STQN 8-K
Strategic Acquisitions Inc /Nv/ (STQN)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date
of Report (Date of earliest event reported):
(Exact name of registrant as specified in its charter)
Commission
File Number:
| (State or other jurisdiction of | (IRS Employer | |
| incorporation) | Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
(Former name or former address, if changed since last report)
| Securities registered pursuant to Section 12(b) of the Act: | None |
| Securities registered pursuant to Section 12(g) of the Act: | |
| (Title of class) |
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) | |
| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) | |
| Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) | |
| Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
This Current Report on Form 8-K (“Form 8-K”) and other reports filed by the Registrant (collectively the “Filings”) from time to time with the Securities and Exchange Commission (the “SEC”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Registrant’s management as well as estimates and assumptions made by the Registrant’s management. When used in the filings the words “anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,” “plan,” “may,” “will,” or the negative of these terms and similar expressions as they relate to the Registrant or the Registrant’s management identify forward-looking statements. Such statements reflect the current views of the Registrant with respect to future events and are subject to risks, uncertainties, assumptions and other factors (including the risks contained in the section of this report entitled “Risk Factors”) relating to the Registrant’s industry, the Registrant’s operations and results of operations and any businesses that may be acquired by the Registrant. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned.
Although the Registrant believes that the expectations reflected in the forward-looking statements are reasonable, the Registrant cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, the Registrant does not intend to update any of the forward-looking statements to conform these statements to actual results. The following discussion should be read in conjunction with the financial statements of Exworth Union Inc and the pro forma financial statements and the related notes filed with this Form 8-K and the financial statements of the Registrant which are included in the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2021, and the Registrant’s Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2022.
Unless otherwise indicated, in this Form 8-K, for periods following the Merger (defined below), references to “we,” “our,” “us,” the “Company” or the “Registrant” refer to Strategic Acquisitions, Inc., a Nevada corporation, and its newly acquired wholly owned subsidiary, Exworth Union Inc, a Delaware corporation, and, unless the context requires otherwise, references to “we,” “our,” “us,” the “Company” or “Registrant” prior to the Merger refer to Exworth Union Inc and its operations.
Item 1.01. Entry into a Material Definitive Agreement
The information contained in Items 2.01 and 5.06 below relating to the Agreement and Plan of Merger described therein is incorporated herein by reference.
Item 2.01. Completion of Acquisition or Disposition of Assets.
On December 22, 2022, we, Strategic Acquisitions, Inc. (“we”, “us” or the “Company”), and STQN Sub, Inc., our recently formed wholly owned subsidiary (“STQN Sub”) entered into and consummated an Agreement and Plan of Merger (“Merger Agreement”) with Exworth Union Inc (“Exworth Union”) and the owners of all of its outstanding shares of capital stock — Exworth Management LLC (“Exworth Management”) and World Class Global Technology LLC (“World Class,” collectively with Exworth Management, the “Stockholders”). Pursuant to the Merger Agreement, Exworth Union merged with and into STQN Sub, with Exworth Union being the surviving corporation and becoming our wholly owned subsidiary (the “Merger”). We issued an aggregate of 3,960,000 shares of our common stock (“Common Stock”), par value $0.001 per share (the “Merger Consideration”) to the Stockholders in exchange for their shares in Exworth Union. Exworth Union, based in Short Hills, New Jersey, is engaged in providing loans collateralized by digital assets. Currently, Bitcoin is the only digital asset Exworth Union is accepting as collateral for loans.
On August 31, 2022, Exworth Management purchased an aggregate of 2,013,000 shares of our Common Stock, representing 74% of the shares of Common Stock then outstanding (the “Control Acquisition”). Immediately prior to the Merger, Exworth Management owned 91% of the outstanding shares of Exworth Union. Consequently, the transaction effected through the Merger Agreement was accounted for as a change in reporting entity between entities under common control, which requires a retrospective combination of the entities for all periods as if the combination had been in effect since inception of common control in accordance with ASC 250-10-45-21. The historical financial statements of Exworth Union which was formed on March 16, 2022, are set forth in Item 9.01 (a) of this report. For pro forma financial information see Item 9.01 (b) of this report.
| -2- |
As a result of the receipt of 3,600,000 shares of Common Stock in connection with the Merger, Exworth Management now owns 5,613,000 shares of our Common Stock, approximately 82.24 % of the fully diluted outstanding shares of our Common Stock. In addition, Yuanyuan Huang, a Director of our Company, who also serves as our Secretary and Treasurer, and Wei Huang, a Director of our Company, are managers of Exworth Union.
The foregoing description of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the copy of the Merger Agreement included as Exhibit 2.1 to this Current Report on Form 8-K.
The Merger is intended to constitute a tax-free reorganization within the meaning of the Internal Revenue Code of 1986. Following the Merger, we continue to be a “smaller reporting company,” as defined in Item 10(f)(1) of Regulation S-K, as promulgated by the SEC.
Immediately prior to the Merger, we were a publicly reporting “shell company,” as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Accordingly, set forth below is the information that would be required if we were filing a general form for registration of securities on Form 10 under the Exchange Act for our Common Stock, which is the only class of our securities subject to the reporting requirements of the Exchange Act upon consummation of the Merger.
FORM 10 INFORMATION
Exworth Union Inc (“Exworth Union”), a Delaware corporation, was formed on March 16, 2022. Exworth Union provides loans that are collateralized by digital assets. Currently, Bitcoin is the only digital currency we are accepting as collateral for loans
Our Business
We currently operate our loan business at a limited scale due to the early stage of the digital asset industry and changing economic conditions. We plan to develop a proprietary software technology platform, or the “Platform”, that facilitates the origination and servicing of digital asset-backed loans. Our target markets are small businesses and individuals that hold intangible assets including digital assets and are seeking loans. We provide term loans to these enterprises and individuals which are collateralized with intangible assets, such as Bitcoin. We generate revenue from interest income and transaction based services fees. Our Platform will be designed to originate and service loans backed by various assets. Nevertheless, to date Bitcoin is the only asset we have accepted as collateral for a loan and we intend to focus on the market for loans secured by digital assets for the immediate future.
Our Mission
To build interactive financial services that increase access to financial opportunities that will enable small businesses and individuals with intangible assets to have more control over their cash flow and balance sheet.
The Platform
The Platform under development will facilitate the origination and servicing of digital asset-backed loans and will consist of a customer facing website, a mobile application and a loan management system used to monitor the loans made by us.
The Platform will provide an integrated service for the origination, documentation and servicing of collateralized loans. Our current core offering is a digital asset-backed loan. We may in the future offer various other loan products, such as a portfolio line of credit, debit card, credit card and digital asset-denominated loans.
We manage and administer all aspects of loans originated by us, including the application process, qualification of the borrower, structuring the terms of the loan, loan funding and servicing, and related regulatory compliance. We will manage borrowers’ digital assets serving as collateral, through services provided by third party providers of digital asset custody services who hold and transfer the collateral.
| -3- |
The Platform will allow us to process and complete transactions. We plan to use the Platform to onboard borrowers, decide whether to approve a loan, to structure the amount and terms of the loans we offer, including the value of the collateral to be deposited under our control as a condition to funding, and to provide funds to borrowers. The Platform will enable us to closely monitor collection and portfolio performance data that we use to determine whether to foreclose on a loan and liquidate the collateral and to refine the statistical measures used in making loan transaction decisions. We will also use the Platform to facilitate the transfer of digital asset collateral for loans and manage the custodial needs for such collateral.
The Platform’s software will also provide an end-to-end system for managing loan processes from acquisition to repayment or foreclosure. The Platform will help us manage applications and track loans through all stages, from initial inquiry through funding, diligence, servicing, margin call and collateral management. Borrowers will receive notifications from the Platform upon collateral deposit, withdrawal requests, margin call, and other account changes.
The Platform will have a borrower-facing website and the mobile application, which will provide prospective borrowers and customers with the ability to directly manage their loans, collateral and account information.
We plan to develop the Platform as a flexible and scalable technology system so that we can include new products intended to meet changes in borrowers’ demands and increased volume.
Digital Asset-Backed Loans
Exworth Union Inc will originate U.S. Dollar denominated loans. We offer loans to small business and individual borrowers who own digital assets and desire liquidity in U.S. Dollar denominate loans. We currently only provide loans to businesses and individuals outside of the United States, mainly in Asia and Europe. We will serve this niche market with term loans ranging in size from $500,000 to $5,000,000. Currently, the only digital asset we are accepting as collateral is Bitcoin. Our loan agreements with borrowers permit us to sell the borrower’s collateral assets to repay the loan principal and accrued interest if a margin call is not cured as required by the loan agreement. If the threshold for collateral liquidation is breached, we trigger a liquidation event. Liquidation events may result in fees which are passed along to the borrower. The margin requirements are determined by us and agreed to by borrowers.
Terms are set forth in loan agreements entered into with each borrower. The loans have a fixed term that range from 3 to 36 months in duration with interest only or principal and interest repayment arrangements. The loans generally require either periodic payments of principal and interest with a fixed payment amount due each period during the term of the loan or periodic payments of interest only with a final lump sum payment of principal at the end of the loan term. Payments are due monthly or quarterly based on the contractual terms. The applicable interest rates, origination fees and liquidation fees for our loans will vary based on several factors including the originating loan-to-value ratio, the business status of the borrower, loan duration and jurisdiction.
We make loans based upon: (i) our ability to securely take possession, store, manage, and liquidate the digital assets held as collateral; (ii) market capitalization, volatility, liquidity, and trading volumes for the digital assets; and (iii) the legal status of the digital assets to be used as collateral; subject to due diligence and applicable know your customer and anti-money laundering regulations.
Under our loan agreements with borrowers, we may, from time to time, repledge certain collateral, including under capital facilities we maintain with financial partners for capital management purposes. The Company regularly monitors such re-hypothecation and repledging transactions as well as the credit standing of its financial partners in order to maintain sufficient available capital.
Loan Agreement with Our Lenders
Exworth Union Inc is and will be party to loan agreements with certain lenders and other strategic partners, pursuant to which it borrows U.S. dollar-based capital for use in our lending business. We utilize such capital to extend loans made to our borrowers
| -4- |
We currently are party to a master loan agreement and a master pledge agreement with a U.S. based lender. According to the master loan agreement, we can borrow utilizing bitcoin as collateral with 70% loan-to-value on a non-recourse basis. We may elect to enter into additional loan transactions pursuant to the agreement by pledging additional bitcoins, at which time the loan-to-value and terms of the new loans will be determined. The current loan is 24 months with quarterly interest-only payments with principal paid at the maturity date. No prepayment of the loan principal amount or of any interest due under the loan is allowed.
If the fair market value of our pledged collateral based upon the closing market price has fallen to less than seventy percent (70%) of its fair market value as of the closing of the loan, the lender will provide written notice and we have five business days to cure the deficiency by the delivery to the lender of additional collateral in U.S. Dollars or bitcoin equivalent. The lender has the right to demand that curative payments be made in U.S. Dollars.
When all of our obligations have been paid in full, the lender must return the pledged collateral, including any curative payments within five business days
Industry Trends
FinTech – In pursuing our growth strategy, we intend to capitalize on the growth of the financial technology industry, or FinTech. FinTech, which is built on the merging of financial services with communications technology, is a growing industry for a variety of reasons. Developments in technology, including big data analytics, artificial intelligence, and mobile development, are combining to give FinTech companies and the services they offer, also referred to as FinTech platforms, an increasing advantage over traditional financial platforms. Faster payment networks typically reduce the time required to move money between accounts. Management believes that as we accumulate customer data and combine analytics, we will be able to adapt our products and services to future customer needs, increase transparency into the financial system and grant more financial control to the customer. We also plan to bring new products to market, improve service offerings, and make FinTech processes more efficient and transparent.
Geographic Market
Our primary geographical markets are Asia and Europe. We hope to increase engagement, gain clients trust, and enhance user understanding of the loans we make available and as our customer base grows, provide other financial services.
Competition
Our primary target customers are small businesses and individuals in Asia and Europe. The lending industry in these markets is rapidly changing and highly innovative. We expect competition within our industry will continue to be intense as existing and new competitors introduce new products or enhance existing products. Our principal competitors are other digital asset-backed lending companies, decentralized finance companies, credit services organizations, online lenders, credit card companies, and other financial institutions that offer similar financial products and services, including loans on an unsecured as well as a secured basis.
An additional significant source of competition are companies, including those located outside the United States, that are subject to significantly less stringent regulatory and compliance requirements in their local jurisdictions. Their business models rely on being unregulated or only regulated in a small number of lower compliance jurisdictions, while also offering their products in highly regulated jurisdictions, including the United States, without necessarily complying with the relevant regulatory requirements in such jurisdictions.
