder is entitled to sell such shares without complying with the manner of sale, volume limitation, or notice provisions of Rule 144, subject to compliance with the public information requirements of Rule 144. To be an eligible shareholder under Rule 144, such shareholder must not be deemed to have been one of our affiliates for purposes of the Securities Act at any time during the 90 days preceding a sale and who has beneficially owned the shares of Class A common stock proposed to be sold for at least six months, including the holding period of any prior owner other than our affiliates. If such a person has beneficially owned the shares of Class A common stock proposed to be sold for at least one year, including the holding period of any prior owner other than our affiliates, then such person is entitled to sell such shares without complying with any of the requirements of Rule 144.
In general, under Rule 144, as currently in effect, our affiliates or persons selling Class A common stock on behalf of our affiliates are entitled to sell shares 90 days after we become a reporting company. Within any three-month period, such shareholders may sell a number of shares that does not exceed the greater of:
| · | 1% of the number of shares of Class A common stock then outstanding, which will equal approximately shares immediately after our registration; or |
| · | the average weekly trading volume of our Class A common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale. |
Sales under Rule 144 by our affiliates or persons selling shares of Class A common stock on behalf of our affiliates also are subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us.
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Rule 701
Rule 701 generally allows a shareholder who was issued shares under a written compensatory plan or contract and who is not deemed to have been our affiliate during the immediately preceding 90 days, to sell these shares in reliance on Rule 144, but without being required to comply with the public information, holding period, volume limitation, or notice provisions of Rule 144. Rule 701 also permits our affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. All holders of Rule 701 shares, however, are required by that rule to wait until 90 days after we become a reporting company before selling those shares under Rule 701.
Registration Statements on Form S-8
We intend to file one or more registration statements on Form S-8 under the Securities Act to register shares of our Class A common stock subject to outstanding stock options or reserved for issuance under our Amended 2014 Stock Plan, as soon as permitted under the Securities Act. Such registration statements will automatically become effective upon filing with the SEC. However, shares registered on Form S-8 may be subject to the volume limitations and the manner of sale, notice, and public information requirements of Rule 144.
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SALE PRICE HISTORY OF OUR CAPITAL STOCK
We have applied to list our Class A common stock on Nasdaq. Prior to the listing of our Class A common stock on Nasdaq, there have been no public market for our Class A common stock. Our Class A common stock has a limited history of trading in private transactions. We sold units to the public in a series of Regulation A offerings. Each unit consisted of two shares of our Class A common stock and one warrant to purchase one share of Class A common stock for a period of 18 months following the date of issuance at an exercise price equal to 75% of the unit price. The unit prices that were sold were $1.00, $1.20, and $2.00.
While Maxim Group LLC, in its capacity as our financial advisor, is expected to consider this information in connection with setting the opening public price of our Class A common stock, this information may have little or no relation to broader market demand for our Class A common stock and thus the opening public price and subsequent public price of our Class A common stock on Nasdaq. As a result, you should not place undue reliance on these historical private sale prices as it may differ materially from the opening public price and subsequent public price of our Class A common stock on Nasdaq.
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MATERIAL
U.S. FEDERAL INCOME TAX CONSEQUENCES
TO NON-U.S. HOLDERS OF OUR CLASS A COMMON STOCK
The following discussion is a summary of the material U.S. federal income tax consequences to non-U.S. holders (as defined below) of the acquisition, ownership, and disposition of our Class A common stock. This discussion is not a complete analysis of all potential U.S. federal income tax consequences relating thereto, does not address the potential application of the Medicare contribution tax on net investment income or the alternative minimum tax, and does not address any estate or gift tax consequences or any tax consequences arising under any state, local, or foreign tax laws, or any other U.S. federal tax laws. This discussion is based on the U.S. Internal Revenue Code of 1986, as amended (the “Code”), Treasury regulations promulgated thereunder, judicial decisions, and published rulings and administrative pronouncements of the Internal Revenue Service (the “IRS”), all as in effect as of the date of this prospectus. These authorities are subject to differing interpretations and may change, possibly retroactively, resulting in U.S. federal income tax consequences different from those discussed below. We have not requested a ruling from the IRS with respect to the statements made and the conclusions reached in the following summary, and there can be no assurance that the IRS or a court will agree with such statements and conclusions.
This discussion is limited to non-U.S. holders who purchase our Class A common stock pursuant to this prospectus and who hold our Class A common stock as a “capital asset” within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion does not address all of the U.S. federal income tax consequences that may be relevant to a particular holder in light of such holder’s particular circumstances. This discussion also does not consider any specific facts or circumstances that may be relevant to holders subject to special rules under the U.S. federal income tax laws, including:
| · | certain former citizens or long-term residents of the United States; |
| · | partnerships or other pass-through entities (and investors therein); |
| · | “controlled foreign corporations;” |
| · | “passive foreign investment companies;” | |
| · | corporations that accumulate earnings to avoid U.S. federal income tax; | |
| · | banks, financial institutions, investment funds, insurance companies, brokers, dealers, or traders in securities; | |
| · | tax-exempt organizations and governmental organizations; | |
| · | tax-qualified retirement plans; | |
| · | persons subject to special tax accounting rules under Section 451(b) of the Code; | |
| · | persons who hold or receive our Class A common stock pursuant to the exercise of any employee stock option or otherwise as compensation; | |
| · | “qualified foreign pension funds” as defined in Section 897(l)(2) of the Code and entities all of the interests of which are held by qualified foreign pension funds; | |
| · | persons that own, or have owned, actually or constructively, more than 5% of our Class A common stock; | |
| · | persons who have elected to mark securities to market; and | |
| · | persons holding our Class A common stock as part of a hedging or conversion transaction or straddle, or a constructive sale, or other risk reduction strategy or integrated investment. |
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If an entity or arrangement that is classified as a partnership for U.S. federal income tax purposes holds our Class A common stock, the U.S. federal income tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership. Partnerships holding our Class A common stock and the partners in such partnerships are urged to consult their own tax advisors about the particular U.S. federal income tax consequences to them of holding and disposing of our Class A common stock.
THIS DISCUSSION IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT ADVICE. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE PARTICULAR U.S. FEDERAL INCOME TAX CONSEQUENCES TO THEM OF ACQUIRING, OWNING, AND DISPOSING OF OUR CLASS A COMMON STOCK, AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER ANY STATE, LOCAL, OR FOREIGN TAX LAWS AND ANY OTHER U.S. FEDERAL TAX LAWS. IN ADDITION, SIGNIFICANT CHANGES IN U.S. FEDERAL TAX LAWS WERE RECENTLY ENACTED. PROSPECTIVE INVESTORS SHOULD ALSO CONSULT WITH THEIR TAX ADVISORS WITH RESPECT TO SUCH CHANGES IN U.S. TAX LAW AS WELL AS POTENTIAL CONFORMING CHANGES IN STATE TAX LAWS.
Definition of Non-U.S. Holder
For purposes of this discussion, a non-U.S. holder is any beneficial owner of our Class A common stock that is not a “U.S. person” or a partnership (including any entity or arrangement treated as a partnership) for U.S. federal income tax purposes. A U.S. person is any person that, for U.S. federal income tax purposes, is or is treated as any of the following:
| · | an individual who is a citizen or resident of the United States; |
| · | a corporation (or any entity treated as a corporation for U.S. federal income tax purposes) created or organized under the laws of the United States, any state thereof or the District of Columbia; |
| · | an estate, the income of which is subject to U.S. federal income tax regardless of its source; or |
| · | a trust (i) whose administration is subject to the primary supervision of a U.S. court and which has one or more U.S. persons who have the authority to control all substantial decisions of the trust, or (ii) that has a valid election in effect under applicable Treasury regulations to be treated as a U.S. person. |
Distributions on Our Class A Common Stock
As described under the section titled “Dividend Policy,” we have never declared or paid dividends on our Class A common stock and do not anticipate paying dividends in the foreseeable future. However, if we make cash or other property distributions on our Class A common stock, such distributions will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Amounts that exceed such current and accumulated earnings and profits and, therefore, are not treated as dividends for U.S. federal income tax purposes will constitute a return of capital and will first be applied against and reduce a holder’s tax basis in our Class A common stock, but not below zero. Any excess amount distributed will be treated as gain realized on the sale or other disposition of our Class A common stock and will be treated as described under the section titled “—Gain On Disposition of Our Class A Common Stock” below.
Subject to the discussion below regarding effectively connected income, backup withholding and FATCA (as defined under the section titled “—Withholding on Foreign Entities” below), dividends paid to a non-U.S. holder of our Class A common stock generally will be subject to U.S. federal withholding tax at a rate of 30% of the gross amount of the dividends or such lower rate specified by an applicable income tax treaty. To receive the benefit of a reduced treaty rate, a non-U.S. holder must furnish us or our withholding agent a valid IRS Form W-8BEN or IRS Form W-8BEN-E (or applicable successor form) certifying such holder’s qualification for the reduced rate. This certification must be provided to us or our withholding agent before the payment of dividends and must be updated periodically. If the non-U.S. holder holds the stock through a financial institution or other agent acting on the non-U.S. holder’s behalf, the non-U.S. holder will be required to provide appropriate documentation to the agent, which then will be required to provide certification to us or our withholding agent, either directly or through other intermediaries.
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If a non-U.S. holder holds our Class A common stock in connection with the conduct of a trade or business in the United States, and dividends paid on our Class A common stock are effectively connected with such holder’s U.S. trade or business (and are attributable to such holder’s permanent establishment or fixed base in the United States if required by an applicable tax treaty), the non-U.S. holder will be exempt from U.S. federal withholding tax. To claim the exemption, the non-U.S. holder must generally furnish a valid IRS Form W-8ECI (or applicable successor form) to the applicable withholding agent.
However, any such effectively connected dividends paid on our Class A common stock generally will be subject to U.S. federal income tax on a net income basis at the regular U.S. federal income tax rates in the same manner as if such holder were a resident of the United States. A non-U.S. holder that is a foreign corporation also may be subject to an additional branch profits tax equal to 30% (or such lower rate specified by an applicable income tax treaty) of its effectively connected earnings and profits for the taxable year, as adjusted for certain items.
Non-U.S. holders that do not provide the required certification on a timely basis, but that qualify for a reduced treaty rate, may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS.
Non-U.S. holders should consult their own tax advisors regarding any applicable income tax treaties that may provide for different rules.
Gain on Disposition of Our Class A Common Stock
Subject to the discussion below regarding backup withholding and FATCA, a non-U.S. holder generally will not be subject to U.S. federal income tax on any gain realized on the sale or other disposition of our Class A common stock, unless:
| · | the gain is effectively connected with the non-U.S. holder’s conduct of a trade or business in the United States and, if required by an applicable income tax treaty, is attributable to a permanent establishment or fixed base maintained by the non-U.S. holder in the United States; |
| · | the non-U.S. holder is a nonresident alien individual present in the United States for 183 days or more during the taxable year of the disposition, and certain other requirements are met; or |
| · | our Class A common stock constitutes a “United States real property interest” by reason of our status as a United States real property holding corporation (“USRPHC”), for U.S. federal income tax purposes at any time within the shorter of the five-year period preceding the disposition or the non-U.S. holder’s holding period for our Class A common stock, and our Class A common stock is not regularly traded on an established securities market during the calendar year in which the sale or other disposition occurs. |
Determining whether we are a USRPHC depends on the fair market value of our U.S. real property interests relative to the fair market value of our other trade or business assets and our foreign real property interests. We believe that we are not currently and do not anticipate becoming a USRPHC for U.S. federal income tax purposes, although there can be no assurance we will not in the future become a USRPHC.
Gain described in the first bullet point above generally will be subject to U.S. federal income tax on a net income basis at the regular U.S. federal income tax rates in the same manner as if such holder were a resident of the United States. A non-U.S. holder that is a foreign corporation also may be subject to an additional branch profits tax equal to 30% (or such lower rate specified by an applicable income tax treaty) of its effectively connected earnings and profits for the taxable year, as adjusted for certain items. Gain described in the second bullet point above will be subject to U.S. federal income tax at a flat 30% rate (or such lower rate specified by an applicable income tax treaty), but may be offset by certain U.S.-source capital losses (even though the individual is not considered a resident of the United States), provided that the non-U.S. holder has timely filed U.S. federal income tax returns with respect to such losses. Gain described in the third bullet point above will generally be subject to U.S. federal income tax in the same manner as gain that is effectively connected with the conduct of a U.S. trade or business (subject to any provisions under an applicable income tax treaty), except that the branch profits tax generally will not apply. Non-U.S. holders should consult their tax advisors regarding any applicable income tax treaties that may provide for different rules.
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Information Reporting and Backup Withholding
Annual reports are required to be filed with the IRS and provided to each non-U.S. holder indicating the amount of dividends on our Class A common stock paid to such holder and the amount of any tax withheld with respect to those dividends. These information reporting requirements apply even if no withholding was required because the dividends were effectively connected with the holder’s conduct of a U.S. trade or business, or withholding was reduced or eliminated by an applicable income tax treaty. This information also may be made available under a specific treaty or agreement with the tax authorities in the country in which the non-U.S. holder resides or is established. Backup withholding, currently at a 24% rate, generally will not apply to payments to a non-U.S. holder of dividends on or the gross proceeds of a disposition of our Class A common stock provided the non-U.S. holder furnishes the required certification for its non-U.S. status, such as by providing a valid IRS Form W-8BEN, IRS Form W-8BEN-E, or IRS Form W-8ECI (or applicable successor form), or certain other requirements are met. Backup withholding may apply if the payor has actual knowledge, or reason to know, that the holder is a U.S. person who is not an exempt recipient.
Backup withholding is not an additional tax. If any amount is withheld under the backup withholding rules, the non-U.S. holder should consult with a U.S. tax advisor regarding the possibility of and procedure for obtaining a refund or a credit against the non-U.S. holder’s U.S. federal income tax liability, if any.
Withholding on Foreign Entities
Sections 1471 through 1474 of the Code and the Treasury regulations promulgated thereunder (collectively, “FATCA”) impose a U.S. federal withholding tax of 30% on certain payments made to a “foreign financial institution” (as specially defined under these rules) unless such institution enters into an agreement with the U.S. government to withhold on certain payments and to collect and provide to the U.S. tax authorities substantial information regarding certain U.S. account holders of such institution (which includes certain equity and debt holders of such institution, as well as certain account holders that are foreign entities with U.S. owners) or an exemption applies. FATCA also generally will impose a U.S. federal withholding tax of 30% on certain payments made to a non-financial foreign entity unless such entity either certifies that it does not have any “substantial United States owners” as defined in the Code or provides the withholding agent a certification identifying certain direct and indirect U.S. owners of the entity or an exemption applies. An intergovernmental agreement between the United States and an applicable foreign country may modify these requirements. Under certain circumstances, a non-U.S. holder might be eligible for refunds or credits of such taxes. The withholding provisions described above currently apply to payments of dividends on our Class A common stock. Prior to the issuance of proposed Treasury regulations described below, withholding taxes under FATCA would have also applied to gross proceeds from sales or other disposition of our Class A common stock. However, the U.S. Treasury Department’s proposed regulations that, if finalized in their present form, would eliminate the federal withholding tax of 30% applicable to the gross proceeds of a sale or other disposition of our Class A common stock. In its preamble to such proposed regulations, the U.S. Treasury Department stated that taxpayers (including withholding agents) may generally rely on the proposed regulations until they are revoked or final regulations are issued.
Under certain circumstances, a non-U.S. holder might be eligible for refunds or credits of such taxes. Prospective investors should consult with their own tax advisors regarding the possible implications of FATCA on an investment in our Class A common stock.
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The Registered Stockholders, and their pledgees, donees, transferees, assignees, or other successors in interest may sell their shares of Class A common stock covered hereby pursuant to brokerage transactions on Nasdaq, or other public exchanges or registered alternative trading venues, at prevailing market prices at any time after the Class A common stock are listed for trading. We are not party to any arrangement with any Registered Stockholder or any broker-dealer with respect to sales of shares of Class A common stock by the Registered Stockholders, except we have engaged a financial advisor with respect to certain other matters relating to the registration of our Class A common stock and listing of our Class A common stock, as further described below. As such, we do not anticipate receiving notice as to if and when any Registered Stockholder may, or may not, elect to sell their shares of Class A common stock or the prices at which any such sales may occur, and there can be no assurance that any Registered Stockholders will sell any or all of their shares of Class A common stock covered by this prospectus.
We will not receive any proceeds from the sale of shares of Class A common stock by the Registered Stockholders. We will recognize costs related to this direct listing and our transition to a publicly-traded company consisting of professional fees and other expenses. We will expense these amounts in the period incurred and not deduct these costs from net proceeds to the issuer as they would be in an initial public offering.
We have engaged Maxim Group LLC (the “Advisor”), as our financial advisor to advise and assist us with respect to certain matters relating to our direct listing (the “Direct Listing”). The services expected to be performed by the Advisor will include providing advice and assistance with respect to defining objectives, analyzing, structuring and planning the Direct Listing, developing and assisting with our investor communication strategy in relation to the Direct Listing, and being available to consult with Nasdaq, including on the day that our shares of Class A common stock are initially listed on the Nasdaq Capital Market.
In addition, the Advisor will determine when our shares of Class A common stock are ready to trade and to approve proceeding with the opening of trading at the Current Reference Price (as defined below). However, the Advisor has not been engaged to participate in investor meetings or to otherwise facilitate or coordinate price discovery activities or sales of our Class A common stock in consultation with us, except as described herein.
On the day that our shares of Class A common stock are initially listed on Nasdaq, Nasdaq will begin accepting, but not executing, pre-opening buy and sell orders and will begin to continuously generate the indicative Current Reference Price on the basis of such accepted orders. The Current Reference Price is calculated each second and, during a 10-minute “Display Only” period, is disseminated, along with other indicative imbalance information, to market participants by Nasdaq on its NOII and BookViewer tools. Following the “Display Only” period, a “Pre-Launch” period begins, during which the Advisor, in its capacity as our financial advisor to perform the functions under Nasdaq Rule 4120(c)(8), must notify Nasdaq that our shares are “ready to trade.” Once the Advisor has notified Nasdaq that our shares of Class A common stock are ready to trade, Nasdaq will calculate the Current Reference Price for our shares of Class A common stock, in accordance with Nasdaq rules. If the Advisor then approves proceeding at the Current Reference Price, Nasdaq will conduct a price validation test in accordance with Nasdaq Rule 4120(c)(8). As part of conducting such price validation test, Nasdaq may consult with the Advisor, if the price bands need to be modified, to select the new price bands for purposes of applying such test iteratively until the validation tests yield a price within such bands. Upon completion of such price validation checks, the applicable orders that have been entered will then be executed at such price and regular trading of our shares of Class A common stock on Nasdaq will commence.
Under Nasdaq rules, the “Current Reference Price” means: (i) the single price at which the maximum number of orders to buy or sell can be matched; (ii) if there is more than one price at which the maximum number of orders to buy or sell can be matched, then it is the price that minimizes the imbalance between orders to buy or sell (i.e. minimizes the number of shares that would remain unmatched at such price); (iii) if more than one price exists under (ii), then it is the entered price (i.e. the specified price entered in an order by a customer to buy or sell) at which our shares of Class A common stock will remain unmatched (i.e. will not be bought or sold); and (iv) if more than one price exists under (iii), a price determined by Nasdaq in consultation with the Advisor in its capacity as our financial advisor. In the event that more than one price exists under (iii), the Advisor will exercise any consultation rights only to the extent that it can do so consistent with the anti-manipulation provisions of the federal securities laws, including Regulation M, or applicable relief granted thereunder.
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In determining the Current Reference Price, Nasdaq’s cross algorithms will match orders that have been entered into and accepted by Nasdaq’s system. This occurs with respect to a potential Current Reference Price when orders to buy shares of Class A common stock at an entered bid price that is greater than or equal to such potential Current Reference Price are matched with orders to sell a like number of shares of Class A common stock at an entered asking price that is less than or equal to such potential Current Reference Price. To illustrate, as a hypothetical example of the calculation of the Current Reference Price, if Nasdaq’s cross algorithms matched all accepted orders as described above, and two limit orders remained—a limit order to buy 500 shares of Class A common stock at an entered bid price of $10.01 per share and a limit order to sell 200 shares of Class A common stock at an entered asking price of $10.00 per share—the Current Reference Price would be selected as follows:
| · | Under clause (i), if the Current Reference Price is $10.00, then the maximum number of additional shares that can be matched is 200. If the Current Reference Price is $10.01, then the maximum number of additional shares that can be matched is also 200, which means that the same maximum number of additional shares would be matched at the price of either $10.00 or $10.01. |
| · | Because more than one price under clause (i) exists, under clause (ii), the Current Reference Price would be the price that minimizes the imbalance between orders to buy or sell (i.e., minimizes the number of shares that would remain unmatched at such price). Selecting either $10.00 or $10.01 as the Current Reference Price would create the same imbalance in the limit orders that cannot be matched, because at either price 300 shares would not be matched. |
| · | Because more than one price under clause (ii) exists, under clause (iii), the Current Reference Price would be the entered price at which orders for shares of Class A common stock at such entered price will remain unmatched. In such case, choosing $10.01 would cause 300 shares of the 500-share limit order with the entered price of $10.01 to remain unmatched, compared to choosing $10.00, where all 200 shares of the limit order with the entered price of $10.00 would be matched, and no shares at such entered price remain unmatched. Thus, Nasdaq would select $10.01 as the Current Reference Price, because orders for shares at such entered price will remain unmatched. The above example (including the prices) is provided solely by way of illustration. |
The Advisor, as the designated financial advisor under Nasdaq Rule 4120(c)(8), will determine when our shares of Class A common stock are ready to trade and approve proceeding at the Current Reference Price primarily based on considerations of volume, timing and price. In particular, the Advisor will determine, based primarily on pre-opening buy and sell orders, when a reasonable amount of volume will cross on the opening trade such that sufficient price discovery has been made to open trading at the Current Reference Price. If the Advisor does not approve proceeding at the Current Reference Price (for example, due to the absence of adequate pre-opening buy and sell interest), the Advisor will request that Nasdaq delay the opening until such a time that sufficient price discovery has been made to ensure that a reasonable amount of volume crosses on the opening trade.
Further, in the highly unlikely event that Nasdaq consults with the Advisor as described in clause (iv) of the definition of Current Reference Price, the Advisor would request that Nasdaq delay the opening to ensure a single opening price within clauses (i), (ii) or (iii) of the definition of the Current Reference Price. Under Nasdaq rules, in the event of such delay, prior to terminating such delay, there will be a 10-minute “Display Only” period during which market participants may enter quotes and orders in shares of our Class A common stock in Nasdaq systems. In addition, beginning at 4:00 a.m., market participants may enter orders in shares of our Class A common stock on Nasdaq. Such orders will be accepted and entered into the system. After the conclusion of the 10-minute “Display Only” period, our Class A common stock will enter a “Pre-Launch” period of indeterminate duration. The “Pre-Launch” period will end and shares of our Class A common stock will be released for trading by Nasdaq when certain conditions are met, including Nasdaq’s receipt of notice from the Advisor that our shares of Class A common stock are ready to trade, after which the Nasdaq system will calculate the Current Reference Price at that time and display it to the Advisor. If the Advisor then approves proceeding, the Nasdaq system will conduct certain validation checks. The Advisor, with concurrence of Nasdaq, may determine at any point during the delay process up through the conclusion of the “Pre-Launch” period to postpone and reschedule the Direct Listing. Neither we nor the Registered Stockholders will be involved in Nasdaq’s price-setting mechanism nor will we or they coordinate or be in communication with the Advisor including with respect to any decision by the Advisor to delay or proceed with trading.
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Similar to a Nasdaq-listed firm-commitment underwritten initial public offering, in connection with the listing of our shares of Class A common stock, buyers and sellers who have subscribed will have access to Nasdaq’s Order Imbalance Indicator (the “Net Order Imbalance Indicator”), a widely available, subscription-based data feed, prior to submitting buy or sell orders. Nasdaq’s electronic trading platform simulates auctions every second to calculate a Current Reference Price, the number of shares of Class A common stock that can be paired off the Current Reference Price, the number of shares of Class A common stock that would remain unexecuted at the Current Reference Price and whether a buy-side or sell-side imbalance exists, or whether there is no imbalance, to disseminate that information continuously to buyers and sellers via the Net Order Imbalance Indicator data feed.
However, because this is not an initial public offering being conducted on a firm-commitment underwritten basis, there will be no traditional book building process (that is, an organized process pursuant to which buy and sell interest is coordinated in advance to some prescribed level – the “book”). Moreover, prior to the opening trade, there will not be a price at which underwriters initially sold shares of Class A common stock to the public, as there would be in a firm-commitment underwritten initial public offering. The lack of an initial public offering price could impact the range of buy and sell orders collected by Nasdaq from various broker-dealers. Consequently, the public price of our shares of Class A common stock may be more volatile than in an initial public offering underwritten on a firm-commitment basis and could, upon being listed on Nasdaq, decline significantly and rapidly.
In addition, to list on Nasdaq, we are also required to have at least three registered and active market makers. We expect that the Advisor will act as a registered and active market maker and will engage other market makers.
In addition to sales made pursuant to this prospectus, the shares of Class A common stock covered by this prospectus may be sold by the Registered Stockholders in private transactions exempt from the registration requirements of the Securities Act. Under the securities laws of some states, shares of Class A common stock may be sold in such states only through registered or licensed brokers or dealers.
A Registered Stockholder may from time to time transfer, distribute (including distributions in kind by Registered Stockholders that are investment funds), pledge, assign, or grant a security interest in some or all the shares of Class A common stock owned by it and, if it defaults in the performance of its secured obligations, the transferees, distributees, pledgees, assignees, or secured parties may offer and sell the shares of Class A common stock from time to time under this prospectus, or under an amendment to this prospectus under applicable provisions of the Securities Act amending the list of the Registered Stockholders to include the transferee, distributee, pledgee, assignee, or other successors in interest as Registered Stockholders under this prospectus. The Registered Stockholders also may transfer the shares in other circumstances, in which case the transferees, distributes, pledgees, or other successors in interest will be the registered beneficial owners for purposes of this prospectus.
A Registered Stockholder that is an entity may elect to make an in-kind distribution of Class A common stock to its members, partners, or stockholders pursuant to the registration statement of which this prospectus forms a part by delivering a prospectus.
If any of the Registered Stockholders utilize a broker-dealer in the sale of the shares of Class A common stock being offered by this prospectus, such broker-dealer may receive commissions in the form of discounts, concessions or commissions from such Registered Stockholder or commissions from purchasers of the shares of Class A common stock for whom they may act as agent or to whom they may sell as principal.
In connection with its engagement as our financial advisor, the Advisor received 700,000 shares of our Class A common stock, which is equal to [●]% of our outstanding Class A common stock, on a fully diluted basis, as of the date of our engagement letter with the Advisor. In addition, the Advisor will be entitled to a cash fee of $[●] (payable upon the Company receiving minimum gross proceeds of $[●]) and that number of shares of Class A common stock equal to 1% of the issued and outstanding Class A common stock upon the successful consummation of the Direct Listing. The Advisor will also be entitled to an expense reimbursement for all reasonable, documented expenses incurred by the Advisor in connection with its engagement, provided that (i) such expenses, other than legal fees, may not exceed $[●] without our prior authorization and (ii) such expenses that constitute legal fees may not exceed $[●].
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In addition, pursuant to our agreement with the Advisor, for a period of 18 months from the date of the consummation of the Direct Listing, if we propose to (i) effect a public offering of our securities on a major U.S. exchange, (ii) effect a private placement of our securities, (iii) enter into certain financing transactions with third parties introduced to us by the Advisor or (iv) propose to enter into certain other transactions with third parties introduced to us by the Advisor, including, without limitation, a merger, acquisition or sale of stock or assets, or other similar transaction, we are obligated to offer to retain the Advisor as our lead underwriter and book running manager, our lead placement or sales agent, or our lead, as applicable, in connection with such financing or transaction, upon such reasonable and customary terms as the Advisor and we may mutually agree, with such terms to be set forth in a separate engagement letter or other agreement between the Advisor and us.
The Advisor will not be engaged to otherwise facilitate or coordinate price discovery activities or the solicitation or sales of shares of our Class A common stock in consultation with us, and will not be permitted to, and will not be instructed by us to, plan or actively participate in any investor education activities, except as described herein.
Prior to the financial advisory services provided by the Advisor to us in connection with the listing of our securities, neither the Advisor nor any affiliates of the Advisor have provided services of any kind to us.
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Saul Ewing LLP, New York, New York, is our legal advisor.
The financial statements for the years ended December 31, 2023 and 2022 included in this prospectus have been audited by Bush & Associates CPA, an independent registered public accounting firm, as set forth in their report appearing herein, and included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act, with respect to the shares of Class A common stock covered by this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits filed therewith. For further information about us and our Class A common stock, we refer you to the registration statement and the exhibits filed therewith. Statements contained in this prospectus regarding the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and in each instance, we refer you to the copy of such contract or other document filed as an exhibit to the registration statement. The SEC maintains a website that contains reports, proxy, and information statements, and other information regarding registrants that file electronically with the SEC. The address of the website is www.sec.gov.
Immediately upon the effectiveness of the registration statement of which this prospectus forms a part, we will become subject to the information and reporting requirements of the Exchange Act and, in accordance with this law, will file periodic reports, proxy statements, and other information with the SEC. These periodic reports, proxy statements, and other information will be available for inspection and copying at the website of the SEC referred to above. We also maintain a website at www.cloudastructure.com. Upon the effectiveness of the registration statement of which this prospectus forms a part, you may access these materials free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. The inclusion of our website address in this prospectus is an inactive textual reference only. The information contained in or accessible through our website is not part of this prospectus or the registration statement of which this prospectus forms a part, and investors should not rely on such information in making a decision to purchase shares of our Class A common stock.
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| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of
Cloudastructure Inc.
OPINION ON THE FINANCIAL STATEMENTS
We have audited the accompanying balance sheet of Cloudastructure Inc. (the “Company”) as of December 31, 2023 and 2022, the related statements of operations and comprehensive loss, stockholders’ equity and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
GOING CONCERN
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered net losses from operations, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters are discussed in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
BASIS FOR OPINION
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgements. We determined that there are no critical audit matters.
/s/Bush & Associates CPA LLC
We have served as the Company’s auditor since 2024.
Henderson, Nevada
July 1, 2024
PCAOB ID Number 6797
| F-2 |
Cloudastructure, Inc.
(in thousands, except share and per share numbers)
| As of December 31, | ||||||||
| 2023 | 2022 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 4,042 | $ | 9,414 | ||||
| Accounts receivable | 351 | 301 | ||||||
| Inventory | 315 | 291 | ||||||
| Other current assets | 122 | 355 | ||||||
| Total current assets | 4,830 | 10,361 | ||||||
| Non-current assets: | ||||||||
| Fixed assets, net | 125 | 291 | ||||||
| Intangible assets, net | – | 1,674 | ||||||
| TOTAL ASSETS | $ | 4,954 | $ | 12,326 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 27 | 146 | |||||
| Accrued expenses | 48 | (20 | ) | |||||
| Deferred revenue | 197 | 53 | ||||||
| Total current liabilities | 272 | 179 | ||||||
| TOTAL LIABILITIES | 272 | 179 | ||||||
| Stockholders’ equity: | ||||||||
| Class A common stock, $0.0001 par value; 250,000,000 shares authorized; 82,828,681 and 81,978,086 shares issued and outstanding at December 31, 2023 and December 31, 2022, respectively | 8 | 8 | ||||||
| Class B common stock, $0.0001 par value; 100,000,000 shares authorized; 4,523,120 and 5,138,017 shares issued and outstanding at December 31, 2023 and December 31, 2022, respectively | – | 1 | ||||||
| Additional paid-in capital | 38,994 | 37,453 | ||||||
| Accumulated deficit | (34,321 | ) | (25,314 | |||||
| TOTAL STOCKHOLDERS’ EQUITY | 4,682 | 12,147 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 4,954 | $ | 12,326 | ||||
See accompany notes to the financial statements.
| F-3 |
Cloudastructure, Inc.
(in thousands, except share and per share numbers)
| Years Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Revenues, net | $ | 607 | $ | 489 | ||||
| Less: cost of goods sold | (725 | ) | (774 | ) | ||||
| Gross profit (loss) | (118 | ) | (286 | ) | ||||
| Operating expenses: | ||||||||
| General and administrative | 2,365 | 3,901 | ||||||
| Research and development | 2,014 | 3,663 | ||||||
| Sales and marketing | 2,541 | 3,580 | ||||||
| Goodwill impairment loss | 1,674 | |||||||
| Total operating expenses | 8,594 | 11,144 | ||||||
| Loss from operations | (8,713 | ) | (11,430 | ) | ||||
| Other expenses, net: | ||||||||
| Interest expense | 55 | (10 | ) | |||||
| Depreciation (expense) | (209 | ) | (196 | ) | ||||
| Other income (expense) | (140 | ) | 10 | |||||
| Net loss | $ | (9,007 | ) | $ | (11,626 | ) | ||
| Basic and diluted (loss) per share of Class A and Class B common stock | $ | (0.10 | ) | $ | (0.15 | ) | ||
See accompany notes to the financial statements.
| F-4 |
Cloudastructure, Inc.
Statement of Stockholders’ Equity
(in thousands, except share and per share numbers)
| Class A Common Stock | Class B Common Stock | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Equity (Deficit) | ||||||||||||||||||||||
| Balance as of January 1, 2022 | 65,317,589 | $ | 6.5 | 6,280,888 | $ | 1 | $ | 26,092 | $ | (13,688 | ) | $ | 12,411 | |||||||||||||||
| Issuances of Class A common stock, net of issuance costs | 16,313,032 | 1.65 | (1,142,871 | ) | (0.11 | ) | 8,662 | – | 8,664 | |||||||||||||||||||
| Conversion of notes payable into Class A common stock | 347,466 | 0.03 | – | – | 1,309 | – | 1,309 | |||||||||||||||||||||
| Stock-based compensation | – | – | – | – | 1,309 | – | 1,309 | |||||||||||||||||||||
| Net loss | – | – | – | – | – | (11,626 | ) | (11,626 | ) | |||||||||||||||||||
| Balance as of January 1, 2023 | 81,978,090 | $ | 8.20 | 5,138,017 | $ | 1 | $ | 37,453 | $ | (25,314 | ) | $ | 12,148 | |||||||||||||||
| Issuances of Class A common stock, net of issuance costs | 850,595 | – | (614,897 | ) | – | 387 | – | 387 | ||||||||||||||||||||
| Stock-based compensation | – | – | – | – | 1,154 | – | 1,154 | |||||||||||||||||||||
| Net loss | – | – | – | – | – | (9,007 | ) | (9,007 | ) | |||||||||||||||||||
| Balance as of December 31, 2023 | 82,828,685 | $ | 8 | 4,523,150 | $ | – | $ | 38,994 | $ | (34,321 | ) | $ | 4,682 | |||||||||||||||
See accompany notes to the financial statements.
| F-5 |
Cloudastructure, Inc.
(in thousands)
| Years Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net Loss | $ | (9,007 | ) | $ | (11,626 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 209 | 196 | ||||||
| Stock-based compensation | 1,154 | 1,309 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| (Increase) decrease in accounts receivable | (50 | ) | (8 | ) | ||||
| (Increase) decrease in other current assets | 209 | (233 | ) | |||||
| Increase (decrease) in accounts payable | (119 | ) | (250 | ) | ||||
| Increase (decrease) in accrued expenses | 69 | (233 | ) | |||||
| Increase (decrease) in deferred revenue | 144 | 1 | ||||||
| Increase (decrease) in interest payable | – | (79 | ) | |||||
| (Increase) decrease in intangibles | 1,674 | – | ||||||
| Net cash provided by (used in) operating activities | (5,716 | ) | (10,922 | ) | ||||
| Cash Flows from Investing Activities | ||||||||
| Purchase of fixed assets | (43 | ) | (131 | ) | ||||
| Acquisition of intangible assets | – | (1,674 | ) | |||||
| (43 | ) | (1,805 | ) | |||||
| Cash Flows from Financing Activities | ||||||||
| Proceeds from issuance of Class A common stock | 387 | 8,663 | ||||||
| Non-cash: notes and interest paid; converted into Class A common stock | – | (169 | ) | |||||
| Net cash provided by financing activities | 387 | 8,494 | ||||||
| Net change in cash | (5,373 | ) | (4,233 | ) | ||||
| Cash at beginning of period | 9,414 | 13,647 | ||||||
| Cash at end of period | $ | 4,042 | $ | 9,414 | ||||
See accompany notes to the financial statements.
| F-6 |
Cloudastructure, Inc.
Note 1 – Nature of Operations
Cloudastructure, Inc. (“Cloudastructure” or the “Company”) was formed on March 28, 2003, as a corporation organized under the laws of the State of Delaware and is headquartered in Florida. The Company is a technology service provider that focuses on intelligent devices and software for physical security applications. Since inception, the Company has relied primarily on financing activities, including an offering under Regulation A of the Securities Act of 1933, as amended (“Regulation A”), to fund its operations.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, all adjustments considered necessary for the fair presentation of the financial statements for the years presented have been included.
Use of Estimates
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the footnotes thereto. Actual results could differ from those estimates.
Risks and Uncertainties
The Company has a limited operating history. The Company’s business and operations are sensitive to general business and economic conditions in the United States. A host of factors beyond the Company’s control could cause fluctuations in these conditions. Adverse conditions may include, without limitation, recession, downturn or otherwise, changes in regulations or restrictions on imports, competition or changes in consumer taste. These or other adverse conditions could affect the Company’s financial condition and the results of its operations.
Cash and Cash Equivalents
The Company considers short-term, highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. Cash consists of funds held in the Company’s checking account. The Company maintains its cash with a major financial institution located in the United States, which it believes to be creditworthy. The Federal Deposit Insurance Corporation insures balances up to $250,000, but at times the Company may maintain balances in excess of federally insured limits.
Receivables and Credit Policy
Trade receivables from customers are uncollateralized customer obligations due under normal trade terms. Trade receivables are stated at the amount billed to the customer. Payments of trade receivables are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the earliest unpaid invoice. The Company routinely assesses its outstanding accounts receivable and recorded a reserve for estimated uncollectible accounts of $82,090 and $8,073 at December 31, 2023 and 2022, respectively.
Sales Taxes
Various states impose a sales tax on the Company’s sales to non-exempt customers. The Company collects the sales tax from customers and remits the entire amount to each respective state. The Company’s accounting policy is to exclude the tax collected and remitted to the states from revenue and cost of sales.
| F-7 |
Property and Equipment
Property and equipment are recorded at cost if the expenditure exceeds $2,500. Expenditures for renewals and improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. Expenditures for maintenance and repairs are expensed as incurred. When equipment is retired or sold, the cost and related accumulated depreciation are eliminated from the balance sheet accounts and the resultant gain or loss is reflected in income.
Depreciation is provided using the straight-line method, based on useful lives of the assets which range from three to fifteen years depending on the asset type.
The Company reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition, and other economic factors.
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. When fair value measurements are used, valuation techniques should maximize the use of observable inputs and minimize the use of unobservable inputs.
GAAP has established a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Level 1 inputs consist of quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the related asset or liability. Level 3 inputs are unobservable inputs related to the asset or liability.
The Company’s Simple Agreements for Future Equity (“SAFEs”) are adjusted to fair value each reporting period pursuant to Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity, and are classified within Level 3 of the fair value hierarchy. The Company’s estimate of fair value is largely based on its expectations related to the likelihood, timing, and manner in which the SAFEs will ultimately be settled. Significant unobservable inputs include an estimate of the underlying fair value of the Company’s Class A common stock, which is dependent on assumptions related to projected cash flows of the business, volatility, and expected term.
Income Taxes
The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
| F-8 |
The Company has incurred taxable losses since inception but is current in its tax filing obligations. The Company is not presently subject to any income tax audit in any taxing jurisdiction.
Revenue Recognition
The Company recognizes revenue when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services.
To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, Revenue from Contracts with Customers, the Company performs the following steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Revenue from subscription contracts with customers is recognized ratably over the period that commences on the subscription start date and ending on the date the subscription term expires. Revenue from door and video services is generally recognized at the completion of the professional services. Revenue from sales of controllers and recorders is generally recognized at time of delivery.
Goodwill
Goodwill represents the excess of the purchase price of an acquired business over the fair value of the net tangible and identifiable intangible assets acquired. Goodwill is tested for impairment annually and whenever events or changing circumstances indicate that the carrying amount may not be recoverable.
In assessing goodwill for impairment, we have the option to assess qualitative factors to determine whether events or circumstances indicate that it is more likely than not that the fair value of an asset (or reporting unit) is less than its carrying amount. Performing a qualitative impairment assessment requires an examination of relevant events and circumstances that could have a negative impact on the carrying value of the Company, such as macroeconomic conditions, industry and market conditions, earnings and cash flows, overall financial performance, and other relevant entity-specific events. The estimates of the fair value of our assets (or reporting units) are primarily determined using an income approach based on discounted cash flows. The discounted cash flow methodology requires significant judgment, including estimation of future cash flows, which is dependent on internal forecasts, current and anticipated economic conditions and trends, the estimation of the long-term growth rate of our business, and the determination of our weighted average cost of capital. Changes in the estimates and assumptions incorporated into our impairment assessment could materially affect the determination of fair value and the associated impairment charge.
A non-cash loss on impairment was recorded on December 31, 2023, reflecting goodwill impairment charges totaling $1.67 million. Following a thorough assessment for goodwill impairment, management determined that goodwill attributed to reporting units Visionful Holding Inc. and Infrastructure Proving Grounds had become impaired due to underutilization of the acquired assets in revenue generation. Despite this impairment, the technology acquired remains the property of Cloudastructure and retains potential for future utilization.
The impairment loss was determined based on the fair value of the reporting units, which was assessed using a combination of the income approach and market approach. This analysis incorporated the projected cash flows from the respective units and market data relevant to similar assets and businesses.
The impairment was primarily due to a significant decline in expected future cash flows attributable to these reporting units as a result of lower-than-expected utilization of the acquired technology in generating revenue.
| F-9 |
There were no changes in the identification of reporting units or in the method of determining fair value. No subsequent events have occurred that would affect the recoverability of the remaining goodwill for these reporting units.
Recent Accounting Pronouncements
ASC 842, Leases, requires entities to recognize on the balance sheet the assets and liabilities for the rights and obligations resulting from leases with terms greater than 12 months. ASC 842 also requires additional disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The new standard is effective for the Company beginning on January 1, 2022, but is not expected to have a significant impact since the Company is not currently a party to any material lease commitments.
Note 3 – Basic and Diluted Loss Per Share
The number of shares used to calculate basic and diluted loss per share for the years ended December 31, 2022 and 2021 were as follows:
| Years Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Class A common stock | 82,657,521 | 81,978,090 | ||||||
| Class B common stock | 5,004,930 | 5,138,017 | ||||||
| Total | 87,662,451 | 87,116,107 | ||||||
In 2023 and 2022, approximately 93.575 million and 93.254 million shares issuable, respectively, upon the exercise of stock options and warrants and from the potential conversion of convertible notes and SAFEs were excluded from the calculation of diluted loss per share because such amounts were antidilutive.
Note 4 – Share Capital
Securities Offerings:
Beginning in 2020, the Company commenced a public offering of units under the exemption from registration provided by Tier 2 of Regulation A. Each unit consists of two shares of Class A common stock of the Company and one warrant to purchase shares of Class A common stock. Through August 24, 2021, the purchase price of each unit was $1.00, and the exercise price of each warrant was $0.75 per share.
On August 25, 2021, the Company updated the terms of the units being offered in this Regulation A offering, offering the units at a price of $1.20 and the exercise price of the accompanying warrants was increased to $0.90 per share. Issued warrants are immediately exercisable and expire 18 months after their issuance date.
On May 19, 2022, the Company again updated the terms of the units it was offering under Regulation A. Beginning on this date, each unit was offered at a price of $2.00 and the exercise price of the accompanying warrant was $1.50 per share.
As of December 31, 2023, 8,755,814 warrants were exercised and 22,561,807 warrants expired. There were 579,543 warrants outstanding as of December 31, 2023.
As of December 31, 2023, the Company had issued 72.5 million shares of Class A common stock and 31.9 million warrants to purchase an additional 580 thousand shares of Class A common stock in connection with this offering. The Company has received cumulative proceeds of $33.1 million, net of issuance costs, through December 31, 2023 in connection with this offering.
| F-10 |
Rights of Common Stockholders
Holders of shares of Class A common stock are entitled to one vote for each share on all matters submitted to a vote of the stockholders, including the election of directors. Holders of shares of Class B common stock are entitled to 20 votes for each share on all matters submitted to a vote of the stockholders, including the election of directors.
Holders of both Class A and Class B common stock are entitled to receive dividends, as may be declared from time to time by the Board of Directors out of legally available funds as detailed in the Company’s Amended and Restated Certificate of Incorporation. The Company has never declared or paid cash dividends on any of its capital stock.