Due to our commitment to legal and regulatory compliance, we have not been able to offer some popular products and services that our unregulated or less regulated competitors offer, which may adversely impact our business, financial condition, and results of operations. We also expect to expend significant managerial, operational, and compliance costs to meet the legal and regulatory requirements applicable to us in the United States and other jurisdictions in which we operate and expect to continue to incur significant costs to comply with these requirements before we could grow our business, which these unregulated or less regulated competitors have not had to incur.
| -5- |
Further, as digital assets become more widely adopted, more traditional financial institutions may begin to directly compete with our platform. Certain of our current and potential competitors, particularly more traditional financial institutions or non-digital asset lenders entering or that may enter our market, have more extensive customer bases and broader customer relationships than we have and have longer operating histories and greater name recognition than we have. They also have significantly more financial, technical, marketing and other resources than we have, and are able to devote greater resources to the development, promotion, sale and support of their products and services. Competing services that have partnered with or are tied to established banks and other financial institutions, may offer greater liquidity and create greater consumer confidence in the safety and efficiency of their services than we do. We expect that there will be continued mergers and acquisitions by or among these companies, which will lead to even larger competitors with more resources. We also expect to continue to see new entrants to our field, which offer competitive products and services.
Regulations That Affect Our Business
We currently make loans only outside of the United States. We plan to market and provide services through a number of different online and offline channels to business in Asia and Europe. In general, local regulations are designed to protect consumers and the public, while providing standard guidelines for business operations. Laws and regulations typically impose restrictions and requirements, such as governing interest rates and fees, maximum loan amounts, loan extensions and refinancings, payment schedules (including maximum and minimum loan durations), disclosures, security for loans and payment mechanisms, licensing, and in certain jurisdictions certain reporting requirements. For more information regarding the regulations applicable to our business and the risks to which they subject us, see the section entitled “Risk Factors” below.
In addition, regulation of blockchain and digital assets is under active consideration by the United States through various federal agencies, including the SEC, Commodity Futures Trading Commission (“CFTC”), Federal Trade Commission (“FTC”) and the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of the Treasury, as well as in other countries. State government regulations may also apply. Furthermore, it is expected that regulations will increase, although we cannot anticipate how and when. As the regulatory and legal environment evolves, we may become subject to new laws and regulation by the SEC and other agencies.
The legal environment is constantly changing as new laws and regulations are introduced and adopted, and existing laws and regulations are repealed, amended, modified and reinterpreted. Regulatory authorities at various levels of government and voters have enacted, and will likely continue to propose, new laws and regulations impacting our industry. Due to the evolving nature of laws and regulations, further rulemaking could result in new or expanded regulations, particularly at the state level, that may adversely impact current product offerings or alter the economic performance of our existing products and services. We cannot provide any assurances that additional federal, state, provincial or local statutes or regulations will not be enacted in the future in any of the jurisdictions in which we operate. It is possible that future changes to statutes or regulations will have a material adverse effect on our results of operations and financial condition. Further, as our business evolves and we make loans or provide services to businesses and individuals in more countries, we will become subject to the applicable laws and regulations in such countries and their political territories.
Crypto Wallet Providers
We are using a crypto custody service provided by Aegis Trust Company, a South Dakota public trust company, to hold the digital assets as collateral. We rely on our custody service provider to maintain and secure its crypto wallet service for our operations and to provide its services in accordance with applicable laws and regulations.
Technology & Technology Suppliers
Our Platform is being developed internally and by third parties directed by us. Our Platform will be hosted in third party data centers on virtual cloud-based infrastructure. These providers include Google Cloud Computing and AWS. These data centers use a mixture of biometric access controls, redundant power, environmental controls and secure internet connection points to ensure uptime and data security. We rely on our data center and service providers to maintain peak operating conditions in their businesses and to quickly address issues related to their service as they arise.
| -6- |
Intellectual Property
Our Platform and other technology include various proprietary and intellectual property developed and owned by us or licensed to us on an exclusive basis. Protecting our rights to our intellectual property enhances our ability to offer distinct and competitive products and services to our customers. We rely on a combination of patent, trademark and trade secret law protections in the United States, as well as confidentiality procedures and contractual provisions to protect our intellectual property rights. Our patent strategy includes identifying key business goals of the Company, enhancing our research and product development, and growing and defending our market share.
Employees
As of December 1, 2022, we had three employees and engaged two consultants.
RISK FACTORS
Our business, financial condition or results of operations could be materially adversely affected by a number of risks if any of them actually occur, including those described below. This Registration Statement also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks we face as described below and elsewhere in this Registration Statement. These risks are not the only ones faced by us. Additional risks not known or that are deemed immaterial could also materially and adversely affect our financial condition, results of operations, business and prospects.
RISKS RELATED TO OUR COMPANY AND OUR BUSINESS
We have a limited operating history, a history of operating losses and expect to incur significant additional operating losses in the foreseeable future.
Exworth Union was incorporated in March, 2022. We have a limited operating history. We continue to incur operating losses and have not generated positive cash flow from operations.
The amounts of future losses and when, if ever, we will achieve profitability and positive cash flow from operations are uncertain.
Our registered public accounting firm has expressed substantial doubt about the Company’s ability to continue as a going concern in their audit report.
Our Company’s commercial operations have not generated sufficient revenues to enable profitability or positive cash flow. As a result, our registered public accounting firm in their audit report has expressed substantial doubt about our ability to continue as a going concern. Continued operations is dependent on our ability to generate profitable operations and raise sufficient funds to finance our activities. Our financial statements do not include any adjustments that might result from the uncertainty about the Company’s ability to continue its business.
We will need to secure financing in the future and our ability to secure future financing is uncertain.
We anticipate that we will continue to incur operating losses and will need to secure additional financing. We may seek such additional funding through public or private financings, collaborative arrangements, debt or other arrangements with third parties. If adequate funds are not available, we may be required to delay, scale back or eliminate one or more segments of our business operations or curtail our business operations in their entirety. If we obtain funds by entering into arrangements with collaborative partners or others, we may be required to relinquish rights to certain of our products, services, or technologies that we would not otherwise relinquish. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
| -7- |
We expect our Company’s business model to continue to evolve.
Our industry is characterized by experimentation, changing customer needs, and frequent introductions of new products and services. As the FinTech industry and digital asset and blockchain technologies become more widely available, we expect the services and products associated with them to continue to rapidly evolve. Thus, in order to stay current with the industry, our Company’s business model may need to evolve as well. From time to time, we may materially modify aspects of our business model relating to our product and service offerings. We cannot offer any assurance that these or any other modifications will be successful or will not harm our business. If changes to our business model are not successful, or if we fail to make appropriate changes, it would have a material adverse effect on the business, prospects or operations of the Company and potentially on our ability to continue as a going concern.
Our Company is in an early stage of development and it may not be able to develop its business as anticipated.
We have generated minimal revenue from our lending business line and have a limited customer base. Our business prospects are difficult to predict because of our limited operating history, early stage of development, and unproven business strategy. In addition, demand for our loans is very difficult to predict and may vary widely based on many factors that are outside of our control. Although our management believes that our current business plan has potential, our Company may never attain profitable operations and our management may not succeed in realizing our business objectives due to a lack of technical, marketing, financial, and other resources or dependence on the success of one product or service, a unique distribution channel, or the effectiveness of a manager or management team or other reasons. If we are not able to execute our business plan as anticipated, or modify our business model or products and services to accommodate changes in the market, we may not be able to achieve profitability.
We are subject to the risks frequently experienced by early stage companies.
The likelihood of our success must be considered in light of the risks frequently encountered by early stage companies, especially those formed to develop and market new technologies in an uncertain and evolving regulatory landscape. These risks include our potential inability to:
| ● | establish and maintain markets for our services products; | |
| ● | expand the number of loans we extend and the markets in which we are able to lend, which may limit the potential market for our products and increase concentration risk; | |
| ● | identify, attract, retain and motivate qualified personnel; | |
| ● | continue to develop and upgrade our technologies to keep pace with changes in technology and regulations and with the growth of markets using digital assets and blockchain technologies; | |
| ● | develop strategic relationships and partnerships; | |
| ● | maintain our reputation and build trust with customers; | |
| ● | scale up to larger operations on a consistent basis; | |
| ● | contract for or develop the internal skills needed to master larger operational scales; and | |
| ● | sufficiently fund the capital expenditures required to scale up from small initial operations to larger operations. |
If we fail to effectively manage our growth our business could suffer.
Our Company anticipates that a period of significant expansion will be required to achieve the objectives set forth in our current business plan. This expansion will place a significant strain on our Company’s management, operational and financial resources. To manage the expected growth of our operations and personnel, we must establish appropriate and scalable operational and financial systems, procedures and controls, and we must continue to establish qualified finance, administrative and operations staff. As a reporting company, our Company and its management will have to implement internal controls to comply with our reporting requirements as well as government-mandated regulations. Our management may be unable to hire, train, retain, motivate and manage the necessary personnel or to identify, manage and exploit potential strategic relationships and market opportunities. Our failure to manage growth effectively could have a material and adverse effect on our business, results of operations and financial condition.
| -8- |
Our quarter-to-quarter performance may vary substantially, and this variance, as well as general market conditions.
We cannot accurately estimate future quarterly revenue and operating expenses based on historical performance. Because the loans we extend are collateralized by digital assets and because we may use those digital assets as collateral for debt that funds our business, our quarterly results are significantly impacted by and can vary widely based on the underlying value of those digital assets. Our quarterly operating results may also vary significantly based on many other factors, including:
| ● | fluctuating demand for our products and services; | |
| ● | announcements or implementation by our competitors of new products; | |
| ● | amount and timing of our costs related to our marketing efforts or other initiatives; | |
| ● | timing and amounts relating to the expansion of our operations; | |
| ● | our ability to enter into, renegotiate or renew key agreements; | |
| ● | timing and amounts relating to the expansion of our operations; | |
| ● | developing regulations relating to digital assets and blockchain technology; or | |
| ● | economic conditions specific to our industry, as well as general economic conditions. |
If we cannot keep pace with rapid technological developments to provide new and innovative products and services and address the rapidly evolving market for the use of our products and services, our revenues could decline.
Our industry has been characterized by many rapid, significant, and disruptive products and services in recent years. We cannot predict the effects of technological changes on our business. We expect that new services and technologies applicable to our industry and new market entrants, such as decentralized finance, or DeFi, will continue to emerge and may be superior to, or render obsolete, the technologies we currently use or are developing in our products and services. Developing and incorporating new technologies into our products and services may require substantial expenditures, take considerable time, and ultimately may not be successful. In addition, our ability to adopt new products and services and develop new technologies may be inhibited by industry-wide standards, payment networks, changes to laws and regulations, resistance to change from consumers or merchants, third-party intellectual property rights, or other factors beyond management’s control. Our success will depend on our ability to develop and incorporate new technologies, address the challenges posed by the rapidly evolving market for block-chain based lending transactions through our platforms and adapt to technological changes and evolving industry standards. If we are unable to do so in a timely or cost-effective manner, our business could be harmed.
Substantial and increasingly intense competition within our industry may harm our business.
The lending and payments industry is rapidly changing, highly innovative and subject to substantial regulatory oversight. We expect competition within our industry will continue to be intense as existing and new competitors introduce new products or enhance existing products. We compete against a number of companies operating both within the United States and abroad, and both those that focus on traditional financial services and those that focus on crypto-based services. Alternative lending platforms utilizing digital assets, such as decentralized finance, or DeFi, may be established that compete with or are more widely used than our Platform. It is possible that alternative platforms could be established that utilize the same or similar proprietary code and protocol underlying our planned Platform and attempt to facilitate services that are materially similar to our Platform.
| -9- |
A significant source of competition to date has been from companies, including those located outside the United States, that are subject to significantly less stringent regulatory and compliance requirements in their local jurisdictions. Their business models rely on being unregulated or only regulated in a small number of lower compliance jurisdictions, while also offering their products in highly regulated jurisdictions, including the United States, without necessarily complying with the relevant regulatory requirements in such jurisdictions.
To date, due to limited enforcement by U.S. and foreign regulators, many of these competitors have been able to operate while offering products and services to consumers, including in the United States and other highly regulated jurisdictions, without complying with the relevant licensing and other requirements in these jurisdictions, and seemingly without penalty. Due to our regulated status in several jurisdictions and our commitment to legal and regulatory compliance, we have not been able to offer many popular products and services, including products and services that our unregulated or less regulated competitors are able to offer to a group that includes many of our customers, which may adversely impact our business, financial condition, and results of operations. We also have expended significant managerial, operational, and compliance costs to meet the legal and regulatory requirements applicable to us in the United States and other jurisdictions in which we operate, and expect to continue to incur significant costs to comply with these requirements, which these unregulated or less regulated competitors have not had to incur.
Further, as digital assets become more widely adopted, more traditional financial institutions may begin to directly provide loans backed by digital assets. Such traditional institutions would have better access to capital, a larger client base, and greater industry connections and resources. In addition, some exchanges have begun offering potentially competing products, including Coinbase, one of the largest crypto exchanges, which in 2020 began offering short term Bitcoin-backed loans.
Additionally, we compete against a wide range of businesses, most of which are larger than we are, which have a dominant and secure position in the market (both in the United States and globally) for loans. These companies have greater financial resources and substantially larger customer bases than we do, which may provide them with significant competitive advantages. These companies may devote greater resources than we do to the development, promotion and sale of products and services, and they may be more effective in introducing innovative, less expensive products and services that hinder our growth. Competing services that have partnered with or are tied to established banks and other financial institutions, may offer greater liquidity and create greater consumer confidence in the safety and efficiency of their services than we do. We expect that there will be continued mergers and acquisitions by or among these companies, which will lead to even larger competitors with more resources.
Our ability to further develop our business depends on our ability to build a strong and trusted brand.
We cannot assure you that we will be able to successfully build our reputation or brand. Building, maintaining, protecting and enhancing our reputation are critical to expanding our customer base. Harm to our brand can arise from many sources, including failure by us or our partners to satisfy expectations of service and quality; inadequate protection of sensitive information; compliance failures and claims; litigation and other claims; employee misconduct; and misconduct by our partners, service providers or other counterparties. If we do not successfully maintain a strong and trusted brand, our business could be harmed, which could adversely affect our financial condition.
Failure to attract customers, customer attrition or a decline in our customers’ growth rate could adversely affect our revenues.
As we expand our services, we will need consumer and commercial borrowers to join our Platform and to continue to use our Platform. The attractiveness of our loans and the products we may offer through our Platform increases as the number of consumer and commercial borrowers grows because of the resulting reduced risk and lower cost. An increased participant pool generates competitive interest rate dynamics and data, which is used to improve the effectiveness of our lending risk models. We may not be able to get consumer and commercial borrowers to join, or if we do, we may experience attrition resulting from several factors, including transfers of customer accounts to our competitors, and account closures that we may initiate due to fraud or AML concerns. We cannot predict the level of acceptance or attrition in the future.
| -10- |
A decline in social and economic conditions may adversely affect our customers, which may negatively impact our business and results of operations.
As a lending platform, we believe our customers are highly susceptible to uncertainties and negative trends in the markets driven by, among other factors, general social and economic conditions. Economic factors include interest rates, unemployment levels, the impact of federal or state government shutdowns, natural disasters, gasoline prices, adjustments in monthly payments, adjustable-rate mortgages and other debt payments, the rate of inflation, relative returns available from competing investment products and consumer perceptions of economic conditions. Social factors include changes in consumer confidence levels and changes in attitudes with respect to incurring debt and the stigma of personal bankruptcy. The volatility in the value of digital assets may also significantly impact the ability of borrowers to obtain loans secured by those assets and may result in margin calls, which in turn may make our loans less attractive to certain borrowers.
These social and economic factors may affect the ability or willingness of borrowers to make payments on their loans or lenders to offer loans. In some circumstances, economic and/or social factors could lead to a borrower deciding to pre-pay his or her loan obligation. There is no penalty to borrowers if they choose to pay their loan early.
We strive to establish a lending platform in which annual percentage rates are attractive to borrowers. These external economic and social conditions and resulting trends or uncertainties could also adversely impact our customers’ ability or desire to participate on our Platform as borrowers, which could negatively affect our business and results of operations.
Loans we provide may give us limited remedies relative to more traditional loans in the event of non-payment or late payment by borrowers.
More traditional loans and other forms of financing can provide for specific remedies, such as increased interest rates or acceleration of principal repayment, in the event of non-payment or default, and may be more readily enforced by judicial action.
If a borrower defaults on the repayment of a secured loan, we could attempt to foreclose on the defaulting borrower’s collateral. Liquidating such collateral could be difficult, however, and there is no assurance that we would recoup the entire amount in default. Most often, we seek to liquidate collateral in connection with a margin call, which in turn is typically caused by declining values of the underlying digital assets. Liquidating digital assets at the time prices for those assets are declining increases the likelihood that we will not recover the full value of the amount needed to restore the loan-to-value ratio of a particular loan or to compensate us for amounts we are owed under a defaulting loan. In addition, we may decide to waive breaches by borrowers or obligors, which could adversely impact our results of operations or financial condition. By contrast, loans and other forms of financing can provide for specific remedies, such as increased interest rates or acceleration of principal repayment, in the event of non-payment or default, and may be more readily enforced by judicial action.
The loans we extend are secured by digital assets, which is subject to several risks that may adversely affect the value of the collateral and amounts we are able to recover under the loan
The loans we extend are secured by digital assets, currently Bitcoin, which involves several risks relating to the unique nature of digital assets, including the following:
| ● | Significant price volatility. The price of Bitcoin has experienced significant volatility in price over the last twelve months, has historically been subject to dramatic fluctuations and is highly volatile. If a borrower is unable to meet margin requirements or defaults on a loan, we may opt to convert the Bitcoin pledged as collateral into fiat money or an alternate form of digital assets. Any significant price volatility affecting such conversion could adversely impact the amount we are able to recover and use to pay amounts due to us under the defaulting loan or to pay our lender. |
| -11- |
| ● | Illiquidity. Bitcoin can be illiquid and, as a result, in the event of a default by an underlying borrower, we may not be able to liquidate Bitcoin held as collateral for fiat currency. Such illiquidity could adversely impact the amount available to us to pay amounts due us under the defaulting loan or to pay our lender. | |
| ● | Loss or destruction of private keys. Digital assets require access to a unique private cryptographic key (or keys) relating to the blockchain address at which the digital asset’s balance is recorded. The loss or destruction of a private key required to access digital assets is irreversible and the resulting loss of access to such digital assets by us would adversely impact the amount available to use to pay amounts due to us under the affected loan or to pay our lender. | |
| ● | Unregulated assets. The use of Bitcoin is currently largely unregulated. If its use becomes subject to greater regulation, it could adversely affect its value and therefore the value of our loans to borrowers. Bitcoin’s status as a “security” in any relevant jurisdiction is subject to a high degree of uncertainty and if we are unable to properly characterize Bitcoin held as collateral, we may not have the appropriate licensing and registration to continue to hold and transact with Bitcoin. This could affect the asset’s value and limit our ability to enforce our security interest. In such a case, we may also be subject to regulatory scrutiny, investigations, fines, and other penalties, which may adversely affect our business, operating results, and financial condition. |
We have no recourse under the loans to any specific assets of borrowers other than the digital assets of the borrowers designated as collateral for the loans.
The loans we make are secured solely by designated digital assets of the borrowers. We have no security interest in any other assets of the borrowers. If a borrower breaches its payment obligations under a loan, the value of the collateral may be insufficient to satisfy the full amount of the borrower’s outstanding payment obligations under the loan. In addition, digital assets are subject to loss or theft due to cyber-attacks, and if collateral is stolen, we would have no recourse against a borrower for its payment obligations under its loan.
Certain digital assets of borrowers securing the loans we make may be rehypothecated or pledged as collateral in third party transactions, which may adversely impact our liquidity and results of financial operations.
Digital assets of borrowers securing the loans we hold prior to the full payoff and satisfaction of the loans may be rehypothecated, repledged, sold, or otherwise transferred or used at our risk (the “Repledged Collateral”) in transactions, including credit facilities or derivatives contracts, we enter into with third parties (each, a “Platform Counterparty”). In the event of we breach our contractual obligations in respect of such transactions or the occurrence of certain conditions, the Platform Counterparty may foreclose on the Repledged Collateral or otherwise require us to liquidate or transfer it. Additionally, to the extent that any Repledged Collateral is required to be transferred or made accessible to a third party in connection with the pledge, such collateral may be vulnerable to loss or theft due to cyber-attacks affecting such third parties or other forms of malfeasance.
Upon the occurrence of any of the foregoing, we may be required to purchase digital assets to replace the Repledged Collateral in order to comply with our obligations to those borrowers whose digital assets constituted the Repledged Collateral. As the price and availability of digital assets are subject to fluctuations, such purchases may subject us to substantial and unpredictable expenses.
We may attempt to mitigate the risks described above relating to the Repledged Collateral through various means, including continuous monitoring and testing of market conditions, the implementation of technology security protocols, and the maintenance of specified capital ratios to ensure its continued solvency. However, there is no assurance that our attempts to mitigate the risks described above will be successful. If we are not successful in mitigating the risks relating to the Repledged Collateral, we may be unable to remit or be delayed in remitting amounts due to the Platform Counterparty.
| -12- |
We use third-party services in connection with our business, and any disruption to these services could result in a disruption to our business, negative publicity and a slowdown in the growth of our users, materially and adversely affecting our business, financial condition and results of operations.
Our business depends on services provided by, and relationships with, various third parties, including digital assets custody providers, exchanges, banks, cloud hosting, server operators, broadband providers, and customer service vendors among others. The failure of any of these parties to perform in compliance with our agreements may negatively impact our business. In addition, we enter into borrowing facilities or loan funding arrangements with third parties. Any loss of one of these loan funding sources could disrupt our business and impair our ability to process loans for our customers. Additionally, if such third parties increase their prices, fail to provide their services effectively, terminate their service or agreements or discontinue their relationships with us, we could suffer service interruptions, reduced revenues or increased costs, any of which may have a material adverse effect on its business, financial condition and results of operations.
Any acquisitions, strategic partnerships or joint ventures that we make or enter into could disrupt our business and harm our financial condition.
Acquisitions, strategic partnerships and joint ventures are part of our growth strategy. We may not be successful in identifying acquisition, strategic partnership, and joint venture targets. In addition, we may not be able to successfully finance or integrate, or realize expected benefits from, any businesses, services, or technologies that we acquire or with which we form a strategic partnership or joint venture, and we may lose merchants and customers as a result of any acquisition, strategic partnership, or joint venture. Furthermore, the integration of any acquisition, strategic partnership, or joint venture may divert management’s time and resources from our core business and disrupt our operations.
Our failure to manage our customer funds properly could harm our business.
We expect to hold a substantial amount of digital assets belonging to our customers or deposit them with third party custody providers or repledge and rehypothecate them pursuant to a third party facility or transaction. Our ability to manage and account accurately for the assets underlying our customer funds and comply with applicable regulatory requirements requires a high level of internal controls. In addition, we are dependent on the operations, liquidity, and financial condition of third-party custody providers for the proper maintenance, use, and safekeeping of our customers’ assets. As our business continues to grow and we expand our product offerings, we must continue to strengthen our associated internal controls. Our success requires significant public confidence in our ability to properly manage our customers’ balances and handle large and growing transaction volumes and amounts of customer funds. Any failure to maintain the necessary controls or to manage our customer funds and the assets underlying our customer funds accurately and in compliance with applicable regulatory requirements could result in reputational harm, lead customers to discontinue or reduce their use of our products and result in significant penalties and fines, which could materially harm our business.
We may receive, store, process and use personal information and other data, which subjects us to governmental regulation and other legal obligations related to privacy. Our actual or perceived failure to comply with such obligations could harm our business.
We may receive, store, process and use personal information and other user data, for certain users. There are numerous federal, state and local laws around the world regarding privacy and the storing, sharing, use, processing, disclosure and protection of personal information and other user data, the scope of which are changing, subject to differing interpretations, and may be inconsistent between countries or conflict with other rules. We generally comply with industry standards and are subject to the terms of our privacy policies and privacy-related obligations to third parties. It is possible that these obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or practices. Any failure or perceived failure by us to comply with its privacy policies, its privacy-related obligations to users or other third parties, or its privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information or other user data, may result in governmental enforcement actions, litigation or negative publicity and could cause users and advertisers to lose trust in our Company, which could have an adverse effect on our business. Additionally, if third parties with whom we work, such as advertisers, vendors or developers, violate applicable laws or our internal policies, such violations may also put our users’ information at risk and could have an adverse effect on our ability to implement our business plans.
| -13- |
The costs and effects of potential future litigation, investigations or similar matters, or adverse facts and developments related thereto, could materially affect our business, financial position and results of operations.
We may be subject to legal, arbitration and administrative investigations, inspections and proceedings arising in the ordinary course of our business or from extraordinary corporate, tax or regulatory events, involving our clients, suppliers, customers, as well as competition, government agencies, tax and environmental authorities, particularly with respect to civil, tax and labor claims. Tax investigations could include investigations into potential tax violations committed by our customers through the use of digital assets. Lawsuits and other legal proceedings can involve substantial costs, including the costs associated with investigation, litigation and possible settlement, judgment, penalty or fine, and could harm our reputation regardless of merit or eventual outcome. Our insurance may not cover all claims that may be asserted against us, and any claims asserted against us. As a smaller company, the collective costs of litigation proceedings or investigations can be significant and could include judgments or settlements that exceed our insurance policies or indemnity rights or reimbursement of attorneys’ fees, litigation costs and expenses if we do not prevail, all of which would represent a drain on our cash resources, as well as require an inordinate amount of management’s time and attention. Moreover, an adverse ruling in respect of certain litigation or investigations could have a material adverse effect on our results of operation and financial condition.
Changes in tax laws and unanticipated tax liabilities could adversely affect our effective income tax rate and profitability.
We are subject to income taxes in the United States and other foreign jurisdictions. Due to the new and evolving nature of crypto assets and the absence of comprehensive legal guidance with respect to crypto asset products and transactions, many significant aspects of the U.S. federal income and foreign tax treatment of transactions involving crypto assets are uncertain Our effective income tax rate could be adversely affected in the future by a number of other factors, including changes in the mix of earnings in countries with differing statutory tax rates or changes in the valuation of deferred tax assets and liabilities. It is unclear what additional guidance may be issued in the future on the treatment of existing crypto asset transactions and future crypto asset innovations for purposes of U.S. federal income tax or other foreign tax regulations. Any such alteration of existing IRS and foreign tax authority positions or additional guidance regarding crypto asset products and transactions could result in adverse tax consequences for holders of crypto assets and could have an adverse effect on the value of crypto assets and of our business. The uncertainty regarding tax treatment of crypto asset transactions impacts our customers, and could impact our business, both domestically and abroad.