In the event of a voluntary or involuntary liquidation, dissolution, or winding up of the Company, holders of the Class A common stock and Class B common stock will be treated equally, identically and ratably, on a per share basis, with respect to any consideration into which such shares are converted or any consideration paid or otherwise distributed to stockholders of the Company.
Stock-Based Compensation:
The following summarizes stock option activity for the years ended December 31, 2023 and 2022:
| Number of Options | Exercise Price | Weighted-Average Exercise Price | ||||||||||
| Options outstanding at January 1, 2022 | 41,014,000 | $ | 0.004 | $ | 0.004 | |||||||
| Granted | 28,609,999 | 0.31-0.36 | 0.311 | |||||||||
| Canceled | – | – | – | |||||||||
| Exercised | – | – | – | |||||||||
| Options outstanding at December 31, 2022 | 66,257,999 | 0.004-0.36 | 0.137 | |||||||||
| Granted | 900,000 | 0.36-0.37 | 0.364 | |||||||||
| Canceled | 3,781,063 | 0.004-0.36 | 0.0670 | |||||||||
| Exercised | – | – | – | |||||||||
| Options outstanding at December 31, 2023 | 63,376,936 | $ | 0.004-0.37 | $ | 0.143 | |||||||
Granted options are exercisable into shares of the Company’s Class B common stock, vest over four years, and expire ten years from the date of grant.
Note 5 – Income Tax Provision
The Company has incurred a cumulative income tax net operating loss from prior years. Without persuasive evidence that the Company will be able to utilize this net operating loss carryforward in the foreseeable future, the Company has established a full valuation allowance against that deferred tax asset. Accordingly, no net tax provision or tax benefit has been recognized during the years ended December 31, 2023 and 2022.
Deferred income taxes are provided to reflect the future tax consequences or benefits on differences between the tax basis of assets and liabilities and their reported amounts in the financial statements using enacted tax rates. The tax effects of temporary differences and carryforwards that give rise to significant portions of deferred tax assets and liabilities are as follows at December 31:
At December 31, 2023, the Company had federal and state net operating loss (“NOL”) carryforwards of $21,977,000 and $18,477,000, respectively, which are available to offset future federal and state taxable income. If not used, these NOL carryforwards begin to expire in 2034. Approximately $21,107,000 of federal NOL carryforwards are not subject to expiration.
The Company also had federal and California state research and development (“R&D”) credit carryforwards at December 31, 2023 of $354,000 and $193,000, respectively, which are available to offset future federal and state taxable income. The federal R&D credit carryforwards begin to expire in 2039, but the California state R&D credit carryforwards are not subject to expiration. Valuation allowances have been reserved, where necessary.
| F-11 |
Utilization of the NOL carryforwards may be subject to an annual limitation due to the ownership percentage change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. This annual limitation may result in the expiration of the NOL carryforwards before utilization.
The Company accounts for uncertain tax positions following the guidance in ASC 740, Accounting for Uncertainty in Income Taxes, which prescribes a recognition threshold of more-likely-than-not and a measurement attribute for all tax positions taken or expected to be taken on a tax return in order for those tax positions to be recognized in the financial statements. ASC 740 clarifies the criteria that each tax position must satisfy for some or all of the benefits of that position to be recognized in the Company’s financial statements. At December 31, 2023 and 2022, the Company determined that no liability related to uncertain tax positions was required to be recorded in the financial statements.
At December 31, 2023 and 2022, the Company had unrecognized tax benefits of $191,000 and $182,000, respectively. The following table summarizes the activity related to the Company’s unrecognized tax benefits:
| Balance at December 31, 2022 | $ | 182,000 | ||
| Decreases related to prior year tax positions | (40,000 | ) | ||
| Increases related to current year tax positions | 49,000 | |||
| Balance at December 31, 2023 | $ | 191,000 |
The Company’s tax returns from 2003 through 2023 will remain open for examination by federal and state authorities for three and four years, respectively, from the date of utilization of any NOL carryforwards.
Note 6 – Commitments and Contingencies
On July 10, 2023, the Company and the Company’s CEO and founder, Rick Bentley, each separately received a “Wells Notice” from the enforcement staff (the “Staff”) of the Securities and Exchange Commission’s Division of Enforcement (“SEC”), stating that the Staff had made a preliminary determination to recommend that the SEC file a civil enforcement action against each of the Company and Mr. Bentley alleging violations of Sections 17(a)(1), 17(a)(2), and 17(a)(3) of the Securities Act of 1933, as amended (the “Securities Act”), and Section 10(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act”), and Rules 10b-5(a), (b) and (c) under the Exchange Act.
On September 27, 2023 the Company agreed to a settlement with the Staff. Without admitting or denying the findings in the order, the Company agreed to a settled order from the SEC, which states that Cloudastructure violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Section 17(a) of the Securities Act. Cloudastructure agreed to a cease-and-desist order barring the Company from committing or causing any violations and any future violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and to pay a penalty of $558,071.
Also on September 27, 2023, Rick Bentley agreed to a settlement with the SEC with respect to the charges against him. Without admitting or denying the allegations in the SEC’s complaint, Mr. Bentley agreed to the entry of a final judgment imposing on him a permanent injunction against future violations of Exchange Act Section 10(b) and Rule 10b-5 thereunder and Securities Act Section 17(a), a civil penalty of $111,614, and an order barring Mr. Bentley from serving as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act or that is required to file reports pursuant to Section 15(d) of the Exchange Act, for a period of 5 years.
Based on the foregoing, no additional material events were identified which require adjustment or disclosure in the financial statements.
| F-12 |
The Company is not currently involved in any litigation, and its management is not aware of any pending or threatened legal actions relating to its intellectual property, conduct of its business activities, or otherwise that would have a material adverse effect on the Company’s business, results of operations and financial condition.
Note 7 – Related Party Transactions
The following transactions occurred between related parties, therefore, there can be no guarantee that the terms, conditions, interest rates or prices were transacted at an arm’s-length rate.
Aircraft Lease
On September 1, 2023, the Company entered into a dry lease of a Cessna T210N Turbo Centurion plane with Cloud Transport Operations LLC. Rick Bentley, the Company’s Chief Executive Officer, has an indirect ownership interest in Cloud Transport Operations LLC. This agreement allows the Company to lease the plane for $350 per hour and will cover insurance and maintenance costs.
Additionally, effective September 1, 2023, the Company also entered into a side agreement related to the dry lease agreement with Hydro Hash, Inc., a company of which Rick Bentley is Chairman and a significant stockholder. Hydro Hash, Inc. agreed, in exchange for use of the plane, to cover 40% of the insurance and maintenance costs for the plane under the dry lease agreement between the Company and Cloud Transport Operations LLC.
Issuance of Shares for Notes Receivable
On February 20, 2020, the Company issued 1,500,000 shares of Class A common stock to Mr. Bentley in exchange for a promissory note receivable for $6,000. The note receivable matures in February 2030 and bears interest at the rate of 1.86% per annum. As of December 31, 2023, this note accrued interest totaling $431.42.
On November 28, 2021, Mr. Bentley exercised options to purchase 3,300,000 shares of Class B common stock. On December 3, 2021, the Company loaned to Mr. Bentley $373,158.84 to pay withholding taxes related to the option exercise. The note accrues interest at 2.0% per annum and has a maturity date of December 3, 2022. The note is secured by the 3,300,000 shares of Class B common stock – if Mr. Bentley does not repay the note, the Company will receive these shares back. On October 13, 2022, Mr. Bentley entered into an agreement to surrender 1,142,871 shares of his Class B common stock to pay off the remaining balance of the loan including interest ($354,289.87), which resulted in this note being repaid in full.
On October 13, 2022, the Company loaned to Mr. Bentley $185,000 to pay income taxes related to the November 28, 2021 option exercise described in the issuance of equity section. The note accrues interest at 3.4% per annum and has a maturity date of October 13, 2023. The note is secured by 2,157,129 shares of Class B common stock Mr. Bentley owns. On October 13, 2023 Mr. Bentley surrendered 614,897 Class B shares to pay off the remaining balance of the loan including interest ($190,618.07), which resulted in this note being repaid in full.
Note 8 – Subsequent Events
Management’s Evaluation
Management has evaluated subsequent events through February 20, 2024, the date the financial statements were available to be issued. Based on the foregoing, no additional material events were identified which require adjustment or disclosure in the financial statements.
| F-13 |
Cloudastructure, Inc.
(in thousands, except share and per share numbers)
| June 30, 2024 (unaudited) | December 31, 2023 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 1,701 | $ | 4,042 | ||||
| Accounts receivable | 199 | 351 | ||||||
| Inventory | 302 | 315 | ||||||
| Other current assets | 52 | 122 | ||||||
| Total current assets | 2,254 | 4,830 | ||||||
| Non-current assets: | ||||||||
| Fixed assets, net | 103 | 125 | ||||||
| Intangible assets, net | – | – | ||||||
| TOTAL ASSETS | $ | 2,357 | $ | 4,954 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 101 | $ | 27 | ||||
| Accrued expenses | 103 | 48 | ||||||
| Deferred revenue | 273 | 197 | ||||||
| Total current liabilities | 478 | 272 | ||||||
| TOTAL LIABILITIES | 478 | 272 | ||||||
| Stockholders’ equity: | ||||||||
| Class A common stock, $0.0001 par value; 250,000,000 shares authorized; 83,528,681 and 82,828,681 shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively | 8 | 8 | ||||||
| Class B common stock, $0.0001 par value; 100,000,000 shares authorized; 4,046,785 and 4,523,120 shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively | – | – | ||||||
| Additional paid-in capital | 39,461 | 38,994 | ||||||
| Accumulated deficit | (37,890 | ) | (34,321 | ) | ||||
| TOTAL STOCKHOLDERS’ EQUITY | 1,879 | 4,682 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 2,357 | $ | 4,954 | ||||
See accompany notes to the financial statements.
| F-14 |
Cloudastructure, Inc.
(in thousands, except share and per share numbers)
(unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Revenues, net | $ | 297 | $ | 138 | $ | 533 | $ | 214 | ||||||||
| Less: cost of goods sold | (189 | ) | (174 | ) | (442 | ) | (332 | ) | ||||||||
| Gross profit (loss) | 108 | (36 | ) | 91 | (118 | ) | ||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative | 729 | 885 | 1,211 | 1,429 | ||||||||||||
| Research and development | 499 | 646 | 808 | 1,174 | ||||||||||||
| Sales and marketing | 623 | 645 | 1,436 | 1,694 | ||||||||||||
| Total operating expenses | 1,851 | 2,176 | 3,455 | 4,297 | ||||||||||||
| Loss from operations | (1,743 | ) | (2,212 | ) | (3,363 | ) | (4,415 | ) | ||||||||
| Other expenses, net: | 31 | 3 | – | – | ||||||||||||
| Interest expense | (140 | ) | – | 74 | 6 | |||||||||||
| Net loss | $ | (1,852 | ) | $ | (2,209 | ) | $ | (3,569 | ) | $ | (4,409 | ) | ||||
| Basic and diluted (loss) per share of Class A and Class B common stock | $ | (0.02 | ) | $ | (0.03 | ) | $ | (0.04 | ) | $ | (0.06 | ) | ||||
See accompany notes to the financial statements.
| F-15 |
Cloudastructure, Inc.
Statement of Stockholders’ Equity (Deficit)
(in thousands, except share and per share numbers)
(unaudited)
| Three Months Ended June 30, 2024 | ||||||||||||||||||||||||||||
| Class A Common Stock | Class B Common Stock | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Equity (Deficit) | ||||||||||||||||||||||
| Balance as of March 31, 2024 | 83,528,681 | $ | 8 | 4,046,785 | $ | – | $ | 39,271 | $ | (36,038 | ) | $ | 3,242 | |||||||||||||||
| Issuances of Class A shares, net of issuance costs | – | – | – | – | 212 | – | 212 | |||||||||||||||||||||
| Conversion of SAFEs into Class A shares | – | – | – | – | – | – | – | |||||||||||||||||||||
| Stock-based compensation | – | – | – | – | 278 | – | 278 | |||||||||||||||||||||
| Net loss | – | – | – | – | – | (1,852 | ) | (1,852 | ) | |||||||||||||||||||
| Balance as of June 30, 2024 | 83,528,681 | $ | 8 | 4,046,785 | $ | – | $ | 39,761 | $ | (37,890 | ) | 1,879 | ||||||||||||||||
| Three Months Ended June 30, 2023 | ||||||||||||||||||||||||||||
| Class A Common Stock | Class B Common Stock | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Equity (Deficit) | ||||||||||||||||||||||
| Balance as of March 31, 2023 | 82,519,588 | $ | 8 | 5,138,017 | $ | 1 | $ | 37,833 | $ | (27,513 | ) | $ | 10,329 | |||||||||||||||
| Issuances of Class A shares, net of issuance costs | 199,933 | – | – | – | 602 | (11 | ) | – | ||||||||||||||||||||
| Conversion of SAFEs into Class A shares | – | – | – | – | – | – | – | |||||||||||||||||||||
| Stock-based compensation | – | – | – | – | – | – | 278 | |||||||||||||||||||||
| Net loss | – | – | – | – | – | (2,199 | ) | (2,199 | ) | |||||||||||||||||||
| Balance as of June 30, 2023 | 82,719,521 | $ | 8 | 5,138,017 | $ | 1 | $ | 38,435 | $ | (29,723 | ) | 8,721 | ||||||||||||||||
See accompany notes to the financial statements.
| F-16 |
Cloudastructure, Inc.
Statement of Stockholders’ Equity (Deficit)
(in thousands, except share and per share numbers)
(unaudited)
| Six Months Ended June 30, 2024 | ||||||||||||||||||||||||||||
| Class A Common Stock | Class B Common Stock | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Equity (Deficit) | ||||||||||||||||||||||
| Balance as of January 1, 2023 | 81,978,090 | $ | 8 | 5,138,017 | $ | 1 | $ | 37,453 | $ | (25,314 | ) | $ | 12,147 | |||||||||||||||
| Issuances of Class A shares, net of issuance costs | 741,435 | – | – | – | 394 | – | 394 | |||||||||||||||||||||
| Conversion of SAFEs into Class A shares | – | – | – | – | – | – | – | |||||||||||||||||||||
| Stock-based compensation | – | – | – | – | 588 | – | 588 | |||||||||||||||||||||
| Net loss | – | – | – | – | – | (4,409 | ) | (4,409 | ) | |||||||||||||||||||
| Balance as of June 30, 2023 | 82,719,521 | $ | 8 | 5,138,017 | $ | 1 | $ | 38,435 | $ | (29,723 | ) | 8,721 | ||||||||||||||||
| Issuances of Class A shares, net of issuance costs | 109,160 | – | (614,897 | ) | – | (7 | ) | – | (7 | ) | ||||||||||||||||||
| Conversion of Notes Payable into Class A Shares | – | – | – | – | – | – | – | |||||||||||||||||||||
| Stock-based compensation | – | – | – | – | – | 566 | 566 | |||||||||||||||||||||
| Net loss | (4,598 | ) | (4,598 | ) | ||||||||||||||||||||||||
| Balance as of December 31, 2023 | 82,828,681 | $ | 8 | 4,523,120 | $ | – | $ | 38,994 | $ | (34,321 | ) | $ | 4,682 | |||||||||||||||
| Issuances of Class A shares, net of issuance costs | 700,000 | – | (476,355 | ) | – | (51 | ) | – | (51 | ) | ||||||||||||||||||
| Stock-based compensation | – | – | – | – | 818 | – | 8,188 | |||||||||||||||||||||
| Net loss | – | – | – | – | – | (3,569 | ) | (3,569 | ) | |||||||||||||||||||
| Balance as of June 30, 2024 | 83,528,681 | $ | 8 | 4,046,785 | $ | – | $ | 39,761 | $ | (37,890 | ) | $ | 1,879 | |||||||||||||||
See accompany notes to the financial statements.
| F-17 |
Cloudastructure, Inc.
(in thousands)
(unaudited)
| Six Months Ended | ||||||||
| June 30, 2024 | June 30, 2023 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net Loss | $ | (3,569 | ) | $ | (4,409 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 38 | 110 | ||||||
| Stock-based compensation | 818 | 588 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| (Increase) Decrease in accounts receivable | 152 | 68 | ||||||
| (Increase) Decrease in other current assets | 83 | 206 | ||||||
| Increase (Decrease) in accounts payable | 28 | 130 | ||||||
| Increase (Decrease) in accrued expenses | 100 | 20 | ||||||
| Increase (Decrease) in deferred revenue | 76 | (27 | ) | |||||
| Net Cash Used in Operating Activities | (2,274 | ) | (3,314 | ) | ||||
| Cash Flows from Investing Activities | ||||||||
| Purchase of fixed assets | (16 | ) | (6 | ) | ||||
| Acquisition of intangible assets | – | – | ||||||
| (16 | ) | (6 | ) | |||||
| Cash Flows from Financing Activities | ||||||||
| Proceeds from issuance of Class A Common Stock | (51 | ) | 395 | |||||
| Net Cash Provided by Financing Activities | (51 | ) | 395 | |||||
| Net Change in Cash | (2,341 | ) | (2,925 | ) | ||||
| Cash at Beginning of Period | 4,042 | 9,414 | ||||||
| Cash at End of Period | $ | 1,701 | $ | 6,489 | ||||
See accompany notes to the financial statements.
| F-18 |
Cloudastructure, Inc.
(unaudited)
Note 1 - Nature of Operations
Cloudastructure, Inc. (“Cloudastructure” or the “Company”) was formed on March 28, 2003, as a corporation organized under the laws of the State of Delaware and is headquartered in Florida. The Company is a technology service provider that focuses on intelligent devices and software for physical security applications. Since inception, the Company has relied primarily on financing activities, including an offering under Regulation A of the Securities Act of 1933, as amended (“Regulation A”), to fund its operations.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, all adjustments considered necessary for the fair presentation of the financial statements for the years presented have been included.
Use of Estimates
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the footnotes thereto. Actual results could differ from those estimates.
Risks and Uncertainties
The Company has a limited operating history. The Company’s business and operations are sensitive to general business and economic conditions in the United States. A host of factors beyond the Company’s control could cause fluctuations in these conditions. Adverse conditions may include, without limitation, recession, downturn or otherwise, changes in regulations or restrictions on imports, competition or changes in consumer taste. These or other adverse conditions could affect the Company’s financial condition and the results of its operations.
Cash and Cash Equivalents
The Company considers short-term, highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. Cash consists of funds held in the Company’s checking account. The Company maintains its cash with a major financial institution located in the United States, which it believes to be creditworthy. The Federal Deposit Insurance Corporation insures balances up to $250,000, but at times the Company may maintain balances in excess of federally insured limits.
Receivables and Credit Policy
Trade receivables from customers are uncollateralized customer obligations due under normal trade terms. Trade receivables are stated at the amount billed to the customer. Payments of trade receivables are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the earliest unpaid invoice. The Company routinely assesses its outstanding accounts receivable and recorded a reserve for estimated uncollectible accounts of $340 and $82,090 at June 30, 2024 and December 31, 2023, respectively.
| F-19 |
Sales Taxes
Various states impose a sales tax on the Company’s sales to non-exempt customers. The Company collects the sales tax from customers and remits the entire amount to each respective state. The Company’s accounting policy is to exclude the tax collected and remitted to the states from revenue and cost of sales.
Property and Equipment
Property and equipment are recorded at cost if the expenditure exceeds $2,500. Expenditures for renewals and improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. Expenditures for maintenance and repairs are expensed as incurred. When equipment is retired or sold, the cost and related accumulated depreciation are eliminated from the balance sheet accounts and the resultant gain or loss is reflected in income.
Depreciation is provided using the straight-line method, based on useful lives of the assets which range from three to fifteen years depending on the asset type.
The Company reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition, and other economic factors.
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. When fair value measurements are used, valuation techniques should maximize the use of observable inputs and minimize the use of unobservable inputs.
GAAP has established a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Level 1 inputs consist of quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the related asset or liability. Level 3 inputs are unobservable inputs related to the asset or liability.
The Company’s Simple Agreements for Future Equity (“SAFEs”) are adjusted to fair value each reporting period pursuant to Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity, and are classified within Level 3 of the fair value hierarchy. The Company’s estimate of fair value is largely based on its expectations related to the likelihood, timing, and manner in which the SAFEs will ultimately be settled. Significant unobservable inputs include an estimate of the underlying fair value of the Company’s Class A common stock, which is dependent on assumptions related to projected cash flows of the business, volatility, and expected term.
Income Taxes
The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
| F-20 |
The Company has incurred taxable losses since inception but is current in its tax filing obligations. The Company is not presently subject to any income tax audit in any taxing jurisdiction.
Revenue Recognition
The Company recognizes revenue when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services.
To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, Revenue from Contracts with Customers, the Company performs the following steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Revenue from subscription contracts with customers is recognized ratably over the period that commences on the subscription start date and ending on the date the subscription term expires. Revenue from door and video services is generally recognized at the completion of the professional services. Revenue from sales of controllers and recorders is generally recognized at time of delivery.
Recent Accounting Pronouncements
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”). ASU 2023-07 is effective for public entities for fiscal years beginning after December 15, 2023, and interim periods in fiscal years beginning after December 15, 2024, and requires single reporting entities to comply with the expanded reportable segment disclosures outlined in the ASU. The expanded reportable segment disclosures are intended to enhance certain disclosures surrounding significant segment expenses. The Company is currently evaluating the impact of the new standard on our financial statements.
In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosure” (“ASU 2023-09”). ASU 2023-09 is effective for public entities for fiscal years beginning after December 15, 2024, and interim periods in fiscal years beginning after December 15, 2025, and establishes new income tax requirements in addition to modifying and eliminating certain existing requirements. Under ASU 2023-09, entities must consistently categorize and provide greater disaggregation of information in the rate reconciliation and further disaggregate income taxes paid. The Company is currently evaluating the impact of the new standard on our financial statements.
In March 2024, the SEC adopted final rules under Release No. 33-11275, The Enhancement and Standardization of Climate-Related Disclosures for Investors (the “Climate Rules”). The Climate Rules require quantitative and qualitative disclosure of certain climate-related information in registration statements and annual reports filed. These disclosures include financial statement footnote disclosure related to the effects of certain severe weather events and other natural conditions. In April 2024, the SEC issued an order staying the Climate Rules pending completion of a judicial review of certain petitions challenging their validity. If the stay is lifted, the effective dates remain unchanged and we remain a smaller reporting company, emerging growth company or non-accelerated filer, the Climate Rules will be effective for our fiscal year ending December 31, 2027. The Company is currently evaluating the impact of the Climate Rules on our financial statements.
| F-21 |
Note 3 – Basic and Diluted Loss Per Share
The number of shares used to calculate basic and diluted loss per share for the six months ended June 30, 2024 and 2023 were as follows:
| Six Months Ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Class A common stock | 83,508,429 | 72,336,557 | ||||||
| Class B common stock | 4,182,508 | 5,138,017 | ||||||
| Total | 87,690,937 | 77,474,574 | ||||||
For the six months ended June 30, 2024 and 2023, approximately 98.9 million and 105.2 million shares, respectively, issuable upon the exercise or conversion of stock options, convertible notes, and SAFEs were excluded from the calculation of diluted loss per share because such amounts were antidilutive.
Note 4 – Share Capital
Securities Offerings:
Beginning in 2020, the Company commenced a public offering of units under the exemption from registration provided by Tier 2 of Regulation A. Each unit consists of two shares of Class A common stock of the Company and one warrant to purchase shares of Class A common stock. Through August 24, 2021, the purchase price of each unit was $1.00, and the exercise price of each warrant was $0.75 per share.
On August 25, 2021, the Company updated the terms of the units being offered in this Regulation A offering, offering the units at a price of $1.20 and the exercise price of the accompanying warrants was increased to $0.90 per share. Issued warrants are immediately exercisable and expire 18 months after their issuance date.
On May 19, 2022, the Company again updated the terms of the units it was offering under Regulation A. Beginning on this date, each unit was offered at a price of $2.00 and the exercise price of the accompanying warrant was $1.50 per share.
As of December 31, 2023, 8,755,814 warrants were exercised, and 22,561,807 warrants expired. There were 579,543 warrants outstanding as of December 31, 2023.
As of June 30, 2024, 8,755,814 warrants were exercised, and 22,926,922 warrants expired. There were 214,428 warrants outstanding as of June 30, 2024.
As of June 30, 2024, the Company had issued 72.5 million shares of Class A common stock and 31.9 million warrants to purchase an additional 580 thousand shares of Class A common stock in connection with this offering. The Company has received cumulative proceeds of $33.1 million, net of issuance costs, through June 30, 2024 in connection with this offering.
The following table is a summary of the outstanding Class A common stock warrants at December 31, 2023 and June 30, 2024:
| Warrants at Exercise Price of $0.75 | Warrants at Exercise Price of $0.90 | Warrants at Exercise Price of $1.50 | Total Warrants | |||||||||||||
| Balance as of January 1, 2023 | 827,332 | 2,064,477 | 115,747 | 3,007,556 | ||||||||||||
| Issued | – | – | 214,428 | 214,428 | ||||||||||||
| Expired | 680,211 | 1,779,363 | 24,642 | 2,484,216 | ||||||||||||
| Exercised | 147,121 | 285,114 | – | 432,235 | ||||||||||||
| Outstanding at December 31, 2023 | – | – | 305,533 | 305,533 | ||||||||||||
| Issued | – | – | – | – | ||||||||||||
| Expired | – | – | 91,105 | 91,105 | ||||||||||||
| Exercised | – | – | – | – | ||||||||||||
| Outstanding at June 30, 2024 | – | – | 214,428 | 214,428 | ||||||||||||
| F-22 |
Stock-Based Compensation:
The following summarizes stock option activity for the six months ended June 30, 2024:
| Number of Options | Exercise Price Range | Weighted-Average Exercise Price | ||||||||||
| Options outstanding at December 31, 2023 | 63,376,936 | $ | 0.004-0.37 | $ | 0.143 | |||||||
| Granted | 22,731,313 | 0.004-0.45 | 0.44 | |||||||||
| Canceled | 201,564 | 0.36 | 0.36 | |||||||||
| Exercised | 10 | 0.31 | 0.31 | |||||||||
| Options outstanding at June 30, 2024 | 85,906,674 | $ | 0.004-0.45 | $ | 0.22 | |||||||
Granted options are exercisable into shares of the Company’s Class B common stock, vest over four years, and expire ten years from the date of grant.
Note 5 – Convertible Notes
As of June 30, 2024, the Company had no convertible notes outstanding.
Certain of the Company’s notes provide the holders with a right to convert into equity at a pre-determined discount to market value under certain conditions. Such conditions include a qualified equity financing, election by a majority of noteholders on the maturity date of the associated notes, or a sale of the Company. This premium that may be received by holders upon conversion of their notes is a variable share redemption feature that is accounted for separately at fair value as an embedded derivative.
Note 6 – SAFE Instruments
As of June 30, 2024, the Company had no SAFEs outstanding.
The SAFEs are convertible into shares of Class A common stock at a conversion price equal to the lesser of (i) the SAFEs’ principal balance divided by the product of the price per share of stock sold in a qualified equity financing multiplied by 80%, and (ii) the SAFEs’ stated valuation cap divided by the number of fully diluted shares outstanding.
Note 7 – Visionful Acquisition
On February 4, 2022, the Company completed the acquisition of substantially all of the assets of Visionful, which offered a smart parking solution for transit providers, as well as commercial companies, hospitals, airports, universities and municipalities who are looking to better understand their parking usage and manage parking efficiency. The company was purchased for $282,662 in cash and 293,062 shares of Class A common stock.
Note 8 – IPG Acquisition
On July 8, 2022, the Company completed the acquisition of IPG, an internet of things (“IoT”) cybersecurity company. IPG produced the award-winning GearBox IoT security tool. GearBox combines a durable appliance with simple execution to allow industrial operators the insight they need to secure their infrastructure. GearBox provides cybersecurity and performance metrics to some of the nation’s most critical infrastructure including utilities, commercial buildings, healthcare and transportation. The acquisition added an important new layer of cybersecurity to the Company’s rapidly expanding physical and cybersecurity platform.
| F-23 |
The purchase agreement (“Purchase Agreement”) provided for a purchase price of $250,000 and a minimum of 1,125,000 and up to a maximum of 21,250,000 warrants for Class A common stock at a strike price of $0.38 per share depending on whether certain performance metrics set forth in the Purchase Agreement were met. These metrics were not met as of June 30, 2024, and 3,750,000 warrants vested upon completion of the acquisition.
Note 9 – Related Party Transactions
The following transactions occurred between related parties, therefore, there can be no guarantee that the terms, conditions, interest rates or prices were transacted at an arm’s-length rate.
Aircraft Lease
On September 1, 2023, the Company entered into a dry lease of a Cessna T210N Turbo Centurion plane with Cloud Transport Operations LLC. Rick Bentley, the Company’s Chief Executive Officer, has an indirect ownership interest in Cloud Transport Operations LLC. This agreement allows the Company to lease the plane for $350 per hour and will cover insurance and maintenance costs.
Additionally, effective September 1, 2023, the Company also entered into a side agreement related to the dry lease agreement with Hydro Hash, Inc., a company of which Rick Bentley is Chairman and a significant stockholder. Hydro Hash, Inc. agreed, in exchange for use of the plane, to cover 40% of the insurance and maintenance costs for the plane under the dry lease agreement between the Company and Cloud Transport Operations LLC.
Issuance of Shares for Notes Receivable
On February 20, 2020, the Company issued 1,500,000 shares of Class A common stock to Mr. Bentley in exchange for a promissory note receivable for $6,000. The note receivable matures in February 2030 and bears interest at the rate of 1.86% per annum. As of June 30, 2024, this note accrued interest totaling $487.40.
Note 10 – Subsequent Events
Management’s Evaluation
Management has evaluated subsequent events through July 22, 2024, the date the financial statements were available to be issued. Based on the foregoing, no additional material events were identified which require adjustment or disclosure in the financial statements.
| F-24 |
The date of this Prospectus is [●] [●], 2024
Through and including [●] [●], 2024 (the 25th day after the listing date of our Class A common stock), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus.
INFORMATION NOT REQUIRED IN PROSPECTUS
| Item 13. | Other Expenses of Issuance and Distribution |
The following table sets forth the costs and expenses payable by us in connection with this registration statement and the listing of our Class A common stock. All amounts shown are estimates except for the SEC registration fee and the Nasdaq listing fee.
| SEC registration fee | $ | * | |
| Nasdaq listing fee | * | ||
| Legal fees and expenses | * | ||
| Accounting fees and expenses | * | ||
| Advisory fee | * | ||
| Printing and engraving expenses | * | ||
| Transfer agent fees and expenses | * | ||
| Miscellaneous expenses | * | ||
| Total | $ | * |
| Item 14. | Indemnification of Directors and Officers |
We are incorporated under the laws of the State of Delaware. Section 145 of the DGCL provides that a Delaware corporation may indemnify any person who was or is, or is threatened to be made, a party to any threatened, pending, or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation), by reason of the fact that such person is or was a director, officer, employee or agent of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding, if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person’s conduct was unlawful.
Section 145 of the DGCL also provides that Delaware corporation may indemnify any person who was or is, or is threatened to be made, a party to any threatened, pending, or completed action or suit by or in the right of the corporation by reason of the fact that such person is or was a director, officer, employee or agent of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification of any claim, issue or matter is permitted without judicial approval if such person is adjudged to be liable to the corporation.
Under the DGCL, where a present or former officer or director is successful on the merits or otherwise in the defense of any action referred to above, or in defense of any claim, issue or matter therein, the corporation must indemnify such present or former officer or director against the expenses (including attorney’s fees) which such present or former officer or director actually and reasonably incurred in connection with such action (or claim, issue or matter therein).
| II-1 |
Section 102(b)(7) of the DGCL permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duties as a director, except for liability for any:
| · | breach of a director’s duty of loyalty to the corporation or its stockholders; |
| · | act or omission not in good faith or that involves intentional misconduct or a knowing violation of law; |
| · | unlawful payment of dividends or unlawful stock purchase or redemption; or |
| · | transaction from which the director derived an improper personal benefit. |
[Our amended and restated certificate of incorporation which will become effective in connection with the effectiveness of the registration statement of which this prospectus forms a part, will contain a provision that precludes any director of ours from being personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director, except for the aforementioned liabilities which we are not permitted to eliminate or limit under Section 107(b)(7) of the DGCL.]
In addition, our amended and restated certificate of incorporation and bylaws, in each case, which will become effective in connection with the effectiveness of the registration statement of which this prospectus forms a part, will require us to indemnify, and advance expenses to, to the fullest extent permitted by law, any person who was or is, or is threatened to be made, a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative by reason of the fact that the person is or was our director, officer, employee or agent, or is or was serving at our request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise.
[Our amended and restated bylaws which will become effective in connection with the effectiveness of the registration statement of which this prospectus forms a part, will further authorize us to purchase and maintain insurance on behalf of any person who is or was our director, officer, employee or agent, or is or was serving at our request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, enterprise or nonprofit entity against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person’s status as such, whether or not we would have the power to indemnify such person against such liability under the provisions of the DGCL.]
We plan to purchase an insurance policy covering our officers and directors with respect to certain liabilities, including liabilities arising under the Securities Act, or otherwise. In addition, in connection with the effectiveness of the registration statement of which this prospectus forms a part, we intend to enter into separate indemnification agreements with each of our directors and executive officers.
| Item 15. | Recent Sales of Unregistered Securities |
The following sets forth information regarding all unregistered securities we have issued since July 14, 2020:
Regulation A Offering
On July 9, 2020, we commenced an offering of units under the exemption from registration provided by Tier 2 of Regulation A under the Securities Act of 1933, as amended (the “Securities Act”). Each unit consisted of two shares of our Class A common stock and one warrant to purchase one share of Class A common stock for a period of 18 months following the date of issuance. Through August 24, 2021, the purchase price of each unit was $1.00 per unit, and the exercise price of each warrant was $0.75 per warrant share. On August 25, 2021, we filed a supplement to our offering circular to increase the purchase price of each unit to $1.20 per unit, and the exercise price of each warrant to $0.90 per warrant share. On May 19, 2022, we again updated the purchase price of each unit to $2.00 per unit, and the exercise price of each warrant to $1.50 per warrant share.
| II-2 |
As of June 30, 2024, we had issued approximately 72.5 million shares of Class A common stock in our Regulation A offering, including shares issued upon exercise of our outstanding warrants, and received cumulative proceeds of approximately $33.1 million, net of issuance costs of approximately $[·], and approximately 214,428 warrants remained outstanding.
Private Placements
On July 8, 2022, we entered into an Asset Purchase Agreement with Infrastructure Proving Grounds, Inc., a Delaware corporation (“IPG”), and each of its stockholders, pursuant to the terms of which we acquired substantially all of the assets of IPG in consideration of our payment $250,000 in cash and the issuance of a warrant to purchase up to 21,250,000 shares of our Class A common stock for a period of 10-years at an exercise price of $0.38 per warrant share, subject to a number of milestone achievements and vesting provisions, in a transaction exempt from registration under Section 4(a)(2) of the Securities Act. As of June 30, 2024, 3,750,000 warrant shares have vested under the terms of the warrant.
On December 30, 2021, we entered into an Asset Purchase Agreement with Visionful Holding Inc., a Delaware corporation (“Visionful”), and its sole stockholders, pursuant to the terms of which we agreed to acquire substantially all of the assets of Visionful in consideration of our payment $282,662 in cash and the issuance of 293,062 shares of Class A common stock, in a transaction exempt from registration under Section 4(a)(2) of the Securities Act. The transaction with Visionful closed on February 4, 2022.
In July 2023, we commenced an offering of units in a transaction exempt from registration under Section 4(a)(2) of the Securities Act, and Regulation D, Rule 506(c) promulgated thereunder. Each unit consisted of one share of Class A common stock and one warrant to purchase one share of Class A common stock for a period of 18 months following the date of issuance. The purchase price of each unit was $2.00 per unit, and the exercise price of each warrant was $1.50 per warrant share. We issued 17,000 units, and received cumulative proceeds of approximately $35,000.
| Item 16. | Exhibits and Financial Statement Schedules |
Exhibits
See the Exhibit Index immediately preceding the signature page hereto for a list of exhibits filed as part of this registration statement, which Exhibit Index is incorporated herein by reference.
Financial Statement Schedules
All financial statement schedules are omitted because the information called for is not required or is shown either in the financial statements or in the accompanying notes.
| Item 17. | Undertakings |
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities Act;
| II-3 |
(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement.
(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;
Provided, however, that paragraphs (a)(1)(i), (ii), and (iii) of this section do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in reports filed with or furnished to the SEC by the registrant pursuant to Section 13 or Section 15(d) of the Exchange Act, that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(4) That, for the purpose of determining liability under the Securities Act to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
(5) That, for the purpose of determining liability of the registrant under the Securities Act to any purchaser in the initial distribution of the securities, the undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
| II-4 |
(b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
(c) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(d) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
| Exhibit No. | Description | |
| 3.1* | Amended and Restated Certificate of Incorporation of the registrant, as currently in effect. | |
| 3.2 | Bylaws of the registrant, as currently in effect. | |
| 4.1 | Reference is made to exhibits 3.1 through 3.2. | |
| 4.2 | Form of Warrant. | |
| 5.1* | Opinion of Saul Ewing LLP. | |
| 10.1 | Amended 2014 Stock Option Plan. | |
| 10.2* | 2024 Stock Option Plan. | |
| 10.3*# | Employment Agreement between Cloudastructure, Inc. and James McCormick, dated June 24, 2024. | |
| 10.4 | Asset Purchase Agreement by and among Cloudastructure, Inc., Infrastructure Proving Grounds, Inc., and its Shareholders, dated June 30, 2022. | |
| 10.5 | Stock Surrender Agreement between Cloudastructure, Inc. and Rick Bentley, dated October 13, 2022. | |
| 23.1* | Consent of Saul Ewing LLP (included in Exhibit 5.1). | |
| 23.2 | Consent of Bush & Associates CPA LLC | |
| 24.1* | Power of Attorney (included in the signature page to this registration statement). | |
| 107** | Filing Fee Table |
* To be filed by amendment.
** Previously filed.
# Indicates management contract or compensatory plan or arrangement.
| II-5 |
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Palo Alto, California, on September [●], 2024.
| CLOUDASTRUCTURE, INC. | ||
| By: | /s/ James McCormick | |
| James McCormick | ||
| Chief Executive Officer | ||
We, the undersigned officers and directors of Cloudastructure, Inc., hereby severally constitute and appoint [James McCormick and Greg Smitherman], and each of them singly (with full power to each of them to act alone), our true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution in each of them for us and in our name, place and stead, and in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement (or any other registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933), and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as full to all intents and purposes as we might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ James McCormick | Chief Executive Officer, Director | September [●], 2024 | ||
| James McCormick | (Principal Executive Officer) | |||
| /s/ Greg Smitherman | Chief Financial Officer | September [●], 2024 | ||
| Greg Smitherman | (Principal Financial and Accounting Officer) | |||
| /s/ Craig Johnson | Director | September [●], 2024 | ||
| Craig Johnson | ||||
| /s/ Jeff Kirby | Director | September [●], 2024 | ||
| Jeff Kirby | ||||
| /s/ Ruba Qashu | Director | September [●], 2024 | ||
| Ruba Qashu |
| II-6 |
Exhibit 3.2
AMENDED AND RESTATED BYLAWS OF
CLOUDASTRUCTURE, INC.
(Adopted on September 16, 2024)
TABLE OF CONTENTS
| ARTICLE I - CORPORATE OFFICES | 1 |
| 1.1 REGISTERED OFFICE | 1 |
| 1.2 OTHER OFFICES | 1 |
| ARTICLE II - MEETINGS OF STOCKHOLDERS | 1 |
| 2.1 PLACE OF MEETINGS | 1 |
| 2.2 ANNUAL MEETING | 1 |
| 2.3 SPECIAL MEETING | 1 |
| 2.4 NOTICE OF STOCKHOLDERS’ MEETINGS | 2 |
| 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE | 2 |
| 2.6 QUORUM | 2 |
| 2.7 ADJOURNED MEETING; NOTICE | 2 |
| 2.8 CONDUCT OF BUSINESS | 2 |
| 2.9 VOTING | 2 |
| 2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING | 3 |
| 2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS | 3 |
| 2.12 PROXIES | 3 |
| 2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE | 4 |
| ARTICLE III - DIRECTORS | 4 |
| 3.1 POWERS | 4 |
| 3.2 NUMBER OF DIRECTORS | 4 |
| 3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS | 4 |
| 3.4 RESIGNATION AND VACANCIES | 4 |
| 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE | 5 |
| 3.6 REGULAR MEETINGS | 5 |
| 3.7 SPECIAL MEETINGS; NOTICE | 5 |
| 3.8 QUORUM | 6 |
| 3.9 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING | 6 |
| 3.10 FEES AND COMPENSATION OF DIRECTORS | 6 |
| 3.11 APPROVAL OF LOANS TO OFFICERS | 6 |
| 3.12 REMOVAL OF DIRECTORS | 6 |
| ARTICLE IV - COMMITTEES | 7 |
| 4.1 COMMITTEES OF DIRECTORS | 7 |
| 4.2 COMMITTEE MINUTES | 7 |
| 4.3 MEETINGS AND ACTION OF COMMITTEES | 7 |
| i |
| ARTICLE V - OFFICERS | 8 |
| 5.1 OFFICERS | 8 |
| 5.2 APPOINTMENT OF OFFICERS | 8 |
| 5.3 SUBORDINATE OFFICERS | 8 |
| 5.4 REMOVAL AND RESIGNATION OF OFFICERS | 8 |
| 5.5 VACANCIES IN OFFICES | 8 |
| 5.6 CHAIRPERSON OF THE BOARD | 8 |
| 5.7 CHIEF EXECUTIVE OFFICER | 8 |
| 5.8 PRESIDENT | 9 |
| 5.9 VICE PRESIDENTS | 9 |
| 5.10 SECRETARY | 9 |
| 5.11 CHIEF FINANCIAL OFFICER | 9 |
| 5.12 ASSISTANT SECRETARY | 10 |
| 5.13 ASSISTANT TREASURER | 10 |
| 5.14 REPRESENTATION OF SHARES OF OTHER CORPORATIONS | 10 |
| 5.15 AUTHORITY AND DUTIES OF OFFICERS | 10 |
| ARTICLE VI - RECORDS AND REPORTS | 10 |
| 6.1 MAINTENANCE AND INSPECTION OF RECORDS | 10 |
| 6.2 INSPECTION BY DIRECTORS | 11 |
| ARTICLE VII - GENERAL MATTERS | 11 |
| 7.1 CHECKS | 11 |
| 7.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS | 11 |
| 7.3 STOCK CERTIFICATES; PARTLY PAID SHARES | 11 |
| 7.4 SPECIAL DESIGNATION ON CERTIFICATES | 12 |
| 7.5 LOST CERTIFICATES | 12 |
| 7.6 CONSTRUCTION; DEFINITIONS | 12 |
| 7.7 DIVIDENDS | 12 |
| 7.8 FISCAL YEAR | 12 |
| 7.9 SEAL | 12 |
| 7.10 TRANSFER OF STOCK | 12 |
| 7.11 STOCK TRANSFER AGREEMENTS | 12 |
| 7.12 REGISTERED STOCKHOLDERS | 13 |
| 7.13 WAIVER OF NOTICE | 13 |
| ARTICLE VIII - NOTICE BY ELECTRONIC TRANSMISSION | 13 |
| 8.1 NOTICE BY ELECTRONIC TRANSMISSION | 13 |
| 8.2 DEFINITION OF ELECTRONIC TRANSMISSION | 14 |
| 8.3 INAPPLICABILITY | 14 |
| 2 |
| ARTICLE IX - -INDEMNIFICATION | 14 |
| 9.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS | 14 |
| 9.2 INDEMNIFICATION OF OTHERS | 14 |
| 9.3 PREPAYMENT OF EXPENSES | 14 |
| 9.4 DETERMINATION; CLAIM | 14 |
| 9.5 NON-EXCLUSIVITY OF RIGHTS | 15 |
| 9.6 INSURANCE | 15 |
| 9.7 OTHER INDEMNIFICATION | 15 |
| 9.8 AMENDMENT OR REPEAL | 15 |
| ARTICLE X - AMENDMENTS | 15 |
| 3 |
AMENDED AND RESTATED BYLAWS
OF
CLOUDASTRUCTURE, INC.
ARTICLE I - CORPORATE OFFICES
1.1 REGISTERED OFFICE.
The registered office of Cloudastructure, Inc. shall be fixed in the corporation’s certificate of incorporation, as the same may be amended from time to time.
1.2 OTHER OFFICES.
The corporation’s Board of Directors (the “Board”) may at any time establish other offices at any place or places where the corporation is qualified to do business.