Changes in applicable tax regulations or unanticipated tax-related liabilities and costs could have a material adverse effect on our ability to implement our business plans.
We may be subject to additional obligations to collect and remit sales tax and other taxes, and we may be subject to tax liability for past sales, which could harm our business.
State, local and foreign jurisdictions have differing rules and regulations governing sales, use, value added and other taxes, and these rules and regulations are subject to varying interpretations that may change over time. In particular, the applicability of such taxes to digital assets in various jurisdictions is unclear. Further, these jurisdictions’ rules regarding tax nexus vary significantly and are complex. As such, we could face possible tax assessments and audits, or increased costs associated with compliance. A successful assertion, by any of these taxing authorities, that we should be collecting additional sales, use, value added or other taxes in jurisdictions where we have not historically done so and do not accrue for such taxes could result in tax liabilities and related penalties for past sales, discourage customers from purchasing our products or otherwise harm our business.
| -14- |
Our principal stockholder owns a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.
Upon completion of the Merger, our principal stockholder beneficially owned approximately 84% of our common stock assuming no exercise of outstanding options. This stockholder is able to control matters requiring stockholder approval. For example, it is able to control elections of directors, amendments of our organizational documents or approval of any merger, sale of assets or other major corporate transactions. This concentration of ownership control may delay, discourage or prevent a change of control, including unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders, entrench our management and board of directors or delay or prevent a merger, consolidation, takeover or other business combination involving us that other stockholders may desire. The interests of this stockholder may not always coincide with your interests or the interests of other stockholders and they may act in a manner that advances their best interests and not necessarily those of other stockholders.
Our management team has limited experience managing a reporting company, and regulatory compliance may divert its attention from the day-to-day management of our business.
The individuals who now constitute our management team have limited experience managing a publicly-traded company and limited experience complying with the increasingly complex laws pertaining to reporting companies. Our management team may not successfully or efficiently manage a reporting company that is subject to significant regulatory oversight and reporting obligations under the federal securities laws. In particular, these new obligations will require substantial attention from our senior management and could divert their attention away from the day-to-day management of our business.
Members of our Board of Directors do not have significant experience as directors of a growing internet-based financial services platform.
Members of our Board of Directors have limited experience as directors overseeing the operation of an internet-based financial services platform that is subject to complex regulations and laws. Our Board of Directors may not successfully oversee the management of our operations and growth, risks applicable to our business or our compliance with the complex regulatory environment in which we operate, which could adversely affect our ability to successfully operate and grow our business or increase the risk of our noncompliance with laws and regulations applicable to our business.
The liability of our board of directors is limited.
The corporate law of the State of Nevada limits the liability of our directors and generally provides that directors shall have no personal liability to the Company or its stockholders for monetary damages for breaches of their fiduciary duties as directors, subject to certain limited exceptions.
We will incur increased costs as a result of operating as a reporting company, and our management will be required to devote substantial time to new compliance initiatives.
We will incur certain costs of compliance with applicable SEC reporting rules and regulations including, but not limited to attorneys’ fees, accounting and auditing fees, other professional fees and Sarbanes-Oxley Act of 2002 (“SOX”) compliance costs.
Our status as an “emerging growth company” under the JOBS Act may make it more difficult to raise capital as and when we need it.
Because of the exemptions from various reporting requirements provided to us as an “emerging growth company” and because we will have an extended transition period for complying with new or revised financial accounting standards, we may be less attractive to investors and it may be difficult for us to raise additional capital as and when we need it. Investors may be unable to compare our business with other companies in our industry if they believe that our financial accounting is not as transparent as other companies in our industry. If we are unable to raise additional capital as and when we need it, our financial condition and results of operations may be materially and adversely affected.
| -15- |
Events outside of our control, including the outbreak of the recent coronavirus (“COVID-19”), or an outbreak of another highly infectious or contagious disease, could adversely affect our business activities, financial condition and results of operations.
The spread of a highly infectious or contagious virus or disease, such as COVID-19, could cause severe disruptions in the U.S. economy, and in turn disrupt the business, activities, and operations of some of our customers, as well as our business and operations. Moreover, since the beginning of January 2020, the coronavirus outbreak has caused significant volatility in the financial markets both globally and in the United States. The continued spread of COVID-19, or an outbreak of another highly infectious or contagious virus or disease, may result in a significant decrease in business and/or cause our customers to be unable to meet existing payment or other obligations to us. In addition, any disruptions to the business operations of a third party service provider on whom our business depends resulting from business restrictions, quarantines, or restrictions on the ability of personnel to perform their jobs could have an adverse impact on our service providers’ ability to provide services to us.
The extent to which COVID-19 will continue to negatively impact our business and results of operations will depend on future developments which are highly uncertain and cannot be accurately predicted, including the duration of the pandemic, actions taken to treat or control the spread of COVID-19, any re-emergence of COVID-19 or related diseases, and the intermediate and longer-term impact on consumers, businesses and the broader economy. For example, COVID-19 raises the possibility of an extended global economic downturn, which could affect the performance of and demand for our products and services and adversely impact our business and results of operations even after the pandemic is contained.
Additionally, this could continue to impact many employees who may have personal needs to attend to (such as looking after children as a result of school closures or family who become sick) and employees may become sick themselves and be unable to work.
RISKS RELATED TO OUR INFORMATION TECHNOLOGY
Interruption or failure of our information technology and communications systems could impair our operations, which could damage our reputation and harm our results of operations.
Our success and ability to process transactions and provide high quality customer service depend on the efficient and uninterrupted operation of our computer server and information technology systems. The failure of our computer systems and information technology to operate effectively or to integrate with other systems, performance inadequacy, or breach in security may cause interruptions in our operations as well as reputational harm. Any failures, problems, or security breaches may mean that fewer customers are willing to borrow money from us. Factors that could occur and significantly disrupt our operations include system failures and outages caused by fire, floods, earthquakes, power loss, telecommunications failure sabotage, terrorist attacks and similar events, software errors, computer viruses, physical or electronic break-ins, and breaches of our customers’ personal information such as passwords or other personal information.
Unauthorized disclosure, destruction or modification of data, including personal information, through cybersecurity breaches, computer viruses or otherwise or disruption of our services could expose us to liability, protracted and costly litigation and damage our reputation.
Our business involves the collection, storage, processing, and transmission of customers’ personal data, including names, addresses, identification numbers and/or bank account numbers. An increasing number of organizations, including large merchants and businesses, other large technology companies, financial institutions and government institutions, have disclosed breaches of their information technology systems, some of which have involved sophisticated and highly targeted attacks, including on portions of their websites or infrastructure. We could also be subject to breaches of security by hackers. Threats may occur by human error, fraud, or malice on the part of employees or third parties or may result from accidental technological failure. Concerns about security are increased when we transmit information. Electronic transmissions can be subject to attack, interception or loss. Also, computer viruses and malware can be distributed and spread rapidly over the internet and could infiltrate our systems or those of our associated participants, which can impact the confidentiality, integrity and availability of information and the integrity and availability of our products, services and systems, among other effects. Denial of service, ransomware or other attacks could be launched against us for a variety of purposes, including interfering with our services or creating a diversion for other malicious activities. These types of actions and attacks could disrupt our delivery of products and services or make them unavailable, which could damage our reputation, force us to incur significant expenses in remediating the resulting impacts, expose us to uninsured liability, subject us to lawsuits, fines or sanctions, distract our management, or increase our costs of doing business.
| -16- |
As part of our business operations, we share information with third parties, including commercial partners, third-party service providers and other agents, who collect, process, store, and transmit sensitive data. Given the rules established by the applicable regulations, we may be held responsible for any failure or cybersecurity breaches attributed to these third parties insofar as they relate to the information we share with them. The loss, destruction, or unauthorized modification of data of the end users of our services by us or our third-party service providers and other agents or through systems we provide could result in significant fines, sanctions, and proceedings or actions against us by the governmental bodies or third parties, which could have a material adverse effect on our business, financial condition, and results of operations. Any such proceeding or action, and any related indemnification obligation, could damage our reputation, force us to incur significant expenses in defense of these proceedings, distract our management, increase our costs of doing business, or result in the imposition of financial liability.
Our encryption of data and other protective measures may not prevent unauthorized access or use of sensitive data. A breach of our system or that of one of our associated participants may subject us to material losses or liability, including payment scheme fines, assessments and claims for unauthorized purchases with misappropriated credit, debit or card information, impersonation, or other similar fraud claims. A misuse of such data or a cybersecurity breach could harm our reputation and deter merchants from using electronic payments generally and our products and services specifically, thus reducing our revenue. In addition, any such misuse or breach could cause us to incur costs to correct the breaches or failures, expose us to uninsured liability, increase our risk of regulatory scrutiny, subject us to lawsuits, result in the imposition of material penalties and fines under state and federal laws or regulations or by the payment systems. While we maintain insurance policies specifically for cyber-attacks, a significant cybersecurity breach of our systems or communications could result in payment systems prohibiting us from processing transactions on their systems, which could materially impede our ability to conduct business.
Cybersecurity incidents are increasing in frequency and evolving in nature and include, but are not limited to, installation of malicious software, unauthorized access to data and other electronic security breaches that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information and the corruption of data. Given the unpredictability of the timing, nature and scope of information technology disruptions, there can be no assurance that the procedures and controls we employ will be sufficient to prevent security breaches from occurring and we could be subject to manipulation or improper use of our systems and networks or financial losses from remedial actions, any of which could have a material adverse effect on our business, financial condition and results of operations.
We have only a limited ability to protect our intellectual property rights, which are important to our success.
The protection of our intellectual property, including our trademarks, any future patents, copyrights, domain names, trade dress, software licensed by us for use in our Platform and trade secrets, is critical to our success. We seek to protect our intellectual property rights by relying on applicable laws and regulations, as well as a variety of administrative procedures. We also rely on contractual restrictions to protect our proprietary rights when offering or procuring products and services, including confidentiality agreements with parties with whom we conduct business.
The contractual provisions that we enter into with employees, consultants, vendors, and customers may not prevent unauthorized use or disclosure of our proprietary technology or intellectual property rights and may not provide an adequate remedy in the event of unauthorized use or disclosure of our proprietary technology or intellectual property rights. Moreover, policing unauthorized use of our technologies, services and intellectual property is difficult, expensive and time consuming, particularly in foreign countries where the laws may not be as protective of intellectual property rights as those in the United States, and where mechanisms for enforcement of intellectual property rights may be weak. We may be unable to determine the extent of any unauthorized use or infringement of our technologies or our intellectual property rights. Any failure to protect or enforce our intellectual property rights adequately, or significant costs incurred in doing so, could materially harm our business.
| -17- |
As the number of products in the software industry increases and the functionalities of these products further overlap, and as we acquire technology through acquisitions or licenses, we may become increasingly subject to infringement claims, including patent, copyright, and trademark infringement claims. We may be required to enter into litigation to determine the validity and scope of the patents or other intellectual property rights of others. The ultimate outcome of any allegation is uncertain and, regardless of the outcome, any such claim, with or without merit, may be time-consuming, result in costly litigation, divert management’s time and attention from our business, require us to stop selling, or redesign our products, or require us to pay substantial amounts to satisfy judgments or settle claims or lawsuits or to pay substantial royalty or licensing fees, or to satisfy indemnification obligations that we have with some of our customers. Our failure to obtain necessary license or other rights, or litigation or claims arising out of intellectual property matters, may materially harm our business.
Our ability to obtain insurance to protect against losses affecting our business, including fraud or theft involving the digital assets used as collateral for loans we extend to borrowers, is limited and may not be sufficient to cover losses we experience.
We have very limited insurance coverage available to us to protect against losses that we may incur, including losses resulting from fraud or theft or loss of digital assets used as collateral for loans. When we hold digital assets with third-party custody service providers we may participate in their insurance coverage, such as cyber and technology errors and omissions. Such insurance coverage may be insufficient to compensate us for losses we may incur in connection with our operations. If we are unable to obtain insurance to cover such losses, we would be liable for the full cost associated with them. Further, even if insurance coverage is or becomes available to us, the coverage may not be sufficient to cover the full amount of losses we incur, which could materially harm our business and financial results.
RISKS RELATED TO REGULATION OF OUR INDUSTRY
Our business is subject to extensive government regulation and oversight as well as complex and overlapping rules in the United States that frequently change.
Our business is subject to laws, regulations, policies and legal interpretations in the United States and the markets in which we operate, including, but not limited to, those governing credit and lending transactions, collections, securities and commodities transactions, cross-border and domestic money transmission, foreign exchange, privacy, data protection, cybersecurity, consumer protection, digital assets, economic and trade sanctions, anti-money laundering, and counter-terrorist financing. The legal and regulatory requirements which we are subject to involve extensive, complex and frequently changing. These laws and regulations affect our business in many ways, and include regulations relating to:
| ● | the amount we may charge in interest rates and fees; | |
| ● | the terms of our loans (such as maximum and minimum durations), repayment requirements and limitations, maximum loan amounts, refinances and extensions and reporting; | |
| ● | underwriting requirements; | |
| ● | collection and servicing activity, including initiation of payments from consumer accounts; | |
| ● | licensing, reporting and document retention; | |
| ● | unfair, deceptive and abusive acts and practices; | |
| ● | non-discrimination requirements; | |
| ● | disclosures, notices, advertising and marketing; | |
| ● | loans to members of the military and their dependents; | |
| ● | requirements governing electronic payments, transactions, signatures and disclosures; | |
| ● | privacy and use of personally identifiable information and consumer credit reports; |
| -18- |
| ● | anti-money laundering and counter-terrorist financing requirements, including currency and suspicious transaction recording and reporting; and | |
| ● | posting of fees and charges. |
As we expand into other international markets, we must comply with the laws of countries or markets in which we operate. There can be no assurance that our employees, contractors, or agents will not violate such laws and regulations. Any such violation could have a material adverse effect on our Company.
We may extend loans to borrowers located outside of the United States, including in emerging markets, which would subject us to risks and additional laws and regulations.
We may expand lending to borrowers located in additional countries including countries in emerging markets. Our expansion into markets in developed countries will be difficult and costly due to heavy regulatory requirements that generally exist in those countries. Developing countries are subject to economic, political and other uncertainties, including changes in monetary, exchange control, trade policies and environmental conditions which may affect their respective overall business environments and, in turn, our ability to originate loans and the ability of borrowers to repay loans. The lending industry in many countries is highly competitive and susceptible to changing individual and entity preferences. Laws, consumer protection requirements and regulations applicable to loans vary significantly from country to country and among jurisdictions within countries, and some countries have banned the use of cryptocurrencies entirely. Additionally, in emerging markets, the repayment of loans will be subject to certain risks not typically associated with investment in developed economies or markets, such as greater political, legal, regulatory, and economic risk.
If we fail to adhere to applicable laws and regulations, we could be subject to fines, civil penalties and other relief that could adversely affect our business and results of operations.
The governmental entities that regulate our business have the ability to sanction us and obtain redress for violations of these regulations, either directly or through civil actions, in a variety of different ways, including:
| ● | ordering remedial or corrective actions, including changes to compliance systems, product terms, and other business operations; | |
| ● | imposing fines or other monetary penalties, including for substantial amounts; | |
| ● | ordering the payment of restitution, damages or other amounts to customers, including multiples of the amounts charged; | |
| ● | disgorgement of revenue or profit from certain activities; | |
| ● | imposing cease and desist orders, including orders requiring affirmative relief, targeting specific business activities; | |
| ● | subjecting our operations to additional regulatory examinations during a remediation period; | |
| ● | revocation of licenses to operate in a particular jurisdiction; and | |
| ● | other consequences. |
Many of the government entities that regulate us have the authority to examine us on a regular basis to determine whether we are complying with applicable laws and regulations and to identify and sanction non-compliance. These examinations and audits increase the likelihood that any failure to comply (or perceived failure to comply) with applicable laws and regulations will be identified and sanctioned, which may include suspension, imposition of fines or revocation of required licenses.
| -19- |
The regulations to which we are subject change from time to time, and future changes, including some that have been proposed and those that subject us to regulation as a bank or other financial institution in non-U.S. jurisdictions, could restrict us in ways that adversely affect our business and results of operations.
The laws and regulations to which we are subject change from time to time, and there has been a general increase in the volume and burden of laws and regulations that apply to us in the jurisdictions in which we operate at all levels of government. We also may be subject to licensing requirements and related compliance obligations under the money transmitter laws of the States in which we operate. For example, in June 2015, the New York State Department of Financial Services (“DFS”) issued its virtual currency regulation, 23 NYCRR Part 200, under the New York Financial Services Law. Under the regulation, businesses are not permitted, in New York or with a New York resident, to receive digital assets as payment, custody digital assets, buy or sell digital assets, or issue digital assets, among other things, without a license issued by the DFS. In addition, money transmission laws vary from state to state, with some states applying money transmission laws to digital assets, in potentially different ways, and others not applying such laws to digital assets. Failure to comply with any such applicable requirements could result in administrative, civil or criminal penalties or other enforcement actions, as well as reputational harm. In addition, we may decide not to, or may not be able to, operate in certain jurisdictions as a result of regulatory or licensing requirements.
In addition, financial services and banking laws and regulations are subject to ongoing review and revision, including changes in response to global regulatory trends. As a result, state, federal and foreign governments have been actively considering new banking laws and regulations, and reviewing and revising existing laws and regulations, particularly in relation to the regulation of non-bank financial institutions, interest rate regulations, capital adequacy and accounting standards. We expect that the interest in increasing the regulation of our industry will continue and that we will be subject to varying rules depending on the state or the country. It is possible that future laws and regulations will be enacted and will adversely affect our pricing, product mix, compliance costs or other business activities in a way that is detrimental to our results of operations. Further, we believe increasingly strict legal and regulatory requirements and additional regulatory investigations and enforcement, any of which could occur or intensify, may result in changes to our business, as well as increased costs, and supervision and examination for both ourselves and our agents and service providers. Moreover, new laws, regulations, or interpretations may result in additional litigation, regulatory investigations, and enforcement or other actions, including preventing or delaying us from offering certain products or services offered by our competitors or could impact how we offer such products and services.
Any legislative or regulatory actions, including the initiation of a proceeding relating to one or more allegations or findings of any violations of laws, and any required changes in our operations resulting from such legislation and regulations could result in significant loss of revenue, limit our ability to pursue certain business opportunities, increase the level of reserves we are required to maintain or capital adequacy requirements, affect the value of assets that we hold, require us to increase interest rates or other fees and, therefore, reduce demand for our products, impose additional costs or otherwise adversely affect our business. Such actions and proceedings may also impair our ability to collect payments on loans, originate additional loans or result in the requirement that we pay damages and/or cancel the balance or other amounts owing under loans associated with such actions and proceedings.
Judicial decisions could potentially render our arbitration agreements unenforceable.
We include pre-dispute arbitration provisions in our loan agreements. These provisions are designed to allow us to resolve most customer disputes through individual arbitration rather than in court. Our arbitration provisions explicitly provide that all arbitrations will be conducted on an individual and not on a class basis. Thus, our arbitration agreements, if enforced, have the effect of shielding us from class action liability. There is always a risk, however, that a court would deny arbitration based upon facts presented by one or more consumers opposing the arbitration or that laws could change that might limit or restrict our ability to enforce the arbitration provisions in our loan agreements, in which case we would be forced to litigate disputes and may be subject to class action liability. In addition, we may be subject to public injunctive relief claims by borrowers in California, which have the potential to broadly affect a company’s business operations, much like a class-wide injunction.
Our use of pre-dispute arbitration provisions will remain dependent on whether courts continue to enforce these provisions. If our arbitration agreements were to become unenforceable for some reason, we could experience an increase in our costs to litigate and settle customer disputes and our exposure to potentially damaging class action lawsuits, with a potential material adverse effect on our business and results of operations.
| -20- |
Current and future legal, class action and administrative proceedings directed towards our industry or us may have a material adverse impact on our results of operations, cash flows and financial condition.
We may be involved in future proceedings, lawsuits or other claims. Other companies in our industry have been subject to regulatory proceedings, class action lawsuits and other litigation regarding the offering of consumer loans. We could be adversely affected by interpretations of state, federal, foreign and provincial laws in those legal and regulatory proceedings, even if we are not a party to those proceedings. We anticipate that lawsuits and enforcement proceedings involving our industry, and potentially involving us, will continue to be brought in the future.
We may incur significant expenses associated with the defense or settlement of current or future lawsuits, the potential exposure for which is uncertain. The adverse resolution of legal or regulatory proceedings, whether by judgment or settlement, could force us to refund fees and interest collected, refund the principal amount of advances, pay damages or other monetary penalties or modify or terminate our operations in particular local, state, provincial or federal jurisdictions. The defense of such legal proceedings, even if successful, requires significant time and attention from our senior officers and other management personnel that would otherwise be spent on other aspects of our business, and requires the expenditure of substantial amounts for legal fees and other related costs. Settlement of proceedings may also result in significant cash payouts, foregoing future revenues and modifications to our operations. Additionally, an adverse judgment or settlement in a lawsuit or regulatory proceeding could in certain circumstances provide a basis for the termination, non-renewal, suspension or denial of a license required for us to do business in a particular jurisdiction (or multiple jurisdictions). A sufficiently serious violation of law in one jurisdiction or with respect to one product could have adverse licensing consequences in other jurisdictions and/or with respect to other products. Thus, legal and enforcement proceedings could have a material adverse effect on our business, future results of operations, financial condition and ability to service our debt obligations.
We are subject to anti-corruption, anti-bribery and anti-money laundering laws and regulations.
We are subject to various anti-corruption, anti-bribery and anti-money laundering laws and regulations that prohibit, among other things, our involvement in improper payments to certain public officials for the purpose of obtaining advantages or in transferring the proceeds of criminal activities. We continue to review and update programs designed to comply with new and existing legal and regulatory requirements. However, any errors, failures, or delays in complying with anti-corruption, anti-bribery and anti-money laundering laws and regulations could result in significant criminal and civil lawsuits, penalties, forfeiture of significant assets, or other enforcement actions, as well as reputational harm.
The main laws regarding anti-money laundering are the Bank Secrecy Act and the USA Patriot Act of 2001. These laws require financial institutions to maintain an anti-money laundering compliance program covering certain of our business activities. The program must include: (1) the development of internal policies, procedures and controls; (2) designation of a compliance officer; (3) an ongoing employee training program; and (4) an independent audit function to test the program. If we are not in compliance with U.S. or other anti-money laundering laws, we may be subject to criminal and civil penalties and other remedial measures, which could have an adverse effect on our business, results of operations, financial condition and cash flows. Any investigation of any potential violations of anti-money laundering laws by U.S. or international authorities could harm our reputation and could have a material adverse effect on our business, prospects, results of operations, financial condition and cash flows.
Regulators may increase enforcement of these obligations, which may require us to further revise or expand our compliance program, including the procedures we use to verify the identity of our customers and to monitor our transactions. Regulators regularly reexamine the transaction volume thresholds at which we must obtain and keep applicable records or verify identities of customers and any change in such thresholds could result in greater costs for compliance. Costs associated with fines or enforcement actions, changes in compliance requirements, or limitations on our ability to grow could harm our business.
GENERAL RISKS RELATED TO DIGITAL ASSETS
The prices of digital assets are extremely volatile.
Fluctuations in the price of digital assets could significantly affect the value of the digital assets that we hold, including treasury assets and collateral securing loans. The price of digital assets is affected by many factors beyond our control. In addition, a decrease in the price of one digital asset may cause volatility in the entire digital asset industry.
| -21- |
The regulatory regime governing digital assets is still developing, and regulatory changes or actions may alter the nature of an investment in digital assets or restrict the use of digital assets in a manner that adversely affects our business plans.
The regulation of digital assets and digital asset exchanges are currently under-developed and likely to rapidly evolve and vary significantly among U.S. and non-U.S. jurisdictions and are subject to significant uncertainty. As digital assets have grown in both popularity and market size, governments around the world have reacted differently to digital assets, with certain governments deeming them illegal while others have allowed their use and trade. Various legislative and executive bodies in the United States, and other countries, are, or are considering, enacting laws, regulations, guidance, or other actions, which could adversely impact our Company and the value of the digital assets we hold as collateral. Our failure to comply with any laws, rules and regulations, some of which may not exist yet or are subject to interpretation and may be subject to change, could result in a variety of adverse consequences, including criminal and civil penalties and fines against our Company.
The development and acceptance of transactions in digital assets are subject to a variety of factors that are difficult to evaluate.
The use of digital assets to buy and sell goods and services and complete transactions is part of a new and rapidly evolving industry, and the continued growth of this industry and the continued and growing use of digital assets is highly uncertain. If the development or acceptance of digital assets were to slow or stop, it could have a material adverse effect on our business. Factors that could affect the expansion or contraction of the use of digital assets and our related business plans, include, but are not limited to:
| ● | continued worldwide growth in the adoption and use of digital assets; | |
| ● | governmental and quasi-governmental regulation of digital assets and their use, or restrictions on or regulation of access to and operation of digital asset systems; | |
| ● | the maintenance and development of software and technology on which many digital assets are dependent; | |
| ● | the availability and popularity of other forms or methods of buying and selling goods and services, including new means of using fiat currencies; | |
| ● | general economic conditions and the regulatory environment relating to digital assets (whether in the U.S. or elsewhere); and | |
| ● | negative consumer sentiment and perception of digital assets in general. |
We cannot predict with certainty any outcome regarding use of digital assets, and any of the above factors may have a material adverse effect on our business.
Digital assets, might be used for illegal or improper purposes, which could expose our Company to liability and harm its business.
Digital assets, including the digital assets we hold as treasury assets and as collateral for our loans, may be susceptible to potentially illegal or improper uses as criminals are using increasingly sophisticated methods to engage in illegal activities involving internet services, such as money laundering, terrorist financing, drug trafficking, and other online misconduct. Borrowers may also try to access a loan for illegal or improper purposes or try to provide stolen digital assets as collateral for a loan. To the extent any of these illegal or improper activities occur outside the United States, our remedies may be significantly limited or nonexistent. Despite measures the Company intends to take to detect and lessen the risk of this kind of conduct, we cannot assure you that these measures will stop all illegal or improper uses of digital assets we hold. The value of our business could be harmed if borrowers use funds obtained from us for illegal or improper purposes. It may also impair our ability to foreclose on digital assets we hold as collateral in the event of a defaulting loan or margin call under a loan.
| -22- |
Incorrect or fraudulent digital asset transactions may be irreversible.