ARTICLE II - MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS.
Meetings of stockholders shall be held at any place, within or outside the State of Delaware, designated by the Board. The Board may, in its sole discretion, determine that a meeting of stockholders shall not be held at any place, but may instead be held solely by means of remote communication as authorized by Section 211(a)(2) of the Delaware General Corporation Law (the “DGCL”). In the absence of any such designation or determination, stockholders’ meetings shall be held at the corporation’s principal executive office.
2.2 ANNUAL MEETING.
The annual meeting of stockholders shall be held each year. The Board shall designate the date and time of the annual meeting. In the absence of such designation the annual meeting of stockholders shall be held on the second Tuesday of May of each year at 10:00 a.m. However, if such day falls on a legal holiday, then the meeting shall be held at the same time and place on the next succeeding business day. At the annual meeting, directors shall be elected and any other proper business may be transacted.
2.3 SPECIAL MEETING.
A special meeting of the stockholders may be called at any time by the Board, chairperson of the Board, chief executive officer or president (in the absence of a chief executive officer) or by one or more stockholders holding shares in the aggregate entitled to cast not less than 10% of the votes at that meeting.
If any person(s) other than the Board calls a special meeting, the request shall:
(i) be in writing;
(ii) specify the time of such meeting and the general nature of the business proposed to be transacted; and
(iii) be delivered personally or sent by registered mail or by facsimile transmission to the chairperson of the Board, the chief executive officer, the president (in the absence of a chief executive officer) or the secretary of the corporation.
The officer(s) receiving the request shall cause notice to be promptly given to the stockholders entitled to vote at such meeting, in accordance with the provisions of Sections 2.4 and 2.5 of these bylaws, that a meeting will be held at the time requested by the person or persons calling the meeting. No business may be transacted at such special meeting other than the business specified in such notice to stockholders. Nothing contained in this paragraph of this Section 2.3 shall be construed as limiting, fixing, or affecting the time when a meeting of stockholders called by action of the Board may be held.
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2.4 NOTICE OF STOCKHOLDERS’ MEETINGS.
All notices of meetings of stockholders shall be sent or otherwise given in accordance with either Section 2.5 or Section 8.1 of these bylaws not less than 10 nor more than 60 days before the date of the meeting to each stockholder entitled to vote at such meeting. The notice shall specify the place, if any, date and hour of the meeting, the means of remote communication, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE.
Notice of any meeting of stockholders shall be given:
(i) if mailed, when deposited in the United States mail, postage prepaid, directed to the stockholder at his or her address as it appears on the corporation’s records; or
(ii) if electronically transmitted as provided in Section 8.1 of these bylaws.
An affidavit of the secretary or an assistant secretary of the corporation or of the transfer agent or any other agent of the corporation that the notice has been given by mail or by a form of electronic transmission, as applicable, shall, in the absence of fraud, be prima facie evidence of the facts stated therein.
2.6 QUORUM.
The holders of a majority of the stock issued and outstanding and entitled to vote, present in person or represented by proxy, shall constitute a quorum for the transaction of business at all meetings of the stockholders. If, however, such quorum is not present or represented at any meeting of the stockholders, then either (i) the chairperson of the meeting, or (ii) the stockholders entitled to vote at the meeting, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present or represented. At such adjourned meeting at which a quorum is present or represented, any business may be transacted that might have been transacted at the meeting as originally noticed.
2.7 ADJOURNED MEETING; NOTICE.
When a meeting is adjourned to another time or place, unless these bylaws otherwise require, notice need not be given of the adjourned meeting if the time, place if any thereof, and the means of remote communications if any by which stockholders and proxy holders may be deemed to be present in person and vote at such adjourned meeting are announced at the meeting at which the adjournment is taken. At the continuation of the adjourned meeting, the corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.
2.8 CONDUCT OF BUSINESS.
The chairperson of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of business.
2.9 VOTING.
The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.11 of these bylaws, subject to Section 217 (relating to voting rights of fiduciaries, pledgors and joint owners of stock) and Section 218 (relating to voting trusts and other voting agreements) of the DGCL.
Except as may be otherwise provided in the certificate of incorporation or these bylaws, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder.
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2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.
Unless otherwise provided in the certificate of incorporation, any action required by the DGCL to be taken at any annual or special meeting of stockholders of a corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice, and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted.
Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing and who, if the action had been taken at a meeting, would have been entitled to notice of the meeting if the record date for such meeting had been the date that written consents signed by a sufficient number of holders to take the action were delivered to the corporation as provided in Section 228 of the DGCL. In the event that the action which is consented to is such as would have required the filing of a certificate under any provision of the DGCL, if such action had been voted on by stockholders at a meeting thereof, the certificate filed under such provision shall state, in lieu of any statement required by such provision concerning any vote of stockholders, that written consent has been given in accordance with Section 228 of the DGCL.
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS.
In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board may fix, in advance, a record date, which record date shall not precede the date on which the resolution fixing the record date is adopted and which shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other such action.
If the Board does not so fix a record date:The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held.
(i) The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the Board is necessary, shall be the day on which the first written consent is expressed.
(ii) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board may fix a new record date for the adjourned meeting.
2.12 PROXIES.
Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for such stockholder by proxy authorized by an instrument in writing or by a transmission permitted by law filed in accordance with the procedure established for the meeting, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212 of the DGCL.
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2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE.
The officer who has charge of the stock ledger of the corporation shall prepare and make, at least 10 days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. The corporation shall not be required to include electronic mail addresses or other electronic contact information on such list. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting for a period of at least 10 days prior to the meeting: (i) on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice of the meeting, or (ii) during ordinary business hours, at the corporation’s principal executive office. In the event that the corporation determines to make the list available on an electronic network, the corporation may take reasonable steps to ensure that such information is available only to stockholders of the corporation. If the meeting is to be held at a place, then the list shall be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. If the meeting is to be held solely by means of remote communication, then the list shall also be open to the examination of any stockholder during the whole time of the meeting on a reasonably accessible electronic network, and the information required to access such list shall be provided with the notice of the meeting. Such list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares held by each of them.
ARTICLE III - DIRECTORS
3.1 POWERS.
Subject to the provisions of the DGCL and any limitations in the certificate of incorporation or these bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board.
3.2 NUMBER OF DIRECTORS.
The authorized number of directors shall be determined from time to time by resolution of the Board, provided the Board shall consist of at least one member. No reduction of the authorized number of directors shall have the effect of removing any director before that director’s term of office expires.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS.
Except as provided in Section 3.4 of these bylaws, directors shall be elected at each annual meeting of stockholders to hold office until the next annual meeting. Directors need not be stockholders unless so required by the certificate of incorporation or these bylaws. The certificate of incorporation or these bylaws may prescribe other qualifications for directors. Each director, including a director elected to fill a vacancy, shall hold office until such director’s successor is elected and qualified or until such director’s earlier death, resignation or removal.
All elections of directors shall be by written ballot, unless otherwise provided in the certificate of incorporation; if authorized by the Board, such requirement of a written ballot shall be satisfied by a ballot submitted by electronic transmission, provided that any such electronic transmission must be either set forth or be submitted with information from which it can be determined that the electronic transmission authorized by the stockholder or proxy holder.
3.4 RESIGNATION AND VACANCIES.
Any director may resign at any time upon notice given in writing or by electronic transmission to the corporation. When one or more directors so resigns and the resignation is effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in this section in the filling of other vacancies.
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Unless otherwise provided in the certificate of incorporation or these bylaws:
(i) Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director.
(ii) Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected.
If at any time, by reason of death or resignation or other cause, the corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the provisions of the certificate of incorporation or these bylaws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of the DGCL.
If, at the time of filling any vacancy or any newly created directorship, the directors then in office constitute less than a majority of the whole Board (as constituted immediately prior to any such increase), then the Court of Chancery may, upon application of any stockholder or stockholders holding at least 10% of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by the provisions of Section 211 of the DGCL as far as applicable.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE.
The Board may hold meetings, both regular and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or these bylaws, members of the Board, or any committee designated by the Board, may participate in a meeting of the Board, or any committee, by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting.
3.6 REGULAR MEETINGS.
Regular meetings of the Board may be held without notice at such time and at such place as shall from time to time be determined by the Board.
3.7 SPECIAL MEETINGS; NOTICE.
Special meetings of the Board for any purpose or purposes may be called at any time by the chairperson of the Board, the chief executive officer, the president, the secretary or any two directors.
Notice of the time and place of special meetings shall be:
(i) delivered personally by hand, by courier or by telephone;
(ii) sent by United States first-class mail, postage prepaid;
(iii) sent by facsimile; or
(iv) sent by electronic mail,
directed to each director at that director’s address, telephone number, facsimile number or electronic mail address, as the case may be, as shown on the corporation’s records.
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If the notice is (i) delivered personally by hand, by courier or by telephone, (ii) sent by facsimile or (iii) sent by electronic mail, it shall be delivered or sent at least 24 hours before the time of the holding of the meeting. If the notice is sent by United States mail, it shall be deposited in the United States mail at least four days before the time of the holding of the meeting. Any oral notice may be communicated to the director. The notice need not specify the place of the meeting (if the meeting is to be held at the corporation’s principal executive office) nor the purpose of the meeting.
3.8 QUORUM.
At all meetings of the Board, a majority of the authorized number of directors shall constitute a quorum for the transaction of business. The vote of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board, except as may be otherwise specifically provided by statute, the certificate of incorporation or these bylaws. If a quorum is not present at any meeting of the Board, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present.
A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting.
3.9 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING.
Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the Board, or of any committee thereof, may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing or by electronic transmission and the writing or writings or electronic transmission or transmissions are filed with the minutes of proceedings of the Board or committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form.
3.10 FEES AND COMPENSATION OF DIRECTORS.
Unless otherwise restricted by the certificate of incorporation or these bylaws, the Board shall have the authority to fix the compensation of directors.
3.11 APPROVAL OF LOANS TO OFFICERS.
The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiary, including any officer or employee who is a director of the corporation or its subsidiary, whenever, in the judgment of the Board, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the Board shall approve, including, without limitation, a pledge of shares of stock of the corporation.
3.12 REMOVAL OF DIRECTORS.
Unless otherwise restricted by statute, the certificate of incorporation or these bylaws, any director or the entire Board may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors.
No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of such director’s term of office.
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ARTICLE IV - COMMITTEES
4.1 COMMITTEES OF DIRECTORS.
The Board may designate one or more committees, each committee to consist of one or more of the directors of the corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board or in these bylaws, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority to (i) approve or adopt, or recommend to the stockholders, any action or matter expressly required by the DGCL to be submitted to stockholders for approval, or (ii) adopt, amend or repeal any bylaw of the corporation.
4.2 COMMITTEE MINUTES.
Each committee shall keep regular minutes of its meetings and report the same to the Board when required.
4.3 MEETINGS AND ACTION OF COMMITTEES.
Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of:
(i) Section 3.5 (place of meetings and meetings by telephone);
(ii) Section 3.6 (regular meetings);
(iii) Section 3.7 (special meetings and notice);
(iv) Section 3.8 (quorum);
(v) Section 7.13 (waiver of notice); and
(vi) Section 3.9 (action without a meeting)
with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the Board and its members. However:
(i) the time of regular meetings of committees may be determined either by resolution of the Board or by resolution of the committee;
| (ii) | special meetings of committees may also be called by resolution of the Board; and |
(iii) notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The Board may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws.
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ARTICLE V - OFFICERS
5.1 OFFICERS.
The officers of the corporation shall be a president and a secretary. The corporation may also have, at the discretion of the Board, a chairperson of the Board, a vice chairperson of the Board, a chief executive officer, a chief financial officer or treasurer, one or more vice presidents, one or more assistant vice presidents, one or more assistant treasurers, one or more assistant secretaries, and any such other officers as may be appointed in accordance with the provisions of these bylaws. Any number of offices may be held by the same person.
5.2 APPOINTMENT OF OFFICERS.
The Board shall appoint the officers of the corporation, except such officers as may be appointed in accordance with the provisions of Sections 5.3 and 5.5 of these bylaws, subject to the rights, if any, of an officer under any contract of employment.
5.3 SUBORDINATE OFFICERS.
The Board may appoint, or empower the chief executive officer or, in the absence of a chief executive officer, the president, to appoint, such other officers and agents as the business of the corporation may require. Each of such officers and agents shall hold office for such period, have such authority, and perform such duties as are provided in these bylaws or as the Board may from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS.
Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by an affirmative vote of the majority of the Board at any regular or special meeting of the Board or, except in the case of an officer chosen by the Board, by any officer upon whom such power of removal may be conferred by the Board.
Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice. Unless otherwise specified in the notice of resignation, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party.
5.5 VACANCIES IN OFFICES.
Any vacancy occurring in any office of the corporation shall be filled by the Board or as provided in Section 5.2.
5.6 CHAIRPERSON OF THE BOARD.
The chairperson of the Board, if such an officer be elected, shall, if present, preside at meetings of the Board and exercise and perform such other powers and duties as may from time to time be assigned to him by the Board or as may be prescribed by these bylaws. If there is no chief executive officer or president, then the chairperson of the Board shall also be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 5.7 of these bylaws.
5.7 CHIEF EXECUTIVE OFFICER.
Subject to such supervisory powers, if any, as the Board may give to the chairperson of the Board, the chief executive officer, if any, shall, subject to the control of the Board, have general supervision, direction, and control of the business and affairs of the corporation and shall report directly to the Board. All other officers, officials, employees and agents shall report directly or indirectly to the chief executive officer. The chief executive officer shall see that all orders and resolutions of the Board are carried into effect. The chief executive officer shall serve as chairperson of and preside at all meetings of the stockholders. In the absence of a chairperson of the Board, the chief executive officer shall preside at all meetings of the Board.
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5.8 PRESIDENT.
In the absence or disability of the chief executive officer, the president shall perform all the duties of the chief executive officer. When acting as the chief executive officer, the president shall have all the powers of, and be subject to all the restrictions upon, the chief executive officer. The president shall have such other powers and perform such other duties as from time to time may be prescribed for him by the Board, these bylaws, the chief executive officer or the chairperson of the Board.
5.9 VICE PRESIDENTS.
In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the Board or, if not ranked, a vice president designated by the Board, shall perform all the duties of the president. When acting as the president, the appropriate vice president shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board, these bylaws, the chairperson of the Board, the chief executive officer or, in the absence of a chief executive officer, the president.
5.10 SECRETARY.
The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the Board may direct, a book of minutes of all meetings and actions of directors, committees of directors, and stockholders. The minutes shall show
(i) the time and place of each meeting;
(ii) whether regular or special (and, if special, how authorized and the notice given);
(iii) the names of those present at directors’ meetings or committee meetings;
(iv) the number of shares present or represented at stockholders’ meetings;
(v) and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation’s transfer agent or registrar, as determined by resolution of the Board, a share register, or a duplicate share register showing;
| (i) | the names of all stockholders and their addresses; |
| (ii) | the number and classes of shares held by each; |
| (iii) | the number and date of certificates evidencing such shares; and |
| (iv) | the number and date of cancellation of every certificate surrendered for cancellation. |
The secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the Board required to be given by law or by these bylaws. The secretary shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the Board or by these bylaws.
5.11 CHIEF FINANCIAL OFFICER.
The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director.
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The chief financial officer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositories as the Board may designate. The chief financial officer shall disburse the funds of the corporation as may be ordered by the Board, shall render to the chief executive officer or, in the absence of a chief executive officer, the president and directors, whenever they request it, an account of all his or her transactions as chief financial officer and of the financial condition of the corporation, and shall have other powers and perform such other duties as may be prescribed by the Board or these bylaws.
The chief financial officer shall be the treasurer of the corporation.
5.12 ASSISTANT SECRETARY.
The assistant secretary, or, if there is more than one, the assistant secretaries in the order determined by the stockholders or Board (or if there be no such determination, then in the order of their election) shall, in the absence of the secretary or in the event of the secretary’s inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as may be prescribed by the Board or these bylaws.
5.13 ASSISTANT TREASURER.
The assistant treasurer, or, if there is more than one, the assistant treasurers, in the order determined by the stockholders or Board (or if there be no such determination, then in the order of their election), shall, in the absence of the chief financial officer or in the event of the chief financial officer’s inability or refusal to act, perform the duties and exercise the powers of the chief financial officer and shall perform such other duties and have such other powers as may be prescribed by the Board or these bylaws.
5.14 REPRESENTATION OF SHARES OF OTHER CORPORATIONS.
The chairperson of the Board, the president, any vice president, the treasurer, the secretary or assistant secretary of this corporation, or any other person authorized by the Board or the president or a vice president, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority granted herein may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority.
5.15 AUTHORITY AND DUTIES OF OFFICERS.
In addition to the foregoing authority and duties, all officers of the corporation shall respectively have such authority and perform such duties in the management of the business of the corporation as may be designated from time to time by the Board or the stockholders.
ARTICLE VI - RECORDS AND REPORTS
6.1 MAINTENANCE AND INSPECTION OF RECORDS.
The corporation shall, either at its principal executive office or at such place or places as designated by the Board, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each stockholder, a copy of these bylaws as amended to date, accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation’s stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person’s interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent so to act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal executive office.
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6.2 INSPECTION BY DIRECTORS.
Any director shall have the right to examine the corporation’s stock ledger, a list of its stockholders, and its other books and records for a purpose reasonably related to his or her position as a director. The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The Court may summarily order the corporation to permit the director to inspect any and all books and records, the stock ledger, and the stock list and to make copies or extracts therefrom. The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the Court may deem just and proper.
ARTICLE VII - GENERAL MATTERS
7.1 CHECKS.
From time to time, the Board shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments.
7.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS.
The Board, except as otherwise provided in these bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the Board or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount.
7.3 STOCK CERTIFICATES; PARTLY PAID SHARES.
The shares of the corporation shall be represented by certificates, provided that the Board may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Notwithstanding the adoption of such a resolution by the Board, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the corporation by the chairperson or vice-chairperson of the Board, or the president or vice-president, and by the treasurer or an assistant treasurer, or the secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue.
The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, upon the books and records of the corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon.
7.4 SPECIAL DESIGNATION ON CERTIFICATES.
If the corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the DGCL, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.
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7.5 LOST CERTIFICATES.
Except as provided in this Section 7.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and cancelled at the same time. The corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate, or such owner’s legal representative, to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares.
7.6 CONSTRUCTION; DEFINITIONS.
Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the DGCL shall govern the construction of these bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term “person” includes both a corporation and a natural person.
7.7 DIVIDENDS.
The Board, subject to any restrictions contained in either (i) the DGCL, or (ii) the certificate of incorporation, may declare and pay dividends upon the shares of its capital stock. Dividends may be paid in cash, in property, or in shares of the corporation’s capital stock.
The Board may set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. Such purposes shall include but not be limited to equalizing dividends, repairing or maintaining any property of the corporation, and meeting contingencies.
7.8 FISCAL YEAR.
The fiscal year of the corporation shall be fixed by resolution of the Board and may be changed by the Board.
7.9 SEAL.
The corporation may adopt a corporate seal, which shall be adopted and which may be altered by the Board. The corporation may use the corporate seal by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced.
7.10 TRANSFER OF STOCK.
Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction in its books.
7.11 STOCK TRANSFER AGREEMENTS.
The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the DGCL.
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7.12 REGISTERED STOCKHOLDERS.
The corporation:
(i) shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner;
(ii) shall be entitled to hold liable for calls and assessments the person registered on its books as the owner of shares; and
(iii) shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of another person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware.
7.13 WAIVER OF NOTICE.
Whenever notice is required to be given under any provision of the DGCL, the certificate of incorporation or these bylaws, a written waiver, signed by the person entitled to notice, or a waiver by electronic transmission by the person entitled to notice, whether before or after the time of the event for which notice is to be given, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice or any waiver by electronic transmission unless so required by the certificate of incorporation or these bylaws.
ARTICLE VIII - NOTICE BY ELECTRONIC TRANSMISSION
8.1 NOTICE BY ELECTRONIC TRANSMISSION.
Without limiting the manner by which notice otherwise may be given effectively to stockholders pursuant to the DGCL, the certificate of incorporation or these bylaws, any notice to stockholders given by the corporation under any provision of the DGCL, the certificate of incorporation or these bylaws shall be effective if given by a form of electronic transmission consented to by the stockholder to whom the notice is given. Any such consent shall be revocable by the stockholder by written notice to the corporation. Any such consent shall be deemed revoked if:
(i) the corporation is unable to deliver by electronic transmission two consecutive notices given by the corporation in accordance with such consent; and
(ii) such inability becomes known to the secretary or an assistant secretary of the corporation or to the transfer agent, or other person responsible for the giving of notice.
However, the inadvertent failure to treat such inability as a revocation shall not invalidate any meeting or other action.
Any notice given pursuant to the preceding paragraph shall be deemed given:
| (i) | if by facsimile telecommunication, when directed to a number at which the stockholder has consented to receive notice; |
| (ii) | if by electronic mail, when directed to an electronic mail address at which the stockholder has consented to receive notice; |
| (iii) | if by a posting on an electronic network together with separate notice to the stockholder of such specific posting, upon the later of (A) such posting and (B) the giving of such separate notice; and |
| (iv) | if by any other form of electronic transmission, when directed to the stockholder. |
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An affidavit of the secretary or an assistant secretary or of the transfer agent or other agent of the corporation that the notice has been given by a form of electronic transmission shall, in the absence of fraud, be prima facie evidence of the facts stated therein.
8.2 DEFINITION OF ELECTRONIC TRANSMISSION.
An “electronic transmission” means any form of communication, not directly involving the physical transmission of paper, that creates a record that may be retained, retrieved, and reviewed by a recipient thereof, and that may be directly reproduced in paper form by such a recipient through an automated process.
8.3 INAPPLICABILITY.
Notice by a form of electronic transmission shall not apply to Sections 164, 296, 311, 312 or 324 of the DGCL.
ARTICLE IX - INDEMNIFICATION
9.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The corporation shall indemnify and hold harmless, to the fullest extent permitted by General Corporation Law of Delaware as it presently exists or may hereafter be amended, any director or officer of the corporation who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a “Proceeding”) by reason of the fact that he or she, or a person for whom he or she is the legal representative, is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, enterprise or non-profit entity, including service with respect to employee benefit plans, against all liability and loss suffered and expenses reasonably incurred by such person in connection with any such action, suit, or Proceeding. The corporation shall be required to indemnify a person in connection with a Proceeding initiated by such person only if the Proceeding was authorized by the Board of Directors of the corporation.
9.2 INDEMNIFICATION OF OTHERS.
The corporation shall have the power to indemnify and hold harmless, to the extent permitted by applicable law as it presently exists or may hereafter be amended, any employee or agent of the corporation who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or Proceeding by reason of the fact that he or she, or a person for whom he or she is the legal representative, is or was an employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, enterprise or non-profit entity, including service with respect to employee benefit plans, against all liability and loss suffered and expenses reasonably incurred by such person in connection with any such action, suit, or Proceeding.
9.3 PREPAYMENT OF EXPENSES.
The corporation shall pay the expenses incurred by any officer or director of the corporation, and may pay the expenses incurred by any employee or agent of the corporation, in defending any Proceeding in advance of its final disposition; provided, however, that the payment of expenses incurred by a person in advance of the final disposition of the Proceeding shall be made only upon receipt of an undertaking by the person to repay all amounts advanced if it should be ultimately determined that the person is not entitled to be indemnified under this Article 9 or otherwise.
9.4 DETERMINATION; CLAIM.
If a claim for indemnification or payment of expenses under this Article 9 is not paid in full within sixty days after a written claim therefor has been received by the corporation the claimant may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid the expense of prosecuting such claim. In any such action the corporation shall have the burden of proving that the claimant was not entitled to the requested indemnification or payment of expenses under applicable law.
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9.5 NON-EXCLUSIVITY OF RIGHTS.
The rights conferred on any person by this Article 9 shall not be exclusive of any other rights which such person may have or hereafter acquire under any statute, provision of the certificate of incorporation, these bylaws, agreement, vote of stockholders or disinterested directors or otherwise.
9.6 INSURANCE.
The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify him or her against such liability under the provisions of the General Corporation Law of Delaware.
9.7 OTHER INDEMNIFICATION.
The corporation’s obligation, if any, to indemnify any person who was or is serving at its request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, enterprise or non-profit entity shall be reduced by any amount such person may collect as indemnification from such other corporation, partnership, joint venture, trust, enterprise or non-profit enterprise.
9.8 AMENDMENT OR REPEAL.
Any repeal or modification of the foregoing provisions of this Article 9 shall not adversely affect any right or protection hereunder of any person in respect of any act or omission occurring prior to the time of such repeal or modification.
ARTICLE X - AMENDMENTS
A majority of the directors then in office shall have power to adopt, amend, alter or repeal the bylaws. In addition, these bylaws may be adopted, amended, altered or repealed by the stockholders, provided that, in addition to any affirmative vote of the holders of any particular class or series of capital stock of the corporation required by applicable law or the Certificate of Incorporation, such adoption, amendment, alteration, or repeal shall be approved by the affirmative vote of the holders of at least a majority of the voting power of the shares of the then outstanding voting stock of the corporation entitled to vote thereon, voting together as a single class; and, provided further, that any proposal by a stockholder to amend these bylaws will be subject to the provisions of ARTICLE II of these bylaws except as otherwise required by law. The fact that such power has been so conferred upon the Board of Directors will not divest the stockholders of the power, nor limit their power to adopt, amend, or repeal bylaws.
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Exhibit 4.2
THIS WARRANT AND THE UNDERLYING SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR UNDER THE SECURITIES LAWS OF ANY STATE. THESE SECURITIES MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED EXCEPT AS PERMITTED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS IN ACCORDANCE WITH APPLICABLE REGISTRATION REQUIREMENTS OR AN EXEMPTION THEREFROM. This warrant must be surrendered to the coMPANY or its WARRANT agent as a condition precedent to the sale, transfer, pledge or hypothecation of any interest in any of the securities represented hereby.
WARRANT TO PURCHASE SHARES OF COMMON STOCK
of
CLOUDASTRUCTURE, INC.
Dated as of [insert date]
Void after the date specified in Section 8
| No. [____] |
Warrant to Purchase [_______] Shares of Class A Common Stock (subject to adjustment) |
THIS CERTIFIES THAT, for value received, [insert name of warrant holder], or its registered assigns (the “Holder”), is entitled to purchase from Cloudastructure, Inc., a Delaware corporation (the “Company”), shares of the Company’s Class A Common Stock, $0.0001 par value per share (the “Shares”), in the amounts, at such times and at the price per share set forth in Section 1, subject to the provisions and upon the terms and conditions set forth herein and in the Warrant Agreement dated as of ______ 20__ (the “Warrant Agreement”) between the Company and VStock Transfer, LLC (the “Warrant Agent”). The term “Warrant” as used herein shall include this Warrant and any warrants delivered in substitution or exchange therefor as provided herein. This Warrant is issued as part of an offering of securities by the Company pursuant to Regulation A under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to an offering circular dated ______, 20__as supplemented or amended and the Subscription Agreement between the Company and the Holder [dated _______, 20__] (the “Subscription Agreement”).
The following is a statement of the rights of the Holder and the conditions to which this Warrant is subject, and to which Holder, by acceptance of this Warrant, agrees:
1. Number and Price of Shares; Exercise Period.
(a) Number of Shares. Subject to any previous exercise of the Warrant, the Holder shall have the right to purchase up to [__________] Shares.
(b) Exercise Price. The exercise price per Share shall be $[_], subject to adjustment pursuant hereto (the “Exercise Price”).
(c) Exercise Period. This Warrant shall be exercisable, in whole or in part, after the date of this Warrant and prior to (or in connection with) the expiration of this Warrant as set forth in Section 8.
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2. Exercise of the Warrant.
(a) Exercise. The purchase rights represented by this Warrant may be exercised at the election of the Holder, in whole or in part, by:
(i) the tender to the Warrant Agent at its principal office (or such other office or agency as the Warrant Agent may designate) of a notice of exercise in the form of Exhibit A (the “Notice of Exercise”), duly completed and executed by or on behalf of the Holder, together with the surrender of this Warrant; and
(ii) the payment to the Company of an amount equal to (x) the Exercise Price multiplied by (y) the number of Shares being purchased, by ACH, wire transfer, debit card, credit card or check and payable to the order of the Company.
(b) Stock Certificates. The rights under this Warrant shall be deemed to have been exercised and the Shares issuable upon such exercise shall be deemed to have been issued immediately prior to the close of business on the date this Warrant is exercised in accordance with its terms, and the person entitled to receive the Shares issuable upon such exercise shall be treated for all purposes as the holder of record of such Shares as of the close of business on such date. As promptly as reasonably practicable on or after such date, the Company shall cause to be issued and delivered to the person or persons entitled to receive the same a certificate or certificates (or a notice of issuance of uncertificated shares, if applicable) for that number of shares issuable upon such exercise. In the event that the rights under this Warrant are exercised in part and have not expired, the Company shall execute and deliver a new Warrant reflecting the number of Shares that remain subject to this Warrant.
(c) No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of the rights under this Warrant. In lieu of such fractional share to which the Holder would otherwise be entitled, the Company shall make a cash payment equal to the Exercise Price multiplied by such fraction.
(d) Conditional Exercise. The Holder may exercise this Warrant conditioned upon (and effective immediately prior to) consummation of any transaction that would cause the expiration of this Warrant pursuant to Section 8 by so indicating in the notice of exercise.
(e) Reservation of Stock. The Company agrees during the term the rights under this Warrant are exercisable to take all reasonable action to reserve and keep available from its authorized and unissued shares of common stock solely for the purpose of effecting the exercise of this Warrant such number of shares as shall from time to time be sufficient to effect the exercise of the rights under this Warrant; and if at any time the number of authorized but unissued shares of common stock shall not be sufficient for purposes of the exercise of this Warrant in accordance with its terms, without limitation of such other remedies as may be available to the Holder, the Company will use reasonable commercial efforts to take such corporate action as may, in the opinion of counsel, be necessary to increase its authorized and unissued shares of its common stock to a number of shares as shall be sufficient for such purposes. The Company represents and warrants that all shares that may be issued upon the exercise of this Warrant will, when issued in accordance with the terms hereof, be validly issued, fully paid and nonassessable.
(f) Qualification of Stock. The Company agrees that it shall use its best efforts to maintain the qualification of its offering statement (SEC File No. _______), and a current offering circular relating thereto, until the expiration of the Warrants in accordance with the provisions of Section 8 of this Warrant. In addition, the Company agrees to use its best efforts to register the shares of common stock issuable upon exercise of the Warrants under state blue sky laws, to the extent an exemption is not available.
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3. Replacement of the Warrant. Subject to the receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and substance to the Company or, in the case of mutilation, on surrender and cancellation of this Warrant, the Company at the expense of the Holder may issue and the Company shall execute, in lieu of this Warrant, a new warrant of like tenor and amount.
4. Transfer of the Warrant.
(a) Warrant Register. Pursuant to Section 2.3 of the Warrant Agreement, the Warrant Agent, on behalf of the Company, shall maintain a register (the “Warrant Register”) containing the name and address of the Holder or Holders. Until this Warrant is transferred on the Warrant Register in accordance herewith, the Company may treat the Holder as shown on the Warrant Register as the absolute owner of this Warrant for all purposes, notwithstanding any notice to the contrary. Any Holder of this Warrant (or of any portion of this Warrant) may change its address as shown on the Warrant Register by written notice to the Warrant Agent requesting a change.
(b) Transferability of the Warrant. Subject to the provisions of this Warrant with respect to compliance with the Securities Act and limitations on assignments and transfers, including without limitation compliance with the provisions of Section 5, title to this Warrant may be transferred by endorsement (by the transferor and the transferee executing the assignment form attached as Exhibit B (the “Assignment Form”)) and delivery in the same manner as a negotiable instrument transferable by endorsement and delivery.
(c) Exchange of the Warrant upon a Transfer. On surrender of this Warrant (and a properly endorsed Assignment Form) for exchange, subject to the provisions of this Warrant with respect to compliance with the Securities Act and limitations on assignments and transfers, the Warrant Agent shall issue to or on the order of the Holder a new warrant or warrants of like tenor, in the name of the Holder or as the Holder (on payment by the Holder of any applicable transfer taxes) may direct, for the number of shares issuable upon exercise hereof, and the Warrant Agent shall register any such transfer upon the Warrant Register. This Warrant (and the securities issuable upon exercise of the rights under this Warrant) must be surrendered to the Warrant Agent, as a condition precedent to the sale, pledge, hypothecation or other transfer of any interest in any of the securities represented hereby.
(d) Taxes. In no event shall the Company be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of any certificate, or a book entry, in a name other than that of the Holder, and the Warrant Agent shall not be required to issue or deliver any such certificate, or make such book entry, unless and until the person or persons requesting the issue or entry thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid or is not payable.
5. Compliance with Securities Laws; Market Stand-off. By acceptance of this Warrant, the Holder agrees to comply with the following:
(a) Securities Laws. Except as specifically set forth in this Section 5, this Warrant may not be transferred or assigned in whole or in part, and any such attempt by Holder to transfer or assign any rights, duties or obligations that arise under this Warrant shall be void. Any transfer of this Warrant or the Shares (the “Securities”) must be in compliance with all applicable federal and state securities laws. The Holder agrees not to make any sale, assignment, transfer, pledge or other disposition of all or any portion of the Securities, or any beneficial interest therein, unless and until such Holder shall have given prior written notice to the Company of such Holder’s intention to make such disposition.
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(b) Investment Representation Statement. Unless the rights under this Warrant are exercised pursuant to an effective registration statement under the Securities Act that includes the Shares with respect to which the Warrant was exercised, it shall be a condition to any exercise of the rights under this Warrant that the Holder shall have executed the Investment Representation Statement, substantially in the form of Exhibit A-1.
(c) Market Stand-off Legend. Each certificate, instrument or book entry representing the Shares issued upon exercise hereof shall also be notated with a legend in substantially the following form:
THE SECURITIES REPRESENTED HEREBY ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE, INCLUDING A LOCK-UP PERIOD IN THE EVENT OF A PUBLIC OFFERING, AS SET FORTH IN THE WARRANT PURSUANT TO WHICH THESE SHARES WERE ISSUED, A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE COMPANY.
6. Adjustments. Subject to the expiration of this Warrant pursuant to Section 8, the number and kind of shares purchasable hereunder and the Exercise Price therefor are subject to adjustment from time to time, as follows:
(a) Merger or Reorganization. If at any time there shall be any reorganization, recapitalization, merger or consolidation (a “Reorganization”) involving the Company (other than as otherwise provided for herein or as would cause the expiration of this Warrant under Section 8) in which shares of the Company’s stock are converted into or exchanged for securities, cash or other property, then, as a part of such Reorganization, lawful provision shall be made so that the Holder shall thereafter be entitled to receive upon exercise of this Warrant, the kind and amount of securities, cash or other property of the successor corporation resulting from such Reorganization, equivalent in value to that which a holder of the Shares deliverable upon exercise of this Warrant would have been entitled in such Reorganization if the right to purchase the Shares hereunder had been exercised immediately prior to such Reorganization. In any such case, appropriate adjustment (as determined in good faith by the Board of Directors of the successor corporation) shall be made in the application of the provisions of this Warrant with respect to the rights and interests of the Holder after such Reorganization to the end that the provisions of this Warrant shall be applicable after the event, as near as reasonably may be, in relation to any shares or other securities deliverable after that event upon the exercise of this Warrant.
(b) Reclassification of Shares. If the securities issuable upon exercise of this Warrant are changed into the same or a different number of securities of any other class or classes by reclassification, capital reorganization or otherwise (other than as otherwise provided for herein) (a “Reclassification”), then, in any such event, in lieu of the number of Shares which the Holder would otherwise have been entitled to receive, the Holder shall have the right thereafter to exercise this Warrant for a number of shares of such other class or classes of stock that a holder of the number of securities deliverable upon exercise of this Warrant immediately before that change would have been entitled to receive in such Reclassification, all subject to further adjustment as provided herein with respect to such other shares.
(c) Subdivisions and Combinations. In the event that the outstanding shares of common stock are subdivided (by stock split, by payment of a stock dividend or otherwise) into a greater number of shares of such securities, the number of Shares issuable upon exercise of the rights under this Warrant immediately prior to such subdivision shall, concurrently with the effectiveness of such subdivision, be proportionately increased, and the Exercise Price shall be proportionately decreased, and in the event that the outstanding shares of common stock are combined (by reclassification or otherwise) into a lesser number of shares of such securities, the number of Shares issuable upon exercise of the rights under this Warrant immediately prior to such combination shall, concurrently with the effectiveness of such combination, be proportionately decreased, and the Exercise Price shall be proportionately increased.
| 4 |
(d) Notice of Adjustments. Upon any adjustment in accordance with this Section 6, the Company shall give notice thereof to the Holder, which notice shall state the event giving rise to the adjustment, the Exercise Price as adjusted and the number of securities or other property purchasable upon the exercise of the rights under this Warrant, setting forth in reasonable detail the method of calculation of each. The Company shall, upon the written request of any Holder, furnish or cause to be furnished to such Holder a certificate setting forth (i) such adjustments, (ii) the Exercise Price at the time in effect and (iii) the number of securities and the amount, if any, of other property that at the time would be received upon exercise of this Warrant.
7. Notification of Certain Events. Prior to the expiration of this Warrant pursuant to Section 8, in the event that the Company shall authorize:
(a) the issuance of any dividend or other distribution on the capital stock of the Company (other than (i) dividends or distributions otherwise provided for in Section 6, (ii) repurchases of common stock issued to or held by employees, officers, directors or consultants of the Company or its subsidiaries; or (iii) repurchases of capital stock of the Company in connection with the settlement of disputes with any stockholder), whether in cash, property, stock or other securities;
(b) the voluntary liquidation, dissolution or winding up of the Company; or
(c) any transaction resulting in the expiration of this Warrant pursuant to Section 8(b) or 8(c),
the Company shall send to the Holder of this Warrant at least ten (10) days prior written notice of the date on which a record shall be taken for any such dividend or distribution specified in clause (a) or the expected effective date of any such other event specified in clause (b) or (c), as applicable. The notice provisions set forth in this section may be shortened or waived prospectively or retrospectively by the consent of the Holder of this Warrant.
8. Expiration of the Warrant. This Warrant shall expire and shall no longer be exercisable as of the earlier of:
(a) 5:00 p.m., Pacific time, on the eighteen-month anniversary of the date of this Warrant;
(b) (i) the acquisition of the Company by another entity by means of any transaction or series of related transactions to which the Company is a party (including, without limitation, any stock acquisition, reorganization, merger or consolidation, but excluding any sale of stock for capital raising purposes and any transaction effected primarily for purposes of changing the Company’s jurisdiction of incorporation) other than a transaction or series of related transactions in which the holders of the voting securities of the Company outstanding immediately prior to such transaction or series of related transactions retain, immediately after such transaction or series of transactions, as a result of shares in the Company held by such holders prior to such transaction or series of transactions, at least a majority of the total voting power represented by the outstanding voting securities of the Company or such other surviving or resulting entity (or if the Company or such other surviving or resulting entity is a wholly-owned subsidiary immediately following such acquisition, its parent), or (ii) a sale, lease or other disposition of all or substantially all of the assets of the Company and its subsidiaries taken as a whole by means of any transaction or series of related transactions, except where such sale, lease or other disposition is to a wholly-owned subsidiary of the Company; or
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(c) Immediately prior to the closing of a firm commitment underwritten public offering pursuant to an effective registration statement filed under the Securities Act covering the offering and sale of the Company’s common stock.
9. No Rights as a Stockholder. Nothing contained herein shall entitle the Holder to any rights as a stockholder of the Company or to be deemed the holder of any securities that may at any time be issuable on the exercise of the rights hereunder for any purpose nor shall anything contained herein be construed to confer upon the Holder, as such, any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issuance of stock, reclassification of stock, change of par value or change of stock to no par value, consolidation, merger, conveyance or otherwise) or to receive notice of meetings, or to receive dividends or subscription rights or any other rights of a stockholder of the Company until the rights under the Warrant shall have been exercised and the Shares purchasable upon exercise of the rights hereunder shall have become deliverable as provided herein.
10. Market Stand-off. The Holder of this Warrant hereby agrees that such Holder shall not sell or otherwise transfer, make any short sale of, grant any option for the purchase of, or enter into any hedging or similar transaction with the same economic effect as a sale, of any common stock (or other securities) of the Company held by the Holder during the one hundred eighty (180) day period following the effective date of a Registration Statement filed under the Securities Act (or such other period as may be requested by the Company or an underwriter to accommodate regulatory restrictions on (i) the publication or other distribution of research reports and (ii) analyst recommendations and opinions, including, but not limited to, the restrictions contained in NYSE Rule 472(f)(4), or any successor provisions or amendments thereto). The Company may impose stop-transfer instructions and may notate each such certificate, instrument or book entry with a legend as substantially set forth in Section 5(c) with respect to the shares of common stock (or other securities) subject to the foregoing restriction until the end of such one hundred eighty (180) day (or other) period. The Holder agrees to execute a market stand-off agreement with the underwriters in the offering in customary form consistent with the provisions of this section.
11. Representations and Warranties of the Holder. By acceptance of this Warrant, the Holder represents and warrants to the Company as follows:
(a) No Registration. The Holder understands that the Securities have not been, and will not be, registered under the Securities Act by reason of a specific exemption from the registration provisions of the Securities Act, the availability of which depends upon the accuracy of the Holder’s representations as expressed herein or otherwise made pursuant hereto.
(b) Illiquidity and Continued Economic Risk. The Holder acknowledges and agrees that there is no ready public market for the Securities and that there is no guarantee that a market for their resale will ever exist. The Holder must bear the economic risk of this investment indefinitely and the Company has no obligation to list the Securities on any market or take any steps (including registration under the Securities Act or the Securities Exchange Act of 1934, as amended) with respect to facilitating trading or resale of the Securities. The Holder acknowledges that it is able to bear the economic risk of losing the Holder’s entire investment in the Securities. The Holder also understands that an investment in the Company involves significant risks and has taken full cognizance of and understands all of the risk factors relating to the purchase of Securities.
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(c) Accredited Investor Status or Investment Limits. The Holder represents that either:
(i) the Holder is an “accredited investor” within the meaning of Rule 501 of Regulation D under the Securities Act; or
(ii) The purchase price, together with any other amounts previously used to purchase Securities in this offering, does not exceed 10% of the greater of the Holder’s annual income or net worth (or in the case where it is a non-natural person, their revenue or net assets for such it's most recently completed fiscal year end).
(d) Company Information. The Holder understands that the Company is subject to all the risks that apply to early-stage companies, whether or not those risks are explicitly set out in the Offering Circular. Holder has had such opportunity as it deems necessary (which opportunity may have presented through online chat or commentary functions) to discuss the Company’s business, management and financial affairs with managers, officers and management of the Company and has had the opportunity to review the Company’s operations and facilities. The Holder has also had the opportunity to ask questions of and receive answers from the Company and its management regarding the terms and conditions of this investment. The Holder acknowledges that except as set forth herein, no representations or warranties have been made to Holder, or to Holder’s advisors or representative, by the Company or others with respect to the business or prospects of the Company or its financial condition.
(e) Domicile. The Holder maintains Holder’s domicile (and is not a transient or temporary resident) at the address shown on the signature page of the Subscription Agreement or, if this Warrant is issued upon transfer or exercise of a Warrant, at the address shown on the Assignment Form or Notice of Exercise, as the case may be.
(f) No Brokerage Fees. There are no claims for brokerage commission, finders’ fees or similar compensation in connection with the transactions contemplated by this Warrant or the subscription agreement or related documents based on any arrangement or agreement binding upon the Holder.
12. Miscellaneous.
(a) Amendments. Except as set forth in the Warrant Agreement, neither this Warrant nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument referencing this Warrant and signed by the Company and countersigned by the Warrant Agent.
(b) Waivers. No waiver of any single breach or default shall be deemed a waiver of any other breach or default theretofore or thereafter occurring.
(c) Notices. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by registered or certified mail, postage prepaid, sent by facsimile or electronic mail (if to the Holder) or otherwise delivered by hand, messenger or courier service addressed:
(i) if to the Holder, to the Holder at the Holder’s address, facsimile number or electronic mail address as shown in the Company’s records, as may be updated in accordance with the provisions hereof, or until any such Holder so furnishes an address, facsimile number or electronic mail address to the Company, then to and at the address, facsimile number or electronic mail address of the last holder of this Warrant for which the Company has contact information in its records; or
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(ii) if to the Company, to the attention of the President or Chief Financial Officer of the Company at the Company’s address as shown on the signature page hereto, or at such other current address as the Company shall have furnished to the Warrant Agent and the Holder.