Digital asset transactions are not, from an administrative perspective, reversible without the consent and active participation of the recipient of the transaction. In theory, digital asset transactions may be reversible with the control or consent of a majority of processing power on the network. Once a transaction has been verified and recorded in a block that is added to the blockchain, an incorrect transfer of a digital assets generally will not be reversible, and our Company may not be capable of seeking compensation for any such transfer or theft. Such events on a large enough scale would have a material adverse effect on our operations.
Digital assets are subject to risks of uninsured losses.
Unlike bank accounts or accounts at some other financial institutions, digital assets are uninsured unless you specifically obtain private insurance to insure them. Thus, in the event of loss or loss of utility value, there is no public insurer, such as the Federal Deposit Insurance Corporation or SIPC protections, and limited or no private insurance arranged by our Company, to offer recourse to holders with respect to digital assets we hold as collateral. Therefore, any lending transactions are made at the risk of the borrower.
The use of digital asset derivatives can introduce additional market and regulatory risk.
We may use instruments referred to as derivatives, which are financial instruments that derive their value from one or more assets, in our case cryptocurrencies including Bitcoin. We may use derivatives for speculative purposes to seek to enhance returns. The use of a derivative is speculative if we are primarily seeking to achieve gains, rather than offset the risk of other positions. To the extent we invest in a derivative for speculative purposes, we will be fully exposed to the risks of loss of that derivative, which may sometimes be greater than the derivative’s cost, and the potential for loss in certain cases may be unlimited.
Digital asset derivatives are a developing market and may be traded on unregulated or offshore exchanges. Regulatory changes or actions may alter the nature of an investment in digital asset derivatives or restrict the use of digital asset derivatives or the operations of the exchanges on which digital asset derivatives trade in a manner that adversely affects the price of digital asset derivatives, which could adversely impact the Company.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion of our financial condition and results of operations should be read in conjunction with the condensed financial statements and the notes to those financial statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors, Forward-Looking Statements and Business sections in this report. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward- looking statements.
Overview
For a discussion and analysis of our financial condition and results of operations prior to the Merger, please refer to the information set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as the related financial statements, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, and our Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2022, which information and financial statements are incorporated herein by reference.
The discussion and analysis of our financial condition and results of operations below is limited to the financial results of Exworth Union Inc As a result of the Merger, we ceased to be a shell company as such term is defined in Rule 12b-2 under the Exchange Act.
| -23- |
Exworth Union Inc, a Delaware corporation, was formed on March 16, 2022. The Company provides loans that are collateralized by digital assets including Bitcoin and will accept other types of alternative collaterals such as eCommerce account receivables, recursive payments of subscriptions, IP and copyrights.
Loans are collateralized with digital assets the Company determines from time to time to be acceptable. Currently, the only asset the Company is accepting as collateral is Bitcoin. The Company’s target markets are individuals and commercial enterprises that hold digital assets and are seeking liquidity without selling their digital assets, with limited or no access to obtain credit line or business loans from conventional financial institutions. The Company provides term loans, up to two years, to these individuals and commercial enterprises.
Results of Operations
Revenue
Interest income, our major source of income, was $11,456 for the period from inception to September 30, 2022. As of September 30, 2022, we have 1 loan in our loan portfolio. A consumer loan secured by Bitcoin. The LTV ratio of this loan and thus our loan portfolio as of September 30, 2022 was 71%. No margin call was initiated for the period from inception to September 30, 2022.
The revenue realized for the period from inception to September 30, 2022, is not necessarily predictive of future revenues.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the period from inception to September 30, 2022 were $82,352, primarily legal and professional expenses. We expect our legal and professional expenses to increase as we become a publicly traded company after the Merger.
Fair Value Adjustment on Repledged Collateral
Fair value adjustment on repledged collateral for the period from inception to September 30, 2022 was $216,674, which was attributable to the decline in the price of Bitcoin during the period. Under loan agreements with borrowers, we may, from time to time, repledge certain collateral with financial partners for capital management purposes. We regularly monitor such repledging transactions as well as the credit standing of our financial partners in order to maintain sufficient available capital.
Interest Expense
Interest expense for the period from inception to September 30, 2022 was $7,232, incurred pursuant to a master loan agreement we entered with a U.S. based lender. The loan has a term of 24 months with quarterly interest-only payments with principal to be paid at maturity. No prepayment of the principal or any interest due is permitted.
Amortization of Loan Origination Fee
Our lender was paid a 1% origination fee of the principal amount that we borrowed. The origination fee was deducted from the loan principal and will be amortized evenly through the loan term. Total amortization of loan origination fee from inception to September 30, 2022 was $1,446.
Net Income
Our net income was $97, 835 from inception to the period ended September 30, 2022, which was primarily driven by the decline in the price of the Bitcoin that we pledged to our lender. Among the more significant factors that may cause our net income to vary from period to period are: 1) the number of loans; 2) the interest rates that we charge our borrowers; 3) the interest rate that we pay to our lenders; 4) the fair market value of collateral held by us or pledged to our lenders.
| -24- |
Liquidity and Capital Resources
As of September 30, 2022, Exworth Union had cash of $267,748. The accompanying condensed financial statements have been prepared assuming that the Company will continue as a going concern. The condensed financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern. Exworth Union financed its operations through a private placement of equity raising approximately $350,000. It also entered into a master loan agreement with a U.S. based lender. The loan is non-recourse and collateralized by pledging our customers’ collateral. The balance on the loan as of September 30, 2022 is $1,388,576 collateralized with 100 Bitcoins. The Company currently has no commitments for the purchase of its equity. In assessing our liquidity, we monitor and analyze our cash-on-hand, operating, and capital expenditure commitments. We believe our current working capital is sufficient to support our operations for the next twelve months. However, if we are unable to raise additional capital, we may not be able to execute our business plan. We will use our limited personnel and financial resources in connection with developing our business plan, including developing a proprietary software platform, issuing equity or debt securities, or obtaining additional credit facilities. The issuance and sale of additional equity would result in dilution to our existing shareholders. The incurrence of indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict our operations. Our obligation to bear credit risk for certain financing transactions we facilitate may also strain our operating cash flow. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.
We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of the JOBS Act, which allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.
There are no limitations in our certificate of incorporation on our ability to borrow funds or raise funds through the issuance of capital stock to fund our working capital requirements. Our limited resources and lack of recent operating history may make it difficult to borrow funds or raise capital. Such inability to borrow funds or raise funds through the issuance of capital stock required to facilitate our business plan may have a material adverse effect on our financial condition and future prospects, including the ability to fund our business plan. To the extent that debt financing ultimately proves to be available, any borrowing will subject us to various risks traditionally associated with indebtedness, including the risks of interest rate fluctuations and insufficiency of cash flow to pay principal and interest, including debt of an acquired business.
Cash Flow
The following summarizes key components of Exworth Union’s cash flows for the period from inception to September 30, 2022:
| Net cash (used in) operating activities | $ | (1,458,489 | ) | |
| Net cash (used in) investing activities | - | |||
| Net cash provided by financing activities | 1,726,237 | |||
| Net increase in cash | 267,748 | |||
| Cash, beginning | - | |||
| Cash, ending | $ | 267,748 |
Operating Activities
Cash used in operating activities resulted primarily from operating expenses for the operation of our digital asset-backed loan business as well as general and administrative expenses. Net cash used in operating activities was $1,458,489 for the period from inception to September 30, 2022. Cash was consumed from operations by net income of $97,835, less non-cash items including fair value adjustment on repledged collateral of $216,674, interest receivable of $11,456, loan receivable of $1,374, 691, offset slightly by deferred income tax expense of $39,265 and accounts payable and accrued expenses of $7,232.
| -25- |
Investing Activities
There were no investing activities during the period from inception to September 30, 2022.
Financing Activities
Net cash provided by financing activities was $1,726,237 during the period from inception to September 30, 2022, consisting of proceeds from the issuance of a note payable of $ 1,376,137 and sales of common stock of $350,100 in private placements.
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Critical Accounting Policies
Our significant accounting policies are disclosed in Note 2 of our Financial Statements included elsewhere in this Report.
DIRECTORS AND EXECUTIVE OFFICERS
| Name | Age | Title | ||
| John P. O’Shea | 66 | President and Director | ||
| Dr. Yuanyuan Hang | 43 | Treasurer, Secretary and Director | ||
| Dr. Wei Huang | 43 | Director |
John P. O’Shea, 66, has been the Company’s President and a director since 2004. Mr. O’Shea has been Chairman of Global Alliance Securities LLC since 2010. Since 1997, Mr. O’Shea has been an officer and director of Westminster Securities Corp, currently serving as Chairman, CEO and a Director. Previously, from 2007 to 2017, he was a non-executive director of BlueRock Energy Holdings, Inc. O’Shea holds a BA and MA in Economics from the University of Cincinnati.
Effective at the close of business on August 31, 2022, Marika X. Tonay resigned as Secretary/Treasurer and Director of the Company and Jonathan Braun resigned as Director and Chairman of the Board of the Company. Concurrently, Dr. Yuanyuan Huang was appointed Secretary/Treasurer and a Director of the Company and Dr. Wei Huang was appointed a Director of the Company. Yuanyuan Huang and Wei Huang are both managing partners of Exworth Management.
Dr. Yuanyuan Huang, 43, has been a managing partner of Exworth Management LLC, a private investment firm, since January, 2021. He has also served as the Managing Member of Fundin, LLC, a consulting firm providing information technology consulting services, since 2018. From August 2019 to September 2022, Dr. Huang served as the director and CFO/COO of UTXO Acquisition Inc., a special purpose acquisition company, and from October 2021 to November 2022, he was VP of Business Development at Roxe Group Inc., a fintech company. From October 2018 to September, 2020, Dr. Huang served as a Venture Partner of Efund City LLC, a fintech company, and was a member of the Investment Committee of Efund City Metro Income Fund LLC, a real estate investment company. From 2008 to 2018, Dr. Huang e worked at several boutique brokerage firms. Dr. Huang holds a Ph.D. in Physics from the College of William and Mary and a master’s degree in Finance from George Washington University.
| -26- |
Dr. Wei Huang, 43, has been a managing partner of Exworth Management LLC, a private investment firm, since January, 2021. He is the CTO of Cogobuy Group, an e-Commerce company since 2018 and also the founder of BlockIoT, a cloud tech company. From August 2019 to September 2022, he served as the Chairman and CEO of UTXO Acquisition Inc., a special purpose acquisition company. In 2017 he founded Board of Dake Data, LTD, a Shenzhen-based company with a proprietary AI, Blockchain and Cloud computing solution, which he continues to serves as Chairman of the Board. From 2013 to 2018, Dr. Huang worked at ION Geophysical as a technical advisor for various oil and gas projects. Dr. Huang holds a bachelor’s degree from the University of Science and Technology of China, a master’s degree in mathematics from the University of Wisconsin and a PhD degree in Geophysics from the University of Houston. Dr. Huang has published more than a dozen papers and holds two international patents.
Directors are elected to serve until the next annual meeting of shareholders and their successors are duly elected and qualified, or their earlier death, resignation or removal. Officers are elected to serve until their successors are duly elected and qualified, or their earlier death, resignation or removal.
There are no agreements or understandings between or among any of our executive officers or directors and any other person with respect to the election of directors or any other matter.
Family Relationships
There are no family relationships between any of our directors or executive officers.
Involvement in Certain Legal Proceedings
None of our directors or executive officers has been convicted in a criminal proceeding, excluding traffic violations or similar misdemeanors, or has been a party to any judicial or administrative proceeding during the past ten years that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws, except for matters that were dismissed without sanction or settlement. Except as set forth in our discussion below in “Certain Transactions with Related Persons,” none of our directors, director nominees or executive officers has been involved in any transactions with us or any of our directors.
Board Committees
Since our common stock is quoted in the OTC Pink Market, we are not required by the rules of any securities exchange to establish an audit committee with a financial expert, a compensation committee to determine guidelines for determining the compensation of our executive officers or directors or a nominating and corporate governance committee or committees performing similar functions. However, our new management plans to form an audit, compensation and nominating and corporate governance committee in the near future. We envision that the audit committee will be primarily responsible for reviewing the services performed by our independent auditors and evaluating our accounting policies and system of internal controls. We envision that the compensation committee will be primarily responsible for reviewing and approving our salary and benefits policies (including stock options) and other compensation of our executive officers. The nominating committee would be primarily responsible for nominating directors and setting policies and procedures for the nomination of directors. The nominating committee would also be responsible for overseeing the creation and implementation of our corporate governance policies and procedures. Until these committees are established, these decisions will continue to be made by our Board of Directors. Although our Board of Directors has not established any minimum qualifications for director candidates, when considering potential director candidates, our Board of Directors considers the candidate’s character, judgment, skills and experience in the context of the needs of our Company and our Board of Directors. We also plan to appoint an individual qualified as an audit committee financial expert.
| -27- |
We do not have a charter governing the nominating process. The members of our Board of Directors, who perform the functions of a nominating committee, are not independent because they are also our officers. There has not been any defined policy or procedure requirements for stockholders to submit recommendations or nominations for directors. Our Board of Directors does not believe that a defined policy with regard to the consideration of candidates recommended by stockholders is necessary at this time because, given the early stages of our development, a specific nominating policy would be premature and of little assistance until our business operations are at a more advanced level.