Each such notice or other communication shall for all purposes of this Warrant be treated as effective or having been given (i) if delivered by hand, messenger or courier service, when delivered (or if sent via a nationally-recognized overnight courier service, freight prepaid, specifying next-business-day delivery, one business day after deposit with the courier), or (ii) if sent via mail, at the earlier of its receipt or five days after the same has been deposited in a regularly-maintained receptacle for the deposit of the United States mail, addressed and mailed as aforesaid, or (iii) if sent via facsimile, upon confirmation of facsimile transfer or, if sent via electronic mail, upon confirmation of delivery when directed to the relevant electronic mail address, if sent during normal business hours of the recipient, or if not sent during normal business hours of the recipient, then on the recipient’s next business day. In the event of any conflict between the Company’s books and records and this Warrant or any notice delivered hereunder, the Company’s books and records will control absent fraud or error.
(d) Governing Law. This Warrant and all actions arising out of or in connection with this Warrant shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to the conflicts of law provisions of the State of Delaware or of any other state.
(e) Jurisdiction and Venue. Each of the Holder and the Company irrevocably consents to the exclusive jurisdiction and venue of any court within State of Delaware, in connection with any matter based upon or arising out of this Warrant or the matters contemplated herein, and agrees that process may be served upon them in any manner authorized by the laws of the State of Delaware for such persons.
(f) Titles and Subtitles. The titles and subtitles used in this Warrant are used for convenience only and are not to be considered in construing or interpreting this Warrant. All references in this Warrant to sections, paragraphs and exhibits shall, unless otherwise provided, refer to sections and paragraphs hereof and exhibits attached hereto.
(g) Severability. If any provision of this Warrant becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, portions of such provision, or such provision in its entirety, to the extent necessary, shall be severed from this Warrant, and such illegal, unenforceable or void provision shall be replaced with a valid and enforceable provision that will achieve, to the extent possible, the same economic, business and other purposes of the illegal, unenforceable or void provision. The balance of this Warrant shall be enforceable in accordance with its terms.
(h) Saturdays, Sundays and Holidays. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or U.S. federal holiday, then such action may be taken or such right may be exercised on the next succeeding day that is not a Saturday, Sunday or U.S. federal holiday.
(i) Entire Agreement. Except as expressly set forth herein and in the Warrant Agreement, this Warrant (including the exhibits attached hereto) and the Warrant Agreement constitute the entire agreement and understanding of the Company and the Holder with respect to the subject matter hereof and supersede all prior agreements and understandings relating to the subject matter hereof.
(signature page follows)
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The Company has signed this Warrant as of the date stated on the first page.
| CLOUDASTRUCTURE, INC.
By: S. Richard Bentley, Chief Executive Officer
Address:
55 E 3rd Avenue San Mateo CA 94401 |
(Signature Page to Warrant to Purchase Shares of Common Stock of Cloudastructure, Inc.)
EXHIBIT A
NOTICE OF EXERCISE
| To: | CLOUDASTRUCTURE, INC. (the “Company”) |
| And To: | VStock Transfer, LLC |
| 18 Lafayette Place | |
| Woodmere, NY 11598 | |
| Attn: Warrant Department |
| (1) | Exercise. The undersigned elects to purchase the following pursuant to the terms of the attached warrant: |
| Number of shares: | ||
| Type of security: |
| (2) | Method of Exercise. The undersigned elects to exercise the attached warrant pursuant to: |
| ☐ | A cash payment, and tenders herewith payment of the purchase price for such shares in full, together with all applicable transfer taxes, if any. | |
| ☐ | The net issue exercise provisions of Section 2(b) of the attached warrant. |
| (3) | Conditional Exercise. Is this a conditional exercise pursuant to Section 2(e): |
| ☐ Yes ☐ No | ||
| If “Yes,” indicate the applicable condition: | ||
| (4) | Stock. Please make a book entry and, if the shares are certificated, issue a certificate or certificates representing the shares in the name of: |
| ☐ | The undersigned | ||
| ☐ | Other—Name: | ||
| Address: |
| (5) | Unexercised Portion of the Warrant. Please issue a new warrant for the unexercised portion of the attached warrant in the name of: |
| ☐ | The undersigned | ||
| ☐ | Other—Name: | ||
| Address: | |||
| ☐ | Not applicable |
| A-1 |
| (6) | Representations. The undersigned represents and warrants that all representations and warranties of the undersigned set forth in Section 11 of the attached warrant are true and correct as of the date hereof. |
| (7) | Investment Representation Statement and Market Stand-Off Agreement. The undersigned has executed, and delivers herewith, an Investment Representation Statement and Market Stand-Off Agreement in a form substantially similar to the form attached to the warrant as Exhibit A-1. |
| (8) | Consent to Receipt of Electronic Notice. Subject to the limitations set forth in Delaware General Corporation Law §232(e), the undersigned consents to the delivery of any notice to stockholders given by the Company under the Delaware General Corporation Law or the Company’s certificate of incorporation or bylaws by (i) facsimile telecommunication to the facsimile number provided below (or to any other facsimile number for the undersigned in the Company’s records), (ii) electronic mail to the electronic mail address provided below (or to any other electronic mail address for the undersigned in the Company’s records), (iii) posting on an electronic network together with separate notice to the undersigned of such specific posting or (iv) any other form of electronic transmission (as defined in the Delaware General Corporation Law) directed to the undersigned. This consent may be revoked by the undersigned by written notice to the Company and may be deemed revoked in the circumstances specified in Delaware General Corporation Law §232. |
| (Print name of the warrant holder) | |
| (Signature) | |
| (Name and title of signatory, if applicable) | |
| (Date) | |
| (Fax number) | |
| (Email address) |
(Signature page to the Notice of Exercise)
| A-2 |
EXHIBIT A-l
INVESTMENT REPRESENTATION STATEMENT
AND
MARKET STAND-OFF AGREEMENT
| INVESTOR: | |||
| COMPANY: | CLOUDASTRUCTURE, INC. | ||
| SECURITIES: | THE WARRANT ISSUED ON [INSERT DATE] (THE “WARRANT”) AND THE SECURITIES ISSUED OR ISSUABLE UPON EXERCISE THEREOF | ||
| DATE: | |||
In connection with the purchase or acquisition of the above-listed Securities, the undersigned Investor represents and warrants to, and agrees with, the Company as follows:
1. No Registration. The Investor understands that the Securities have not been, and will not be, registered under the Securities Act of 1933, as amended (the “Securities Act”), by reason of a specific exemption from the registration provisions of the Securities Act, the availability of which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of the Investor’s representations as expressed herein or otherwise made pursuant hereto.
2. Illiquidity and Continued Economic Risk. The Investor acknowledges and agrees that there is no ready public market for the Securities and that there is no guarantee that a market for their resale will ever exist. The undersigned must bear the economic risk of this investment indefinitely and the Company has no obligation to list the Securities on any market or take any steps (including registration under the Securities Act or the Securities Exchange Act of 1934, as amended) with respect to facilitating trading or resale of the Securities. The Investor acknowledges that it is able to bear the economic risk of losing the undersigned’s entire investment in the Securities. The Investor also understands that an investment in the Company involves significant risks and has taken full cognizance of and understands all of the risk factors relating to the purchase of Securities.
3. Accredited Investor Status or Investment Limits. The Investor represents that either:
(i) it is an “accredited investor” within the meaning of Rule 501 of Regulation D under the Securities Act; or
(ii) The purchase price, together with any other amounts previously used to purchase Securities in this offering, does not exceed 10% of the greater of the Investor’s annual income or net worth (or in the case where it is a non-natural person, their revenue or net assets for such it's most recently completed fiscal year end).
4. Company Information. The Investor understands that the Company is subject to all the risks that apply to early-stage companies, whether or not those risks are explicitly set out in the Offering Circular. Investor has had such opportunity as it deems necessary (which opportunity may have presented through online chat or commentary functions) to discuss the Company’s business, management and financial affairs with managers, officers and management of the Company and has had the opportunity to review the Company’s operations and facilities. The Investor has also had the opportunity to ask questions of and receive answers from the Company and its management regarding the terms and conditions of this investment. The Investor acknowledges that except as set forth herein, no representations or warranties have been made to Investor, or to Investor’s advisors or representative, by the Company or others with respect to the business or prospects of the Company or its financial condition.
| A-1-1 |
5. Domicile. The Investor maintains Investor’s domicile (and is not a transient or temporary resident) at the address shown on the signature page hereto.
6. No Brokerage Fees. There are no claims for brokerage commission, finders’ fees or similar compensation in connection with the transactions contemplated by the Warrant or related documents based on any arrangement or agreement binding upon the Investor.
7. Market Stand-off. The Investor agrees that the Investor shall not sell or otherwise transfer, make any short sale of, grant any option for the purchase of, or enter into any hedging or similar transaction with the same economic effect as a sale, of any common stock (or other securities) of the Company held by the Investor (other than those included in the registration) during the one hundred eighty (180) day period following the effective date of a registration statement of the Company filed under the Securities Act (or such other period as may be requested by the Company or an underwriter to accommodate regulatory restrictions on (i) the publication or other distribution of research reports and (ii) analyst recommendations and opinions, including, but not limited to, the restrictions contained in NYSE Rule 472(f)(4), or any successor provisions or amendments thereto). The Company may impose stop-transfer instructions and may notate each such certificate, instrument or book entry with a legend with respect to the shares of common stock (or other securities) subject to the foregoing restriction until the end of such one hundred eighty (180) day (or other) period. The Investor agrees to execute a market stand-off agreement with the relevant underwriters in customary form consistent with the provisions of this section.
(signature page follows)
| A-1-2 |
The Investor is signing this Investment Representation Statement and Market Stand-Off Agreement on the date first written above.
| INVESTOR | |
| (Print name of the investor) | |
| (Signature) | |
| (Name and title of signatory, if applicable) | |
| (Street address) | |
| (City, state and ZIP) |
| A-1-3 |
EXHIBIT B
ASSIGNMENT FORM
| ASSIGNOR: | |||
| COMPANY: | CLOUDASTRUCTURE, INC. | ||
| WARRANT: | THE WARRANT TO PURCHASE SHARES OF COMMON STOCK ISSUED ON [INSERT DATE] (THE “WARRANT”) | ||
| DATE: | |||
| (1) | Assignment. The undersigned registered holder of the Warrant (“Assignor”) assigns and transfers to the assignee named below (“Assignee”) all of the rights of Assignor under the Warrant, with respect to the number of shares set forth below: |
| Name of Assignee: | |||
| Address of Assignee: | |||
| Number of Shares Assigned: | |||
| and does irrevocably constitute and appoint ______________________ as attorney to make such transfer on the books of Cloudastructure, Inc., maintained for the purpose, with full power of substitution in the premises. | |||
| (2) | Obligations of Assignee. Assignee agrees to take and hold the Warrant and any shares of stock to be issued upon exercise of the rights thereunder (the “Securities”) subject to, and to be bound by, the terms and conditions set forth in the Warrant to the same extent as if Assignee were the original holder thereof. | ||
| (3) | Representations. Assignee represents and warrants that all representations and warranties set forth in Section 11 of the Warrant are true and correct as to Assignee as of the date hereof. | ||
| (4) | Investment Representation Statement and Market Stand-Off Agreement. Assignee has executed, and delivers herewith, an Investment Representation Statement and Market Stand-Off Agreement in a form substantially similar to the form attached to the Warrant as Exhibit A-1. | ||
| Assignor and Assignee are signing this Assignment Form on the date first set forth above. | |||
| 1 |
| ASSIGNOR | ASSIGNEE | |
| (Print name of Assignor) | (Print name of the Assignee) | |
| (Signature of Assignor) | (Signature of Assignee) | |
| (Print name of signatory, if applicable) | (Print name of signatory, if applicable) | |
| (Print title of signatory, if applicable) | (Print title of signatory, if applicable) | |
| Address: | Address: | |
| 2 |
Exhibit 10.1
CLOUDASTRUCTURE, INC.
2014-AMENDED STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this Stock Option Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees, Directors and Consultants and to promote the success of the Company’s business. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant.
2. Definitions. As used herein, the following definitions shall apply:
A. “Administrator” means the Board or any of its Committees as shall be administering the Plan in accordance with Section 4 hereof.
B. “Applicable Laws” means the requirements relating to the administration of stock option plans under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any other country or jurisdiction where Options are granted under the Plan.
C. “Board” means the Board of Directors of the Company.
D. “Change of Control” means the occurrence of any of the following events:
(1) Any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes the “beneficial owner” (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company’s then outstanding voting securities; or
(2) The consummation of the sale or disposition by the Company of all or substantially all of the Company’s assets; or
(3) The consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or its parent) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity or its parent outstanding immediately after such merger or consolidation.
E. “Code” means the Internal Revenue Code of 1986, as amended.
F. “Committee” means a committee of Directors appointed by the Board in accordance with Section 4 hereof.
G. “Common Stock” means the Common Stock of the Company.
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H. “Company” means Cloudastructure, Inc., a Delaware corporation.
I. “Consultant” means any natural person who is engaged by the Company or any Parent or Subsidiary to render consulting or advisory services to such entity and who satisfies the requirements of subsection (c)(1) of Rule 701 under the Securities Act of 1933, as amended.
J. “Director” means a member of the Board.
K. “Disability” means total and permanent disability as defined in Section 22(e)(3) of the Code.
L. “Employee” means any person, including officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. For purposes of Incentive Stock Options, no such leave may exceed ninety (90) days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, then three (3) months following the 91st day of such leave, any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. Neither service as a Director nor payment of a director’s fee by the Company shall be sufficient to constitute “employment” by the Company.
M. “Exchange Act” means the Securities Exchange Act of 1934, as amended.
N. “Fair Market Value” means, as of any date, the value of Common Stock determined as follows:
(1) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system on the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable;
(2) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high bid and low asked prices for the Common Stock on the day of determination; or
(3) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator.
O. “Incentive Stock Option” means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code.
| 2 |
P. “Nonstatutory Stock Option” means an Option not intended to qualify as an Incentive Stock Option.
Q. “Option” means a stock option granted pursuant to the Plan.
R. “Option Agreement” means a written or electronic agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan.
S. “Optioned Stock” means the Common Stock subject to an Option.
T. “Optionee” means the holder of an outstanding Option granted under the Plan.
U. “Parent” means a “parent corporation,” whether now or hereafter existing, as defined in Section 424(e) of the Code.
V. “Plan” means this 2014 Stock Option Plan.
W. “Service Provider” means an Employee, Director or Consultant.
X. “Share” means a share of the Common Stock, as adjusted in accordance with Section 12 below.
Y. “Subsidiary” means a “subsidiary corporation,” whether now or hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 12 of the Plan, the maximum aggregate number of Shares that may be subject to option and sold under the Plan is 1,500,000,000 Shares. The Shares may be authorized but unissued, or reacquired Common Stock.
If an Option expires or becomes unexercisable without having been exercised in full, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated). However, Shares that have actually been issued under the Plan, upon exercise of an Option, shall not be returned to the Plan and shall not become available for future distribution under the Plan, except that if Shares of restricted stock issued pursuant to an Option are repurchased by the Company at their original purchase price, such Shares shall become available for future grant under the Plan.
4. Administration of the Plan.
A. Administrator. The Plan shall be administered by the Board or a Committee appointed by the Board, which Committee shall be constituted to comply with Applicable Laws.
B. Powers of the Administrator. Subject to the provisions of the Plan and, in the case of a Committee, the specific duties delegated by the Board to such Committee, and subject to the approval of any relevant authorities, the Administrator shall have the authority in its discretion:
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(1) to determine the Fair Market Value;
(2) to select the Service Providers to whom Options may from time to time be granted hereunder;
(3) to determine the number of Shares to be covered by each such Option granted hereunder;
(4) to approve forms of agreement for use under the Plan;
(5) to determine the terms and conditions of any Option granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or the Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine;
(6) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of satisfying applicable foreign laws;
(7) to allow Optionees to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option that number of Shares having a Fair Market Value equal to the minimum amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by Optionees to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable; and
(8) to construe and interpret the terms of the Plan and Options granted pursuant to the Plan.
C. Effect of Administrator’s Decision. All decisions, determinations and interpretations of the Administrator shall be final and binding on all Optionees.
5. Eligibility. Nonstatutory Stock Options may be granted to Service Providers. Incentive Stock Options may be granted only to Employees.
6. Limitations.
A. Incentive Stock Option Limit. Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted.
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B. At-Will Employment. Neither the Plan nor any Option shall confer upon any Optionee any right with respect to continuing the Optionee’s relationship as a Service Provider with the Company, nor shall it interfere in any way with his or her right or the Company’s right to terminate such relationship at any time, with or without cause, and with or without notice.
7. Term of Plan. Subject to stockholder approval in accordance with Section 18, the Plan shall become effective upon its adoption by the Board. Unless sooner terminated under Section 14, it shall continue in effect for a term of ten (10) years from the later of (i) the effective date of the Plan, or (ii) the date of the most recent Board approval of an increase in the number of shares reserved for issuance under the Plan.
8. Term of Option. The term of each Option shall be stated in the Option Agreement; provided, however, that the term shall be no more than ten (10) years from the date of grant thereof. In the case of an Incentive Stock Option granted to an Optionee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Option Agreement.
9. Option Exercise Price and Consideration.
A. Exercise Price. The per share exercise price for the Shares to be issued upon exercise of an Option shall be such price as is determined by the Administrator, but shall be subject to the following:
(1) In the case of an Incentive Stock Option
(a) granted to an Employee who, at the time of grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant.
(b) granted to any other Employee, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant.
(2) In the case of a Nonstatutory Stock Option
(a) granted to a Service Provider who, at the time of grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant.
(b) granted to any other Service Provider, the per Share exercise price shall be no less than 85% of the Fair Market Value per Share on the date of grant.
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(3) Notwithstanding the foregoing, Options may be granted with a per Share exercise price other than as required above pursuant to a merger or other corporate transaction.
B. Forms of Consideration. The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant). Such consideration may consist of, without limitation, (1) cash, (2) check, (3) promissory note, (4) other Shares, provided Shares acquired directly from the Company (x) have been owned by the Optionee for more than six (6) months on the date of surrender, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which such Option shall be exercised, (5) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan, or (6) any combination of the foregoing methods of payment. In making its determination as to the type of consideration to accept, the Administrator shall consider if acceptance of such consideration may be reasonably expected to benefit the Company. Notwithstanding the foregoing, the Administrator may permit an Optionee to exercise his or her Option by delivery of a full-recourse promissory note secured by the purchased Shares. The terms of such promissory note shall be determined by the Administrator in its sole discretion.
10. Exercise of Option.
A. Procedure for Exercise; Rights as a Stockholder. Any Option granted hereunder shall be exercisable according to the terms hereof at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. Except in the case of Options granted to officers, Directors and Consultants, Options shall become exercisable at a rate of no less than 20% per year over five (5) years from the date the Options are granted. Unless the Administrator provides otherwise, vesting of Options granted hereunder to officers and Directors shall be suspended during any unpaid leave of absence. An Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Shares, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 12 of the Plan.
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Exercise of an Option in any manner shall result in a decrease in the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised.
B. Termination of Relationship as a Service Provider. If an Optionee ceases to be a Service Provider, such Optionee may exercise his or her Option within thirty (30) days of termination, or such longer period of time as specified in the Option Agreement, to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of the Option as set forth in the Option Agreement). If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan.
C. Disability of Optionee. If an Optionee ceases to be a Service Provider as a result of the Optionee’s Disability, the Optionee may exercise his or her Option within six (6) months of termination, or such longer period of time as specified in the Option Agreement, to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan.
D. Death of Optionee. If an Optionee dies while a Service Provider, the Option may be exercised within six (6) months following Optionee’s death, or such longer period of time as specified in the Option Agreement, to the extent that the Option is vested on the date of death (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement) by the Optionee’s designated beneficiary, provided such beneficiary has been designated prior to Optionee’s death in a form acceptable to the Administrator. If no such beneficiary has been designated by the Optionee, then such Option may be exercised by the personal representative of the Optionee’s estate or by the person(s) to whom the Option is transferred pursuant to the Optionee’s will or in accordance with the laws of descent and distribution. If, at the time of death, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall immediately revert to the Plan. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan.
11. Limited Transferability of Options. Unless determined otherwise by the Administrator, Options may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or the laws of descent and distribution, and may be exercised during the lifetime of the Optionee, only by the Optionee. If the Administrator in its sole discretion makes an Option transferable, such Option may only be transferred by (i) will, (ii) the laws of descent and distribution, (iii) instrument to an inter vivos or testamentary trust in which the Option is to be passed to beneficiaries upon the death of the Optionee, or (iv) gift to a member of Optionee’s immediate family (as such term is defined in Rule 16a-1(e) of the Exchange Act). In addition, any
transferable Option shall contain additional terms and conditions as the Administrator deems appropriate.
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12. Adjustments Upon Changes in Capitalization, Liquidation or Change of Control.
A. Changes in Capitalization. Subject to any required action by the stockholders of the Company, the number and type of Shares which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, and the number and type of Shares covered by each outstanding Option, as well as the price per Share covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number or type of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company. The conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration.” Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number, type or price of Shares subject to an Option.
B. Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Optionee as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for an Optionee to have the right to exercise his or her Option until fifteen (15) days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option would not otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option applicable to any Shares purchased upon exercise of an Option shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Option will terminate immediately prior to the consummation of such proposed action.
C. Change of Control. In the event of a Change of Control, each outstanding Option shall be assumed or an equivalent option substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation in a Change of Control refuses to assume or substitute for the Option, then the Optionee shall fully vest in and have the right to exercise the Option as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable. If an Option becomes fully vested and execisable in lieu of assumption or substitution in the event of a Change of Control, the Administrator shall notify the Optionee in writing or electronically that this Option shall be fully exercisable for a period of fifteen (15) days from the date of such notice, and the Option shall terminate upon expiration of such period. For the purposes of this paragraph, the Option shall be considered assumed if, following the Change of Control, the Option confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option immediately prior to the Change of Control, the consideration (whether stock, cash, or other securities or property) received in the Change of Control by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the Change of Control is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option, for each Share of Optioned Stock subject to the Option, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of common stock in the Change of Control.
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13. Time of Granting Options. The date of grant of an Option shall, for all purposes, be the date on which the Administrator makes the determination granting such Option, or such later date as is determined by the Administrator. Notice of the determination shall be given to each Service Provider to whom an Option is so granted within a reasonable time after the date of such grant.
14. Amendment and Termination of the Plan.
A. Amendment and Termination. The Board may at any time amend, alter, suspend or terminate the Plan.
B. Stockholder Approval. The Board shall obtain stockholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws.
C. Effect of Amendment or Termination. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. Termination of the Plan shall not affect the Administrator’s ability to exercise the powers granted to it hereunder with respect to Options granted under the Plan prior to the date of such termination.
15. Conditions Upon Issuance of Shares.
A. Legal Compliance. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance.
B. Investment Representations. As a condition to the exercise of an Option, the Administrator may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required.
16. Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.
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17. Reservation of Shares. The Company, during the term of this Plan, shall at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan.
18. Stockholder Approval. The Plan shall be subject to approval by the stockholders of the Company within twelve (12) months after the date the Plan is adopted. Such stockholder approval shall be obtained in the degree and manner required under Applicable Laws.
19. Information to Optionees. The Company shall provide to each Optionee and to each individual who acquires Shares pursuant to the Plan, not less frequently than annually during the period such Optionee has one or more Options outstanding, and, in the case of an individual who acquires Shares pursuant to the Plan, during the period such individual owns such Shares, copies of annual financial statements. The Company shall not be required to provide such statements to key employees whose duties in connection with the Company assure their access to equivalent information.
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Exhibit 10.4
ASSET PURCHASE AGREEMENT
By and Among
CLOUDASTRUCTURE, INC.,
INFRASTRUCTURE PROVING GROUNDS, INC.
and
EACH OF THE SHAREHOLDERS (AS DEFINED HEREIN)
Dated as of June 30, 2022
THIS DRAFT IS BEING PROVIDED PRIOR TO COMPLETION OF A DUE DILIGENCE REVIEW AND REMAINS SUBJECT TO REVISIONS AS NECESSARY TO ADDRESS ANY DUE DILIGENCE FINDINGS. ALTHOUGH SPECIFIC PROVISIONS ARE BRACKETED AND NOTE THAT REVISIONS MAY BE NECESSARY AFTER COMPLETION OF THE DUE DILIGENCE PROCESS, THE ENTIRETY OF THIS AGREEMENT IS SUBJECT TO CHANGE UPON COMPLETION OF THE DUE DILIGENCE PROCESS, AND SUCH CHANGES MAY BE MATERIAL.
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TABLE OF CONTENTS
| ARTICLE I DEFINITIONS | 3 |
| ARTICLE II PURCHASE AND SALE | 13 |
| ARTICLE III CLOSING | 19 |
| ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SELLERING PARTIES | 19 |
| ARTICLE V REPRESENTATIONS AND WARRANTIES OF BUYING PARTIES | 33 |
| ARTICLE VI COVENANTS | 34 |
| ARTICLE VII EMPLOYMENT AND EMPLOYEE BENEFITS | 40 |
| ARTICLE VIII CONDITIONS TO CLOSING | 41 |
| ARTICLE IX INDEMNIFICATION | 43 |
| ARTICLE X TERMINATION | 46 |
| ARTICLE XI MISCELLANEOUS | 46 |
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ASSET PURCHASE AGREEMENT
This ASSET PURCHASE AGREEMENT (this "Agreement"), dated as of June 30, 2022, is entered into between Infrastructure Proving Grounds, Inc., a Delaware corporation ("Seller"); the Persons who have executed this Agreement on the signature page hereof (the “Stockholders”); and Cloudastructure Inc., a Delaware corporation ("Buyer"). The Seller and the Stockholders are hereinafter sometimes collectively referred to as the "Selling Parties" and each a "Selling Party". The Selling Parties and the Buyer are collectively referred to herein as the “Parties.”
Recitals
WHEREAS, Seller owns certain assets that it uses in connection with its business of producing, selling and servicing the GearBox product, and other related business items (collectively, the “Seller’s Business”);
WHEREAS, Seller wishes to sell and assign to Buyer, and Buyer wishes to purchase and assume from Seller, substantially all the assets, and certain specified liabilities, of the Seller’s Business, subject to the terms and conditions set forth herein; and
WHEREAS, concurrently with the execution and delivery of this Agreement and as a condition and inducement to Buyer’s willingness to enter into this Agreement, (i) each of Steve Kiss, Stacey Glasgow, Chad Zerangue and Alan Penzotti, as the founding Stockholders of the Seller (collectively, the “Executive Employees” and, each, a “Executive Employee”) shall have entered into an employee agreement with Buyer or its Affiliate (collectively, the “Executive Employment Agreements”), which shall be effective as of the Closing and will terminate any and all employment agreements or similar arrangements between each IPG Employee, on the one hand, and the Seller or any of its Affiliates, on the other hand, as of immediately prior to the Closing.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto agree as follows:
The following terms have the meanings specified or referred to in this Article I:
“Accounts Receivable” has the meaning set forth in Section 2.01(b).
“Accounting Principles” means the following accounting principles which shall be used in calculating the EBIT and EBITDA of the Gearbox Division of Buyer following the Closing and allocating corporate overhead in each of the three trailing twelve (12) month periods ending June 30, 2023, June 30, 2024 and June 30, 2025:
| (a) | EBIT and EBITDA is calculated, in each case in accordance with GAAP, by (i) the Net Revenues of the Gearbox Division, minus (ii) cost of sales of the Gearbox Division, (iii) minus the expenses of the Gearbox Division, exclusive of interest and taxes, plus (iv) in the case of the calculation of EBITDA, depreciation and amortization of intangibles. |
| (b) | The GearBox Division of the Buyer will pay 8% of its consumed budget towards G&A Expenses of the Buyer. |
| (c) | Hiring bonuses of $250,000 will not be part of the calculations in sections (a) and (b) above. |
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“Action” means any claim, action, cause of action, demand, lawsuit, arbitration, inquiry, audit, notice of violation, proceeding, litigation, citation, summons, subpoena or investigation of any nature, civil, criminal, administrative, regulatory or otherwise, whether at law or in equity.
“Acquisition Proposal” has the meaning set forth in Section 6.03(a).
“Affiliate” of a Person means any other Person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such Person. The term “control” (including the terms “controlled by” and “under common control with”) means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise.
“Agreement” has the meaning set forth in the preamble.
“Allocation Schedule” has the meaning set forth in Section 2.07.
“Anniversary Year(s)” means each of the three (3) consecutive twelve (12) month periods ending June 30, 2023, June 30, 2024 and June 30, 2025.
“Annual Financial Statements” has the meaning set forth in Section 4.04(a).
“Assigned Contracts” has the meaning set forth in Section 2.01(e).
“Assignment and Assumption Agreement” has the meaning set forth in 8.02(g).
“Assignment and Assumption of Lease” has the meaning set forth in 8.02(i).
“Assumed Liabilities” has the meaning set forth in Section 2.03.
“Balance Sheet” has the meaning set forth in Section 4.04(a).
“Balance Sheet Date” has the meaning set forth in Section 4.04(a).
“Benefit Plan” has the meaning set forth in Section 4.21(a).
“Bill of Sale” has the meaning set forth in Section 8.02(f).
"Books and Records" has the meaning set forth in Section 2.01(q).
"Business" has the meaning set forth in the recitals.
"Business Day" means any day except Saturday, Sunday or any other day on which commercial banks located in San Francisco are authorized or required by Law to be closed for business.
"Business IT Systems" means all Software, computer hardware, servers, networks, platforms, peripherals, and similar or related items of automated, computerized, or other information technology (IT) networks and systems (including telecommunications networks and systems for voice, data, and video) owned, leased, licensed, or used (including through cloud-based or other third-party service providers) in the conduct of the Seller’s Business.
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"Buyer" has the meaning set forth in the preamble.
"Buyer Closing Certificate" has the meaning set forth in Section 8.03(e).
"Buyer Indemnified Party" has the meaning set forth in Section 9.02.
"Buyer's Accountants" means IndigoSpire CPA Group, LLC or any other auditor qualified by the Public Company Accounting Oversight Board selected by the Buyer.
"Cap" has the meaning set forth in Section 9.04(a).
“Cash Equivalents” means collectively, certificates of deposit, security deposits and immediately marketable securities.
“Claim Notice” has the meaning set forth in Section 9.05(a).
"Class A Common Stock" means the Class A Common Stock of Buyer with a par value of $0.0001 per share.
"Closing" has the meaning set forth in Section 3.01.
“Closing Cash Payment” has the meaning set forth in Section 2.05.
"Closing Date" has the meaning set forth in Section 3.01.
"Code" means the Internal Revenue Code of 1986, as amended.
"Contracts" means all contracts, leases, deeds, mortgages, licenses, instruments, notes, commitments, undertakings, indentures, joint ventures and all other agreements, commitments and legally binding arrangements, whether written or oral.
“Customer Contracts” means any contracts, orders or other agreements (written or oral) between Seller or an Affiliate of Seller and a Third Party (including any Major Customer) pursuant to which such Seller or an Affiliate supplies products or services to the Third Party or any Affiliate in connection with the operation of the Seller’s Business.
“Default” has the meaning set forth in Section 4.07(c).
"Disclosure Schedules" means the Seller’s Disclosure Schedules delivered by Seller to Buyer and Buyer concurrently with the execution and delivery of this Agreement.
“Documents” means all files, documents, instruments, papers, books, reports, records, tapes, microfilms, photographs, letters, budgets, forecasts, ledgers, journals, title policies, lists of past, present and/or prospective customers, supplier lists, regulatory filings, operating data and plans, technical documentation (design specifications, functional requirements, operating instructions, logic manuals, flow charts, etc.), user documentation (installation guides, user manuals, training materials, release notes, working papers, etc.), marketing documentation (sales brochures, flyers, pamphlets, web pages, etc.), and other similar materials related to the Seller’s Business, Purchased Assets and Assumed Liabilities, in each case whether or not in electronic form.
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"Dollars or $" means the lawful currency of the United States.
“EBIT” means for the purposes of this Agreement and the Warrant, and with respect to the Gearbox Division, the exact same method by which the Buyer calculates its EBIT for presentation of financial statements to its shareholders for each of the three consecutive trailing twelve (12) month periods ending June 30, 2023, June 30, 2024 and June 30, 2025, calculated in accordance with GAAP (a) after deduction for Buyer overhead charges for each of such trailing (12) twelve month periods as calculated in accordance with the Accounting Principles, and (b) before deductions in each of such trailing twelve month periods for interest and income taxes. EBIT will be adjusted to account for the contract signed between Buyer and Seller prior to the acquisition in relation to the Licensing Agreement between the Parties dated November 19, 2021.
“EBITDA ”means for the purposes of this Agreement and the Warrant, and with respect to the Gearbox Division, the exact same method by which the Buyer calculates its EBITDA for presentation of financial statements to its shareholders for each of the three consecutive trailing twelve (12) month periods ending June 30, 2023, June 30, 2024 and June 30, 2025, calculated in accordance with GAAP (a) after deduction for Buyer overhead charges for each of such trailing (12) twelve month periods, as calculated in accordance with the Accounting Principles and (b) before deductions in each of such trailing twelve month periods for interest, income taxes, depreciation and amortization of intangible assets. EBITDA will be adjusted to account for the contract signed between buyer and seller prior to the acquisition in relation to the Licensing Agreement between the Parties dated November 19, 2021.
"Encumbrance" means any charge, claim, community property interest, pledge, condition, equitable interest, lien (statutory or other), option, security interest, mortgage, easement, encroachment, right of way, right of first refusal, or restriction of any kind, including any restriction on use, voting, transfer, receipt of income or exercise of any other attribute of ownership.
"Environmental Claim" means any Action, Governmental Order, lien, fine, penalty, or, as to each, any settlement or judgment arising therefrom, by or from any Person alleging liability of whatever kind or nature (including liability or responsibility for the costs of enforcement proceedings, investigations, cleanup, governmental response, removal or remediation, natural resources damages, property damages, personal injuries, medical monitoring, penalties, contribution, indemnification and injunctive relief) arising out of, based on or resulting from: (a) the presence, Release of, or exposure to, any Hazardous Materials; or (b) any actual or alleged non-compliance with any Environmental Law or term or condition of any Environmental Permit.
"Environmental Law" means any applicable Law, and any Governmental Order or binding agreement with any Governmental Authority: (a) relating to pollution (or the cleanup thereof) or the protection of natural resources, endangered or threatened species, human health or safety, or the environment (including ambient air, soil, surface water or groundwater, or subsurface strata); or (b) concerning the presence of, exposure to, or the management, manufacture, use, containment, storage, recycling, reclamation, reuse, treatment, generation, discharge, transportation, processing, production, disposal or remediation of any Hazardous Materials. The term "Environmental Law" includes, without limitation, the following (including their implementing regulations and any state analogs): the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C. §§ 9601 et seq.; the Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976, as amended by the Hazardous and Solid Waste Amendments of 1984, 42 U.S.C. §§ 6901 et seq.; the Federal Water Pollution Control Act of 1972, as amended by the Clean Water Act of 1977, 33 U.S.C. §§ 1251 et seq.; the Toxic Substances Control Act of 1976, as amended, 15 U.S.C. §§ 2601 et seq.; the Emergency Planning and Community Right-to-Know Act of 1986, 42 U.S.C. §§ 11001 et seq.; the Clean Air Act of 1966, as amended by the Clean Air Act Amendments of 1990, 42 U.S.C. §§ 7401 et seq.; and the Occupational Safety and Health Act of 1970, as amended, 29 U.S.C. §§ 651 et seq.
"Environmental Notice" means any written directive, notice of violation or infraction, or notice respecting any Environmental Claim relating to actual or alleged non-compliance with any Environmental Law or any term or condition of any Environmental Permit.
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"Environmental Permit" means any Permit, letter, clearance, consent, waiver, closure, exemption, decision or other action required under or issued, granted, given, authorized by or made pursuant to Environmental Law.
“Equity Interest” means (i) shares of capital stock, common stock, partnership interests, membership interests in a limited liability company, beneficial interests in a trust or other equity interests in any Person (including classes, groups or series thereof having such relative rights, powers or obligations as may from time to time be established by the issuer thereof or the governing body of its Affiliate, as the case may be, including rights, powers or duties different from, senior to or more favorable than existing classes, groups and series of units, stock and other equity interests and including any so-called “profits interests”) or securities or Contracts providing for profit participation features, equity appreciation rights, phantom equity or similar rights to participate in profits, (ii) warrants, options or other rights to purchase or otherwise acquire, or contracts or commitments that could require the issuance of, securities described in the foregoing clause of this definition, or (iii) any obligations convertible into or exchangeable for, or giving any person a right, option or warrant to acquire, such equity interests or such convertible or exchangeable obligations.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the regulations promulgated thereunder.
"ERISA Affiliate" means all employers (whether or not incorporated) that would be treated together with the Seller or any of its Affiliates as a "single employer" within the meaning of Section 414 of the Code or Section 4001 of ERISA.
“Excluded Assets” has the meaning set forth in Section 2.02.
“Excluded Contracts” has the meaning set forth in Section 2.02(b).
“Excluded Employee” has the meaning set forth in Section 7.01(b).
"Excluded Liabilities" has the meaning set forth in Section 2.04.
“Executive Employees” has the meaning set forth in the Recitals.
“Executive Employment Agreements” has the meaning set forth in the Recitals.
“Financial Statements” has the meaning set forth in Section 4.04(a).
“Free Cash Flow” means the EBITDA less (i) increases in working capital, less (ii) capitalized expenditures of the Gearbox Division of the Buyer for each of the three consecutive trailing twelve (12) month periods ending June 30, 2023, June 30, 2024 and June 30, 2025.Gearbox Division
"GAAP" means United States generally accepted accounting principles in effect from time to time.
“Gearbox Division” means the IPG Business, as owned and operated by the Buyer following the Closing Date, and operated as a separate division of the Buyer.
"Governmental Authority" means any federal, state, local or foreign government or political subdivision thereof, or any agency or instrumentality of such government or political subdivision, or any self-regulated organization or other non-governmental regulatory authority or quasi-governmental authority (to the extent that the rules, regulations or orders of such organization or authority have the force of Law), or any arbitrator, court or tribunal of competent jurisdiction.
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"Governmental Order" means any order, writ, judgment, injunction, decree, stipulation, determination or award entered by or with any Governmental Authority.
"Hazardous Materials" means: (a) any material, substance, chemical, waste, product, derivative, compound, mixture, solid, liquid, mineral or gas, in each case, whether naturally occurring or manmade, that is hazardous, acutely hazardous, toxic, or words of similar import or regulatory effect under Environmental Laws; and (b) any petroleum or petroleum-derived products, radon, radioactive materials or wastes, asbestos in any form, lead or lead-containing materials, urea formaldehyde foam insulation and polychlorinated biphenyls.
“Indebtedness” of any Person means, without duplication, (a) the principal, accreted value, accrued and unpaid interest, prepayment and redemption premiums or penalties (if any), unpaid fees or expenses and other monetary obligations in respect of (i) indebtedness of such Person for money borrowed and (ii) indebtedness evidenced by notes, debentures, bonds or other similar instruments for the payment of which such Person is responsible or liable; (b) all obligations of such Person issued or assumed as the deferred purchase price of property, all conditional sale obligations of such Person and all obligations of such Person under any title retention agreement (but excluding trade accounts payable and other accrued current liabilities arising in the ordinary course of business); (c) all obligations of such Person under leases required to be capitalized in accordance with GAAP; (d) all obligations of such Person for the reimbursement of any obligor on any letter of credit, banker’s acceptance or similar credit transaction; (e) all obligations of such Person under interest rate or currency swap transactions (valued at the termination value thereof); (f) all obligations of such Person for any deferred compensation or accrued incentive compensation or under any severance plan, bonus plan, employment agreement or other plan, agreement or arrangement with any other Person, which obligations are payable or become due as a result of the transaction contemplated herein; (g) all obligations of the type referred to in clauses (a) through (f) of any Persons for the payment of which such Person is responsible or liable, directly or indirectly, as obligor, guarantor, surety or otherwise, including guarantees of such obligations; and (h) all obligations of the type referred to in clauses (a) through (g) of other Persons secured by (or for which the holder of such obligations has an existing right, contingent or otherwise, to be secured by) any Lien on any property or asset of such Person (whether or not such obligation is assumed by such Person).
“Indemnified Party” has the meaning set forth in Section 9.05(a).
“Indemnifying Party” has the meaning set forth in Section 9.05(a).
“Insurance Policies” has the meaning set forth in Section 4.17.
"Intellectual Property" means any and all rights in, arising out of, or associated with any of the following in any jurisdiction throughout the world: (a) issued patents and patent applications (whether provisional or non-provisional), including divisionals, continuations, continuations-in-part, substitutions, reissues, reexaminations, extensions, or restorations of any of the foregoing, and other Governmental Authority-issued indicia of invention ownership (including certificates of invention, petty patents, and patent utility models) ("Patents"); (b) trademarks, service marks, brands, certification marks, logos, trade dress, trade names, and other similar indicia of source or origin, together with the goodwill connected with the use of and symbolized by, and all registrations, applications for registration, and renewals of, any of the foregoing ("Trademarks"); (c) copyrights and works of authorship, whether or not copyrightable, and all registrations, applications for registration, and renewals of any of the foregoing ("Copyrights"); (d) internet domain names and social media account or user names (including "handles"), whether or not Trademarks, all associated web addresses, URLs, websites and web pages, and all content and data thereon or relating thereto, whether or not Copyrights; (e) mask works, and all registrations, applications for registration, and renewals thereof; (f) industrial designs, and all Patents, registrations, applications for registration, and renewals thereof; (g) trade secrets, know-how, inventions (whether or not patentable), discoveries, improvements, technology, business and technical information, databases, data compilations and collections, tools, methods, processes, techniques, and other confidential and proprietary information and all rights therein ("Trade Secrets"); (h) Software; and (i) all other intellectual or industrial property and proprietary rights.
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"Intellectual Property Agreements" means all licenses, sublicenses, consent to use agreements, settlements, coexistence agreements, covenants not to sue, waivers, releases, permissions and other Contracts, whether written or oral, relating to any Intellectual Property that is used or held for use in the conduct of the Seller’s Business as currently conducted or proposed to be conducted to which any Selling Party is a party, beneficiary or otherwise bound.
"Intellectual Property Assets" means all Intellectual Property that is owned by any Selling Party and used or held for use in the conduct of the Seller’s Business as currently conducted or proposed to be conducted, together with all (i) royalties, fees, income, payments, and other proceeds now or hereafter due or payable by any Selling Party with respect to such Intellectual Property; and (ii) claims and causes of action with respect to such Intellectual Property, whether accruing before, on, or after the date hereof/accruing on or after the date hereof, including all rights to and claims for damages, restitution, and injunctive and other legal or equitable relief for past, present, or future infringement, misappropriation, or other violation thereof.
"Intellectual Property Assignments" has the meaning set forth in 8.02(h).
"Intellectual Property Registrations" means all Intellectual Property Assets that are subject to any issuance, registration, or application by or with any Governmental Authority or authorized private registrar in any jurisdiction, including issued Patents, registered Trademarks, domain names and Copyrights, and pending applications for any of the foregoing.
“Interim Balance Sheet Date” has the meaning set forth in Section 4.04(a).
“Interim Financial Statements” has the meaning set forth in Section 4.04(a).
"Knowledge of Selling Parties" or any other similar knowledge qualification, means the actual or constructive knowledge, after due inquiry, of any of the Stockholders and any other director or officer of Seller.
"Law" means any statute, law, ordinance, regulation, rule, code, order, constitution, treaty, common law, judgment, decree, other requirement or rule of law of any Governmental Authority.
“Leased Real Property” has the meaning set forth in Section 4.10(a).
“Leases” has the meaning set forth in Section 4.10(a).
"Liabilities" means liabilities, obligations or commitments of any nature whatsoever, asserted or unasserted, known or unknown, absolute or contingent, accrued or unaccrued, matured or unmatured or otherwise.
"Licensed Intellectual Property" means all Intellectual Property in which any Selling Party holds any rights or interests granted by other Persons, including any of Seller's Affiliates, that is used or held for use in the conduct of the Seller’s Business as currently conducted or proposed to be conducted, including (a) any sublicense, right, permission, consent or non-assertion granted by or obtained from any Selling Party to another Person relating to or under any Intellectual Property Agreement; and (b) any sublicense, right, permission, consent or non-assertion granted to or obtained by any Selling Party from another Person relating to or under any Intellectual Property Agreement.
“Licenses” means all licenses, agreements and other arrangements of any Selling Party which is used or held for use primarily in the operation or conduct of the Seller’s Business, including but not limited to Licensed Intellectual Property and Vendor Licenses.
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"Losses" means losses, damages, liabilities, deficiencies, Actions, judgments, interest, awards, penalties, fines, costs or expenses of whatever kind, including reasonable attorneys' fees and the cost of enforcing any right to indemnification hereunder and the cost of pursuing any insurance providers; provided, however, that "Losses" shall not include punitive damages, except to the extent actually awarded to a Governmental Authority or other third party.