Code of Ethics
We intend to adopt a corporate code of ethics in the near future.
Director Independence
Our Board of Directors has determined that John P. O’Shea is an “independent directors” within the meaning of NYSE American Rule 803A(2).
Executive Compensation
The compensation information in the below table reflects amounts paid by Strategic Acquisitions for the fiscal years ended December 31, 2021 and 2020. Because Exworth Union was formed in March 2022, there was no activity to report for the periods presented. The table reflects amount paid to John P. O’Shea, our President, and Marika Tonay, who served as our Secretary/Treasurer prior to the change of control on August 31, 2022.
Summary Compensation Table
Name and Principal Position | Year | Salary ($) | Bonus ($) | Stock awards ($) | Option awards ($) | Non-equity Incentive Plan Information ($) | Nonqualified deferred compensation earnings ($) | All other compensation ($) | Total ($) | |||||||||||||||||||||||||||
| John O’Shea | 2021 | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
| President | 2020 | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
| Marika Tonay, Secretary and Treasurer | 2021 | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||
| 2020 | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||
Employment Contracts
Neither Yuanyuan Huang nor Wei Huang has been compensated for services rendered by either Exworth Union or Strategic Acquisitions, Inc. and we have not entered into an employment agreement or salary arrangement with either Yuanyuan Huang or Wei Huang. We expect to establish employment contracts with our senior managers in the foreseeable future.
Director’s Compensation
Exworth Union has not paid any salaries or bonuses to officers, or director fees to directors, since inception. No payments for services were made by Strategic Acquisitions, Inc, to officers or directors during the fiscal year ending December 31, 2021. In the fiscal year ending December 31, 2020, Strategic Acquisitions paid $750 to Westminster Securities Corp., an entity controlled by John O’Shea, and $19,000 to Jonathan Braun, a former Director, for services relating to identifying and evaluating potential merger or acquisition candidates; and $4,500 to Marika Tonay, formerly Secretary/Treasurer, for services relating to preparing financial statements and filing periodic reports with the SEC.
| -28- |
In consideration for services rendered, on August 31, 2022, there was issued to Mr. O’Shea 37,129 warrants, to Mr. Braun 112,137 warrants and to Mr. Tonay 734 warrants to purchase shares of the Common Stock of Strategic Acquisitions, Inc., exercisable for a period of five years at a price of $1.20 per share.
Each of the Company’s officers may be reimbursed for out-of-pocket expenses incurred on behalf of the Company. The Company has no stock option, retirement, pension, or profit-sharing programs for the benefit of directors, officers or other employees.
Our Board of Directors has yet to establish a policy regarding compensation or enter into an agreement with any of John O’Shea, Yuanyuan Huang or Wei Huang for compensation to be paid for serving as a director of the Company. We anticipate establishing a policy regarding compensation or entering into agreements with our directors in the foreseeable future.
Equity Awards; Outstanding Equity Awards at Fiscal Year-End
We did not grant any equity awards or stock options during the fiscal year ended December 31, 2021, and there were no equity awards outstanding as of such year. We anticipate that we will adopt an equity plan in the foreseeable to incentivize individuals engaged as employees.
Certain Relationships and Related Transactions
Exworth Union
In connection with the organization of Exworth Union, Exworth Management made a capital contribution of $100 for which it received 1,000 shares of Exworth Union’s common stock.
MARKET FOR COMMON STOCK
Market Information
Our common stock is quoted on OTC Pink under the symbol “STQN.” The following table shows the high and low bid prices for our common stock for the periods indicated. There exists only a very limited trading market for our common stock with limited or no volume. The quotations are inter-dealer prices without retail markups, markdowns or commissions, and may not necessarily represent actual transactions.
Inter-dealer bid quotations for Common Stock | ||||||||
| High | Low | |||||||
| Year Ended December 31, 2021 | ||||||||
| First Quarter | $ | 0.282 | $ | 0.166 | ||||
| Second Quarter | 0.2078 | 0.18 | ||||||
| Third Quarter | 1.10 | 0.2078 | ||||||
| Fourth Quarter | 0.401 | 0.40 | ||||||
| Year Ended December 31, 2020 | ||||||||
| First Quarter | $ | 0.151 | $ | 0.12 | ||||
| Second Quarter | 0.18 | 0.10 | ||||||
| Third Quarter | 0.21 | 0.05 | ||||||
| Fourth Quarter | 0.165 | 0.151 | ||||||
| -29- |
| Year Ended December 31, 2022 | ||||||||
| First Quarter | $ | 1.28 | $ | 0.51 | ||||
| Second Quarter | $ | 1.28 | $ | 0.40 | ||||
| Third Quarter | $ | 2.00 | $ | 0.40 | ||||
| Fourth Quarter (through December 14, 2022) | $ | 0.70 | $ | 0.45 | ||||
As of December 8, 2022, there were approximately 58 holders of record and 80 beneficial owners of the Company’s common stock.
The Board of Directors has never declared a dividend and the Company does not anticipate paying dividends at any time in the foreseeable future.
Recent Sales of Unregistered Securities
In consideration of services rendered, on August 31, 2002, there was issued to Mr. O’Shea 37,129 warrants, to Mr. Braun 112,137 warrants and to Mr. Tonay 734 warrants to purchase shares of the Common Stock of Strategic Acquisitions, Inc., exercisable for a period of five years at a price of $1.20 per share.
In connection with the organization of Exworth Union, Exworth Management made a capital contribution of $100 for which it received 1,000 shares of Exworth Union’s common stock.
In June 2022, Exworth Union issued 100 shares of its common stock to World Class Global Technology PTE LTD. at a price of $3,500 per share.
Issuer Purchases of Equity Securities
The Company did not repurchase any equity securities during the last fiscal year.
Securities Authorized for Issuance under Equity Compensation Plans
The Company does not have an equity compensation plan.
Penny Stock Regulations
The SEC has regulations which generally define so-called “penny stocks” to be an equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. Our common stock is a “penny stock” and is subject to Rule 15g-9 under the Exchange Act, or the Penny Stock Rule. This rule imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than established customers and “accredited investors” (generally, individuals with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together with their spouses). For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to sale. As a result, this rule may affect the ability of broker-dealers to sell our securities and may affect the ability of purchasers to sell any of our securities in the secondary market, thus possibly making it more difficult for us to raise additional capital.
For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in penny stock, of a disclosure schedule required by the SEC relating to the penny stock market. Disclosure is also required to be made about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock.
There can be no assurance that our common stock will qualify for exemption from the Penny Stock Rule. In any event, even if our common stock were exempt from the Penny Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any person from participating in a distribution of penny stock, if the SEC finds that such a restriction would be in the public interest.
| -30- |
SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND MANAGEMENT
Change in Control
On August 31, 2022, Exworth Management purchased an aggregate of 2,013,000 shares of the Common Stock of Strategic Acquisitions, Inc, representing 74% of the shares of Common Stock then outstanding (the “Control Acquisition”).
Security Ownership
The following table sets forth information concerning beneficial ownership of our common stock after giving effect to shares issued pursuant to the Merger Agreement by (i) any person or group with more than 5% of our common stock, (ii) each director, (iii) our chief executive officer and each other executive officer whose cash compensation for the most recent fiscal year exceeded $100,000 and (iv) all such executive officers and directors as a group. After giving effect to the Merger, we had outstanding 6,675,000 shares of our Common Stock and 150,000 warrants.
Beneficial ownership is determined in accordance with the rules of the SEC and includes voting and investment power with respect to the securities. Subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. In addition, shares of common stock issuable upon exercise of options, warrants and other convertible securities anticipated to be exercisable or convertible at or within sixty days of December1, 2022, are deemed outstanding for the purpose of computing the percentage ownership of the person holding those securities, and the group as a whole, but are not deemed outstanding for computing the percentage ownership of any other person.
To our knowledge, the persons named in the table have sole voting and investment power with respect to all shares of securities shown as beneficially owned by them. The address of each person named in the table below is c/o of our company at 51 JKF Parkway Suite 135, Short Hills, NJ 07078.
| Name of Shareholder | Amount and Nature of Beneficial Ownership | Percent of Common Stock | |||||||
| Exworth Management LLC | 5,613,000 | 84.1 | % | ||||||
| World Class Global Technology LLC | 360,000 | 5.4 | % | ||||||
| Directors and Executive Officers: John P. O’Shea | 170,365 | (1) | 2.5 | % | |||||
| Dr. Yuanyuan Hang | (2) | ||||||||
| Dr. Wei Huang | |||||||||
| All directors and executive officers as a group | 170,365 | (1) | (2) | 2.5 | % | ||||
| (1) | Includes 18,565 shares of common stock that may be acquired upon exercise of warrants at a price of $1.20 per share. | |
| (2) | Dr. Yuanyuan Huang and Dr. Yuanyuan Huang each serves as a Manager of Exworth Management and disclaims any ownership of the 5,613,000 shares of the Company held by Exworth Management. |
DESCRIPTION OF CAPITAL STOCK
We are authorized to issue 50,000,000 shares of Common Stock, par value $0.001 par value per share. After giving effect to the Merger we had outstanding 6,675,000 shares of common stock and 150,000 warrants
| -31- |
Common Stock
We are authorized to issue 50,000,000 shares of Common Stock, par value $0.001 par value per share. After giving effect to the Merger we had outstanding 6,675,000 shares of common stock and 150,000 warrants
The holders of common stock are entitled to one vote per share on all matters submitted to a vote of the stockholders and may not cumulate their votes for the election of directors. The holders of common stock do not have preemptive rights to subscribe for additional shares of any class that we may issue, and no share of common stock is entitled in any manner to any preference over any other share of such stock.
Holders of our common stock are entitled to receive dividends when and as declared by our Board out of funds legally available therefore. Each share of common stock is entitled to participate on a pro rata basis with each other share of such stock in dividends and other distributions declared on shares of common stock. Upon dissolution of our company, the holders of common stock are entitled to share, pro rata, in our net assets after payment of or provision for all of our debts and liabilities.
Warrants
Each of the 150,000 warrants (the “Warrants”) currently outstanding was issued on August 1, 2022, and is exercisable at a price of $1.20 per share for a period of five years from the date of issuance, The Warrants contain customary anti-dilution provisions.
Anti-Takeover Effects of Certain Provisions of Our Bylaws
Summarized in the following paragraphs are provisions included in our Certificate of Incorporation, as amended, and our bylaws that may have the effect of discouraging, delaying or preventing a change in control or an unsolicited acquisition proposal that a stockholder might consider favorable, including a proposal that might result in the payment of a premium over the market price for the shares held by our stockholders.
Effects of authorized but unissued common. One of the effects of the existence of authorized but unissued common stock may be to enable our Board to make more difficult or to discourage an attempt to obtain control of our company by means of a merger, tender offer, proxy contest or otherwise, and thereby to protect the continuity of management. If the Board were to determine that a takeover proposal was not in our best interest, such shares could be issued by the Board without stockholder approval in one or more transactions that might prevent or render more difficult or costly the completion of the takeover transaction by diluting the voting or other rights of the proposed acquirer or insurgent stockholder group, by putting a substantial voting block in institutional or other hands that might undertake to support the position of the incumbent board of directors, by effecting an acquisition that might complicate or preclude the takeover, or otherwise.
Cumulative Voting. Our Certificate of Incorporation, as amended, does not provide for cumulative voting in the election of directors which would allow holders of less than a majority of the voting stock to elect some directors.
Vacancies. Section of the Revised Nevada Statutes and our bylaws provide that all vacancies, including newly created directorships, may be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum.
Special Meeting of Stockholders. A special meeting of stockholders may be called by our by president or secretary at the request in writing of a majority of the board of directors, or at the request in writing of stockholders owning a majority in amount of the entire capital stock of the corporation issued and outstanding and entitled to vote at the meeting. The requirement that the holders of 10% of our outstanding capital stock entitled to vote at the meeting is required to call a special meeting means that small stockholders will not have the power to call a special meeting to, for example, elect new directors.
Bylaws. Our certificate of incorporation, as amended, and bylaws authorizes the board of directors to adopt, repeal, alter or amend our bylaws without shareholder approval.
| -32- |
Indemnification of Directors and Officers
Article X of our Articles of Incorporation, as amended, provide as follows:
Section 1. Pursuant to the provisions of NRS 78.751, the corporation will indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding whether civil, criminal, administrative or investigative except an action by or in the right of the corporation, by reason of the fact that he 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 expenses, including attorneys’ fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with the action, suit or proceeding if he acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, does not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and that, with respect to any criminal action or proceeding, he had reasonable cause to believe that his conduct was unlawful.