“Major Customers” has the meaning set forth in Section 4.14.
“Major Vendors” has the meaning set forth in Section 4.14.
"Material Adverse Effect" means any event, occurrence, fact, condition or change that is, or could reasonably be expected to become, individually or in the aggregate, materially adverse to (a) the Seller’s Business, results of operations, condition (financial or otherwise) or assets of the Seller’s Business, (b) the value of the Purchased Assets, or (c) the ability of Seller to consummate the transactions contemplated hereby on a timely basis; provided, however, that "Material Adverse Effect" shall not include any event, occurrence, fact, condition or change, directly or indirectly, arising out of or attributable to: (i) general economic or political conditions; (ii) conditions generally affecting the industries in which the Seller’s Business operates; (iii) any changes in financial or securities markets in general; (iv) acts of war (whether or not declared), armed hostilities or terrorism, or the escalation or worsening thereof; (v) any action required or permitted by this Agreement; (vi) any changes in applicable Laws or accounting rules, including GAAP; or (vii) the public announcement, pendency or completion of the transactions contemplated by this Agreement; provided further, however, that any event, occurrence, fact, condition or change referred to in clauses (i) through (iv) immediately above shall be taken into account in determining whether a Material Adverse Effect has occurred or could reasonably be expected to occur to the extent that such event, occurrence, fact, condition or change has a disproportionate effect on the Seller’s Business compared to other participants in the industries in which the Seller’s Business operates.
“Material Contracts” has the meaning set forth in Section 4.07(a).
“Net Revenue” shall mean the revenue (calculated in accordance with GAAP and all applicable Laws) that is attributable to (without duplication): (A) the Gearbox Division of the Buyer, less related pricing discounts and allowances, returns and refunds, promotions with contra-revenue components (coupons), fraud losses, revenue-based fees and taxes and similar items; provided, however, that Net Revenue shall not include revenue resulting from: (i) acquisitions or (ii) equity investments and joint ventures.
“Nonassignable Assets” has the meaning set forth in Section 2.09.
“Ordinary Course of Business” means the ordinary and usual course of normal day-to-day operations of the Seller’s Business, as conducted by Seller, through the date hereof consistent with past practice.
"Outside Closing Date" has the meaning set forth in Section 3.01.
“Performance Bonuses” shall have the meaning as defined in Section 6.08.
"Permits" means all permits, Licenses, franchises, approvals, authorizations, registrations, certificates, variances and similar rights obtained, or required to be obtained, from Governmental Authorities.
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“Permitted Encumbrances” means (i) mechanics', carriers', workmen's, repairmen's or other like liens arising or incurred in the Ordinary Course of Business consistent with past practice or amounts that are not delinquent and which are not, individually or in the aggregate, material to the Seller’s Business or the Purchased Assets; (ii) easements, rights of way, zoning ordinances and other similar encumbrances affecting Real Property which are not, individually or in the aggregate, material to the Seller’s Business or the Purchased Assets, which do not prohibit or interfere with the current operation of any Real Property and which do not render title to any Real Property unmarketable; (iii) liens arising under original purchase price conditional sales contracts and equipment leases with third parties entered into in the Ordinary Course of Business consistent with past practice which are not, individually or in the aggregate, material to the Seller’s Business or the Purchased Assets; (iv) statutory liens for current Taxes, assessments or other governmental charges not yet delinquent or the amount or validity of which is being contested in good faith by appropriate proceedings, provided an appropriate reserve has been established therefor in the Financial Statements in accordance with GAAP; and (c) zoning, entitlement and other land use and environmental regulations by any Government Authority, provided that such regulations have not been violated.
"Person" means an individual, corporation, partnership, joint venture, limited liability company, Governmental Authority, unincorporated organization, trust, association or other entity.
"Purchase Price" has the meaning set forth in Section 2.05.
"Purchased Assets" has the meaning set forth in Section 2.01.
"Real Property" means, collectively, the Owned Real Property and the Leased Real Property, if any.
"Release" means any actual or threatened release, spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, abandonment, disposing or allowing to escape or migrate into or through the environment (including, without limitation, ambient air (indoor or outdoor), surface water, groundwater, land surface or subsurface strata or within any building, structure, facility or fixture).
"Representative" means, with respect to any Person, any and all directors, officers, employees, consultants, financial advisors, counsel, accountants and other agents of such Person.
"Restricted Business" means any business which directly or indirectly competes with the Gearbox Division.
“Restricted Period” has the meaning set forth in Section 6.07(a).
"Seller" has the meaning set forth in the preamble.
“Seller Closing Certificate” has the meaning set forth in 8.02(n).
"Seller’s Business” has the meaning as defined in the Preamble.
"Seller Indemnified Party" has the meaning set forth in Section 9.03.
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“Software” means any and all: (a) computer programs, including any and all software, implementations of algorithms, models and methodologies, whether in source code or object code; (b) databases and compilations, including any and all data and collections of data, whether machine readable or otherwise; (c) descriptions, flow-charts and other work product used to design, plan, organize and develop any of the foregoing, screens, user interfaces, report formats, firmware, development tools, scripts, templates, menus, buttons and icons; and (d) all documentation, including user manuals and other training documentation, related to any of the foregoing.
“Fundamental Representations” has the meaning set forth in Section 9.01.
“Stockholders” has the meaning set forth in the preamble.
"Tangible Personal Property" has the meaning set forth in Section 2.01(f).
“Target EBITDA Goals” means the EBITDA of the Gearbox Division of the Buyer generated in each of the three consecutive trailing twelve (12) month periods that commences July 1, 2022 and ends on June 30, 2023, commences July 1, 2023 and ends on June 30, 2024 and commences July 1, 2024 and ends on June 30, 2025 (each a “Measuring Period”); which Target EBITDA Goals shall be a minimum of $442,000 in the Measuring Period ending June 30, 2023, $831,000 in the Measuring Period ending June 30, 2024 and $1,835,750 in the Measuring Period ending June 30, 2025.
“Tax Clearance Certificate” has the meaning set forth in Section 6.14.
"Taxes" means all federal, state, local, foreign and other income, gross receipts, sales, use, production, ad valorem, transfer, documentary, franchise, registration, profits, license, lease, service, service use, withholding, payroll, employment, unemployment, estimated, excise, severance, environmental, stamp, occupation, premium, property (real or personal), real property gains, windfall profits, customs, duties or other taxes, fees, assessments or charges of any kind whatsoever, together with any interest, additions or penalties with respect thereto and any interest in respect of such additions or penalties.
"Tax Return" means any return, declaration, report, claim for refund, information return or statement or other document relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof.
"Territory" means the United States of America, its territories and possessions.
“Third Party” means any Person (or group of Persons) other than Buyer.
“Threshold” has the meaning set forth in Section 9.04(a).
“Total Consideration” has the meaning set forth in Section 2.05.
“Transaction Documents” shall mean the collective reference to this Agreement, the Warrant, , the Bill of Sale, the Assignment and Assumption Agreement, the Intellectual Property Assignment Agreement, the IPG Employment Agreements, the IPG Equities limited liability company agreement and all consents, resolutions and other ancillary documents required to be delivered by the Parties on the Closing Date
“Transferred Employees” has the meaning set forth in Section 7.01.
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“Vendor Agreements” means any purchase contracts, orders or other agreements (written or oral) between Seller or an Affiliate of Seller and a Third Party (including any Major Vendor) pursuant to which such Vendor supplies products or services to the Seller or any Affiliate in connection with the operation of the Seller’s Business.
“Vendor Licenses” means any License, sublicense, right, permission, consent or authorization [obtained by any Selling Party from a Third Party (including any Government Authority) that is (i) used, held for use, or necessary for the conduct and operations of the Seller’s Business as currently conducted or proposed to be conducted or (ii) related to any General Vendor Agreement or required for performance thereunder.
“Vesting Conditions” shall mean the performance and related conditions under which the Warrant may be exercised as set forth in the Warrant.
"WARN Act" means the federal Worker Adjustment and Retraining Notification Act of 1988, and similar state, local and foreign laws related to plant closings, relocations, mass layoffs and employment losses.
“Warrant” has the meaning set forth in Section 2.06(b).
Article
II
PURCHASE AND SALE
Section 2.01 Purchase and Sale of Assets. Subject to the terms and conditions set forth herein, at the Closing, Seller shall sell, assign, transfer, convey and deliver to Buyer, and the Buyer shall purchase from Seller, free and clear of any Encumbrances other than Permitted Encumbrances, all of Seller's right, title and interest in, to and under all of the assets, properties and rights of every kind and nature, whether tangible or intangible (including goodwill), wherever located and whether now existing or hereafter acquired (other than the Excluded Assets), which relate to, or are used or held for use in connection with, the Seller’s Business (collectively, the "Purchased Assets"), including, without limitation, the following:
(a) all cash and Cash Equivalents on hand and in banks;
(b) all deposits (including customer deposits or otherwise) and prepaid charges and expenses of Seller;
(c) all accounts or notes receivable held by Seller or any Affiliate, and any security, claim, remedy or other right to receive payment from a third party related to any of the foregoing ("Accounts Receivable");
(d) all raw materials, work-in-process and finished goods inventory used or intended to be used primarily in connection with the Seller’s Business, including all materials and supplies, owned or used by Seller, including any inventory paid for but not yet delivered to or received by Seller ("Inventory");
(e) all Contracts listed on Schedule 2.01(e) of the Seller Disclosure Schedule which shall include all Intellectual Property Agreements, Customer Contracts and Vendor Agreements applicable to the Seller and the Seller’s Business (the "Assigned Contracts"), including all rights, claims, causes of action and rights of set-off with respect to the Assigned Contracts;
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(f) all Intellectual Property Assets, including all remedies against infringements thereof, and all rights to protection of interests therein under all Laws;
(g) all tangible personal property intended to be used primarily in connection with the Seller’s Business to be operated by the Gearbox Division, including furniture, fixtures, equipment, machinery, tools, vehicles, office equipment, supplies, computers, telephones (the "Tangible Personal Property");
(h) reserved;
(i) all Permits which are used by Seller in the Seller’s Business (including all Permits necessary to conduct the Seller’s Business as currently conducted) or are necessary for the ownership and use of the Purchased Assets;
(j) all Licenses which are used by Seller in the Seller’s Business (including all Licenses necessary to conduct the Seller’s Business as currently conducted) or are necessary for the ownership and use of the Purchased Assets, including all Vendor Licenses and Licensed Intellectual Property;
(k) all goodwill and other intangible assets associated with the Seller’s Business, including the goodwill associated with the Purchased Assets;
(l) all rights, claims, credits, causes of action or rights of set-off of Seller against Third Parties under or pursuant to all warranties, representations and guarantees made by suppliers, manufacturers and contractors to the extent relating to products sold or services provided to Seller or to the extent affecting any Purchased Assets;
(m) all rights of Seller under non-disclosure, confidentiality, non-compete, or non-solicitation agreements with former employees, current employees and agents of Seller or with Third Parties to the extent relating to the Seller’s Business or the Purchased Assets (or any portion thereof);
(n) all rights to any Actions of any nature available to or being pursued by Seller to the extent related to the Seller’s Business, the Purchased Assets or the Assumed Liabilities, whether arising by way of counterclaim or otherwise;
(o) all of Seller's rights under warranties, indemnities and all similar rights against Third Parties to the extent related to any Purchased Assets;
(p) all Third Party property and casualty insurance proceeds, and all rights to property and casualty insurance proceeds, in each case to the extent received or receivable in respect of the Seller’s Business, the Purchased Assets or the Assumed Liabilities;
(q) all Documents that are related to the Seller’s Business, including Documents relating to products, services, marketing, advertising, promotional materials, Intellectual Property Agreements, personnel files for Transferred Employees and all files, customer files and customer documents (including credit information), supplier and customer lists, records, literature and correspondence, whether or not physically located on any of the premises referred to in clause (g) above, but excluding personnel files for employees of Seller who are not Transferred Employees; and
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(r) originals, or where not available, copies, of all books and records, including, but not limited to, books of account, ledgers and general, financial and accounting records, machinery and equipment maintenance files, customer lists, customer purchasing histories, price lists, distribution lists, supplier lists, production data, quality control records and procedures, customer complaints and inquiry files, research and development files, records and data (including all correspondence with any Governmental Authority), sales material and records (including pricing history, total sales, terms and conditions of sale, sales and pricing policies and practices), strategic plans, internal financial statements, marketing and promotional surveys, material and research and files relating to the Intellectual Property Assets and the Intellectual Property Agreements ("Books and Records").
Section 2.02 Excluded Assets. Notwithstanding the foregoing, the Purchased Assets shall not include the following assets (collectively, the "Excluded Assets"):
(a) All Contracts other than Assigned Contracts (the "Excluded Contracts");
(b) the corporate seals, organizational documents, minute books, stock books, Tax Returns, books of account or other records having to do with the corporate organization of Seller and duplicate copies of such records as are necessary to enable Seller to file tax returns and reports;
(c) all Benefit Plans, including all rights or benefits attributable thereto;
(d) except with respect to copies thereof provided to Buyer (including copies of Documents set forth under Section 2.01(p)), all personnel records and other records that Seller is required by Law to retain in its possession;
(e) the rights which accrue or will accrue to any Selling Party under this Agreement and the Transaction Documents; and
(f) all other assets, properties, interests and rights of Seller or any Affiliate set forth on Section 2.02(f) of the Disclosure Schedules.
Section 2.03 Assumed Liabilities. Subject to the terms and conditions set forth herein, Buyer shall (or shall cause its designated Affiliate or Affiliates to) assume and agree to pay, perform and discharge only the following Liabilities of Seller (collectively, the "Assumed Liabilities"), and no other Liabilities:
(a) all Liabilities of Seller under the Assigned Contracts that arise out of or relate to the period from and after the Closing Date, other than any such Liability arising out of a breach thereof or default thereunder by Seller prior to the close of business on the Closing Date; and
(b) those specific Liabilities of Seller set forth on Section 2.03(b) of the Disclosure Schedules.
Section 2.04 Excluded Liabilities. Other than the specific Assumed Liabilities set forth in Section 2.03, Buyer shall not assume and shall not be responsible to pay, perform or discharge any Liabilities of Seller, the Stockholders or any of its or their Affiliates of any kind or nature whatsoever (the "Excluded Liabilities"). Seller shall, and shall cause each of its Affiliates to, pay and satisfy in due course all Excluded Liabilities which they are obligated to pay and satisfy. Without limiting the generality of the foregoing, the Excluded Liabilities shall include, but not be limited to, the following:
(a) all accounts payable and all trade accounts payable of Seller to Third Parties in connection with the operation of the Seller’s Business that remain unpaid as of the Closing Date, other than any Assumed Liabilities;
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(b) any Liabilities of any Selling Party arising or incurred in connection with the negotiation, preparation, investigation and performance of this Agreement, the Transaction Documents and the transactions contemplated hereby and thereby, including, without limitation, fees and expenses of counsel, accountants, consultants, advisers and others;
(c) all Liabilities for (i) Taxes of Seller, (ii) Taxes of any Stockholder (if applicable), (iii) Taxes that relate to the Purchased Assets or the Assumed Liabilities for taxable periods (or portions thereof) ending on or before the close of business on the Closing Date, including, without limitation, Transfer Taxes and Taxes allocable to Seller pursuant to Section 2.11, and (iv) payments under any Tax allocation, sharing or similar agreement (whether oral or written);
(d) any Liabilities relating to or arising out of the Excluded Assets;
(e) any Liabilities in respect of any pending or threatened Action arising out of, relating to or otherwise in respect of the operation of the Seller’s Business or the Purchased Assets to the extent such Action relates to such operation on or prior to the Closing Date;
(f) any product Liability or similar claim for injury to a Person or property which arises out of or is based upon any express or implied representation, warranty, agreement or guaranty made by Seller, or by reason of the improper performance or malfunctioning of a product, improper design or manufacture, failure to adequately package, label or warn of hazards or other related product defects of any products at any time manufactured or sold or any service performed by Seller on or prior to the Closing Date.
(g) any recall, design defect or similar claims of any products manufactured or sold or any service performed by Seller on or prior to the Closing Date.
(h) any Liabilities of Seller arising under or in connection with any Benefit Plan, including but not limited to the sponsorship or operation of any Benefit on or prior to the Closing Date.
(i) any Liabilities for any present or former employees, officers, directors, retirees, independent contractors or consultants of Seller, including, without limitation, any Liabilities associated with any claims for wages or other benefits, bonuses, accrued vacation, workers' compensation, severance, retention, termination or other on or prior to the Closing Date.
(j) any Environmental Claims, or Liabilities under Environmental Laws, to the extent arising out of or relating to facts, circumstances or conditions existing on or prior to the Closing or otherwise to the extent arising out of any actions or omissions of Seller;
(k) any Liabilities of the Seller’s Business relating or arising from unfulfilled commitments, quotations, purchase orders, customer orders or work orders that (i) do not constitute part of the Purchased Assets issued by the Seller’s Business' customers to Seller on or before the Closing; or (ii) are not Assumed Liabilities set forth under Section 2.03;
(l) any Liabilities to indemnify, reimburse or advance amounts to any present or former officer, director, employee or agent of Seller (including with respect to any breach of fiduciary obligations by same), except for indemnification of same pursuant to Section 9.03 as a Seller Indemnified Party on or prior to the Closing Date.
(m) any Liabilities under the Excluded Contracts or any other Contracts, (i) which are not Assumed Contracts hereunder; or (ii) that arise out of or relate to a breach under any Assumed Contract by any Selling Party occurring prior to Closing;
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(n) any Indebtedness of the Seller or Liabilities related to Indebtedness of the Seller on or prior to the Closing Date.
(o) any Liabilities relating to any dispute with any client or customer of the Seller’s Business existing as of the close of business on the Closing Date or based upon, relating to or arising out of events, actions, or failures to act prior to the close of business on the Closing Date;
(p) any Liabilities arising out of, in respect of or in connection with the failure by Seller or any of its Affiliates to comply with any Law or Governmental Order on or prior to the Closing Date.; and
(q) any Liabilities of any Shareholder which are not Assumed Liabilities hereunder on or prior to the Closing Date.
Section 2.05 Purchase Price. The aggregate purchase price for the Purchased Assets shall be (a) an amount in cash equal to two hundred fifty thousand dollars ($250,000) (the "Closing Cash Payment"), (b) the Warrant (as defined herein) (collectively, the “Purchase Price” and (c) the assumption of the Assumed Liabilities (together with the Purchase Price, the “Total Consideration”).
Section 2.06 Payment of Purchase Price.
(a) Closing Cash Payment. On the Closing Date, the Buyer shall pay by wire transfer of immediately available funds to Seller the Closing Cash Payment. Three (3) Business Days prior to the proposed Closing Date, Seller shall deliver to the Buyer, in writing, the account information for purposes of the wire transfers contemplated in the preceding sentence.
(b) Warrant. On the Closing Date, Buyer shall issue to the Seller a warrant to purchase up to 21,250,000 shares of the Buyer’s Class A Common Stock, which is exercisable subject to the milestone achievements and vesting provisions and such other terms and conditions set forth in the Warrant. The Warrant shall have a term of ten (10) years and may be exercised in accordance with the Vesting Conditions set forth in the Warrant which includes 6,250,000 Performance Warrants, and shall be in the form set forth on Exhibit A attached hereto (the “Warrant”).
Section 2.07 Allocation of Purchase Price. Seller and Buyer agree that the Total Consideration (plus other relevant items) shall be allocated among the Purchased Assets for all purposes (including Tax and financial accounting) as shown on the allocation schedule (the "Allocation Schedule"). A draft of the Allocation Schedule shall be prepared by Buyer and delivered to Seller within thirty (30) days following the Closing Date. If Seller notifies Buyer in writing that Seller objects to one or more items reflected in the Allocation Schedule, Seller and Buyer shall negotiate in good faith to resolve such dispute; provided, however, that if Seller and Buyer are unable to resolve any dispute with respect to the Allocation Schedule within sixty (60) days following the Closing Date, such dispute shall be resolved by a selected independent accounting firm mutually agreeable to Seller and the Buyer. The fees and expenses of such accounting firm shall be borne equally by Seller and Buyer. Buyer and Seller shall file all Tax Returns (including amended returns and claims for refund) and information reports in a manner consistent with the Allocation Schedule. Any adjustments to the Total Consideration pursuant to Section 2.07 of the Disclosure Schedule herein shall be allocated in a manner consistent with the Allocation Schedule.
Section 2.08 Withholding Tax. If Buyer is required to deduct and withhold from the Purchase Price all Taxes that Buyer may be required to deduct and withhold under any provision of Tax Law. All such withheld amounts shall be treated as delivered to Seller hereunder.
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Section 2.09 Further Conveyances and Assumptions; Third Party Consents.
(a) As of the effective date hereof and from time to time following the Closing Date, except as prohibited by Law, the Selling Parties shall, or shall cause their Affiliates to, make available to the Buyer such data in personnel records of Transferred Employees as is reasonably necessary for Buyer to transition such Transferred Employees into Buyer’s records.
(b) From time to time following the Closing, the Selling Parties and Buyer shall, and shall cause their respective Affiliates to, execute, acknowledge and deliver all such further conveyances, notices, assumptions, releases and acquittances and such other instruments, and shall take such further actions, as may be necessary or appropriate to assure fully to the Buyer and its respective successors or assigns, all of the properties, rights, titles, interests, estates, remedies, powers and privileges intended to be conveyed to the Buyer under this Agreement and the Transaction Documents and to assure fully to Seller and its Affiliates and their successors and assigns, the assumption of the Liabilities intended to be assumed by Buyer under this Agreement and the Transaction Documents, and to otherwise make effective the transactions contemplated hereby and thereby.
(c) Nothing in this Agreement nor the consummation of the transactions contemplated hereby shall be construed as an attempt or agreement to assign any Purchased Asset, including any Contract, Permit, License, certificate, approval, authorization or other right, which by its terms or by Law is non-assignable without the consent of a Third Party or a Government Authority or is cancelable by a Third Party in the event of an assignment (“Non-assignable Assets”) unless and until such consent shall have been obtained. The Selling Parties shall, and shall cause their Affiliates to, use their best efforts to cooperate with Buyer at its request in endeavoring to obtain such consents promptly. To the extent permitted by applicable Law, in the event consents to the assignment thereof cannot be obtained, such Non-assignable Assets shall be held, as of and from the close of business on the Closing Date, by Seller or the applicable Affiliate of Seller in trust for Buyer and the covenants and obligations thereunder shall be performed by Buyer in Seller’s or such Affiliate’s name and all benefits and obligations existing thereunder shall be for Buyer’s account. Selling Parties shall take or cause to be taken at the expense of the Selling Parties such actions in their name or otherwise as the Buyer may reasonably request so as to provide the Buyer with the benefits of the Nonassignable Assets and to effect collection of money or other consideration that becomes due and payable under the Non-assignable Assets, and the Selling Parties or the applicable Affiliate of Seller shall promptly pay over to Buyer all money or other consideration received by it in respect of all Nonassignable Assets. As of and after the close of business on the Closing Date, the Selling Parties authorizes Buyer, to the extent permitted by applicable Law and the terms of the Non-assignable Assets, at Buyer’s expense, to perform all the obligations and receive all the benefits of the Selling Parties or their Affiliates under the Non-assignable Assets and appoints Buyer its attorney-in-fact to act in its name on its behalf or in the name of the applicable Affiliate of such Selling Party and on such Affiliate’s behalf with respect thereto.
Notwithstanding the foregoing, Schedule 2.09(c) of the Disclosure Schedules sets forth a list of all Non-assignable Assets, including any Customer Contracts which require the consent of the customer to assign to Buyer and which consent has not been obtained. In the event that such Customer Contract is a Material Customer Contract, the Buyer shall have the right to terminate this Agreement without any liability or obligation to the Selling Parties.
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Section 2.10 Right to Control Payment. Buyer shall have the right, but not the obligation, to make any payment due from Seller with respect to any accounts payable or other Excluded Liabilities which are not paid by Seller or its Affiliate within three (3) Business Days following written request for payment from Buyer; provided, however, that if Seller advises Buyer in writing during such three (3) Business Day period that a good faith payment dispute exists or Seller has valid defenses to non-payment with respect to such accounts payable or other Excluded Liability, then Buyer shall not have the right to pay such Excluded Liability. Seller agrees to reimburse Buyer promptly and in any event within five (5) Business Days following written notice of such payment by Buyer for the amount of any payment made by Buyer pursuant to this Section 2.10; provided further, that in the event Buyer fails to receive any such amounts owed from Seller under this Section 2.10 within the allotted period set forth in the precedent sentence, Buyer shall be entitled to deduct and withhold vested shares of Class A Common Stock under the Warrant as may be required to satisfy any outstanding amounts owed to the Buyer in accordance this Section 2.10.
Section 2.11 Prorations. Seller shall bear all property and ad valorem tax liability with respect to the Purchased Assets if the lien or assessment date arises prior to the Closing Date irrespective of the reporting and payment dates of such taxes. All other real property taxes, personal property taxes, or ad valorem obligations and similar recurring taxes and fees on the Purchased Assets for taxable periods beginning before, and ending after, the Closing Date, shall be prorated between Buyer and Seller as of the Closing Date. Seller shall be responsible for all such taxes and fees on the Purchased Assets accruing during any period up to and including the Closing Date. Buyer shall be responsible for all such taxes and fees on the Purchased Assets accruing during any period after the Closing Date. With respect to Taxes described in this Section 2.11, Seller shall timely file all Tax Returns due before the Closing Date with respect to such Taxes and Buyer shall prepare and timely file all Tax Returns due after the Closing Date with respect to such Taxes. If one party remits to the appropriate Taxing Authority payment for Taxes, which are subject to proration under this Section 2.11 and such payment includes the other party’s share of such Taxes, such other party shall promptly reimburse the remitting party for its share of such Taxes.
Article
III
CLOSING
Section 3.01 Closing. Subject to the terms and conditions of this Agreement, the consummation of the transactions contemplated by this Agreement (the "Closing") shall take place at the offices of Michelman & Robinson, LLP, 10880 Wilshire Blvd, 19th Floor, Los Angeles, CA 90024 or remotely by exchange of documents and signatures (or their electronic counterparts), at 12.00 a.m., Pacific Time, on the second (2) Business Day after all of the conditions to Closing set forth in Article VIII are either satisfied or waived (other than conditions which, by their nature, are to be satisfied on the Closing Date), or at such other time, date or place as Seller and Buyer may mutually agree upon in writing. The date on which the Closing is to occur is herein referred to as the "Closing Date". The Parties shall undertake to consummate the Closing on or before June 30, 2022 or such other date as the Buyer or Buyer may request; provided that unless otherwise agreed to the Selling Parties, the Closing and the Closing Date shall be not later than July 15, 2022 (the “Outside Closing Date”). For all purposes of this Agreement and the Exhibits hereto, the Parties shall deem the Closing to have taken place at 5:00 p.m. PST on June 30, 2022.
Article
IV
REPRESENTATIONS AND WARRANTIES
OF THE SELLING PARTIES
Except as set forth in the correspondingly numbered Section of the Disclosure Schedules, Seller and each of the Stockholders do hereby jointly and severally represent and warrant to the Buyer that the statements contained in this Article IV are true and correct as of the date hereof and will be correct and complete on the Closing Date, except to the extent such representations and warranties expressly relate to an earlier date (in which case such representations and warranties shall each be true and correct on and as of such earlier date):
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Section 4.01 Organization and Qualification of Seller. Seller is a corporation duly organized, validly existing and in good standing under the Laws of the state of Delaware and has full corporate power and authority to own, operate or lease the properties and assets now owned, operated or leased by it and to carry on the Seller’s Business as currently conducted. Section 4.01 of the Disclosure Schedules sets forth each jurisdiction in which Seller is licensed or qualified to do business, and Seller is duly licensed or qualified to do business and is in good standing in California and in each other jurisdiction in which the ownership of the Purchased Assets or the operation of the Seller’s Business as currently conducted makes such licensing or qualification necessary.
Section 4.02 Authority of Seller and the Stockholders.
(a) Seller has full corporate power and authority to enter into this Agreement and the Transaction Documents to which Seller is a party, to carry out its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution and delivery by Seller of this Agreement and any Transaction Document to which Seller is a party, the performance by Seller of his or its obligations hereunder and thereunder and the consummation by Seller of the transactions contemplated hereby and thereby have been duly authorized by all requisite corporate action on the part of Seller. This Agreement has been duly executed and delivered by Seller, and (assuming due authorization, execution and delivery by the other parties) this Agreement constitutes a legal, valid and binding obligation of Seller enforceable against the Buyer in accordance with its terms. When each Transaction Document to which Seller is or will be a party has been duly executed and delivered by Seller (assuming due authorization, execution and delivery by each other party thereto), such Transaction Document will constitute a legal and binding obligation of Seller enforceable against it in accordance with its terms.
(b) Each Stockholder has all requisite power and authority and full legal capacity to execute and deliver this Agreement and the Transaction Documents to which it is a party, and to perform his, her or its obligations hereunder and thereunder. This Agreement has been duly and validly executed and delivered by each Stockholder, and (assuming the due authorization, execution and delivery hereof by the other parties) constitutes the legal, valid and binding obligation of each Stockholder, enforceable against such Stockholder in accordance with its terms, except as may be limited by bankruptcy, insolvency, moratorium, reorganization or similar laws affecting the rights of creditors generally and of general principles of equity. When each Transaction Document to which a Stockholder is or will be a party has been duly executed and delivered by such Stockholder (assuming due authorization, execution and delivery by each other party thereto), such Transaction Document will constitute a legal and binding obligation of such Stockholder enforceable against it in accordance with its terms.
Section 4.03 No Conflicts; Consents. The execution, delivery and performance by the Selling Parties of this Agreement and the Transaction Documents to which it is a party, and the consummation of the transactions contemplated hereby and thereby, do not and will not: (a) conflict with or result in a violation or breach of, or default under, any provision of the certificate of incorporation, by-laws or other organizational documents of any Selling Party; (b) conflict with or result in a violation or breach of any provision of any Law or Governmental Order applicable to any Selling Party, the Seller’s Business or the Purchased Assets; (c) except as set forth in Section 4.03 of the Disclosure Schedules, require the consent, notice or other action by any Person under, conflict with, result in a violation or breach of, constitute a default or an event that, with or without notice or lapse of time or both, would constitute a default under, result in the acceleration of or create in any party the right to accelerate, terminate, modify or cancel any Contract, Permit or License to which any Selling Party is a party or by which any Selling Party or the Seller’s Business is bound or to which any of the Purchased Assets are subject (including any Assigned Contract); or (d) result in the creation or imposition of any Encumbrance other than Permitted Encumbrances on the Purchased Assets. No consent, approval, Permit, Governmental Order, declaration or filing with, or notice to, any Governmental Authority is required by or with respect to any Selling Party in connection with the execution and delivery of this Agreement or any of the Transaction Documents and the consummation of the transactions contemplated hereby and thereby.
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Section 4.04 Financial Statements.
(a) Complete copies of the unaudited financial statements consisting of the balance sheet of the Seller’s Business as of December 31 in each of the years ended December 31, 2020 and December 31, 2021 and the related statements of income and retained earnings, stockholders' equity and cash flow for the years then ended (the "Annual Financial Statements"), and unaudited financial statements consisting of the balance sheet of the Seller’s Business as at March 31, 2022 and the related unaudited statements of income and retained earnings, stockholders' equity and cash flow for the three month period then ended (the "Interim Financial Statements" and together with the Annual Financial Statements, the "Financial Statements") are set forth on Section 4.04(a) of the Disclosure Schedules and have been delivered to Buyer prior to the date hereof. To the Knowledge of the Selling Parties, the Financial Statements are capable of being audited in accordance with GAAP, subject to normal and recurring year-end audit adjustments. The Financial Statements are based on the books and records of the Seller’s Business, and fairly present in all material respects the financial condition of the Seller’s Business as of the respective dates they were prepared and the results of the operations of the Seller’s Business for the periods indicated. The balance sheet of the Seller’s Business as of December 31, 2021 is referred to herein as the "Balance Sheet" and the date thereof as the "Balance Sheet Date" and the balance sheet of the Seller’s Business as of March 31, 2022 is referred to herein as the "Interim Balance Sheet" and the date thereof as the "Interim Balance Sheet Date".
(b) Seller makes and maintains books, records and accounts which are correct and complete and fairly reflect the transactions and dispositions of their respective assets. Seller maintains systems of internal accounting controls sufficient to provide assurances that: (i) transactions are executed in accordance with management’s general or specific authorization; and (ii) transactions are recorded as necessary to permit the preparation of audited Financial Statements.
Section 4.05 Undisclosed Liabilities. Seller has no Liabilities with respect to the Seller’s Business, except (a) those which are adequately reflected or reserved against in the Balance Sheet as of the Balance Sheet Date, and (b) those which have been incurred in the Ordinary Course of Business consistent with past practice since the Balance Sheet Date and which are not, individually or in the aggregate, material in amount.
Section 4.06 Absence of Certain Changes, Events and Conditions. Since the Balance Sheet Date, and other than in the Ordinary Course of Business consistent with past practice, there has not been any event occurrence or development that has had or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. Without limiting the generality of the foregoing, since the Balance Sheet Date, except as set forth in Section 4.06 of the Disclosure Schedules, there has not been:
(a) any amendment or change to the Seller’s organizational documents;
(b) any material change by Seller in its accounting methods, principles or practices;
(c) any material Tax election made, rescinded or changed, any change in method of accounting with respect to Taxes or any compromise or settlement of any proceeding with respect to any material Tax liability;
(d) any declaration, setting aside or payment of any dividend (whether in cash, stock or property) or capital return in respect of any capital stock or any redemption, purchase or other acquisition by Seller of any capital stock or other Equity Interests in Seller, or any amendment of any material term of any Equity Interest in Seller;
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(e) any sale, assignment, transfer, license, sublicense, lease or other disposition or agreement to sell, assign, transfer, license, sublicense, lease or otherwise dispose of any of the assets of Seller (including any rights under or with respect to any Purchased Assets) other than in the Ordinary Course of Business;
(f) any acquisition (by merger, consolidation, or acquisition of stock or assets) by Seller of any corporation, partnership or other business organization or division thereof or any Equity Interest therein, or any loan or advance to any Person;
(g) any incurrence of, guarantee with respect to, or provision of credit support for, any Indebtedness by Seller or any creation or assumption by Seller of any Encumbrances on or with respect to any Purchased Assets;
(h) (i) any employment, deferred compensation, severance or similar agreement entered into or amended by Seller, on the one hand, and any Person, on the other hand, (ii) any increase in the compensation payable or to become payable by Seller to any of its stockholders or officers or generally applicable to all or any category of Seller’s employees, (iii) any increase in the coverage or benefits available under any vacation pay, company awards, salary continuation or disability, sick leave, deferred compensation, bonus or other incentive compensation, insurance, pension or other employee benefit plan, payment or arrangement made to, for or with any of the stockholders or officers of Seller or generally applicable to all or any category of Seller’s employees or (iv) severance pay arrangements made to, for or with such stockholders, officers or employees other than, in the case of clauses (ii) and (iii) of this Section 4.06(h) and only with respect to employees who are not officers or stockholders of Seller, increases in the Ordinary Course of Business and that in the aggregate have not resulted in a material increase in the benefits or compensation expenses of Seller;
(i) any loan, advance or capital contribution made by Seller to, or investment in, any Person;
(j) the incurrence of any Seller Indebtedness;
(k) any waiver, direct or indirect, by Seller of (i) any right or rights of material value of (ii) any payment of any Indebtedness, Liability or other obligation, except for payments made in the Ordinary Course of Business;
(l) the sale, transfer or lease of any properties or assets (whether real, personal or mixed, tangible or intangible) to, or entering into of any agreement, arrangement, or transaction with or on behalf of, any officer, stockholder, or employee of Seller or any of its Affiliates, or any business or entity in which Seller or any of its Affiliates, or relative of any such Person, has any material, direct or indirect, interest, except for directors’ fees, compensation to the officers and employees of Seller in the Ordinary Course of Business, and advancement or reimbursement of expenses in the Ordinary Course of Business;
(m) any issuance, sale, disposition or transfer of any capital stock or other Equity Interest of Seller or issuance or grant of any options, warrants or other rights to purchase any such capital stock or Equity Interest or any securities convertible into or exchangeable for such capital stock or Equity Interest or any other change in the issued and outstanding capitalization of Seller;
(n) any capital expenditure, other than capital expenditures consistent with and not in excess of the proposed capital expenditures identified in Section 4.06(n) of the Disclosure Schedules;
(o) any action that, if it had been taken after the date hereof, would have required the consent of the Buyer under Section 6.01; or
(p) any agreement to take any of the actions specified in this Section 4.06, except for this Agreement.
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Section 4.07 Material Contracts.
(a) Section 4.07(a) of the Disclosure Schedules sets forth a true, complete and correct list of the following Contracts (separated by subsection) to which any Selling Party is a party or by which Seller’s assets or properties is bound (collectively, the “Material Contracts”):
(i) Contracts, or any group of Contracts with the same party, the performance of which could reasonably be expected to require annual expenditures by or Liabilities of any party thereto in excess of $25,000 in any calendar year;
(ii) Contracts providing for any future contingent payment in excess of $25,000 annually;
(iii) Contracts with any Major Customer or Major Supplier;
(iv) Contracts containing covenants limiting the freedom of Seller or any of its Affiliates (including Buyer and its Affiliates after the Closing Date) to engage in any line of business or compete with any Person, in any product line or line of business, or operate at any location;
(v) Contracts or other instruments providing for the borrowing or lending of money, in an amount in excess of $25,000, whether as borrower, lender or guarantor, including Contracts or other instruments related to Indebtedness;
(vi) Contracts relating to joint ventures, alliances, partnerships, or joint development or similar arrangements with any Third Party;
(vii) All Customer Contracts;
(viii) All Vendor Agreements;
(ix) Contracts, Licensed Intellectual Property, Intellectual Property Agreements, royalty Contracts or any other Contracts relating to any Intellectual Property of the Seller or the Seller’s Business (excluding licenses pertaining to “off-the-shelf” commercially available Software used pursuant to shrink-wrap or click-through license agreements on reasonable terms for a license fee of no more than $10,000 per year);
(x) Contracts with or for the benefit of current or former officers, stockholders, consultants, independent contractors or agents for employment, and all severance, change in control or similar arrangements with any current or former directors, managers, officers, employees, consultants, independent contractors or agents that will result in any obligation (absolute or contingent) of Seller to make any payment to any current or former stockholders, officers, managers, employees, consultants, independent contractors or agents following either the consummation of the transactions contemplated hereby, termination of employment (or the relevant relationship), or both;
(xi) Contracts with any Stockholder or other Affiliate of Seller;
(xii) Contracts with any Government Authority;
(xiii) Contracts relating to any Permits or Licenses;
(xiv) Contracts involving purchases or leases of personal property of Seller;
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(xv) Contracts or commitments in which Seller has granted manufacturing rights or exclusive marketing rights relating to any product or service, any group of products or services or any territory;
(xvi) Contracts for the acquisition or sale, directly or indirectly (by merger or otherwise) of assets (whether tangible or intangible, other than inventory sold in the Ordinary Course of Business), the capital stock or securities of another Person;
(xvii) Contracts relating to the capital stock or other ownership in assets of another Person, including Contracts containing voting, management, change of control, or transfer provisions related to such capital stock, securities or other assets;
(xviii) all Contracts under which Seller is lessor of or permits any Third Party to hold, use or operate any tangible property (other than Real Property), owned or controlled by the Seller, except for any Contract under which the aggregate annual rental payments do not exceed $10,000;
(xix) all Contracts for supply, inventory or purchase or for the receipt of services that involve, or are reasonably expected to involve, consideration payable to or by the Seller of more than $25,000 in the aggregate (A) in the fiscal year ended December 31, 2021 or (B) in the fiscal year ended December 31, 2022;
Not relevant for an asset purchase.
(xx) all Contracts that involve:
(A) a covenant or other restriction that limits the ability of the Seller to conduct its business or that restricts the right of the Seller to sell to, or purchase from, any Person, including non-solicitation, non-competition, and most-favored nation pricing restrictions;
(B) the granting of an Encumbrance (other than a Permitted Encumbrance) upon any assets of the Seller or assets used in the operations of the Seller’s Business;
(C) indemnification by the Seller of any Person with respect to Liabilities relating to any current or former business of the Seller (other than standard indemnification provisions entered into in the Ordinary Course of Business).
(b) True, complete and correct copies of the written Material Contracts and descriptions of oral Material Contracts, if any, have been physically delivered to the Buyer or are available for viewing in a data room provided by Seller and the Stockholders. Each of the Material Contracts is a valid and binding obligation of Seller and, to the Knowledge of Seller, the other parties thereto, enforceable against the other parties thereto in accordance with its terms, except as may be limited by bankruptcy, insolvency, moratorium, reorganization or similar Laws affecting the rights of creditors generally and of general principles of equity. Except for the consummation of the transactions contemplated hereby and by the Transaction Documents, no event has occurred that would, on notice or lapse of time or both, entitle the holder of any Indebtedness issued pursuant to a Material Contract to accelerate, or that does accelerate, the maturity of any such Indebtedness.
(c) Seller is not, nor has any of the Selling Parties received any notice from any Third Party alleging that it is, or, to the Knowledge of Seller, no Third Party is, in breach, default or violation (each a “Default”) (and no event has occurred or not occurred through Seller’s inaction or, to the Knowledge of Selling Parties, through the action or inaction of any Third Parties, which with notice or the lapse of time or both would constitute a Default) of any term, condition or provision of any Material Contract.
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(d) No Selling Party has received notice of the termination of, or intent to terminate or otherwise fail to fully perform any Material Contract and otherwise has no reason to believe or not believe that the parties to any Material Contract will not fulfill their obligations thereunder in all material respects.
Section 4.08 Title to Purchased Assets; Sufficiency. The Purchased Assets constitute all of the assets and properties that are required to operate the Seller’s Business and operations of Seller as presently conducted. Seller has good and marketable title to or a valid leasehold estate in, free and clear of any Encumbrances other than the Permitted Exceptions, all of the Purchased Assets. On the Closing Date, Seller will convey to Purchaser good and marketable title to the Purchased Assets or, in the case of assets which are leased or licensed by Seller pursuant to leases or other Contracts, valid leasehold interests or licenses to such leases or other Contracts, free and clear of all Encumbrances of any nature other than the Permitted Exceptions. None of the Excluded Assets are material to the Seller’s Business.
Section 4.09 Condition of Assets. The buildings, plants, structures, furniture, fixtures, machinery, equipment, vehicles and other items of tangible personal property included in the Purchased Assets are structurally sound, are in good operating condition and repair, and are adequate for the uses to which they are being put, and none of such buildings, plants, structures, furniture, fixtures, machinery, equipment, vehicles and other items of tangible personal property is in need of maintenance or repairs except for ordinary, routine maintenance and repairs that are not material in nature or cost.
Section 4.10 Real Property. The Seller does not own or lease any Real Property.
Section 4.11 Intellectual Property.
(a) Section 4.11(a) of the Disclosure Schedules contains a correct, current and complete list of: (i) all Intellectual Property Registrations of Seller, specifying as to each, as applicable: the title, mark, or design; the jurisdiction by or in which it has been issued, registered or filed; the patent, registration or application serial number; the issue, registration or filing date; and the current status; (ii) all unregistered Trademarks included in the Intellectual Property Assets; (iii) all proprietary Software included in the Intellectual Property Assets; and (iv) all other Intellectual Property Assets that are used in the conduct of the Seller’s Business as currently conducted or proposed to be conducted. All necessary registration, maintenance, renewal and other relevant filing fees in connection with any of the Intellectual Property Assets owned or purported to be owned by, or exclusively licensed to, Seller that has been issued or registered or is the subject of a pending application have been timely paid, and all necessary documents, certificates and other relevant filings in connection with such Intellectual Property Assets have been timely filed with the relevant Governmental Authority in the United States or foreign jurisdictions, as the case may be, for the purpose of maintaining the same in full force and effect and all issuances, registrations and applications therefor. There are, as of the date of this Agreement, no filings, payments or similar actions that must be taken within ninety (90) days following the Closing Date for the purposes of obtaining, maintaining or renewing any applications or registrations for such Intellectual Property Assets. Selling Parties have provided Buyer with true and complete copies of all file histories, documents, certificates, office actions, correspondence, assignments, and other instruments relating to the Intellectual Property Registrations of Seller.
(b) Section 4.11(b) of the Disclosure Schedules contains a correct, current and complete list of all Intellectual Property Agreements: (i) under which Seller is a licensor or otherwise grants to any Person any right or interest relating to any Intellectual Property Asset; (ii) under which Seller is a licensee or otherwise is granted any rights or interests relating to the Intellectual Property of any Person; and (iii) which otherwise relate to Seller’s ownership or use of any Intellectual Property in the conduct of the Seller’s Business as currently conducted, in each case identifying the Intellectual Property covered by such Intellectual Property Agreement. The Selling Parties have provided Buyer with true and complete copies (or in the case of any oral agreements, a complete and correct written description) of all such Intellectual Property Agreements, including all modifications, amendments and supplements thereto and waivers thereunder. All Intellectual Property Agreements are valid and binding on the Seller in accordance with its terms and is in full force and effect. Neither Seller nor any other party thereto is, or is alleged to be, in breach of or default under, or has provided or received any notice of breach of, default under, or intention to terminate (including by non-renewal), any Intellectual Property Agreement.
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(c) Seller is (i) the sole and exclusive legal and beneficial owner of all right, title and interest in and to the Intellectual Property Assets, or (ii) has the valid and enforceable right to use all other Intellectual Property used in or necessary for the conduct of the Seller’s Business as currently conducted or as proposed to be conducted, in each case, free and clear of Encumbrances other than Permitted Encumbrances. Except as set forth in Section 4.11(c) of the Disclosure Schedules, no Stockholder has any direct interest in Licensed Intellectual Property, nor is a party to any Intellectual Property Agreement, as it relates to the Seller or the Seller’s Business, in his or her personal capacity. The Intellectual Property Assets and Licensed Intellectual Property are all of the Intellectual Property of Seller necessary to operate the Seller’s Business as presently conducted or proposed to be conducted.
(d) The Intellectual Property Assets, and all rights in and to the Intellectual Property Assets licensed to Seller under the Licensed Intellectual Property or Intellectual Property Agreements, are valid and enforceable. All Intellectual Property Assets owned or used by Seller immediately prior to the Closing hereunder will be owned or available for use by Buyer on identical terms and conditions immediately subsequent to the Closing hereunder without any action on the part of Buyer and without the payment by Buyer of any transfer or other fee resulting from the Closing.
(e) Seller has delivered to Buyer correct and complete copies of all Licensed Intellectual Property and other Intellectual Property Agreements (each as amended to date). No consents are necessary for Buyer to continue to use the Intellectual Property Assets or Licensed Intellectual Property in the same manner as Seller.
(f) Seller has entered into binding, valid and enforceable written Contracts with each current and former employee and independent contractor who is or was involved in or has contributed to the invention, creation, or development of any Intellectual Property during the course of employment or engagement with Seller whereby such employee or independent contractor (i) acknowledges Seller's exclusive ownership of all Intellectual Property Assets invented, created or developed by such employee or independent contractor within the scope of his or her employment or engagement with Seller; (ii) grants to Seller a present, irrevocable assignment of any ownership interest such employee or independent contractor may have in or to such Intellectual Property; and (iii) irrevocably waives any right or interest, including any moral rights, regarding such Intellectual Property, to the extent permitted by applicable Law. All Contracts with each current and former employee and independent contractor contemplated under this Section 4.11(f) have been provided to the Buyer prior to the date hereof.
(g) Neither the execution, delivery, or performance of this Agreement or any Transaction Documents, nor the consummation of the transactions contemplated hereunder, will result in the loss or impairment of or payment of any additional amounts with respect to, or require the consent of any other Person in respect of, the Buyer's right to own or use any Intellectual Property Assets or Licensed Intellectual Property in the conduct of the Seller’s Business as currently conducted and as proposed to be conducted. Immediately following the Closing, all Intellectual Property Assets will be owned or available for use by Buyer on substantially the same terms as they were owned or available for use by Seller immediately prior to the Closing.
(h) All of the Intellectual Property Assets and Licensed Intellectual Property are valid and enforceable. Seller has taken all desirable action and necessary steps to maintain, protect and enforce the Intellectual Property Assets and Licensed Intellectual Property and to preserve the confidentiality of all Trade Secrets included in the Intellectual Property Assets, including by requiring all Persons having access thereto to execute binding, written non-disclosure agreements.
(i) The conduct of the Seller’s Business as currently and formerly conducted, including the use of the Intellectual Property Assets and Licensed Intellectual Property in connection therewith, and the products, processes, and services of the Seller’s Business have not infringed, misappropriated, or otherwise violated and will not infringe, misappropriate, or otherwise violate the Intellectual Property or other rights of any Person. No Person has infringed, misappropriated, or otherwise violated any Intellectual Property Assets or Licensed Intellectual Property.
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(j) There are no Actions (including any opposition, cancellation, revocation, review, or other proceeding), whether settled, pending or threatened (including in the form of offers to obtain a license): (i) alleging any infringement, misappropriation, or other violation of the Intellectual Property of any Person by Seller in the conduct of the Seller’s Business; (ii) challenging the validity, enforceability, registrability, patentability, or ownership of any Intellectual Property Assets or Licensed Intellectual Property; or (iii) by Seller or any other Person alleging any infringement, misappropriation, or other violation by any Person of any Intellectual Property Assets. Seller is not aware of any facts or circumstances that could reasonably be expected to give rise to any such Action. No Selling Party is subject to any outstanding or prospective Governmental Order (including any motion or petition therefor) that does or could reasonably be expected to restrict or impair the use of any Intellectual Property Assets or Licensed Intellectual Property.
(k) To the Knowledge of the Seller and to the Knowledge of the Stockholders, there do not exists any products, inventions, procedures, or service offerings that any competitors or other Persons have developed and/or are offering which reasonably could be expected to supersede or make obsolete any Purchased Asset or product or service offering of Seller.
(l) No proprietary information or rights included in the Intellectual Property Assets has been authorized to be disclosed or actually has been disclosed by any Selling Party to any employee, consultant or contractor or other Person other than pursuant to a written non-disclosure agreement restricting the disclosure and use of such proprietary information. Each Selling Party has taken adequate security measures to protect the confidentiality and value of all of Seller’s proprietary information and any other material non-public, proprietary information of Seller (and any confidential information owned by another Person to whom Seller has a confidentiality obligation) which measures are reasonable in the industry in which Seller operates.
(m) No licenses or rights have been granted to any Person to distribute the source code of, to use the source code to create derivative works of, or to otherwise exploit the source code of any product currently marketed by, commercially available from or under development by Seller. Seller is not currently party to any source code escrow agreement or any other agreement (or a party to any agreement obligating Seller to enter into a source code escrow agreement or other agreement) requiring the deposit of source code or related materials for any Software.
(n) All Business IT Systems are in good working condition and are sufficient for the operation of the Seller’s Business as currently conducted and as proposed to be conducted. In the past three (3) years, there has been no malfunction, failure, continued substandard performance, denial-of-service, or other cyber incident, including any cyberattack, or other impairment of the Seller’s Business IT Systems that has resulted or is reasonably likely to result in material disruption or damage to the Seller’s Business and that has not been remedied. Seller has taken all commercially reasonable steps to safeguard the confidentiality, availability, security, and integrity of the Seller’s Business IT Systems, including implementing and maintaining appropriate backup, disaster recovery, and Software and hardware support arrangements.
(o) Except as set forth in Section 4.11(o) of the Disclosure Schedules, there are no licensing fees, royalties, honoraria or other payments or consideration payable by Seller or any successor in interest to any Person by reason of the ownership, development, use, license, sale or disposition of the Intellectual Property Assets.
(p) Except as set forth in Section 4.11(p) of the Disclosure Schedules, with respect to each item of the Intellectual Property Assets, Seller has not agreed to or assumed, any obligation or duty to warrant, defend, indemnify, reimburse, hold harmless, guaranty or otherwise assume or incur any obligation or liability with respect to any Person for or against any interference, infringement, misappropriation or other conflict with respect to the item.
(q) The consummation of the transactions contemplated hereby will not result in the loss or impairment of Buyer’s right to own or use any of the Intellectual Property Assets in the same manner as Seller. Neither this Agreement nor any transaction contemplated by this Agreement will result in the grant of any license or other rights with respect to any Intellectual Property Assets to any other Person pursuant to any Contract to which Seller is a party or by which any assets or properties of Seller is bound.
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(r) Seller has complied with all applicable Laws and all internal or publicly posted policies, notices, and statements concerning the collection, use, processing, storage, transfer, and security of personal information in the conduct of the Seller’s Business. In the past three (3) years, Seller has not (i) experienced any actual, alleged, or suspected data breach or other security incident involving personal information in its possession or control or (ii) been subject to or received any notice of any audit, investigation, complaint, or other Action by any Governmental Authority or other Person concerning the Company's collection, use, processing, storage, transfer, or protection of personal information or actual, alleged, or suspected violation of any applicable Law concerning privacy, data security, or data breach notification, in each case in connection with the conduct of the Seller’s Business, and to Seller's Knowledge and the Knowledge of the Stockholders, there are no facts or circumstances that could reasonably be expected to give rise to any such Action.
Section 4.12 Inventory. All Inventory, whether or not reflected in the Balance Sheet, consists of a quality and quantity usable and salable in the Ordinary Course of Business consistent with past practice, except for obsolete, damaged, defective or slow-moving items that have been written off or written down to fair market value or for which adequate reserves have been established. All Inventory is owned by Seller free and clear of all Encumbrances, and no Inventory is held on a consignment basis. The quantities of each item of Inventory (whether raw materials, work-in-process or finished goods) are not excessive, but are reasonable in the present circumstances of Seller.
Section 4.13 Accounts Receivable. The Accounts Receivable reflected on the Interim Balance Sheet and the Accounts Receivable arising after the date thereof (a) have arisen from bona fide transactions entered into by Seller involving the sale of goods or the rendering of services in the Ordinary Course of Business consistent with past practice; (b) constitute only valid, undisputed claims of Seller not subject to claims of set-off or other defenses or counterclaims other than normal cash discounts accrued in the Ordinary Course of Business consistent with past practice; and (c) subject to a reserve for bad debts shown on the Interim Balance Sheet or, with respect to Accounts Receivable arising after the Interim Balance Sheet Date, on the accounting records of the Seller’s Business, are collectible in full within ninety (90) days after billing. Any reserve for bad debts shown on the Interim Balance Sheet or, with respect to Accounts Receivable arising after the Interim Balance Sheet Date, on the accounting records of the Seller’s Business have been determined in accordance with GAAP, consistently applied, subject to normal year-end adjustments and the absence of disclosures normally made in footnotes.
Section 4.14 Major Customers and Vendors. Set forth on Section 4.14 of the Disclosure Schedules is a list of the ten largest suppliers and the ten largest service providers to Seller based on the dollar value of materials or services purchased by Seller for the year ended December 31, 2020, the year ended December 31, 2021, and the three months ended March 31, 2022, respectively (collectively, the “Major Vendors”). Set forth on Section 4.14 of the Disclosure Schedules is a list of the ten largest customers of Seller based on the dollar value of revenue generated by such customers for the year ended December 31, 2020, the year ended December 31, 2021, and the three months ended March 31, 2022, respectively (collectively, the “Major Customers”). There has not been, nor as a result of the transactions contemplated by this Agreement is there reasonably anticipated to be, any change in relations with any Major Vendor or Major Customer. The current vendors and service providers of Seller provide sufficient materials and services for the operation of the Seller’s Business.
Section 4.15 Minute Books. The minute books of Seller accurately reflect in all respects all material actions taken by written consent or resolution and meetings held by the stockholders. The ownership record book of Seller accurately reflect in all material respects all transactions in Seller’s equity. True, correct and complete copies of the minute books and ownership record books of Seller have been delivered to Buyer prior to the date hereof. Nothing that has not been reflected in the minute books and/or ownership records of Seller could have, individually or in the aggregate, a Material Adverse Effect.
Section 4.16 Product Liability and Warranty.
(a) Each product or service sold or otherwise delivered by Seller has been in conformity in all material respects with all applicable contractual commitments and all express and implied warranties, and Seller does not have any material Liability (and there is no basis for any present or future action, suit, proceeding, hearing, investigation, charge, complaint, claim or demand against Seller or Buyer after the Closing Date) for replacement or repair of any such products or services or other damages in connection therewith, subject only to the reserve for service warranty claims set forth in the Financial Statements. No product manufactured, sold, leased or delivered, and no service provided, by Seller is subject to any guaranty, warranty or other indemnity beyond applicable law and the applicable standard terms and conditions of sale, lease or service.
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(b) Seller does not have any Liability, and there is no basis for any present or future action, suit, proceeding, hearing, investigation, charge, complaint, claim or demand against Seller or Buyer giving rise to any Liability, arising out of any injury to any Person or property as a result of the ownership, possession or use of a product or service manufactured, sold, leased, delivered or provided by Seller.
Section 4.17 Insurance. Section 4.17 of the Disclosure Schedules sets forth (a) a true and complete list of all current policies or binders of fire, liability, product liability, umbrella liability, real and personal property, workers' compensation, vehicular, fiduciary liability and other casualty and property insurance maintained by Seller or its Affiliates and relating to the Seller’s Business, the Purchased Assets or the Assumed Liabilities (collectively, the "Insurance Policies"). There are no claims related to the Seller’s Business, the Purchased Assets or the Assumed Liabilities pending under any such Insurance Policies. Neither Seller nor any of its Affiliates has received any written notice of cancellation or, premium increase with respect to, or alteration of coverage under, any of such Insurance Policies. All premiums due on such Insurance Policies have either been paid or, if not yet due, accrued. All such Insurance Policies (a) are in full force and effect and enforceable in accordance with their terms; (b) are provided by carriers who are financially solvent; and (c) have not been subject to any lapse in coverage. Neither Seller nor any of its Affiliates is in default under, or has otherwise failed to comply with, in any material respect, any provision contained in any such Insurance Policy. The Insurance Policies are of the type and in the amounts customarily carried by Persons conducting a business similar to the Seller’s Business and are sufficient for compliance with all applicable Laws and Contracts to which Seller is a party or by which it is bound. True and complete copies of the Insurance Policies have been made available to the Buyer.
Section 4.18 Legal Proceedings; Governmental Orders.
(a) There are no Actions pending or, to Seller’s Knowledge or the Knowledge of the Stockholders, threatened against or by Seller (i) relating to or affecting the Seller’s Business, the Purchased Assets or the Assumed Liabilities; or (ii) that challenge or seek to prevent, enjoin or otherwise delay the transactions contemplated by this Agreement. No event has occurred or circumstances exist that may give rise to, or serve as a basis for, any such Action.
(b) There are no outstanding Governmental Orders and no unsatisfied judgments, penalties or awards against, relating to or affecting the Seller’s Business.
Section 4.19 Compliance With Laws; Permits; Licenses.
(a) Seller has complied, and is now complying, with all Laws applicable to the conduct of the Seller’s Business as currently conducted or the ownership and use of the Purchased Assets.
(b) All Permits required for Seller to conduct the Seller’s Business as currently conducted or for the ownership and use of the Purchased Assets have been obtained by Seller and are valid and in full force and effect. All fees and charges with respect to such Permits as of the date hereof have been paid in full. Section 4.19(b) of the Disclosure Schedules lists all current Permits issued to Seller which are related to the conduct of the Seller’s Business or the ownership and use of the Purchased Assets, including the names of the Permits and their respective dates of issuance and expiration. No event has occurred that, with or without notice or lapse of time or both, would reasonably be expected to result in the revocation, suspension, lapse or limitation of any Permit set forth in Section 4.19(b) of the Disclosure Schedules.
(c) Except as set forth in Section 4.19(c) of the Disclosure Schedules, Seller has, maintains in full force and effect, and is in compliance with, all Licenses required by Seller to own, lease and operate its properties and to carry on its business as currently conducted or otherwise necessary to operate Seller’s Business as currently conducted. Section 4.19(c) of the Disclosure Schedules sets forth all actions, proceedings or investigations, pending, or to the Knowledge of Seller, threatened, against Seller that could be reasonably be expected to result in the suspension, loss or revocation of any License.
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Section 4.20 Environmental Matters. The operations of Seller with respect to the Seller’s Business and the Purchased Assets are currently and have been in compliance with all Environmental Laws. Seller has not received from any Person, with respect to the Seller’s Business or the Purchased Assets, any: (i) Environmental Notice or Environmental Claim; or (ii) written request for information pursuant to Environmental Law, which, in each case, either remains pending or unresolved, or is the source of ongoing obligations or requirements as of the Closing Date.
Section 4.21 Employee Benefit Matters.
(a) Except as set forth in Section 4.21(a) of the Disclosure Schedules, neither Seller nor any ERISA Affiliate maintains, administers, sponsors or otherwise has any obligations or liability, contingent or otherwise, with respect to (i) any “employee benefit plan,” as defined in section 3(3) of ERISA, (ii) any other plan, program, policy or arrangement (written or oral) whether or not subject to ERISA (including any funding mechanism therefor now in effect or required) providing for retirement, bonuses or other incentive compensation, profit-sharing, stock option, stock purchase, restricted stock, stock unit, other stock related rights, deferred compensation, vacation, health or medical benefits, life insurance, disability benefits, cafeteria (section 125), workers’ compensation, supplemental unemployment benefits, severance benefits, salary continuation, leave of absence or other fringe benefits, or (iii) any employment, consulting, termination, retention, severance, or change of control or similar agreement or arrangement. The items required to be listed in Section 4.21(a) of the Disclosure Schedules are referred to collectively herein as the “Benefit Plans.”
(b) None of the Benefit Plans is subject to Title IV of ERISA. Neither Seller nor any ERISA Affiliate has any outstanding liability (whether absolute or contingent) under title IV of ERISA. An “ERISA Affiliate” means any Person that would be treated as a single employer with Seller under section 414(b), (c), (m) or (o) of the Code.
(c) Each Benefit Plan has been maintained in compliance with its terms and with the requirements prescribed by any and all applicable Laws, including ERISA and the Code. All amendments and actions to bring each Benefit Plan into conformity with the applicable provisions of ERISA, the Code and other applicable Laws have been made or taken except to the extent that such amendments or actions are not required by Law to be made or taken until a date after the Closing Date and are disclosed in Section 4.21(c) of the Disclosure Schedules. Nothing has been done or omitted to be done and no transaction or holding of any asset under or in connection with any Benefit Plan has occurred that will make Seller or any officer or Shareholder of Seller subject to any liability under Title I of ERISA or liable for any Tax pursuant to section 4975 of the Code (assuming the taxable period of any such transaction expired as of the date hereof).
(d) Seller does not have, nor has ever had any, obligation or liability (contingent or otherwise) with respect to any retiree health insurance, life insurance or other welfare benefits under any Benefit Plan, other than as mandated by section 4980B of the Code or under applicable Law and at the expense of the participant or the participant’s beneficiary. Each Benefit Plan may be amended or terminated or otherwise discontinued after the Closing in accordance with its terms, without incurring any liability thereunder to Seller other than ordinary administrative expenses typically incurred in a termination event. Seller does not have any commitments or obligations and the Seller has not made any representations to any employee, officer, manager, independent contractor or consultant, whether or not legally binding, to adopt, amend, modify or terminate any Benefit Plan or any collective bargaining agreement or other industrial instruments, in connection with the consummation of the transactions contemplated by this Agreement and the other Transaction Documents or otherwise.
(e) Each Benefit Plan that is subject to Section 409A of the Code has been administered in compliance with its terms and the operational and documentary requirements of Section 409A of the Code and all applicable regulatory guidance (including notices, rulings and proposed and final regulations) thereunder. Seller does not have any obligation to gross up, indemnify or otherwise reimburse any individual for any excise Taxes, interest or penalties incurred pursuant to Section 409A of the Code.
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(f) No Benefit Plan is under audit or is the subject of an audit or investigation by any Government Authority, nor, to the Knowledge of Seller, is any such audit or investigation pending. No actions, suits, termination proceedings or claims (other than routine claims for benefits in the Ordinary Course) are pending or, to the Knowledge of Seller, threatened with respect to any Benefit Plan, the assets of any Benefit Plan, or the plan administrator or any fiduciary of any Benefit Plan with respect to the operation of such plan, and no facts or circumstances exist that could reasonably be expected to give rise to any such actions, suits, termination proceedings or claims.
Section 4.22 Labor and Employment Matters.
(a) Section 4.22(a) of the Disclosure Schedules contains a list of all persons who are employees, independent contractors or consultants of the Seller’s Business as of the date hereof, including any employee who is on a leave of absence of any nature, paid or unpaid, authorized or unauthorized, and sets forth for each such individual the following: (i) name; (ii) title or position (including whether full-time or part-time); (iii) hire or retention date; (iv) current annual base compensation rate or contract fee; (v) commission, bonus or other incentive-based compensation; and (vi) a description of the fringe benefits provided to each such individual as of the date hereof. As of the date hereof, all compensation, including wages, commissions, bonuses, fees and other compensation, payable to all employees, independent contractors or consultants of the Seller’s Business for services performed on or prior to the date hereof have been paid in full and there are no outstanding agreements, understandings or commitments of Seller with respect to any compensation, commissions, bonuses or fees. Seller does not employ any employee who cannot be dismissed immediately, whether currently or immediately after the transactions contemplated by this Agreement and the Transaction Documents, without notice and without further liability to Seller, subject to applicable Laws relating to employment discrimination. To Seller’s Knowledge, no employee of Seller intends to terminate his or her employment relationship with Seller. As of the date hereof, all compensation, including wages, commissions and bonuses, payable to all employees, independent contractors, consultants, or other service providers of the Seller for services performed on or prior to the date hereof have been paid as required by Law.
(b) Section 4.22(b) of the Disclosure Schedules sets forth a list of each written employment, severance, retention or termination agreement, or a consulting agreement with an individual person, to which Seller is a party and that has continuing rights or obligations. Except as set forth on Section 4.22(b) of the Disclosure Schedules, Seller does not employ any employee who cannot be dismissed immediately, whether currently or immediately after the transactions contemplated by this Agreement and the Transaction Documents, without notice and without further liability to Seller, subject to applicable Laws relating to employment discrimination. As of the date hereof, all compensation, including wages, commissions and bonuses, payable to all employees, independent contractors, consultants, or other service providers of the Seller for services performed on or prior to the date hereof have been paid as required by Law.
(c) Seller is not, and has not been, a party to, bound by, or negotiating any collective bargaining agreement or other Contract with a union, works council or labor organization (collectively, "Union"), and to Seller’s Knowledge, no Union or group of employees is seeking or has sought to organize employees for the purpose of collective bargaining. There has never been, nor has there been any threat of, any strike, slowdown, work stoppage, lockout, concerted refusal to work overtime or other similar labor disruption or dispute affecting Seller or any employees of the Seller’s Business. Seller has no duty to bargain with any Union.
(d) There are no unfair labor practice charges, grievances or complaints pending, or to the Knowledge of Seller threatened, by or on behalf of any employee or group of employees of Seller, and, to the Knowledge of Seller, there is no basis for any such charges, grievances or complaints.
(e) All employees of Seller possess all applicable passports, visas, permits and other authorizations required by all applicable immigration or similar Laws to be employed by and to perform services for and on behalf of Seller. Seller and its employees have complied in all material respects with all applicable immigration and similar Laws.
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(f) Any actions taken by Seller prior to the date of this Agreement have been taken in accordance with WARN. The transactions contemplated in this Agreement will not result in a plant closing or mass lay-off, as those terms are defined in WARN.
(g) Seller is and has been in compliance in all material respects with all applicable Laws pertaining to employment and employment practices to the extent they relate to employees, volunteers, interns, consultants and independent contractors of the Seller’s Business. Seller employs or engages those leased employees or independent contractors with respect to the Seller’s Business who are listed on Schedule 4.22(g) of the Disclosure Schedule. Seller has properly and permissibly classified for all purposes (including without limitation for all Tax purposes and for purposes of determining eligibility and benefits under any Benefit Plan) all employees (including by class of employee), leased employees, consultants and independent contractors, and has withheld and paid all applicable Taxes and made all required filings in connection with services provided by such persons. Each independent contractor providing services to Seller has executed a written independent contractor agreement.
(h) No current officer or senior employee of Seller has provided written or, to the Seller’s Knowledge, oral notice that he or she intends to terminate his or her employment relationship with the Seller prior to Closing or within one (1) year following the consummation of the transactions contemplated by this Agreement.
(i) Except as set forth on Section 4.22(i) of the Disclosure Schedules, Seller is not a party to any Contract with any employee that (i) restricts the right of any of Seller to terminate the employment of such employee without cause or without a specified notice period, or (ii) obligates Seller to pay severance or pay or accelerate any other payments (including acceleration of equity) or benefits to such employee upon termination of such employee’s employment with Seller. No former or current employee of Seller is a party to, or is otherwise bound by, any Contract that in any way adversely affected, affects, or will affect the ability of Buyer to operate the Purchased Assets as presently conducted and proposed to be conducted.
Section 4.23 Taxes.
(a) All Tax Returns with respect to the Seller’s Business required to be filed by Seller have been, or will be, timely filed. Such Tax Returns are, or will be, true, complete and correct in all respects. All Taxes due and owing by Seller (whether or not shown on any Tax Return) have been, or will be, timely paid.
(b) Seller has withheld and paid each Tax required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, customer, shareholder or other party, and complied with all information reporting and backup withholding provisions of applicable Law.
(c) No extensions or waivers of statutes of limitations have been given or requested with respect to any Taxes of Seller.
(d) All deficiencies asserted, or assessments made, against Seller as a result of any examinations by any taxing authority have been fully paid.
(e) Seller is not a party to any Action by any taxing authority. There is no pending or threatened Actions by any taxing authority.
(f) There are no Encumbrances for Taxes upon any of the Purchased Assets nor is any taxing authority in the process of imposing any Encumbrances for Taxes on any of the Purchased Assets (other than for current Taxes not yet due and payable).
(g) Seller is not a "foreign person" as that term is used in Treasury Regulations Section 1.1445-2.
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(h) Seller is not, and has not been, a party to, or a promoter of, a "reportable transaction" within the meaning of Section 6707A(c)(1) of the Code and Treasury Regulations Section 1.6011 4(b).
(i) None of the Purchased Assets is (a) required to be treated as being owned by another person pursuant to the so-called "safe harbor lease" provisions of former Section 168(f)(8) of the Internal Revenue Code of 1954, as amended, (b) subject to Section 168(g)(1)(A) of the Code, or (iii) subject to a disqualified leaseback or long-term agreement as defined in Section 467 of the Code.
Section 4.24 Brokers. There is no investment banker, financial advisor, broker, finder or other intermediary that has been retained by, or is authorized to act on behalf of, Seller or any Stockholder that might be entitled to any fee or commission from Seller or any Stockholder, Buyer or any of their respective Affiliates upon consummation of any of the transactions contemplated by this Agreement or the Transaction Documents.
Section 4.25 Subsidiaries; Seller Names.
(c) Seller does not own, directly or indirectly, any capital stock, membership interest, partnership interest, joint venture interest or other equity interest in any Person.
(d) Seller has not used any corporate, fictitious or other name in the conduct of the Seller’s Business or in connection with the ownership, operation, or lease of its assets or properties.
Section 4.24 Full Disclosure. No representation or warranty by any of the Selling Parties in this Agreement and no statement contained in the Disclosure Schedules to this Agreement or any certificate or other document furnished or to be furnished to the Buyer pursuant to this Agreement contains any untrue statement of a material fact, or omits to state a material fact necessary to make the statements contained therein, in light of the circumstances in which they are made, not misleading.
Article
V
REPRESENTATIONS AND WARRANTIES
OF THE Buyer
The Buyer represents and warrants to the Selling Parties that the statements contained in this Article V are true and correct as of the date hereof.
Section 5.01 Organization of Buyer. Buyer is a corporation duly organized, validly existing and in good standing under the Laws of the state of Delaware. Buyer is a corporation duly organized, validly existing and in good standing under the Laws of the state of Delaware
Section 5.02 Authority of Buyer. The Buyer has full corporate power and authority to enter into this Agreement and the Transaction Documents to which the Buyer is a party thereto, to carry out its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution and delivery by the Buyer of this Agreement and any Transaction Document to which the Buyer is a party, the performance by Buyer of its obligations hereunder and thereunder and the consummation by the Buyer of the transactions contemplated hereby and thereby have been duly authorized by all requisite corporate action on the part of the Buyer. This Agreement has been duly executed and delivered by the Buyer, and (assuming due authorization, execution and delivery by each of the Selling Parties) this Agreement constitutes a legal, valid and binding obligation of the Buyer enforceable against the Buyer in accordance with its terms. When each Transaction Document to which any Buyer is or will be a party to has been duly executed and delivered by such Buyer (assuming due authorization, execution and delivery by each other party thereto), such Transaction Document will constitute a legal and binding obligation of such Buyer enforceable against it in accordance with its terms.
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Section 5.03 No Conflicts; Consents. The execution, delivery and performance by the Buyer to this Agreement and the Transaction Documents, as applicable, to which such Buyer is a party, and the consummation of the transactions contemplated hereby and thereby, do not and will not: (a) conflict with or result in a violation or breach of, or default under, any provision of the certificate of incorporation, by-laws or other organizational documents of the Buyer; (b) conflict with or result in a violation or breach of any provision of any Law or Governmental Order applicable to the Buyer; or (c) require the consent, notice or other action by any Person under any Contract to which the Buyer is a party. No consent, approval, Permit, Governmental Order, declaration or filing with, or notice to, any Governmental Authority is required by or with respect to the Buyer in connection with the execution and delivery of this Agreement and the Transaction Documents and the consummation of the transactions contemplated hereby and thereby.
Section 5.04 Brokers. No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement or any Transaction Document based upon arrangements made by or on behalf of the Buyer.
Section 5.05 Sufficiency of Funds. The Buyer has sufficient cash on hand or other sources of immediately available funds to enable it to make payment of the Closing Cash Payment and consummate the transactions contemplated by this Agreement.
Section 5.06 Legal Proceedings. There are no Actions pending or, to knowledge of the Buyer, threatened against or by any Buyer or any Affiliate of such Buyer that challenges or seeks to prevent, enjoin or otherwise delay the transactions contemplated by this Agreement. No event has occurred or circumstances exist that may give rise or serve as a basis for any such Action.
Section 5.07 12 Month Operating Budget. Following the Closing, the Buyer will provide to the Gearbox Division $1,250,000 of working capital to assist the Gearbox Division and the IPG Employees in achieving the Vesting Conditions set forth in the Warrant and the performance bonuses set forth in the Executive Employment Agreements.
Section 5.08 No Other Representations or Warranties. Except for the representations and warranties of the Buyer expressly set forth in this Article V or the representations and warranties expressly set forth in this Agreement or any Transaction Document or any certificate delivered hereunder or thereunder and not in limitation hereof, and, except in the case of fraud, neither Buyer nor any other Person makes any other express or implied representation or warranty on behalf of the Buyer and any such representation or warranty not expressly set forth in this Agreement or any Transaction Document or certificate delivered hereunder or thereunder is disclaimed by the Buyer in its entirety.
Article
VI
covenants
Section 6.01 Conduct of Business Prior to the Closing. Except as expressly permitted by this Agreement, without the prior written consent of Buyer, from the date hereof until the Closing Date, Selling Parties shall conduct the Seller’s Business only in the Ordinary Course of Business, and shall (i) preserve intact its present business organization, (ii) keep available the services of Seller’s officers, key employees and consultants, and (iii) preserve existing relationships with Seller’s customers, suppliers, service providers and other Persons with whom Seller has business relationships. Without limiting the generality of the foregoing, and as an extension thereof, except as set forth on Section 6.01 of the Disclosure Schedules or as otherwise expressly permitted by this Agreement, without the prior written consent of Buyer, from the date hereof until the Closing Date, neither the Seller nor any of the Stockholders shall, directly or indirectly:
(a) propose or adopt any change in the Seller’s organizational documents;
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(b) split, combine or reclassify any Equity Interests or amend the terms of any rights, warrants or options to acquire any Seller Equity Interests, (ii) declare, set aside or pay any dividend (including, without limitation, an extraordinary dividend) or other distribution (whether in cash, stock or property or any combination thereof) in respect of any Seller Equity Interests, or (iii) redeem, repurchase or otherwise acquire or offer to redeem, repurchase, or otherwise acquire any Seller Equity Interests;
(c) issue, deliver, sell, grant, pledge, encumber or transfer or authorize the issuance, delivery, sale, grant, pledge, encumbrance or transfer of, or agree to commit to issue, sell or deliver (whether through the issuance or granting of options, warrants, commitments, subscriptions, rights to purchase or otherwise) any Seller Equity Interests, or (ii) alter or amend any Contract governing Seller’s outstanding Equity Interests;
(d) permit Seller to merge with or acquire (by merger, consolidation, acquisition of stock or assets, joint venture or otherwise of a direct or indirect ownership interest or investment), in one transaction or series of related transactions, any Person, any Equity Interests or other securities of any Person, any division or business of any Person or all or substantially all of the assets of any Person;
(e) sell, lease, encumber or otherwise dispose of any Purchased Assets, other than inventory sold in the Ordinary Course of Business;
(f) (i) (A) permit Seller to incur any Indebtedness, except to fund operations of the Seller’s Business in the Ordinary Course of Business and solely for the purpose of Seller’s working capital requirements, (B) issue or sell any debt securities of Seller; (C) permit Seller to make any loans, advances or capital contributions to, or investments in, any other Person, (D) permit Seller to assume, guarantee or endorse, or otherwise become liable or responsible (whether directly, contingently or otherwise) for, the obligations of any Person, (E) alter or amend in any way any compensation (including without limitation, any commission schedule) or other payments due to managers, employees or independent contractors of Seller or (ii) enter into or materially amend any Contract to effect any of the transactions prohibited by this Section 6.01(f);
(g) (i) increase the amount of compensation of any stockholder, manager or officer of Seller, (ii) except as required by any Material Contract or pursuant to a Seller severance policy existing on the date hereof, grant any severance or termination pay to any shareholder, manager, employee, consultant, independent contractor or agent of Seller, (iii) permit Seller to adopt any employee benefit plan, (iv) provide for the payment of any amounts as a result of the consummation of the transactions contemplated by this Agreement, (v) enter into any new Seller benefit plan, (vi) amend any Benefit Plan, or (vii) pay any bonuses to any employee, manager, consultant, independent contractor or agent of Seller;
(h) permit Seller to authorize or incur any capital expenditure;
(i) make any changes in Seller’s accounting methods, principles or practices currently in effect, except as required by the Financial Accounting Standards Board or GAAP, in each case as concurred in by its independent public accountants;
(j) settle, pay or discharge, any litigation, investigation, arbitration, proceeding or other claim of or relating to Seller;
(k) (i) make or revoke any material Tax election of Seller or take any position on any Tax Return of Seller filed on or after the date of this Agreement or adopt any method therein that is inconsistent with elections made, positions taken or methods used in preparing or filing similar returns in prior periods unless such position or election is pursuant to changes in applicable Law or the Code, (ii) enter into any settlement or compromise of any material Tax liability of Seller, (iii) file any amended Tax Return of Seller, (iv) change any annual Tax accounting period of Seller, (v) enter into any closing agreement, (vi) surrender any right to claim a Tax refund of Seller or (vii) give or request any waiver of a statute of limitation with respect to any Tax Return of Seller;
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(l) except for the Seller’s Business as presently conducted, permit Seller to enter into any new line of business;
(m) adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization of Seller (other than the transactions contemplated by this Agreement);
(n) except as required by any Material Contract, grant any loan, advance, extensions of credit to current or former employees of Seller or forgiveness or deferral of any loans due from any employee of Seller;
(o) except as contemplated by this Agreement, effect new programs or change existing programs of Seller that relate to employment Contracts, severance benefits, change in control benefits, bonuses, commissions, base salaries, 401(k) and pension benefits, phantom stock grants, incentive trips, prizes and awards, vacation and PTO benefits, health and medical benefits or any other remuneration of any kind to any employee of Seller;
(p) amend, modify or waive in any material respects any right under or amend or modify any material term of any Material Contract (including the Leased Real Property);
(q) take any action that would result in any representation or warranty of Seller or the Shareholders contained in this Agreement that is qualified as to materiality becoming untrue as of the Closing Date or any representation or warranty not so qualified becoming untrue in any material respect as of the Closing Date;
(r) except as required by applicable Law or GAAP, reduce any of Seller’s assets, including writing up or down the value of inventory in any material manner or writing-off notes or accounts receivable in any manner, or reduce any of its reserves;
(s) permit to lapse any Permit or License of Seller;
(t) sell, assign, license or encumber any Intellectual Property of the Seller; or
(u) authorize, agree or commit to do any of the foregoing.
Section 6.02 Access to Information. From the date hereof until the Closing, Seller shall (a) afford the Buyer and their Representatives full and free access to and the right to inspect all of the Real Property of Seller, properties, assets, premises, Books and Records, Contracts and other documents and data related to the Seller’s Business; (b) furnish the Buyer and their Representatives with such financial, operating and other data and information related to the Seller’s Business as the Buyer and their Representatives may reasonably request; and (c) instruct the Representatives of Seller to cooperate with the Buyer and their Representatives in its investigation of the Seller’s Business. Any investigation pursuant to this Section 6.02 shall be conducted in such manner as not to interfere unreasonably with the conduct of the Seller’s Business or any other businesses of Seller. No investigation by any Buyer or other information received by any Buyer shall operate as a waiver or otherwise affect any representation, warranty or agreement given or made by the Selling Parties in this Agreement.
Section 6.03 No Solicitation of Other Bids.
(a) The Selling Parties shall not, and shall not authorize or permit any of their Affiliates or any of its or their Representatives to, directly or indirectly, (i) encourage, solicit, initiate, facilitate or continue inquiries regarding an Acquisition Proposal; (ii) enter into discussions or negotiations with, or provide any information to, any Person concerning a possible Acquisition Proposal; or (iii) enter into any agreements or other instruments (whether or not binding) regarding an Acquisition Proposal. The Selling Parties shall immediately cease and cause to be terminated, and shall cause its Affiliates and all of its and their Representatives to immediately cease and cause to be terminated, all existing discussions or negotiations with any Persons conducted heretofore with respect to, or that could lead to, an Acquisition Proposal. For purposes hereof, "Acquisition Proposal" means any inquiry, proposal or offer from any Person (other than any Buyer or any of its Affiliates) relating to the direct or indirect disposition, whether by sale, merger or otherwise, of all or any portion of the Seller’s Business or the Purchased Assets.
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(b) In addition to the other obligations under this Section 6.03(b), the Selling Parties shall promptly (and in any event within three (3) Business Days after receipt thereof by any Selling Party or its Representatives) advise the Buyer orally and in writing of any Acquisition Proposal, any request for information with respect to any Acquisition Proposal, or any inquiry with respect to or which could reasonably be expected to result in an Acquisition Proposal, the material terms and conditions of such request, Acquisition Proposal or inquiry, and the identity of the Person making the same.
(c) The Selling Parties agree that the rights and remedies for noncompliance with this Section 6.03 shall include having such provision specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed that any such breach or threatened breach shall cause irreparable injury to Buyer and that money damages would not provide an adequate remedy to Buyer.
Section 6.04 Intentionally Deleted.
Section 6.05 Confidentiality. From and after the Closing, the Selling Parties shall, and shall cause their Affiliates to, hold, and shall each use its reasonable best efforts to cause their Representatives to hold, in confidence any and all information, whether written or oral, concerning the Seller’s Business, except to the extent that Seller can show that such information (a) is generally available to and known by the public through no fault of any Selling Party, any of their Affiliates or their Representatives; or (b) is lawfully acquired by any Selling Party, any of their Affiliates or their Representatives from and after the Closing from sources which are not prohibited from disclosing such information by a legal, contractual or fiduciary obligation. If any Selling Party or any of their Affiliates or their Representatives are compelled to disclose any information by judicial or administrative process or by other requirements of Law, the Selling Parties shall promptly notify the Buyer in writing and shall disclose only that portion of such information which any Selling Party is advised by its counsel in writing is legally required to be disclosed, provided that the Selling Parties shall use reasonable best efforts to obtain an appropriate protective order or other reasonable assurance that confidential treatment will be accorded such information.
Section 6.06 [Reserved.] Intentionally Deleted.
Section 6.07 Non-Competition; Non-Solicitation.
(a) During the Term of Employment, commencing on the Closing Date, and expiring on the Termination Date of an Executive Employee (individually, not jointly) (the "Restricted Period"), each Selling Party shall not, and shall not permit any of their Affiliates to, directly or indirectly, (i) engage in or assist others in engaging in the Restricted Business in the Territory; (ii) have an interest in any Person that engages directly or indirectly in the Restricted Business in the Territory in any capacity, including as a partner, shareholder, member, employee, principal, agent, trustee or consultant; or (iii) cause, induce or encourage any material actual or prospective client, customer, supplier or licensor of the Seller’s Business (including any existing or former client or customer of Seller and any Person that becomes a client or customer of the Seller’s Business after the Closing), or any other Person who has a material business relationship with the Seller’s Business, to terminate or modify any such actual or prospective relationship.
(b) For a period equal to two years following termination of the employment of the Executive Employees (the “Restricted Period”), the Selling Parties and the Executive Employees shall not, and shall not permit any of their Affiliates to, directly or indirectly, hire or solicit any Transferred Employee pursuant to Section 7.01(a) or any person who is offered any other employment by any Buyer or is or was employed in the Seller’s Business during the Restricted Period, or encourage any such employee to leave such employment or hire any such employee who has left such employment, except pursuant to a general solicitation which is not directed specifically to any such employees.
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(c) Each Selling Party acknowledges that a breach or threatened breach of this Section 6.07 would give rise to irreparable harm to the Buyer, for which monetary damages would not be an adequate remedy, and hereby agrees that in the event of a breach or a threatened breach by the Selling Parties of any such obligations, the Buyer shall, in addition to any and all other rights and remedies that may be available to it in respect of such breach, be entitled to equitable relief, including a temporary restraining order, an injunction, specific performance and any other relief that may be available from a court of competent jurisdiction (without any requirement to post bond).
(d) Each Selling Party acknowledges that the restrictions contained in this Section 6.07 are reasonable and necessary to protect the legitimate interests of the Buyer and constitute a material inducement to the Buyer to enter into this Agreement and the Transaction Documents and consummate the transactions contemplated by this Agreement and the Transaction Documents. In the event that any covenant contained in this Section 6.07 should ever be adjudicated to exceed the time, geographic, product or service or other limitations permitted by applicable Law in any jurisdiction, then any court is expressly empowered to reform such covenant, and such covenant shall be deemed reformed, in such jurisdiction to the maximum time, geographic, product or service or other limitations permitted by applicable Law. The covenants contained in this 6.07 and each provision hereof are severable and distinct covenants and provisions. The invalidity or unenforceability of any such covenant or provision as written shall not invalidate or render unenforceable the remaining covenants or provisions hereof, and any such invalidity or unenforceability in any jurisdiction shall not invalidate or render unenforceable such covenant or provision in any other jurisdiction.
Section 6.08 Performance Bonuses.
(a) Not later than 90 days following the end of each of the Measuring Periods ending June 30, 2023, June 30, 2024 and June 30, 2025 (each a “Performance Bonus Year”), the Seller shall be entitled to bonuses payable in cash (collectively, the “Cash Bonuses”).
(b) Cash Bonuses shall equal 35% of the Free Cash Flow of the Gearbox Division in each Performance Bonus Year; provided, that the cumulative amount of such Cash Bonuses payable for all three Performance Bonus Years shall not exceed an aggregate of $1,750,000.
(c) Equity Bonuses are addressed in the Warrant attached to this document as Exhibit “ A.”
(d) Eligible employees entitled to Cash Bonuses shall be selected by the Chief Executive Officer of the Seller and approved by the Buyer.
Section 6.09 Books and Records.
(a) In order to facilitate the resolution of any claims made against or incurred by Seller prior to the Closing, or for any other reasonable purpose, for a period of six (6) years after the Closing, Buyer shall: (i) retain the Books and Records (including personnel files) relating to periods prior to the Closing in a manner reasonably consistent with the prior practices of Seller; and (ii) upon reasonable notice, afford the Seller's Representatives reasonable access (including the right to make, at Seller's expense, photocopies), during normal business hours, to such Books and Records.
(b) In order to facilitate the resolution of any claims made by or against or incurred by Buyer after the Closing, or for any other reasonable purpose, for a period of six (6) years following the Closing, the Selling Parties shall: (i) retain the books and records (including personnel files) of Seller which relate to the Seller’s Business and its operations for periods prior to the Closing; and (ii) upon reasonable notice, afford the Representatives of the Buyer reasonable access (including the right to make, at any Buyer’s expense, photocopies), during normal business hours, to such books and records.
(c) Neither Buyer nor Seller shall be obligated to provide the other parties with access to any books or records (including personnel files) pursuant to this Section 6.08 where such access would violate any Law.
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Section 6.10 Closing Conditions From the date hereof until the Closing, each party hereto shall use reasonable best efforts to take such actions as are necessary to expeditiously satisfy the closing conditions set forth in Article VIII hereof.
Section 6.11 Public Announcements. Unless otherwise required by applicable Law (including state and federal securities laws, and in each case, based upon the reasonable advice of counsel), no party to this Agreement shall make any public announcements in respect of this Agreement or the transactions contemplated hereby or otherwise communicate with any news media without the prior written consent of the other party (which consent shall not be unreasonably withheld, conditioned or delayed), and the Parties shall cooperate as to the timing and contents of any such announcement.
Section 6.12 Bulk Sales Laws. The parties hereby waive compliance with the provisions of any bulk sales, bulk transfer or similar Laws of any jurisdiction that may otherwise be applicable with respect to the sale of any or all of the Purchased Assets to Buyer; it being understood that any Liabilities arising out of the failure of Seller to comply with the requirements and provisions of any bulk sales, bulk transfer or similar Laws of any jurisdiction which would not otherwise constitute Assumed Liabilities shall be treated as Excluded Liabilities.
Section 6.13 Receivables; Collection and Transitional Services.
(a) From and after the Closing, if any Selling Party or their Affiliates receives or collects any funds relating to any Accounts Receivable or any other Purchased Asset, the Selling Parties or their Affiliate shall remit such funds to the Buyer within three (3) Business Days after its receipt thereof. From and after the Closing, if Buyer or its Affiliate receives or collects any funds relating to any Excluded Asset, Buyer or its Affiliate shall remit any such funds to Seller within three (3) Business Days after its receipt thereof.
(b) The Selling Parties shall provide reasonable assistance to Buyer in the collection of Accounts Receivable. If Seller receives payment in respect of Accounts Receivable that are included in the Purchased Assets, then Seller promptly shall forward such payment to Buyer.
(c) The Selling Parties shall provide reasonable assistance to Buyer in the transition and assignment of all General Vendor Agreements over to Buyer and the transfer and assignment of all Vendor Licenses to Buyer or its Affiliates or (in the event that any Vendor License represents a Non-assignable Asset) to obtain in the name of Buyer or its Affiliates any such Vendor Licenses.
Section 6.14 Transfer Taxes. All transfer, documentary, sales, use, stamp, registration, value added and other such Taxes and fees (including any penalties and interest) incurred in connection with this Agreement and the Transaction Documents (including any real property transfer Tax and any other similar Tax) shall be borne and paid by Seller when due. Seller shall, at its own expense, timely file any Tax Return or other document with respect to such Taxes or fees (and Buyer shall cooperate with respect thereto as necessary).
Section 6.15 Tax Clearance Certificates. If requested by the Buyer, Seller shall notify all of the taxing authorities in the jurisdictions that impose Taxes on Seller or where Seller has a duty to file Tax Returns of the transactions contemplated by this Agreement in the form and manner required by such taxing authorities, if the failure to make such notifications or receive any available tax clearance certificate (a "Tax Clearance Certificate") could subject the Buyer to any Taxes of Seller. If any taxing authority asserts that Seller is liable for any Tax, Seller shall promptly pay any and all such amounts and shall provide evidence to the Buyer that such liabilities have been paid in full or otherwise satisfied.
Section 6.16 Operating Budget. Following the Closing, Buyer shall duly authorize and approve an operating budget for the Performance Year ending June 30, 2023 in the aggregate amount of $1,250,000, which shall be funded to the Gearbox Division by the Buyer.
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Section 6.17 Further Assurances. Following the Closing, each of the Parties hereto shall, and shall cause their respective Affiliates to, execute and deliver such additional documents, instruments, conveyances and assurances and take such further actions as may be reasonably required to carry out the provisions hereof and give effect to the transactions contemplated by this Agreement and the Transaction Documents.
Article
VII
EMPLOYment AND EMPLOYEE BENEFITS
Section 7.01 Employment.
(a) Transferred Employees. Prior to the Closing, Buyer shall deliver, in writing, an offer of employment (on an “at will” basis) to those employees of Seller identified by Buyer on Section 7.01(a) of the Disclosure Schedules to be delivered to Seller no later than ten (10) Business Days prior to the Closing Date to commence such employment immediately upon the Closing Date. Individuals who accept such offer by the Closing Date are hereinafter referred to as the “Transferred Employees.” Subject to applicable Laws, on and after the Closing Date, Buyer shall have the right to dismiss any or all Transferred Employees at any time, with or without cause, and to change the terms and conditions of their employment (including compensation and employee benefits provided to them).
(b) Excluded Employees. Any employee who is not offered employment by Buyer prior to Closing or who does not accept an offer of employment by Buyer and commence work with Buyer by the Closing Date, in each case pursuant to Section 7.01(a), is hereinafter referred to as an “Excluded Employee.”
(c) Seller shall be solely responsible, and Buyer shall have no obligations whatsoever for, any compensation or other amounts payable to any current or former employee, officer, director, independent contractor or consultant of the Seller’s Business, including, without limitation, hourly pay, commission, bonus, salary, accrued vacation, fringe, pension or profit sharing benefits or severance pay for any period relating to the service with Seller at any time on or prior to the Closing Date and Seller shall pay all such amounts to all entitled persons on or prior to the Closing Date or all such amounts owed to any Excluded Employee.
Section 7.02 Signing Bonuses Pool. The Buyer shall make available a cash award pool in the amount of $250,000 for the purpose of making signing bonus payments to Transferring Employees, in each case, with the allocation of such cash awards from the pool to be determined in the sole discretion of Steve Kiss following the Closing Date.
Section 7.03 Standard Procedure. Pursuant to the “Standard Procedure” provided in section 5 of Revenue Procedure 96-60, 1996-2 C.B. 399, (i) Buyer and Seller shall report on a predecessor/successor basis as set forth therein, (ii) Seller will not be relieved from filing a Form W-2 with respect to any Transferred Employees, and (iii) Buyer will undertake to file (or cause to be filed) a Form W-2 for each such Transferred Employee only with respect to the portion of the year during which such Transferred Employees are employed by Buyer that includes the Closing Date, excluding the portion of such year that such Transferred Employee was employed by Seller.
Section 7.04 Employee Benefits.
(a) Benefits. As soon as reasonably practicable following the Closing, the Buyer shall provide the Transferred Employees with benefits under any Buyer existing employee benefit plans provided to similarly situated employees of any Buyer, in each case as determined by the Buyer. Notwithstanding anything to the contrary in this Agreement, nothing in this Agreement shall be construed as requiring any compensation or employee benefit plans, programs or arrangements to continue to be maintained by any Buyer with respect to the Transferred Employees for any specified period after the Closing Date. Notwithstanding anything to the contrary set forth herein, Seller shall remain solely responsible for the satisfaction of all claims under any Benefit Plan.
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(b) Accrued Vacation. Seller shall be exclusively responsible for complying with Seller’s paid time off policies and applicable Laws with respect to the payment of all accrued and unused vacation through the Closing Date.
(c) COBRA. Seller shall be exclusively responsible for complying with COBRA with respect to its employees (including the Transferred Employees) and their qualified beneficiaries by reason of any such employees’ termination of employment with Seller, and Buyer shall not have any obligation or liability to provide rights under COBRA on account of any such termination of employment.
Article
VIII
CONDITIONS TO CLOSING
Section 8.01 Conditions to Obligations of All Parties. The obligations of the Selling Parties and Buyer to consummate the transactions contemplated hereby are subject to the satisfaction or waiver, at or prior to the Closing, of the condition that no Government Authority of competent authority or jurisdiction shall have issued any Law or taken any other action then in effect, which restrains, enjoins or otherwise prohibits or makes illegal the consummation of the transactions contemplated hereby; provided, however, that the parties hereto shall use their commercially reasonable efforts to have any such Law or other legal restraint vacated.
Section 8.02 Conditions to Obligations of Buyer. The obligations of Buyer to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment or the Buyer waiver, at or prior to the Closing, of each of the following conditions:
(a) All of the representations and warranties of Selling Parties contained in Article IV of this Agreement, in the Transaction Documents and any certificate or other writing delivered pursuant hereto shall be true and correct in all respects on and as of the date hereof and on and as of the Closing Date with the same effect as though made at and as of such date (except those representations and warranties that address matters only as of a specified date, the accuracy of which shall be determined as of that specified date in all respects).
(b) The Selling Parties shall have duly performed and complied in all material respects with all agreements, covenants and conditions required by this Agreement and each of the Transaction Documents to be performed or complied with by it prior to or on the Closing Date.
(c) No Action shall have been commenced against any Buyer or Selling Party, which would prevent the Closing. No injunction or restraining order shall have been issued by any Governmental Authority, and be in effect, which restrains or prohibits any transaction contemplated hereby.
(d) All approvals, consents and waivers required under Section 2.09 and listed on Section 2.09 of the Disclosure Schedules shall have been received and executed counterparts thereof shall have been delivered to the Buyer at or prior to the Closing.
(e) From the date of this Agreement, there shall not have occurred any Material Adverse Effect, nor shall any event or events have occurred that, individually or in the aggregate, with or without the lapse of time, could reasonably be expected to result in a Material Adverse Effect.
(f) Seller shall have delivered to the Buyer a bill of sale in the form of Exhibit B hereto (the "Bill of Sale") duly executed by Seller, transferring the tangible personal property included in the Purchased Assets to Buyer.
(g) Seller shall have delivered to Buyer an assignment and assumption agreement in the form of Exhibit C hereto (the "Assignment and Assumption Agreement") duly executed by Seller, effecting the assignment to and assumption by Buyer of the Purchased Assets and the Assumed Liabilities.
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(h) Seller shall have delivered to Buyer an assignment in the form of Exhibit D hereto (the "Intellectual Property Assignments") duly executed by Seller, transferring all of Seller's right, title and interest in and to the Intellectual Property Assets to Buyer.
(i) Seller shall have obtained the consent of Intel Corporation to the assignment of the Intel Contract.
(j) The Executive Employment Agreements to be entered into by each of the Executive Employees which shall be in substantially the forms Exhibits E-1, E-2, E-3 and E-4 hereto, shall have been duly executed and delivered to the Buyer.
(k) Buyer shall have received all Permits and Licenses that are necessary for it to conduct the Seller’s Business as conducted by Seller as of the Closing Date.
(l) All Encumbrances relating to the Purchased Assets shall have been released in full, other than Permitted Encumbrances, and Seller shall have delivered to Buyer written evidence, in form satisfactory to the Buyer in its sole discretion, of the release of such Encumbrances.
(m) Buyer shall have received a certificate, dated the Closing Date and signed by a duly authorized officer of Seller, that each of the conditions set forth in Section 8.02(a), Section 8.02(b) and Section 8.02(e) have been satisfied (the "Seller Closing Certificate").
(n) Buyer shall have received a certificate of the Secretary or an Assistant Secretary (or equivalent officer) of Seller certifying that attached thereto are true and complete copies of all resolutions adopted by the board of directors and stockholders of the Seller authorizing the execution, delivery and performance of this Agreement and the Transaction Documents and the consummation of the transactions contemplated hereby and thereby, and that all such resolutions are in full force and effect and are all the resolutions adopted in connection with the transactions contemplated hereby and thereby.
(o) Buyer shall have received a certificate of the Secretary or an Assistant Secretary (or equivalent officer) of Seller certifying the names and signatures of the officers of Seller authorized to sign this Agreement, the Transaction Documents and the other documents to be delivered hereunder and thereunder.
(p) Buyer shall have received a Form W-9, duly executed by Seller.
(q) Seller shall have delivered, or caused to be delivered, to Buyer a reasonably current long-form good standing certificate (or equivalent document) for Seller issued by the secretary of state of its jurisdiction of incorporation and any other state in which Seller is qualified to do business.
(r) the boards of directors and stockholder(s) of Seller shall have approved this Agreement, the Transaction Documents, and the transactions contemplated hereby and thereby.
(s) The Buyer and its counsel shall be satisfied in their sole and absolute discretion with the results of any due diligence investigation related to facts, matters, circumstances or Liabilities of Seller, the Purchased Assets and the Seller’s Business, and shall have delivered, or caused to be delivered, to Buyer such other documents as the Buyer may reasonably request.
(t) Seller shall have delivered to Buyer such other documents or instruments as Buyer reasonably requests and are reasonably necessary to consummate the transactions contemplated by this Agreement.
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Section 8.03 Conditions to Obligations of Selling Parties. The obligations of Selling Parties to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment or Seller's waiver, at or prior to the Closing, of each of the following conditions:
(a) All of the representations and warranties of Buyer contained in Article V of this Agreement, the Transaction Documents and any certificate or other writing delivered pursuant hereto shall be true and correct in all respects on and as of the date hereof and on and as of the Closing Date with the same effect as though made at and as of such date (except those representations and warranties that address matters only as of a specified date, the accuracy of which shall be determined as of that specified date in all respects).
(b) The Buyer shall have duly performed and complied in all material respects with all agreements, covenants and conditions required by this Agreement and each of the Transaction Documents to be performed or complied with by it prior to or on the Closing Date.
(c) Buyer shall have delivered, or caused to be delivered, to Seller evidence of the wire transfer for the Closing Cash Payment and Buyer shall have delivered the Warrant to Seller.
(d) No injunction or restraining order shall have been issued by any Governmental Authority, and be in effect, which restrains or prohibits any material transaction contemplated hereby.
(e) The Buyer shall have delivered to Seller duly executed counterparts to the Transaction Documents.
(f) Seller shall have received a certificate, dated the Closing Date and signed by a duly authorized officer of Buyer, that each of the conditions set forth in Section 8.03(a) and Section 8.03(b) have been satisfied (the "Buyer Closing Certificate").
(g) Seller shall have received a certificate of the Secretary or an Assistant Secretary (or equivalent officer) of Buyer certifying that attached thereto are true and complete copies of all resolutions adopted by the board of directors of Buyer and Buyer authorizing the execution, delivery and performance of this Agreement and the Transaction Documents and the consummation of the transactions contemplated hereby and thereby, and that all such resolutions are in full force and effect and are all the resolutions adopted in connection with the transactions contemplated hereby and thereby.
(h) Seller shall have received a certificate of the Secretary or an Assistant Secretary (or equivalent officer) of Buyer certifying the names and signatures of the officers of Buyer authorized to sign this Agreement, the Transaction Documents and the other documents to be delivered hereunder and thereunder.
(i) Buyer shall have delivered to Seller such other documents or instruments as Seller reasonably requests and are reasonably necessary to consummate the transactions contemplated by this Agreement.
Article
IX
INDEMNIFICATION
Section 9.01 Survival. The representations and warranties made by any party and contained in or made pursuant to this Agreement shall survive the Closing (even if the damaged party knew or had reason to know of any misrepresentation or breach of warranty at the time of Closing) and continue in full force and effect for a period of three (3) years thereafter; provided, however, that (a) the representations and warranties contained in Sections 4.01, 4.02, 4.08, 4.21, 4.22(g), 4.24, 5.01 and 5.02 (the “Fundamental Representations”) and all claims for fraud, intentional misrepresentation or willful misconduct shall survive indefinitely, and (b) the representations and warranties contained in Section 4.23 shall survive until 30 days following the expiration of the applicable statutes of limitations. Any representation and warranty that would otherwise terminate in accordance with the immediately preceding sentence shall continue to survive if a Claim Notice has been timely given under this Article IX on or prior to the applicable termination date until the claim for indemnification asserted therein has been satisfied or otherwise resolved as provided in this Article IX, but only with respect to the matter set forth in such Claim Notice. The covenants made by any party shall survive the Closing until the later of (a) the date the covenant is fully performed or (b) on the termination or expiration date of such covenant as set forth in this Agreement.
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Section 9.02 Indemnification by the Selling Parties. After the Closing, Seller and the Stockholders, jointly and severally, shall indemnify the Buyer and its Affiliates, officers, directors, employees and representatives (each, a “Buyer Indemnified Party”) against and hold them harmless from and reimburse them for all Losses which such Buyer Indemnified Party may sustain or incur through and after the date of the claim for indemnification (including any Losses sustained or incurred after the end of any applicable survival period) as a result of, arising out of, relating to, or in the nature of:
(a) the breach of any representation or warranty of Seller or the Stockholders contained herein;
(b) the breach of any covenant or obligation to be performed after the Closing Date by Seller or the Stockholders in this Agreement or the Transaction Documents;
(c) the Excluded Liabilities and the Excluded Assets;
(d) Liabilities to the Transferred Employees with respect to their participation in or exclusion from Benefit Plans; and
(e) any Third Party Claim based upon, resulting from or arising out of the Seller’s Business, operations, properties, assets or obligations of the Selling Parties or any of its Affiliates (other than the Purchased Assets or Assumed Liabilities) conducted, existing or arising on or prior to the Closing Date.
Section 9.03 Indemnification by Buyer. After the Closing, the Buyer and Buyer shall severally (and not jointly) indemnify Seller, the Stockholders and their Affiliates, officers, directors, employees and representatives (each, a “Seller Indemnified Party”) against and hold them harmless from and reimburse them for all Losses which a Seller Indemnified Party may sustain or incur through and after the date of the claim for indemnification (including any Losses sustained or incurred after the end of any applicable survival period) as a result of, arising out of, relating to, or in the nature of:
(a) the breach of any representation or warranty of any Buyer contained herein;
(b) the breach of any covenant or obligation to be performed after the Closing Date by any Buyer in this Agreement or in the Transaction Documents;
(c) the Assumed Liabilities; and
(d) Buyer’s ownership of the Purchased Assets and operation of Gearbox Division after the Closing Date.
Section 9.04 Limitations. No party hereto shall be required to indemnify or hold harmless any Person with respect to any claim for indemnification pursuant to Section 9.02 or Section 9.03, unless and until the aggregate amount of Losses of Seller Indemnified Parties or Buyer Indemnified Parties, as applicable, exceeds $10,000 (the “Threshold”); provided, that, once the Threshold has been reached, all Losses, including such Losses to reach the Threshold, will be indemnifiable. In no event shall the indemnification obligation of the Buyer pursuant to Section 9.03, on the one hand, or Seller and the Stockholders pursuant to Section 9.02, on the other hand, exceed 50% of the sum of (a) the Closing Cash Payment, (b) any Performance Bonus payable to the Selling Parties and (c) the total number of Warrant Shares that vest under the terms of the Warrant (the “Cap”). Notwithstanding the preceding two sentences, the Threshold and the Cap shall not apply to any: (i) indemnity claim by any party hereto for fraud, intentional misrepresentation or willful misconduct;; or (ii) indemnity claim relating to a breach of any of the Fundamental Representations of the Selling Parties. For the avoidance of doubt, neither the Seller nor the Stockholders shall be obligated to indemnify the Buyer Indemnified Parties for any Losses, unless such Losses result from a breach by Seller or the Stockholders of their representations, warranties and covenants contained in this Agreement. Absent the foregoing, Buyer shall be responsible for any Losses relating to the operation of the Gearbox Division after the Closing.
| 44 |
Section 9.05 Claims.
(a) Claim Notices. A party entitled to be indemnified pursuant to Section 9.02 or Section 9.03 (the “Indemnified Party”) shall within five (5) Business Days notify the party or parties liable for such indemnification (the “Indemnifying Party”) in writing of any claim or demand which the Indemnified Party has determined has given or could give rise to a right of indemnification under this Agreement (such notice, a “Claim Notice”). Any Claim Notice (i) shall state (with reasonable specificity) the basis on which indemnification is being asserted, (ii) shall set forth the amount of Losses or estimated Losses for which indemnification is being asserted, and (iii) in the case of Third Party claims, shall be accompanied by copies of all relevant pleadings, demands and other papers served on the Indemnified Party.
(b) Defense of Claims.
(i) If the Indemnified Party notifies the Indemnifying Party of any claim or demand pursuant to Section 9.02 or Section 9.03 asserted by a Third Party, the Indemnifying Party shall have the right to (A) employ counsel acceptable to the Indemnified Party to defend any such claim or demand asserted against the Indemnified Party, (B) control and conduct any proceedings or negotiations in connection therewith and necessary or appropriate to defend the Indemnified Party and (C) take all other steps or proceedings to settle or defend any such claims (provided, however, that the Indemnifying Party shall not settle any such claim or demand unless such settlement provides for a full release (satisfactory to the Indemnified Party) of each Indemnified Party from all Liability with respect to such claim or demand) so long as (1) the Indemnifying Party notifies the Indemnified Party in writing within 15 days after the Indemnified Party has given notice of the Third Party claim or demand that the Indemnifying Party will indemnify the Indemnified Party from and against the entirety of any Losses the Indemnified Party may suffer resulting from, arising out of, relating to, in the nature of, or caused by the Third Party claim or demand, (2) the Indemnifying Party provides the Indemnified Party with evidence acceptable to the Indemnified Party that the Indemnifying Party will have the financial resources to defend against the Third Party claim or demand and fulfill its indemnification obligations hereunder, (3) the Third Party claim or demand involves only money damages and does not seek an injunction or other equitable relief, (4) settlement of, or an adverse judgment with respect to, the Third Party claim or demand is not, in the good faith judgment of the Indemnified Party, likely to establish a precedential custom or practice adverse to the continuing business interest of the Indemnified Party or its Affiliates, and (5) the Indemnifying Party conducts the defense of the Third Party claim or demand actively and diligently.
(ii) So long as the Indemnifying Party is conducting the defense in accordance with Section 9.05(b)(i) above, the Indemnified Party shall have the right to participate in such defense (including without limitation with counsel of its choice), at its own expense, and the Indemnifying Party shall reasonably cooperate with the Indemnified Party in connection with such participation. If the Indemnifying Party does not satisfy the conditions set forth in Section 9.05(b)(i) above, (A) the Indemnified Party may defend against, and consent to the entry of any judgment or enter into any settlement with respect to, the Third Party claim or demand in any manner it reasonably may deem appropriate (and the Indemnified Party need not consult with, or obtain any consent from, any Indemnifying Party in connection therewith), (B) the Indemnifying Parties will reimburse the Indemnified Party promptly and periodically for the costs of defending against the Third Party claim or demand (including attorneys’ fees and expenses), and (C) the Indemnifying Parties will remain responsible for any Losses the Indemnified Party may suffer resulting from, arising out of, relating to, in the nature of, or caused by the Third Party claim or demand to the fullest extent provided in this Article IX.
Section 9.06 [intentionally omitted]
Section 9.07 Other Indemnification Provisions. The foregoing indemnification provisions are in addition to, and not in derogation of, any statutory, equitable, or common law remedy any party may have with respect to Seller, the Stockholders or the transactions contemplated by this Agreement.
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Article
X
TERMINATION
Section 10.01 Termination. This Agreement may be terminated at any time prior to the Closing:
(a) by the mutual written consent of Selling Parties and Buyer, if;
(i) Buyer is not then in material breach of any provision of this Agreement and there has been a breach, inaccuracy in or failure to perform any representation, warranty, covenant or agreement made by a Selling Party pursuant to this Agreement that would give rise to the failure of any of the conditions specified in Article VIII and such breach, inaccuracy or failure has not been cured by such Selling Party within ten (10) days of Selling Parties receipt of written notice of such breach from Buyer; or
(ii) any of the conditions set forth in Section 8.01 or Section 8.02 shall not have been, or if it becomes apparent that any of such conditions will not be, fulfilled by the Outside Closing Date unless such failure shall be due to the failure of Buyer to perform or comply with any of the covenants, agreements or conditions hereof to be performed or complied with by it prior to the Closing;
(b) by Seller by written notice to Buyer if:
(i) No Selling Party is then in material breach of any provision of this Agreement and there has been a breach, inaccuracy in or failure to perform any representation, warranty, covenant or agreement made by Buyer pursuant to this Agreement that would give rise to the failure of any of the conditions specified in Article VIII and such breach, inaccuracy or failure has not been cured by such Buyer within ten (10) days of its receipt of written notice of such breach from Seller; or
(ii) any of the conditions set forth in Section 8.01 or Section 8.03 shall not have been, or if it becomes apparent that any of such conditions will not be, fulfilled by the Outside Closing Date, unless such failure shall be due to the failure of a Selling Party to perform or comply with any of the covenants, agreements or conditions hereof to be performed or complied with by it prior to the Closing; or
(c) by the Buyer or Selling Parties in the event that (i) there shall be any Law that makes consummation of the transactions contemplated by this Agreement illegal or otherwise prohibited or (ii) any Governmental Authority shall have issued a Governmental Order restraining or enjoining the transactions contemplated by this Agreement, and such Governmental Order shall have become final and non-appealable.
Section 10.02 Effect of Termination. In the event of the termination of this Agreement in accordance with this Article, this Agreement shall forthwith become void and there shall be no liability on the part of any Party hereto except that nothing herein shall relieve any Party hereto from liability for any willful breach of any provision hereof.
Article
XI
MISCELLANEOUS
Section 11.01 Expenses. Except as otherwise expressly provided herein, all costs and expenses, including, without limitation, fees and disbursements of counsel, financial advisors and accountants, incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the Party incurring such costs and expenses, whether or not the Closing shall have occurred.
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Section 11.02 Notices. All notices, requests, consents, claims, demands, waivers and other communications hereunder shall be in writing and shall be deemed to have been given (a) when delivered by hand (with written confirmation of receipt); (b) when received by the addressee if sent by a nationally recognized overnight courier (receipt requested); (c) on the date sent by facsimile or e-mail of a PDF document (with confirmation of transmission) if sent during normal business hours of the recipient, and on the next Business Day if sent after normal business hours of the recipient or (d) on the third (3rd) day after the date mailed, by certified or registered mail, return receipt requested, postage prepaid. Such communications must be sent to the respective parties at the following addresses (or at such other address for a Party as shall be specified in a notice given in accordance with this Agreement):
| If to any Selling Party: |
Infrastructure Proving Grounds, Inc. Attention: Steve Kiss, CEO Email: |
|
If to any Buyer:
|
Cloudastructure, Inc. 150 SE 2nd Ave, Suite 300 Miami FL 33131 Attn: Greg Smitherman, CFO Email: |
Section 11.04 Interpretation. Unless the context otherwise requires, references herein: (x) to Articles, Sections, Disclosure Schedules and Exhibits mean the Articles and Sections of, and Disclosure Schedules and Exhibits attached to, this Agreement; (y) to an agreement, instrument or other document means such agreement, instrument or other document as amended, supplemented and modified from time to time to the extent permitted by the provisions thereof and (z) to a statute means such statute as amended from time to time and includes any successor legislation thereto and any regulations promulgated thereunder.
The Disclosure Schedules and Exhibits referred to herein shall be construed with, and as an integral part of, this Agreement to the same extent as if they were set forth verbatim herein.
Section 11.05 Headings. The headings in this Agreement are for reference only and shall not affect the interpretation of this Agreement.
Section 11.06 Severability. If any term or provision of this Agreement is invalid, illegal or unenforceable in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other term or provision of this Agreement or invalidate or render unenforceable such term or provision in any other jurisdiction. Upon such determination that any term or other provision is invalid, illegal or unenforceable, the Parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in a mutually acceptable manner in order that the transactions contemplated hereby be consummated as originally contemplated to the greatest extent possible.
Section 11.07 Entire Agreement. This Agreement and the Transaction Documents constitute the sole and entire agreement of the Parties to this Agreement with respect to the subject matter contained herein and therein, and supersede all prior and contemporaneous understandings and agreements, both written and oral, with respect to such subject matter. In the event of any inconsistency between the statements in the body of this Agreement and those in the Transaction Documents, the Exhibits and Disclosure Schedules (other than an exception expressly set forth as such in the Disclosure Schedules), the statements in the body of this Agreement will control.
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Section 11.08 Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the Parties hereto and their respective successors and permitted assigns. Neither Party may assign its rights or obligations hereunder without the prior written consent of the other Party, which consent shall not be unreasonably withheld, conditioned or delayed; provided, however, that prior to the Closing Date, Buyer may, without the prior written consent of Seller, assign all or any portion of its rights under this Agreement to one or more of its direct or indirect wholly-owned subsidiaries. No assignment shall relieve the assigning Party of any of its obligations hereunder.
Section 11.09 No Third-Party Beneficiaries. The terms and provisions of this Agreement are intended solely for the benefit of the Parties hereto and their respective successors and permitted assigns and nothing herein, express or implied, is intended to or shall confer upon any other Person or entity any legal or equitable right, benefit or remedy of any nature whatsoever under or by reason of this Agreement.
Section 11.10 Amendment and Modification; Waiver. This Agreement may only be amended, modified or supplemented by an agreement in writing signed by each Party hereto. No waiver by any Party of any of the provisions hereof shall be effective unless explicitly set forth in writing and signed by the Party so waiving. No waiver by any Party shall operate or be construed as a waiver in respect of any failure, breach or default not expressly identified by such written waiver, whether of a similar or different character, and whether occurring before or after that waiver. No failure to exercise, or delay in exercising, any right, remedy, power or privilege arising from this Agreement shall operate or be construed as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege.
Section 11.11 Governing Law; Submission to Jurisdiction; Waiver of Jury Trial.
(a) This Agreement shall be governed by and construed in accordance with the internal laws of the State of Delaware without giving effect to any choice or conflict of law provision or rule (whether of the State of California or any other jurisdiction).
(b) ANY LEGAL SUIT, ACTION OR PROCEEDING ARISING OUT OF OR BASED UPON THIS AGREEMENT, THE TRANSACTION DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY MAY BE INSTITUTED IN THE FEDERAL COURTS OF THE UNITED STATES OF AMERICA OR THE COURTS OF THE STATE OF CALIFORNIA IN EACH CASE LOCATED IN THE CITY OF SAN JOSE AND SANTA CLARA COUNTY, AND EACH PARTY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS IN ANY SUCH SUIT, ACTION OR PROCEEDING. SERVICE OF PROCESS, SUMMONS, NOTICE OR OTHER DOCUMENT BY MAIL TO SUCH PARTY’S ADDRESS SET FORTH HEREIN SHALL BE EFFECTIVE SERVICE OF PROCESS FOR ANY SUIT, ACTION OR OTHER PROCEEDING BROUGHT IN ANY SUCH COURT. THE PARTIES IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY OBJECTION TO THE LAYING OF VENUE OF ANY SUIT, ACTION OR ANY PROCEEDING IN SUCH COURTS AND IRREVOCABLY WAIVE AND AGREE NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
(c) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT OR THE OTHER DOCUMENTS CONTEMPLATED HEREBY IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES AND, THEREFORE, TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH SUCH PARTY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LEGAL ACTION ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE ANCILLARY DOCUMENTS OR TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. ANY PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION 11.11© WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF EACH SUCH PARTY TO THE WAIVER OF HIS, HER OR ITS RIGHT TO TRAIL BY JURY.
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Section 11.12 Waiver of Right to Legal Counsel. The Seller and the Stockholders have elected to proceed with this Agreement and the transactions contemplated hereby without retaining legal counsel. The Buyer has urged the Seller and the Stockholders to engage the services of competent legal counsel to review and comment on this Agreement and the other Transaction Documents. By their execution of this Agreement each of the Selling Parties hereby acknowledges receipt of such advice, but expressly have elected to proceed with the transactions contemplated by this Agreement and the other Transaction Documents without legal counsel and expressly waives their rights to representation by legal counsel.
Section 11.13 Specific Performance. The parties agree that irreparable damage would occur if any provision of this Agreement were not performed in accordance with the terms hereof and that the Parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy to which they are entitled at law or in equity.
Section 11.14 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall be deemed to be one and the same agreement. A signed copy of this Agreement delivered by facsimile, e-mail or other means of electronic transmission shall be deemed to have the same legal effect as delivery of an original signed copy of this Agreement.
[signature page follows]
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IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized.
|
SELLER: |
INFRASTRUCTURE PROVING GROUNDS, INC.
|
|
|
By /s/ Steve Kiss Name: Steve Kiss Title: Chief Executive Officer |
|
STOCKHOLDERS:
|
/s/ Steve Kiss Steve Kiss
/s/ Stacy Kiss Stacy Kiss
/s/ Alan Penzotti Alan Penzotti
CZ Holding Company 1, LLC |
|
By: /s/ Chad Zerangue Name: Chad Zerangue Title: Managing Member
J. Lund Trust Dated 4/30/2018
By: /s/ Jennifer Lundmark Name: Jennifer Lundmark Title: Trustee
Sanregret Family 2003 Revocable Trust By: /s/ Sam Sanregret Name: Sam Sanregret Title: Co-Trustee
By: /s/ Judy Sanregret Name: Judy Sanregret Title: Co-Trustee |
| 50 |
| BUYER: | CLOUDASTRUCTURE, INC. |
| By /s/ Richard Bentley | |
| Name: Richard Bentley | |
| Title: Chief Executive Officer |
| 51 |
Exhibit A
Warrant
THIS WARRANT AND THE UNDERLYING SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR UNDER THE SECURITIES LAWS OF ANY STATE. THESE SECURITIES MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED EXCEPT AS PERMITTED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS IN ACCORDANCE WITH APPLICABLE REGISTRATION REQUIREMENTS OR AN EXEMPTION THEREFROM. THIS WARRANT MUST BE SURRENDERED TO THE COMPANY AS A CONDITION PRECEDENT TO THE SALE, TRANSFER, PLEDGE OR HYPOTHECATION OF ANY INTEREST IN ANY OF THE SECURITIES REPRESENTED HEREBY.
WARRANT TO PURCHASE SHARES OF CLASS A COMMON STOCK
of
CLOUDASTRUCTURE, INC.
Dated as of [l]
Void after the date specified in Section 9
| No. [l] | Warrant | |
| to Purchase |
21,250,000 Shares of
Class A Common Stock
(subject to adjustment)
THIS CERTIFIES THAT, for value received, INFRASTRUCTURE PROVING GROUNDS, INC., or its registered assigns (individually and collectively the “Holder”), is entitled to purchase from CLOUDASTRUCTURE, INC., a Delaware corporation (the “Company”), shares of the Company’s Class A Common Stock, $0.0001 par value per share (the “Shares”), in the amounts, at such times and at the price per share set forth in Section 1, subject to the provisions and upon the terms and conditions set forth herein. The term “Warrant” as used herein shall include this Warrant and any warrants delivered in substitution or exchange therefor as provided herein. This Warrant is being issued pursuant to that certain Asset Purchase Agreement dated as of June 30, 2022 between the Company, and Infrastructure Proving Grounds, Inc set forth thereunder (the “Purchase Agreement”). All capitalized terms used but not otherwise defined herein shall have the meaning ascribed to such terms in the Purchase Agreement.
The following is a statement of the rights of the Holder and the conditions to which this Warrant is subject, and to which Holder, by acceptance of this Warrant, agrees:
| 1 |
1. Number and Price of Shares; Exercise Period.
(a) Number of Shares. Subject to any previous exercise of the Warrant, the Holder shall have the right to purchase up to 21,250,000 Shares subject to Section 1(b), Section 1(c), Section 1(d), Section 7 and such other terms and conditions set forth herein.
(b) Vesting of Shares. The number of Shares issuable upon exercise of this Warrant shall be dependent on the achievement of certain milestones and the vesting schedule set forth below, in each case, subject to adjustment pursuant to Section 1(c) hereof. A portion of the Shares shall become exercisable on the Initial Vesting Date (as defined below) and the remaining Shares shall vest as follows:
(i) 3,750,000 Shares shall become exercisable on the Closing Date (the “Initial Vesting Date”);
(ii) Subject to Section 1(c), if the EBITDA of the Gearbox Division of the Buyer for the twelve consecutive months ending June 30, 2023 equals or exceeds $442,000 (the “Period 1 EBITDA Target”), then 3,750,000 Shares (the “Second Vesting Allotment”) shall become exercisable five (5) Business Days following the date that the Final Statement of the EBITDA of the Gearbox Division of the Buyer for the twelve consecutive months ending June 30, 2023 becomes final and binding upon the Company and Holder (the “Second Vesting Date”);
(iii) Subject to Section 1(c), if EBITDA of the Gearbox Division of the Buyer equals or exceeds $831,000 for the twelve consecutive months ending June 30, 2024 (the “Period 2 EBITDA Target”) , then 3,750,000 Shares (the “Third Vesting Allotment”) shall become exercisable five (5) Business Days following the date that the Final Statement of the EBITDA of the Gearbox Division of the Buyer for the twelve consecutive months ending June 30, 2024 becomes final and binding upon the Company and Holder (the “Third Vesting Date”); and
(iv) Subject to Section 1(c), if EBITDA of the Gearbox Division of the Buyer equals or exceeds $1,835,925 for the for the twelve consecutive months ending June 30, 2025 (the “Period 3 EBITDA Target”), then 3,750,000 Shares (the “Fourth Vesting Allotment”) shall become exercisable five (5) Business Days following the date that EBITDA of the Gearbox Division of the Buyer for the twelve consecutive months ending June 30, 2025 becomes final and binding upon the Company and Holder (the “Fourth Vesting Date”). Each of the three consecutive twelve (12) month periods ending June 30, 2023, 2024 and 2025 is sometimes referred to herein a “Vesting Period.”
(c) Adjustment to Vesting of Shares. Each Vesting Allotment set forth in Section 1(b) above shall be subject to adjustments as follows:
(i) If the Actual EBITDA represents an amount equal to or greater than the product of 95% of the Target EBITDA (in each case for the applicable Vesting Period), then the applicable Vesting Allotment exercisable on the applicable Vesting Date shall represent 100% of the applicable Vesting Allotment (without adjustment);
(ii) If the Actual EBITDA represents an amount (expressed as a percentage) no less than the product of 90% of the Target EBITDA and no greater than the product of 95% of the Target EBITDA (in each case for the applicable Vesting Period), then the applicable Vesting Allotment exercisable on the applicable Vesting Date shall be adjusted to represent the product of 95% of the applicable Vesting Allotment;
(iii) If the Actual EBITDA represents an amount (expressed as a percentage) no less than the product of 80% of the Target EBITDA and no greater than the product of 90% of the Target EBITDA, then the applicable Vesting Allotment exercisable on the applicable Vesting Date shall be adjusted to represent the product of 90% of the applicable Vesting Allotment;
| 2 |
(iv) If the Actual EBITDA represents an amount (expressed as a percentage) no less than the product of 70% of the Target EBITDA and no greater than the product of 80% of the Target EBITDA, then the applicable Vesting Allotment exercisable on the applicable Vesting Date shall be adjusted to represent the product of 80% of the applicable Vesting Allotment;
(v) If the Actual EBITDA represents an amount (expressed as a percentage) no less than the product of 60% of the Target EBITDA and no greater than the product of 70% of the Target EBITDA, then the applicable Vesting Allotment exercisable on the applicable Vesting Date shall be adjusted to represent the product of 65% of the applicable Vesting Allotment;
(vi) If the Actual EBITDA represents an amount (expressed as a percentage) no less than the product of 50% of the Target EBITDA and no greater than the product of 60% of the Target EBITDA, then the applicable Vesting Allotment exercisable on the applicable Vesting Date shall be adjusted to represent the product of 50% of the applicable Vesting Allotment;
(vii) If the Actual EBITDA represents an amount (expressed as a percentage) no less than the product of 40% of the Target EBITDA and no greater than the product of 50% of the Target EBITDA, then the applicable Vesting Allotment exercisable on the applicable Vesting Date shall be adjusted to represent the product of 25% of the applicable Vesting Allotment; and
(vii) If the Actual EBITDA represents an amount (expressed as a percentage) less than the product of 40% of the Target EBITDA, then the applicable Vesting Allotment exercisable on the applicable Vesting Date shall be adjusted to represent the product of 10% of the applicable Vesting Allotment (“Minimum Vesting Allotment”). For the avoidance of doubt, in no event shall the number of Shares to vest during any applicable Vesting Period be less than the Minimum Vesting Allotment.
(d) Performance Warrants. In addition to the Cash Bonuses, on the Closing Date, the Holder shall be issued 6,250,000 additional warrants in form and content substantially identical to the Warrants included in the Purchase Price (the “Performance Warrants”). Such Performance Warrants shall be exercisable by the Holder at the Exercise Price only in the event that the Target EBITDA Goals set forth in Section 1(b)(ii), (iii) and (iv) are exceeded in the applicable Vesting Period and will be allocated as follows:
(i) If the Actual EBITDA represents an amount equal to or less than the product of 110% of the Target EBITDA (in each case for the applicable Vesting Period), then there will be no Performance Warrant Allotment exercisable on the applicable Vesting Date;
(ii) If the Actual EBITDA represents an amount greater than the product of 110% of the Target EBITDA and no greater than the product of 120% of the Target EBITDA (in each case for the applicable Vesting Period), then there will be a Performance Warrant exercisable on the applicable Vesting Date equal to an additional 10% in excess of the 3,750,000 Shares exercisable pursuant to Section 1(b)(ii), (iii) and (iv);
(iii) If the Actual EBITDA represents an amount greater than the product of 120% of the Target EBITDA and no greater than the product of 130% of the Target EBITDA (in each case for the applicable Vesting Period), then there will be a Performance Warrant Allotment exercisable on the applicable Vesting Date equal to an additional 15% in excess of the 3,750,000 Shares exercisable pursuant to Section 1(b)(ii), (iii) and (iv);
| 3 |
(iv) If the Actual EBITDA represents greater than the product of 130% of the Target EBITDA and no greater than the product of 145% of the Target EBITDA (in each case for the applicable Vesting Period), then there will be a Performance Warrant exercisable on the applicable Vesting Date equal to an additional 30% in excess of the 3,750,000 Shares exercisable pursuant to Section 1(b)(ii), (iii) and (iv);
(v) If the Actual EBITDA represents an amount no less than the product of 145% of the Target EBITDA and no greater than the product of 160% of the Target EBITDA (in each case for the applicable Vesting Period), then there will be a Performance Warrant Allotment exercisable on the applicable Vesting Date equal to an additional 50% in excess of the 3,750,000 Shares exercisable pursuant to Section 1(b)(ii), (iii) and (iv);
(vi) If the Actual EBITDA represents an amount no less than the product of 160% of the Target EBITDA and no greater than the product of 175% of the Target EBITDA (in each case for the applicable Vesting Period), then there will be a Performance Warrant exercisable on the applicable Vesting Date equal to an additional 75% in excess of the 3,750,000 Shares exercisable pursuant to Section 1(b)(ii), (iii) and (iv); and
(vii) If the Actual EBITDA represents an amount greater than the product of 175% of the Target EBITDA, then there will be a Performance Warrant exercisable on the applicable Vesting Date equal to an additional 100% in excess of the 3,750,000 Shares exercisable pursuant to Section 1(b)(ii), (iii) and (iv).
(e) Exercise Price. The exercise price per Share shall be [$0.31][2], subject to adjustment pursuant hereto (the “Exercise Price”).
(f) Exercise Period. Subject to Section 1 hereof, this Warrant shall be exercisable, in whole or in part, after the date of this Warrant and prior to (or in connection with) the expiration of this Warrant as set forth in Section 9.
(g) Definitions.
(i) “Actual EBITDA” shall mean the EBITDA of the Gearbox Division for the applicable Vesting Period.
(ii) “EBITDA” shall have the meaning as that term is defined in the Purchase Agreement.
(iii) “Target EBITDA” shall mean both individually and collectively the Period 1 EBITDA Target, Period 2 EBITDA Target and Period 3 EBITDA Target
(iv) “Vesting Allotment” shall mean both individually and collectively the Second Vesting Allotment, Third Vesting Allotment and Fourth Vesting Allotment.
(v) “Vesting Date” shall mean both individually and collectively the First Vesting Date, Second Vesting Date, Third Vesting Date and Fourth Vesting Date.
(vi) “Vesting Period” shall mean both individually and collectively the 2022 Vesting Period, 2023 Vesting Period and 2024 Vesting Period.
______________________________________
[2]NTD: To be set at the 409A valuation as of the Closing Date (currently $0.31 per Share).
| 4 |
| 2. | Information Rights. |
(a) Promptly following completion of the financial statements of the Company for each Vesting Period (which Company shall exercise commercially reasonable efforts to complete no later than 120 days following the end of the applicable Vesting Period), the Company will deliver to the Holder a draft report (each a “Draft Report”) setting forth the Actual EBITDA of the Gearbox Division and the projected Vesting Allotment of Shares, if any. The Holder will have 30 days from receipt thereof to review the Draft Report (such 30-day period, through the close of business on the 30th day, being referred to herein as the “Holder Review Period”). The Company will make available to the Holder and their representatives and agents all documents, records, work papers, information and data relating to the preparation of the Draft Report and the calculation of the Vesting Period Actual EBITDA of the Gearbox Division and the projected Vesting Allotment of Shares as the Holder may request.
(b) The Draft Report shall become final and binding upon the Company and Holder (the “Final Statement”), unless on or prior to the expiration of the Holder Review Period the Holder gives written notice of its disagreement with the Draft Report (a “Notice of Disagreement”) to the Company prior to such date stating that the Holder disputes one or more items contained in the Draft Report (a “Disputed Item”) and specifying in reasonable detail each Disputed Item. If the Holder delivers a Notice of Disagreement, then the Company and the Holder shall seek in good faith to resolve the Disputed Items during the thirty (30)-day period beginning on the date the Company receives the Notice of Disagreement (the “Resolution Period”). If the Company and the Holder reach agreement with respect to any Disputed Items, the Company shall revise the Draft Report to reflect such agreement. If the Company and the Holder are unable to resolve all Disputed Items during the Resolution Period, the Company and the Holder shall promptly thereafter submit, in the form of a written brief, the remaining Disputed Items to the Accounting Firm. The Accounting Firm shall act as an expert, not as an arbitrator.
(c) In resolving matters submitted to it pursuant to Section 2(b) above, the Accounting Firm shall be instructed to make its final determination on all matters within thirty (30) days of its appointment.
(d) The scope of the disputes to be resolved by the Accounting Firm shall be limited to the Disputed Items that were submitted to the Accounting Firm in accordance with Section 2(b) above. The Accounting Firm’s determinations must be within the range of the respective amounts asserted by the Holder and the Company in the written brief submitted by each party to the Accounting Firm. The Company and the Holder shall instruct the Accounting Firm to, and the Accounting Firm shall, make its determination based solely on written presentations by the Company and the Holder that are in accordance with the procedures set forth in this Agreement and not on the basis of an independent review.
(e) The final determination by the Accounting Firm of the matters submitted to it pursuant to Section 2(b) above shall: (i) be in writing, (ii) include the Accounting Firm’s determination of each matter submitted to it pursuant to Section 2(b) above and (iii) be conclusive and binding upon the Holder and the Company for all purposes hereunder in the absence of manifest error. The Company shall revise the Final Statement to reflect the final determination by the Accounting Firm of the Disputed Items.
(f) The fees and expenses of the Accounting Firm incurred pursuant to this Section 2 shall be allocated to and borne by the Company and the Holder to the extent that either the Company or the Holder shall not prevail on matters to be resolved by the Accounting Firm; which proportionate allocations shall also be determined by the Accounting Firm at the time the determination of the Accounting Firm is rendered on the merits of the matters submitted.
| 3. | Exercise of the Warrant. |
(a) Exercise. Subject to Section 1 hereof, the purchase rights represented by this Warrant may be exercised at the election of the Holder, in whole or in part from time to time, by:
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(i) the tender to the Company at its principal office (or such other office or agency as the Company may designate) of a notice of exercise in the form of Exhibit A (the “Notice of Exercise”), duly completed and executed by or on behalf of the Holder, together with the surrender of this Warrant; and
(ii) the payment to the Company of an amount equal to (x) the Exercise Price multiplied by (y) the number of Shares being purchased, by ACH, wire transfer, debit card, credit card or check and payable to the order of the Company.
(b) Stock Certificates. The rights under this Warrant shall be deemed to have been exercised and the Shares issuable upon such exercise shall be deemed to have been issued immediately prior to the close of business on the date this Warrant is exercised in accordance with its terms, and the person entitled to receive the Shares issuable upon such exercise shall be treated for all purposes as the holder of record of such Shares as of the close of business on such date. As promptly as reasonably practicable on or after such date, the Company shall cause to be issued and delivered to the person or persons entitled to receive the same a certificate or certificates (or a notice of issuance of uncertificated shares, if applicable) for that number of shares issuable upon such exercise. In the event that the rights under this Warrant are exercised in part and have not expired, the Company shall execute and deliver a new Warrant reflecting the number of Shares that remain subject to this Warrant.
(c) No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of the rights under this Warrant. In lieu of such fractional share to which the Holder would otherwise be entitled, the Company may either make a cash payment equal to the Exercise Price multiplied by such fraction or issue scrip or a warrant for such fractional share which shall entitle the Holder to receive a full share upon the surrender of such scrip or warrants aggregating a full share.
(d) Conditional Exercise. Subject to Section 1, the Holder may exercise this Warrant conditioned upon (and effective immediately prior to) consummation of any transaction that would cause the expiration of this Warrant pursuant to Section 9 by so indicating in the notice of exercise.
(e) Reservation of Stock. The Company agrees during the term the rights under this Warrant are exercisable to take all reasonable action to reserve and keep available from its authorized and unissued shares of common stock designated as Class A Common Stock, $0.0001 par value per share (“Class A Common Stock”) solely for the purpose of effecting the exercise of this Warrant such number of shares of Class A Common Stock as shall from time to time be sufficient to effect the exercise of the rights under this Warrant; and if at any time the number of authorized but unissued shares of Class A Common Stock shall not be sufficient for purposes of the exercise of this Warrant in accordance with its terms, without limitation of such other remedies as may be available to the Holder, the Company will use reasonable commercial efforts to take such corporate action as may, in the opinion of counsel, be necessary to increase its authorized and unissued shares of its Class A Common Stock to a number of shares of Class A Common Stock as shall be sufficient for such purposes. The Company represents and warrants that all shares of Class A Common Stock that may be issued upon the exercise of this Warrant will, when issued in accordance with the terms hereof, be validly issued, fully paid and nonassessable.
4. Replacement of the Warrant. Subject to the receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and substance to the Company or, in the case of mutilation, on surrender and cancellation of this Warrant, the Company at the expense of the Holder may issue and the Company shall execute, in lieu of this Warrant, a new warrant of like tenor and amount.
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5. Transfer of the Warrant.
(a) Warrant Register. The Company shall maintain a register (the “Warrant Register”) containing the name and address of the Holder or Holders. Until this Warrant is transferred on the Warrant Register in accordance herewith, the Company may treat the Holder as shown on the Warrant Register as the absolute owner of this Warrant for all purposes, notwithstanding any notice to the contrary. Any Holder of this Warrant (or of any portion of this Warrant) may change its address as shown on the Warrant Register by written notice to the Company requesting a change.
(b) Assignment. Subject to the provisions of this Warrant with respect to compliance with the Securities Act and limitations on assignments and transfers, including without limitation compliance with the provisions of this Section 5, title to this Warrant may be transferred by endorsement (by the transferor and the transferee executing the assignment form attached as Exhibit B (the “Assignment Form”)) and delivery in the same manner as a negotiable instrument transferable by endorsement and delivery.
(c) Transferability of the Warrant.
(i) This Warrant may not be sold, transferred, pledged, hypothecated, or otherwise disposed of (any such sale, transfer or other disposition, a “Transfer”) and no Shares may be Transferred, except in compliance with this Section 5.
(ii) A Holder may Transfer this Warrant to either (a) a transferee that is an “accredited investor” or a “qualified institutional buyer,” as such terms are defined in Regulation D and Rule 144A under the Securities Act, respectively, (b) to a partner of the Holder if the Holder is a partnership or to a member of the Holder if the Holder is a limited liability company, (c) to a partnership of which the Holder is a partner or a limited liability company of which the Holder is a member, (d) any affiliate of the Holder if the Holder is a corporation, or (e) any transferee, if the Warrant has been registered for resale under the Securities Act or there is an applicable exemption available from the registration requirements under the Securities Act; provided, however, in any such Transfer, if applicable, the transferee shall on the Company’s request agree in writing to be bound by the terms of this Warrant as if an original holder hereof.
(iii) In addition to the foregoing, a Holder may exercise this Warrant and may Transfer the Shares subject to exercise in accordance with Rule 144 under the Securities Act or in any transaction that is registered under the Securities Act.
(d) Exchange of the Warrant upon a Transfer. On surrender of this Warrant (and a properly endorsed Assignment Form) for exchange, subject to the provisions of this Warrant with respect to compliance with the Securities Act and limitations on assignments and transfers, the Company shall issue to or on the order of the Holder a new warrant or warrants of like tenor, in the name of the Holder or as the Holder (on payment by the Holder of any applicable transfer taxes) may direct, for the number of shares issuable upon exercise hereof, and the Company shall register any such transfer upon the Warrant Register. This Warrant (and the securities issuable upon exercise of the rights under this Warrant) must be surrendered to the Company, as a condition precedent to the sale, pledge, hypothecation or other transfer of any interest in any of the securities represented hereby.
(e) Taxes. In no event shall the Company be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of any certificate, or a book entry, in a name other than that of the Holder, and the Company shall not be required to issue or deliver any such certificate, or make such book entry, unless and until the person or persons requesting the issue or entry thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid or is not payable.
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6. Compliance with Securities Laws; Market Stand-off. By acceptance of this Warrant, the Holder agrees to comply with the following:
(a) Securities Laws. Except as specifically set forth in this Section 5, this Warrant may not be transferred or assigned in whole or in part, and any such attempt by Holder to transfer or assign any rights, duties or obligations that arise under this Warrant shall be void. Any transfer of this Warrant or the Shares (the “Securities”) must be in compliance with the terms set forth hereunder and all applicable federal and state securities laws. The Holder agrees not to make any sale, assignment, transfer, pledge or other disposition of all or any portion of the Securities, or any beneficial interest therein, except in compliance with the terms set forth herein and provided that the Holder shall have given prior written notice to the Company of such Holder’s intention to make such disposition.
(b) Investment Representation Statement. Unless the rights under this Warrant are exercised pursuant to an effective registration statement under the Securities Act that includes the Shares with respect to which the Warrant was exercised, it shall be a condition to any exercise of the rights under this Warrant that the Holder shall have executed the Investment Representation Statement, substantially in the form of Exhibit A-1.
(c) Legend. Each certificate, instrument or book entry representing the Shares issued upon exercise hereof shall also be notated with a legend in substantially the following form:
THE SECURITIES REPRESENTED HEREBY ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE, AS SET FORTH IN THE WARRANT PURSUANT TO WHICH THESE SHARES WERE ISSUED, A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE COMPANY.
7. Further Adjustments. Subject to the expiration of this Warrant pursuant to Section 9, the number and kind of shares purchasable hereunder and the Exercise Price therefor are subject to adjustment from time to time, as follows:
(a) Merger or Reorganization. If at any time there shall be any reorganization, recapitalization, merger or consolidation (a “Reorganization”) involving the Company (other than as otherwise provided for herein or as would cause the expiration of this Warrant under Section 9) in which shares of the Company’s stock are converted into or exchanged for securities, cash or other property, then, as a part of such Reorganization, lawful provision shall be made so that the Holder shall thereafter be entitled to receive upon exercise of this Warrant, the kind and amount of securities, cash or other property of the successor corporation resulting from such Reorganization, equivalent in value to that which a holder of the Shares deliverable upon exercise of this Warrant would have been entitled in such Reorganization if the right to purchase the Shares hereunder had been exercised immediately prior to such Reorganization. In any such case, appropriate adjustment (as determined in good faith by the Board of Directors of the successor corporation) shall be made in the application of the provisions of this Warrant with respect to the rights and interests of the Holder after such Reorganization to the end that the provisions of this Warrant shall be applicable after the event, as near as reasonably may be, in relation to any shares or other securities deliverable after that event upon the exercise of this Warrant.
(b) Reclassification of Shares. If the securities issuable upon exercise of this Warrant are changed into the same or a different number of securities of any other class or classes by reclassification, capital reorganization or otherwise (other than as otherwise provided for herein) (a “Reclassification”), then, in any such event, in lieu of the number of Shares which the Holder would otherwise have been entitled to receive, the Holder shall have the right thereafter to exercise this Warrant for a number of shares of such other class or classes of stock that a holder of the number of securities deliverable upon exercise of this Warrant immediately before that change would have been entitled to receive in such Reclassification, all subject to further adjustment as provided herein with respect to such other shares.
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(c) Subdivisions and Combinations. In the event that the outstanding shares of Class A Common Stock are subdivided (by stock split, by payment of a stock dividend or otherwise) into a greater number of shares of such securities, the number of Shares issuable upon exercise of the rights under this Warrant immediately prior to such subdivision shall, concurrently with the effectiveness of such subdivision, be proportionately increased, and the Exercise Price shall be proportionately decreased, and in the event that the outstanding shares of Class A Common Stock are combined (by reclassification or otherwise) into a lesser number of shares of such securities, the number of Shares issuable upon exercise of the rights under this Warrant immediately prior to such combination shall, concurrently with the effectiveness of such combination, be proportionately decreased, and the Exercise Price shall be proportionately increased.
(d) Notice of Adjustments. Upon any adjustment in accordance with this Section 7, the Company shall give notice thereof to the Holder, which notice shall state the event giving rise to the adjustment, the Exercise Price as adjusted and the number of securities or other property purchasable upon the exercise of the rights under this Warrant, setting forth in reasonable detail the method of calculation of each. The Company shall, upon the written request of any Holder, furnish or cause to be furnished to such Holder a certificate setting forth (i) such adjustments, (ii) the Exercise Price at the time in effect and (iii) the number of securities and the amount, if any, of other property that at the time would be received upon exercise of this Warrant.
8. Notification of Certain Events. Prior to the expiration of this Warrant pursuant to Section 9, in the event that the Company shall authorize:
(a) the issuance of any dividend or other distribution on the Class A Common Stock of the Company (other than (i) dividends or distributions on the Class A Common Stock otherwise provided for in Section 7, (ii) repurchases of Class A Common Stock issued to or held by employees, officers, directors or consultants of the Company or its subsidiaries; or (iii) repurchases of Class A Common Stock in connection with the settlement of disputes with any stockholder), whether in cash, property, stock or other securities;
(b) the voluntary liquidation, dissolution or winding up of the Company; or
(c) any transaction resulting in the expiration of this Warrant pursuant to Sections 9(b);
then in each such event the Company shall send to the Holder of this Warrant at least ten (10) days prior written notice of the date on which a record shall be taken for any such dividend or distribution specified in clause (a) or the expected effective date of any such other event specified in clause (b) or (c), as applicable. The notice provisions set forth in this section may be shortened or waived prospectively or retrospectively by the consent of the Holder of this Warrant.
9. Expiration of the Warrant. This Warrant shall expire and shall no longer be exercisable as of the earlier of:
(a) 5:00 p.m., Pacific time, on the 10th anniversary year of the date of this Warrant; or
(b) (i) the acquisition of the Company by another entity by means of any transaction or series of related transactions to which the Company is a party (including, without limitation, any stock acquisition, reorganization, merger or consolidation, but excluding any sale of stock for capital raising purposes and any transaction effected primarily for purposes of changing the Company’s jurisdiction of incorporation) other than a transaction or series of related transactions in which the holders of the voting securities of the Company outstanding immediately prior to such transaction or series of related transactions retain, immediately after such transaction or series of transactions, as a result of shares in the Company held by such holders prior to such transaction or series of transactions, at least a majority of the total voting power represented by the outstanding voting securities of the Company or such other surviving or resulting entity (or if the Company or such other surviving or resulting entity is a wholly-owned subsidiary immediately following such acquisition, its parent), or (ii) a sale, lease or other disposition of all or substantially all of the assets of the Company and its subsidiaries taken as a whole by means of any transaction or series of related transactions, except where such sale, lease or other disposition is to a wholly-owned subsidiary of the Company; provided however that proper notice of such transaction or series of transactions is delivered at least 90 days prior to the closing of such transaction or series of transactions to the Holder of said warrants according to the terms and conditions of Section 13.
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10. No Rights as a Stockholder. Nothing contained herein shall entitle the Holder to any rights as a stockholder of the Company or to be deemed the holder of any securities that may at any time be issuable on the exercise of the rights hereunder for any purpose nor shall anything contained herein be construed to confer upon the Holder, as such, any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issuance of stock, reclassification of stock, change of par value or change of stock to no par value, consolidation, merger, conveyance or otherwise) or to receive notice of meetings, or to receive dividends or subscription rights or any other rights of a stockholder of the Company until the rights under the Warrant shall have been exercised and the Shares purchasable upon exercise of the rights hereunder shall have become deliverable as provided herein.
11. Market Stand-off. The Holder of this Warrant hereby agrees that such Holder shall not sell or otherwise transfer, make any short sale of, grant any option for the purchase of, or enter into any hedging or similar transaction with the same economic effect as a sale, of any common stock (or other securities) of the Company held by the Holder during the one hundred eighty (180) day period following the effective date of a registration statement filed under the Securities Act (or such other period as may be requested by the Company or an underwriter to accommodate regulatory restrictions on (i) the publication or other distribution of research reports and (ii) analyst recommendations and opinions, including, but not limited to, the restrictions contained in NYSE Rule 472(f)(4), or any successor provisions or amendments thereto). The Company may impose stop-transfer instructions and may notate each such certificate, instrument or book entry with a legend as substantially set forth in Section 6(c) with respect to the shares of common stock (or other securities) subject to the foregoing restriction until the end of such one hundred eighty (180) day (or other) period. The Holder agrees to execute a market stand-off agreement with the underwriters in the offering in customary form consistent with the provisions of this section.
12. Representations and Warranties of the Holder. By acceptance of this Warrant, the Holder represents and warrants to the Company as follows:
(a) No Registration. The Holder understands that the Securities have not been, and will not be, registered under the Securities Act by reason of a specific exemption from the registration provisions of the Securities Act, the availability of which depends upon the accuracy of the Holder’s representations as expressed herein or otherwise made pursuant hereto.
(b) Illiquidity and Continued Economic Risk. The Holder acknowledges and agrees that there is no ready public market for the Securities and that there is no guarantee that a market for their resale will ever exist. The Holder must bear the economic risk of this investment indefinitely and the Company has no obligation to list the Securities on any market or take any steps (including registration under the Securities Act or the Securities Exchange Act of 1934, as amended) with respect to facilitating trading or resale of the Securities. The Holder acknowledges that it is able to bear the economic risk of losing the Holder’s entire investment in the Securities. The Holder also understands that an investment in the Company involves significant risks and has taken full cognizance of and understands all of the risk factors relating to the purchase of Securities.
(c) Accredited Investor Status or Investment Limits. The Holder represents that either:
(i) The Holder is an “accredited investor” within the meaning of Rule 501 of Regulation D under the Securities Act;
(ii) The Holder is acquiring this Warrant for its own account for investment purposes only and not with a view to, or for the resale in connection with, any “distribution” thereof in violation of the Securities Act; or
(iii) This Warrant must be held indefinitely unless subsequently registered under the Securities Act and qualified under any applicable state securities laws, or unless exemptions from registration and qualification are otherwise available. The holder is aware of the provisions of Rule 144, promulgated under the Securities Act.
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(d) Company Information. The Holder understands that the Company is subject to all the risks that apply to early-stage companies, whether or not those risks are explicitly set out in any Company filings made with the Securities and Exchange Commission or materials filed with the EDGAR system of the Securities and Exchange Commission. Holder has had such opportunity as it deems necessary to discuss the Company’s business, management and financial affairs with managers, officers and management of the Company and has had the opportunity to review the Company’s operations and facilities. The Holder has also had the opportunity to ask questions of and receive answers from the Company and its management regarding the terms and conditions of this investment. The Holder acknowledges that except as set forth herein, no representations or warranties have been made to Holder, or to Holder’s advisors or representative, by the Company or others with respect to the business or prospects of the Company or its financial condition.
(e) No Brokerage Fees. There are no claims for brokerage commission, finders’ fees or similar compensation in connection with the transactions contemplated by this Warrant or related documents based on any arrangement or agreement binding upon the Holder.
13. Miscellaneous.
(a) Amendments. Except as set forth in the Warrant Agreement, neither this Warrant nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument referencing this Warrant and signed by the Company and countersigned by the Warrant Agent.
(b) Waivers. No waiver of any single breach or default shall be deemed a waiver of any other breach or default theretofore or thereafter occurring.
(c) Notices. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by registered or certified mail, postage prepaid, sent by facsimile or electronic mail (if to the Holder) or otherwise delivered by hand, messenger or courier service addressed:
(i) if to the Holder, to the Holder at the Holder’s address, facsimile number or electronic mail address as shown in the Company’s records, as may be updated in accordance with the provisions hereof, or until any such Holder so furnishes an address, facsimile number or electronic mail address to the Company, then to and at the address, facsimile number or electronic mail address of the last holder of this Warrant for which the Company has contact information in its records; or
(ii) if to the Company, to the attention of the President or Chief Financial Officer of the Company at the Company’s address as shown on the signature page hereto, or at such other current address as the Company shall have furnished to the Warrant Agent and the Holder.
Each such notice or other communication shall for all purposes of this Warrant be treated as effective or having been given (i) if delivered by hand, messenger or courier service, when delivered (or if sent via a nationally-recognized overnight courier service, freight prepaid, specifying next-business-day delivery, one business day after deposit with the courier), or (ii) if sent via mail, at the earlier of its receipt or five days after the same has been deposited in a regularly-maintained receptacle for the deposit of the United States mail, addressed and mailed as aforesaid, or (iii) if sent via facsimile, upon confirmation of facsimile transfer or, if sent via electronic mail, upon confirmation of delivery when directed to the relevant electronic mail address, if sent during normal business hours of the recipient, or if not sent during normal business hours of the recipient, then on the recipient’s next business day. In the event of any conflict between the Company’s books and records and this Warrant or any notice delivered hereunder, the Company’s books and records will control absent fraud or error.
(d) Governing Law. This Warrant and all actions arising out of or in connection with this Warrant shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to the conflicts of law provisions of the State of Delaware or of any other state.
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(e) Jurisdiction and Venue. Each of the Holder and the Company irrevocably consents to the exclusive jurisdiction and venue of any court within State of Delaware, in connection with any matter based upon or arising out of this Warrant or the matters contemplated herein and agrees that process may be served upon them in any manner authorized by the laws of the State of Delaware for such persons.
(f) Titles and Subtitles. The titles and subtitles used in this Warrant are used for convenience only and are not to be considered in construing or interpreting this Warrant. All references in this Warrant to sections, paragraphs and exhibits shall, unless otherwise provided, refer to sections and paragraphs hereof and exhibits attached hereto.
(g) Severability. If any provision of this Warrant becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, portions of such provision, or such provision in its entirety, to the extent necessary, shall be severed from this Warrant, and such illegal, unenforceable or void provision shall be replaced with a valid and enforceable provision that will achieve, to the extent possible, the same economic, business and other purposes of the illegal, unenforceable or void provision. The balance of this Warrant shall be enforceable in accordance with its terms.
(h) Saturdays, Sundays and Holidays. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or U.S. federal holiday, then such action may be taken or such right may be exercised on the next succeeding day that is not a Saturday, Sunday or U.S. federal holiday.
(i) Entire Agreement. Except as expressly set forth herein and in the Warrant Agreement, this Warrant (including the exhibits attached hereto) and the Warrant Agreement constitute the entire agreement and understanding of the Company and the Holder with respect to the subject matter hereof and supersede all prior agreements and understandings relating to the subject matter hereof.
(signature page follows)
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The Company has signed this Warrant as of the date stated on the first page.
|
CLOUDASTRUCTURE, INC.
By: S. Richard Bentley, Chief Executive Officer
Address:
150 SE 2nd Ave, Suite 300 Miami FL 33131 |
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EXHIBIT A
NOTICE OF EXERCISE
To: CLOUDASTRUCTURE, INC. (the “Company”)
150 SE 2nd Ave, Suite 300
Miami FL 33131
Attn:
Greg Smitherman
| (1) | Exercise. The undersigned elects to purchase the following pursuant to the terms of the attached warrant: Number of shares of Class A Common Stock: | |
| (2) | Method of Exercise. The undersigned elects to exercise the attached warrant pursuant to a cash payment, and tenders herewith payment of the purchase price for such shares in full, together with all applicable transfer taxes, if any. |
| (3) | Conditional Exercise. Is this a conditional exercise pursuant to Section 3(d): | |
| ☐ Yes ☐ No | ||
If “Yes,” indicate the applicable condition: | ||
| (4) | Stock. Please make a book entry and, if the shares are certificated, issue a certificate or certificates representing the shares in the name of: | ||
| ☐ The undersigned | |||
| ☐ Other—Name: | |||
| Address: | |||
| (5) | Unexercised Portion of the Warrant. Please issue a new warrant for the unexercised portion of the attached warrant in the name of: |
| ☐ The undersigned | |||
| ☐ Other—Name: | |||
| Address: | |||
| ☐ Not applicable | |||
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| (6) | Representations. The undersigned represents and warrants that all representations and warranties of the undersigned set forth in Section 11 of the attached warrant are true and correct as of the date hereof. |
| (7) | Investment Representation Statement and Market Stand-Off Agreement. The undersigned has executed, and delivers herewith, an Investment Representation Statement in a form substantially similar to the form attached to the warrant as Exhibit A-1. |
| (8) | Consent to Receipt of Electronic Notice. Subject to the limitations set forth in Delaware General Corporation Law §232(e), the undersigned consents to the delivery of any notice to stockholders given by the Company under the Delaware General Corporation Law or the Company’s certificate of incorporation or bylaws by (i) facsimile telecommunication to the facsimile number provided below (or to any other facsimile number for the undersigned in the Company’s records), (ii) electronic mail to the electronic mail address provided below (or to any other electronic mail address for the undersigned in the Company’s records), (iii) posting on an electronic network together with separate notice to the undersigned of such specific posting or (iv) any other form of electronic transmission (as defined in the Delaware General Corporation Law) directed to the undersigned. This consent may be revoked by the undersigned by written notice to the Company and may be deemed revoked in the circumstances specified in Delaware General Corporation Law §232. |
| (Print name of the warrant holder) | |
| (Signature) | |
| (Name and title of signatory, if applicable) | |
| (Date) | |
| (Fax number) | |
| (Email address) |
(Signature page to the Notice of Exercise)
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EXHIBIT A-1
INVESTMENT REPRESENTATION STATEMENT
AND MARKET STAND-OFF AGREEMENT
INVESTOR:
| COMPANY: | CLOUDASTRUCTURE, INC. | |
| SECURITIES: | THE WARRANT ISSUED ON [INSERT DATE] (THE “WARRANT”) AND THE SECURITIES ISSUED OR ISSUABLE UPON EXERCISE THEREOF | |
| DATE: |
In connection with the purchase or acquisition of the above-listed Securities, the undersigned Investor represents and warrants to, and agrees with, the Company as follows:
1. No Registration. The Investor understands that the Securities have not been, and will not be, registered under the Securities Act of 1933, as amended (the “Securities Act”), by reason of a specific exemption from the registration provisions of the Securities Act, the availability of which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of the Investor’s representations as expressed herein or otherwise made pursuant hereto.
2. Illiquidity and Continued Economic Risk. The Investor acknowledges and agrees that there is no ready public market for the Securities and that there is no guarantee that a market for their resale will ever exist. The undersigned must bear the economic risk of this investment indefinitely and the Company has no obligation to list the Securities on any market or take any steps (including registration under the Securities Act or the Securities Exchange Act of 1934, as amended) with respect to facilitating trading or resale of the Securities. The Investor acknowledges that it is able to bear the economic risk of losing the undersigned’s entire investment in the Securities. The Investor also understands that an investment in the Company involves significant risks and has taken full cognizance of and understands all of the risk factors relating to the purchase of Securities.
3. Accredited Investor Status or Investment Limits. The Investor represents that either:
(i) The Investor is an “accredited investor” within the meaning of Rule 501 of Regulation D under the Securities Act;
(ii) The Investor is acquiring this Warrant for its own account for investment purposes only and not with a view to, or for the resale in connection with, any “distribution” thereof in violation of the Securities Act; or
(iii) This Warrant must be held indefinitely unless subsequently registered under the Securities Act and qualified under any applicable state securities laws, or unless exemptions from registration and qualification are otherwise available. The holder is aware of the provisions of Rule 144, promulgated under the Securities Act.
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4. Company Information. The Investor understands that the Company is subject to all the risks that apply to early- stage companies, whether or not those risks are explicitly set out in the Offering Circular. Investor has had such opportunity as it deems necessary (which opportunity may have presented through online chat or commentary functions) to discuss the Company’s business, management and financial affairs with managers, officers and management of the Company and has had the opportunity to review the Company’s operations and facilities. The Investor has also had the opportunity to ask questions of and receive answers from the Company and its management regarding the terms and conditions of this investment. The Investor acknowledges that except as set forth herein, no representations or warranties have been made to Investor, or to Investor’s advisors or representative, by the Company or others with respect to the business or prospects of the Company or its financial condition.
5. No Brokerage Fees. There are no claims for brokerage commission, finders’ fees or similar compensation in connection with the transactions contemplated by the Warrant or related documents based on any arrangement or agreement binding upon the Investor.
6. Market Stand-off. The Investor agrees that the Investor shall not sell or otherwise transfer, make any short sale of, grant any option for the purchase of, or enter into any hedging or similar transaction with the same economic effect as a sale, of any common stock (or other securities) of the Company held by the Investor (other than those included in the registration) during the one hundred eighty (180) day period following the effective date of a registration statement of the Company filed under the Securities Act (or such other period as may be requested by the Company or an underwriter to accommodate regulatory restrictions on (i) the publication or other distribution of research reports and (ii) analyst recommendations and opinions, including, but not limited to, the restrictions contained in NYSE Rule 472(f)(4), or any successor provisions or amendments thereto). The Company may impose stop- transfer instructions and may notate each such certificate, instrument or book entry with a legend with respect to the shares of common stock (or other securities) subject to the foregoing restriction until the end of such one hundred eighty (180) day (or other) period. The Investor agrees to execute a market stand-off agreement with the relevant underwriters in customary form consistent with the provisions of this section.
(signature page follows)
| 17 |
The Investor is signing this Investment Representation Statement and Market Stand-Off Agreement on the date first written above.
| INVESTOR | |
| (Print name of the investor) | |
| (Signature) | |
| (Name and title of signatory, if applicable) | |
| (Street address) | |
| (City, state and ZIP) | |
| 18 |
EXHIBIT B
ASSIGNMENT FORM
ASSIGNOR:
| COMPANY: | CLOUDASTRUCTURE, INC. | |
| WARRANT: | THE WARRANT TO PURCHASE SHARES OF COMMON STOCK ISSUED ON [INSERT DATE] (THE “WARRANT”) | |
| DATE: |
| (1) | Assignment. The undersigned registered holder of the Warrant (“Assignor”) assigns and transfers to the assignee named below (“Assignee”) all of the rights of Assignor under the Warrant, with respect to the number of shares set forth below: |
Name of Assignee: ____________________________________________________________________
Address of Assignee: __________________________________________________________________
Number of Shares Assigned: ____________________________________________________________
and does irrevocably constitute and appoint as attorney to make such transfer on the books of Cloudastructure, Inc., maintained for the purpose, with full power of substitution in the premises.
| (2) | Obligations of Assignee. Assignee agrees to take and hold the Warrant and any shares of stock to be issued upon exercise of the rights thereunder (the “Securities”) subject to, and to be bound by, the terms and conditions set forth in the Warrant to the same extent as if Assignee were the original holder thereof. |
| (3) | Representations. Assignee represents and warrants that all representations and warranties set forth in Section 12 of the Warrant are true and correct as to Assignee as of the date hereof. |
| (4) | Investment Representation Statement and Market Stand-Off Agreement. Assignee has executed, and delivers herewith, an Investment Representation Statement and Market Stand-Off Agreement in a form substantially similar to the form attached to the Warrant as Exhibit A-1. |
| 1 |
Assignor and Assignee are signing this Assignment Form on the date first set forth above.
| ASSIGNOR | |
| (Print name of the investor) | |
| (Signature) | |
| (Name and title of signatory, if applicable) | |
| (Street address) | |
| (City, state and ZIP) | |
| ASSIGNEE | |
| (Print name of the investor) | |
| (Signature) | |
| (Name and title of signatory, if applicable) | |
| (Street address) | |
| (City, state and ZIP) | |
| 2 |
Exhibit B
Bill of Sale
[Omitted]
| 3 |
EXHIBIT C
(Form of)
Assignment and Assumption Agreement
This Assignment and Assumption Agreement (the “Agreement”), effective as of ____, 2022 (the “Effective Date”), is by and between INFRASTRUCTURE PROVING GROUNDS INC., a Delaware corporation (“Seller”) and CLOUDASTRUCTURE, INC., a Delaware corporation (“Buyer”).
WHEREAS, Seller and Buyer have entered into a certain Asset Purchase Agreement, dated as of the date hereof (the “Purchase Agreement”), pursuant to which, among other things, Seller has agreed to assign all of its rights, title and interests in, and Buyer has agreed to assume all of Seller’s duties and obligations under, the Assigned Contracts (as defined in the Purchase Agreement).
NOW, THEREFORE, in consideration of the mutual covenants, terms, and conditions set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Definitions. All capitalized terms used in this Agreement but not otherwise defined herein are given the meanings set forth in the Purchase Agreement.
2. Assignment and Assumption. Seller hereby sells, assigns, grants, conveys, and transfers to Buyer all of Seller’s right, title, and interest in and to the Assigned Contracts. Buyer hereby accepts such assignment and assumes all of Seller's duties and obligations under the Assigned Contracts and agrees to pay, perform, and discharge, as and when due, all of the obligations of Seller under the Assigned Contracts accruing on and after the Effective Date.
3. Terms of the Purchase Agreement. The terms of the Purchase Agreement, including, but not limited to, the representations, warranties, covenants, agreements, and indemnities relating to the Assigned Contracts are incorporated herein by this reference. The parties hereto acknowledge and agree that the representations, warranties, covenants, agreements, and indemnities contained in the Purchase Agreement shall not be superseded hereby but shall remain in full force and effect to the full extent provided therein. In the event of any conflict or inconsistency between the terms of the Purchase Agreement and the terms hereof, the terms of the Purchase Agreement shall govern.
4. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of California without giving effect to any choice or conflict of law provision or rule (whether of the State of California or any other jurisdiction).
5. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall be deemed to be one and the same agreement. A signed copy of this Agreement delivered by facsimile, email or other means of electronic transmission shall be deemed to have the same legal effect as delivery of an original signed copy of this Agreement.
6. Further Assurances. Each of the parties hereto shall execute and deliver, at the reasonable request of the other party hereto, such additional documents, instruments, conveyances, and assurances and take such further actions as such other party may reasonably request to carry out the provisions hereof and give effect to the transactions contemplated by this Agreement.
[Signature Page Follows]
| 1 |
IN WITNESS WHEREOF, the parties have executed this Agreement to be effective as of the date first above written.
|
INFRASTRUCTRE PROVING GROUNDS INC.
| |
| By_____________________ Name: Steve Kiss Title: Chief Executive Officer | |
|
CLOUDASTRUCTURE, INC. | |
|
By_____________________ |
| 2 |
EXHIBIT D
(Form of)
INTELLECTUAL PROPERTY ASSIGNMENT AGREEMENT
THIS INTELLECTUAL PROPERTY ASSIGNMENT AGREEMENT (“IP Assignment Agreement”) is made and entered into effective as of ___, 2022, by and between INFRASTRUCTURE PROVING GROUNDS INC., a Delaware corporation (“Assignor”) and CLOUDASTRUCTURE INC., a Delaware corporation (“Assignee”).
Pursuant to the Asset Purchase Agreement, dated as of the date hereof by and among the Assignor and the Assignee (the “Purchase Agreement”), Assignor has agreed to assign to Assignee all of their rights, title and interest in all registered intellectual property material or related to, necessary for, or used in Assignee’s business, and to execute and deliver this IP Assignment Agreement.
NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows:
1. Assignment. Assignor hereby absolutely, irrevocably and unconditionally conveys, assigns, transfers and agrees to assign and deliver to Assignee and its successors and assigns forever, without any restrictions, limitations or reservations, and Assignee hereby accepts all of Assignor’s right, title and interest in and to the Business IP (defined below), together with the goodwill of the business connected with the use of, and symbolized by, the Business IP, as fully and entirely as the same would have been held and enjoyed by Assignor had this IP Assignment Agreement not been made, including any and all rights in, arising out of, or associated with any of the following in any jurisdiction throughout the world (the “Business IP”):
(a) issued patents and patent applications (whether provisional or non-provisional), including divisionals, continuations, continuations-in-part, substitutions, reissues, reexaminations, extensions, or restorations of any of the foregoing, and other Governmental Authority-issued indicia of invention ownership (including certificates of invention, petty patents, and patent utility models);
(b) trademarks, service marks, brands, certification marks, logos, trade dress, trade names, and other similar indicia of source or origin, together with the goodwill connected with the use of and symbolized by, and all registrations, applications for registration, and renewals of, any of the foregoing;
(c) copyrights and works of authorship, whether or not copyrightable, and all registrations, applications for registration, and renewals of any of the foregoing;
(d) telephone numbers, email addresses and accounts, internet domain names and social media account or user names (including "handles"), whether or not trademarks, all associated web addresses, URLs, websites and web pages, social media sites and pages, and all content and data thereon or relating thereto, whether or not copyrights;
(e) mask works, and all registrations, applications for registration, and renewals thereof;
(f) trade secrets, know-how, inventions (whether or not patentable), discoveries, improvements, technology, business and technical information, databases, data compilations and collections, tools, methods, processes, techniques, and other confidential and proprietary information and all rights therein;
| 1 |
(g) computer programs, operating systems, applications, firmware and other code, including all source code, object code, application programming interfaces, data files, databases, protocols, specifications, and other documentation thereof; and
(h) all other intellectual or industrial property and proprietary rights.
2. Recordation and Further Actions. Assignor hereby authorizes the Commissioner for Patents, and the Commissioner for Trademarks in the United States Patent and Trademark Office, and the Register for Copyrights in the United States Copyright Office and the officials of corresponding entities or agencies in any applicable jurisdictions to record and register this Assignment upon request by Assignee. Following the date hereof, upon Assignee’s reasonable request, Assignor shall take such steps and actions, and provide such cooperation and assistance to Assignee and its successors, assigns and legal representatives, including the execution and delivery of any affidavits, declarations, oaths, exhibits, assignments, powers of attorney, or other documents, as may be reasonably necessary to effect, evidence or perfect the assignment of the Business IP to Assignee, or any assignee or successor thereto. These actions may include, but are not limited to, promptly (i) unlocking the domain name(s) and providing the authorization code for the domain name(s) to Assignee; (ii) executing and/or completing such other additional documents or forms as are delivered to Assignor by Assignee or the applicable registrar; and (iii) taking the necessary steps required by the applicable registrar to transfer the domain name(s) to Assignee.
3. Successors and Assigns. This IP Assignment Agreement will bind and inure to the benefit of Assignor and Assignee and their respective successors and permitted assigns.
4. Counterparts. This IP Assignment may be executed in multiple counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties delivered to the other party, it being understood that all parties need not sign the same counterpart. Copies of this IP Assignment with signatures transmitted by facsimile or electronically (e.g., .pdf) shall be deemed to be original signed versions of this IP Assignment.
5. Severability. If any term or provision of this IP Assignment Agreement is invalid, illegal, or unenforceable in any jurisdiction, such invalidity, illegality, or unenforceability shall not affect the enforceability of any other term or provision of this IP Assignment Agreement or invalidate or render unenforceable such term or provision in any other jurisdiction.
6. Controlling Terms. Assignor and Assignee hereby agree and acknowledge that this IP Assignment Agreement is being entered into pursuant to and subject to the terms and conditions set forth in the Purchase Agreement. In the event of any irreconcilable inconsistency between this IP Assignment Agreement and the Purchase Agreement, the Purchase Agreement shall control.
7. Governing Law. This IP Assignment Agreement shall be governed by and construed in accordance with the internal laws of the State of California without giving effect to any choice or conflict of law provision or rule (whether of the State of California or any other jurisdiction). The parties irrevocably submit to the jurisdiction of the courts of the State of California and the United States District Court located in California in any action arising out of or relating to this IP Assignment Agreement, and hereby irrevocably agree that all claims in respect of such action shall be heard and determined in such state or federal court. Each of the parties hereby irrevocably waives all right to trial by jury in any action or counterclaim arising out of or relating to this IP Assignment Agreement.
[Signature Page Follows]
| 2 |
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized.
|
ASSIGNOR:
INFRASTRUCTURE PROVING GROUNDS INC.
| |
|
By_____________________ Name: Steve Kiss Title: Chief Executive Officer | |
| Acknowledged and Agreed: | ASSIGNEE: |
| CLOUDASTRUCTURE, INC. | |
| By_____________________ | |
| Name: Richard Bentley | |
| Title: Chief Executive Officer |
| 3 |
Exhibit E-1 – E-5
Employment Agreements
[Omitted]
Exhibit 10.5
CLOUDASTRUCTURE, INC.
SECURITIES SURRENDER AGREEMENT
This Agreement is made as of October 13, 2022 between Cloudastructure, Inc. (the “Company”) and S. Richard Bentley (“Holder”).
The Company granted a loan to Holder on December 3, 2021 in the aggregate principal amount of $373,158.84 (the “Existing Founder Loan”) pursuant to a secured full-recourse promissory note (the “Existing Note”). Holder agrees to surrender to the Company of 1,142,871 shares of Class B Common Stock of the Company (the “Surrendered Shares”) held by Holder (the “Surrender”). The Company agrees to cancel the Existing Founder Loan under the Existing Note in exchange for the Surrender. The Company acknowledges and confirms that, upon the Surrender, the security interests granted under that certain Security Agreement between the Company and Holder dated as of December 3, 2021 will terminate and all rights to the shares pledged under the Security Agreement will revert to Holder.
Holder shall deliver to the Company any and all certificates or other documents evidencing the Surrendered Shares (or an affidavit of loss for any missing such certificate or other document). Upon such delivery, the Company shall cancel the Existing Founder Loan and release the shares pledged under the Existing Founder Loan to Holder.
Holder hereby represents, warrants and agrees that:
(a) Holder is the sole record and beneficial owner of the Surrendered Shares and has the sole right and authority to transfer the Surrendered Shares to the Company. The Surrendered Shares are not subject to any lien, encumbrance or claim of any sort, nor any restriction on transfer. Upon the Surrender, the Company will obtain good and marketable title to the Surrendered Shares.
(b) Holder has all requisite power and authority to enter into this Agreement and consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by Holder and constitutes the valid and binding obligation of Holder enforceable in accordance with its terms. No consent, waiver or approval of any governmental entity or any third party, is required in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby.
(c) Holder has entered into this Agreement based on its own knowledge, investigation and analysis and/or that of its advisors. Holder understands that the Company’s plans for the future, if successful, may result in the Company’s capital stock becoming significantly more valuable, and that the future value of the Surrendered Shares could far exceed the amount of the Existing Founder Loan. Holder acknowledges and understands that the Company may pursue various acquisitions and liquidity events. Nevertheless, Holder is surrendering the Surrendered Shares to the Company of its own free will, with the full understanding of such potential acquisitions and liquidity events.
(d) Holder, as a shareholder of the Company, has had access to, and the opportunity to review, the information and records of the Company for the purposes of conducting its own independent review and analysis of the Company’s business, prospects and financial condition. Holder has had an opportunity to discuss the Company’s business, operations and financial affairs with management. Holder further acknowledges that it has received all information that it has deemed necessary or appropriate to enable it to evaluate its decision to surrender the Surrendered Shares to the Company.
(e) Holder is relying solely upon its own tax, legal and other advisors and not on any statements or representations of the Company, its agents or advisers, both with respect to the consequences of this transaction and the condition and prospects of the Company. Neither the Company nor any of its employees or agents has made any representation to Holder about the advisability of this decision or the potential future value of the Surrendered Shares. Holder agrees that neither the Company nor any of its employee or agent is under any obligation to disclose to Holder any information or opinion they may have about the potential future value of the Company’s capital stock, even if such information is material.
| 1 |
Holder agrees to take such additional actions and execute such additional documents as may be necessary or appropriate to consummate the transactions contemplated by this Agreement, including the execution and delivery of any additional instruments necessary to complete the Surrender and the vesting of title to the Surrendered Shares in the Company, and otherwise to assist and cooperate the Company in accomplishing the foregoing.
This Agreement is governed by California laws, and any litigation pertaining to this Agreement shall be exclusively adjudicated in federal or state courts located in California. The provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties. This Agreement may not be modified, amended or supplemented, except upon the execution and delivery of a written agreement executed by both the Company and Holder. Holder shall bear its own expenses with respect to this Agreement. In the event any provision of this Agreement is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without such provision; provided that no such severability shall be effective if it materially changes the economic benefit of this Agreement to any party. This Agreement sets forth the entire understanding as the parties and supersedes any prior oral or written agreements and understandings with respect to the subject matter hereof. This Agreement may be executed in any number of counterparts, each of which shall be enforceable against the parties, and all of which together shall constitute one instrument.
IN WITNESS WHEREOF, this Agreement is hereby executed as of the date first above written.
| “HOLDER” | |
| /s/ Rick Bentley | |
| (signature) | |
| S. Richard Bentley | |
| (print name) | |
| “THE COMPANY” | |
| CLOUDASTRUCTURE, INC. | |
| /s/ Greg Smitherman | |
| Name: Greg Smitherman | |
| Title: CFO |
| 2 |
EXHIBIT A
Surrendered Shares
|
Number of Shares |
Description |
|
1,142,871 |
Class B Common Stock |
| 3 |
Exhibit 23.2
To Whom It May Concern:
We hereby consent to the use in the Registration Statement of Cloudastructure, Inc. on Form S-1 of our Report of Independent Registered Public Accounting Firm, dated July 1, 2024, related to the balance sheet of Cloudastructure, Inc. as of December 31, 2023, and 2022, and the related statements of operations and comprehensive loss, stockholder's equity and cash flows for the year then ended.
We also consent to the references to us under the headings "Experts" in such Registration Statement.
Very truly yours,
/s/ Bush & Associates CPA LLC
Bush & Associates CPA LLC (PCAOB 6797)
Henderson, Nevada
September 25, 2024
179 N. Gibson Rd., Henderson, NV 89014 • 702.703.5979 • www.bushandassociatescpas.com