Section 2. The corporation will indemnify any person who was or is a party 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 to procure a judgment in its favor by reason of the fact that he 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 of agent of another corporation, partnership, joint venture, trust or other enterprise against expenses, including amounts paid in settlement and attorneys’ fee actually and reasonably incurred by him in connection with the defense or settlement of the action or suit if he acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation. Indemnification may not be made for any claim, issue or matter as to which such a person has been adjudged by a court of competent jurisdiction, after exhaustion of all appeals therefrom, to be liable to the corporation or for amounts paid in settlement to the corporation, unless and only to the extent that the court in which the action or suit was brought or other court of competent jurisdiction determines upon application that in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnify for such expenses as the court will deems proper.
Section 3. To the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 1 and 2, or in defense of any claim, issue or matter therein, he must be indemnified by the corporation against expenses, including attorneys’ fees, actually and reasonably incurred by him in connection with the defense.
Section 4. Any indemnification under Sections 1 and 2, unless ordered by a court or advanced pursuant to Section 5 herein, must be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances. The determination must be made: (a) By the stockholders; (b) By the board of directors by a majority vote of a quorum consisting of directors who were not parties to the act, suit or proceeding; (c) If a majority vote of a quorum consisting of directors who were not parties to the act, suit or proceeding so ordered, by independent legal counsel in a written opinion; or (d) If a quorum consisting of directors who were not parties to the act, suit or proceeding cannot be obtained, by independent legal counsel in a written opinion.
Section 5. The expenses of officers and directors incurred in defending a civil or criminal action, suit or proceeding must be paid by the corporation as they are incurred and in advance of the final disposition of the action, suit or proceeding, upon receipt of an undertaking by or on behalf of the director or officer to repay the amount if it is ultimately determined by a court of competent jurisdiction that he is not entitled to be indemnified by the corporation. The provisions of this Section do not affect any rights to advancement of expenses to which corporate personnel other than directors or officers may be entitled under any contact or otherwise by law.
| -33- |
Section 6. The indemnification and advancement of expenses authorized in or ordered by a court pursuant to this Section: (a) Does not exclude any other rights to which a person seeking indemnification or advancement of expenses may be entitled under the certificate or articles of incorporation or any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, for either an action in his official capacity or an action in another capacity while holding his office, except that indemnification, unless ordered by a court pursuant to Section 2 or for the advancement of expenses made pursuant to Section 5, may not be made to or on behalf of any director or office if a final adjudication establishes that his acts or omissions involved intentional misconduct, fraud or a knowing violation of the law and was material to the cause of action. (b) Continues for a person who has ceased to be a director, officer, employee or agent and inures to the benefit of the heirs, executors and administrators of such a person.
Article XI of our Articles of Incorporation, as amended, provide as follows:
Section 1. The corporation may purchase and maintain insurance or make other financial arrangements 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 for any liability asserted against him and liability and expenses incurred by him in his capacity as a director, officer, employee or agent, arising out of his status as such, whether or not the corporation has the authority to indemnify him against such liability and expenses.
Section 2. The other financial arrangements made by the corporation pursuant to Section 1 may include the following: (a) The creation of a trust fund. (b) The establishment of a program of self-insurance (c) The securing of its obligation of indemnification by granting a security interest or other lien on any assets of the corporation. (d) The establishment of a letter of credit, guaranty or surety. No financial arrangement made pursuant to this Section may provide protection for a person adjudged by a court of competent jurisdiction, after exhaustion of all appeals therefrom, to be liable for intentional misconduct, fraud or a knowing violation of law, except with respect to the advancement of expenses or indemnification ordered by the court. Section 3. Any insurance or other financial arrangement made on behalf of a person pursuant to this Section may be provided by the corporation or any other person approved by the board of directors, even if all or part of the other person’s stock or other securities is owned by the corporation. Section 4. In the absence of fraud: (a) The decision of the board of directors as to the propriety of the terms and conductions of any insurance or other financial arrangement made pursuant to this Section and the choice of the person to provide the insurance or other financial arrangement is conclusive; and (b) The insurance or other financial arrangement: (1) Is not void or voidable; and (2) Does not subject any director approving it to personal liability for his action, even if a director approving the insurance or other financial arrangement is a beneficiary of the insurance or other financial arrangement.
Article XII of our Articles of Incorporation, as amended, provide as follows:
No director or officer of the corporation shall be personally liable to the corporation or its stockholders for damages for his acts or omissions resulting in his breach of fiduciary duty as a director or officer, except if such acts or omissions involve: (a) intentional misconduct, fraud or a knowing violation of the law; or (b) the payment of dividends in violation of NRS 78.300.
Transfer Agent and Registrar
The transfer agent of our Common stock is American Stock Transfer & Trust Company, LLC, at 6201 15th Avenue, Brooklyn, NY 11219, 800 947-5449.
| -34- |
SHARES ELEGIBLE FOR SALE
After giving effect to the Merger, we had outstanding 6,675,000 shares of common stock, of which all but 306,790 shares are restricted securities under Rule 144 or owned by affiliates of our company.
Rule 144
Rule 144 permits a person who has beneficially owned restricted shares for at least six months to sell their shares provided that: (i) such person is not deemed to have been one of our affiliates at the time of, or at any time during the three months preceding, a sale and (ii) we are subject to the Exchange Act periodic reporting requirements for at least three months before the sale.
Persons who have beneficially owned restricted shares for at least six months but who are our affiliates at the time of, or at any time during the three months preceding, a sale, are subject to additional restrictions, by which such person would be entitled to sell within any three-month period only a number of shares that does not exceed the greater of either of the following:
| ● | 1.0% of the number of shares of common stock then outstanding; and | |
| ● | if the common stock is listed on a national securities exchange, the average weekly trading volume of the shares of common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. |
Sales by affiliates under Rule 144 are also limited by manner of sale provisions and notice requirements and to the availability of current public information about us.
Sales Under Rule 144 By Non-Affiliates
Under Rule 144, a person who is not deemed to have been one of our affiliates at the time of or at any time during the three months preceding a sale, and who has beneficially owned the restricted shares of common stock proposed to be sold for at least six months, including the holding period of any prior owner other than an affiliate, is entitled to sell their shares without complying with the manner of sale and volume limitation or notice provisions of Rule 144. We must be current in our public reporting if the non-affiliate is seeking to sell under Rule 144 after holding his shares of common stock between six months and one year. After one year, non-affiliates do not have to comply with any other Rule 144 requirements.
Restrictions on the Use of Rule 144 by Shell Companies or Former Shell Companies
Rule 144 is not available for the resale of securities initially issued by companies that are, or previously were, blank check companies like us, to their promoters or affiliates despite technical compliance with the requirements of Rule 144. Rule 144 also is not for resale of securities issued by any shell companies (other than business combination related shell companies) or any issuer that has been at any time previously a shell company. The SEC has provided an exception to this prohibition, however, if the following conditions are met:
| ● | the issuer of the securities that was formerly a shell company has ceased to be a shell company; | |
| ● | the issuer of the securities is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act; | |
| ● | the issuer of the securities has filed all Exchange Act reports and material required to be filed, as applicable, during the preceding 12 months (or such shorter period that the issuer was required to file such reports and materials), other than Form 8-K reports; and | |
| ● | at least one year has elapsed from the time that the issuer filed current Form 10 type information with the SEC reflecting its status as an entity that is not a shell company. |
As a result, none of our shareholders will be able to sell any shares of common stock pursuant to Rule 144 until December 22, 2023.
| -35- |
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Article X of our Articles of Incorporation, as amended, provide as follows:
Section 1. Pursuant to the provisions of NRS 78.751, the corporation will indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding whether civil, criminal, administrative or investigative except an action by or in the right of the corporation, by reason of the fact that he 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 expenses, including attorneys’ fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with the action, suit or proceeding if he acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, does not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and that, with respect to any criminal action or proceeding, he had reasonable cause to believe that his conduct was unlawful.
Section 2. The corporation will indemnify any person who was or is a party 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 to procure a judgment in its favor by reason of the fact that he 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 of agent of another corporation, partnership, joint venture, trust or other enterprise against expenses, including amounts paid in settlement and attorneys’ fee actually and reasonably incurred by him in connection with the defense or settlement of the action or suit if he acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation. Indemnification may not be made for any claim, issue or matter as to which such a person has been adjudged by a court of competent jurisdiction, after exhaustion of all appeals therefrom, to be liable to the corporation or for amounts paid in settlement to the corporation, unless and only to the extent that the court in which the action or suit was brought or other court of competent jurisdiction determines upon application that in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnify for such expenses as the court will deems proper.
Section 3. To the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 1 and 2, or in defense of any claim, issue or matter therein, he must be indemnified by the corporation against expenses, including attorneys’ fees, actually and reasonably incurred by him in connection with the defense.
Section 4. Any indemnification under Sections 1 and 2, unless ordered by a court or advanced pursuant to Section 5 herein, must be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances. The determination must be made: (a) By the stockholders; (b) By the board of directors by a majority vote of a quorum consisting of directors who were not parties to the act, suit or proceeding; (c) If a majority vote of a quorum consisting of directors who were not parties to the act, suit or proceeding so ordered, by independent legal counsel in a written opinion; or (d) If a quorum consisting of directors who were not parties to the act, suit or proceeding cannot be obtained, by independent legal counsel in a written opinion.
Section 5. The expenses of officers and directors incurred in defending a civil or criminal action, suit or proceeding must be paid by the corporation as they are incurred and in advance of the final disposition of the action, suit or proceeding, upon receipt of an undertaking by or on behalf of the director or officer to repay the amount if it is ultimately determined by a court of competent jurisdiction that he is not entitled to be indemnified by the corporation. The provisions of this Section do not affect any rights to advancement of expenses to which corporate personnel other than directors or officers may be entitled under any contact or otherwise by law.
Section 6. The indemnification and advancement of expenses authorized in or ordered by a court pursuant to this Section: (a) Does not exclude any other rights to which a person seeking indemnification or advancement of expenses may be entitled under the certificate or articles of incorporation or any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, for either an action in his official capacity or an action in another capacity while holding his office, except that indemnification, unless ordered by a court pursuant to Section 2 or for the advancement of expenses made pursuant to Section 5, may not be made to or on behalf of any director or office if a final adjudication establishes that his acts or omissions involved intentional misconduct, fraud or a knowing violation of the law and was material to the cause of action. (b) Continues for a person who has ceased to be a director, officer, employee or agent and inures to the benefit of the heirs, executors and administrators of such a person.
Article XI of our Articles of Incorporation, as amended, provide as follows:
Section 1. The corporation may purchase and maintain insurance or make other financial arrangements 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 for any liability asserted against him and liability and expenses incurred by him in his capacity as a director, officer, employee or agent, arising out of his status as such, whether or not the corporation has the authority to indemnify him against such liability and expenses.
Section 2. The other financial arrangements made by the corporation pursuant to Section 1 may include the following: (a) The creation of a trust fund. (b) The establishment of a program of self-insurance (c) The securing of its obligation of indemnification by granting a security interest or other lien on any assets of the corporation. (d) The establishment of a letter of credit, guaranty or surety. No financial arrangement made pursuant to this Section may provide protection for a person adjudged by a court of competent jurisdiction, after exhaustion of all appeals therefrom, to be liable for intentional misconduct, fraud or a knowing violation of law, except with respect to the advancement of expenses or indemnification ordered by the court. Section 3. Any insurance or other financial arrangement made on behalf of a person pursuant to this Section may be provided by the corporation or any other person approved by the board of directors, even if all or part of the other person’s stock or other securities is owned by the corporation. Section 4. In the absence of fraud: (a) The decision of the board of directors as to the propriety of the terms and conductions of any insurance or other financial arrangement made pursuant to this Section and the choice of the person to provide the insurance or other financial arrangement is conclusive; and (b) The insurance or other financial arrangement: (1) Is not void or voidable; and (2) Does not subject any director approving it to personal liability for his action, even if a director approving the insurance or other financial arrangement is a beneficiary of the insurance or other financial arrangement.
Article XII of our Articles of Incorporation, as amended, provide as follows:
No director or officer of the corporation shall be personally liable to the corporation or its stockholders for damages for his acts or omissions resulting in his breach of fiduciary duty as a director or officer, except if such acts or omissions involve: (a) intentional misconduct, fraud or a knowing violation of the law; or (b) the payment of dividends in violation of NRS 78.300.
CHANGES IN REGISTERED INDEPENDENT PUBLIC ACCOUNTANT
Dismissal of Berkower LLC
Effective December 22, 2022, immediately following consummation of the Merger, Berkower LLC was dismissed from its position as the independent registered public accountant of the Company. Other than an explanatory paragraph included in Berkower’s audit report for our fiscal years ended December 31, 2021 and 2020, relating to the uncertainty of our ability to continue as a going concern, the audit reports of Berkower on our financial statements for the fiscal years ended December 31, 2021 and 2020 did not contain an adverse opinion or disclaimer of opinion, and such reports were not qualified or modified as to uncertainty, audit scope, or accounting principle.
During our fiscal years ended December 31, 2021 and 2020 and any subsequent interim period through December 22, 2022, the date of dismissal of Berkower, there were no disagreements with Berkower on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to Berkower’s satisfaction, would have caused Berkower to make reference to the subject matter of the disagreements in connection with their report on our consolidated financial statements for such years; and there were no reportable events, as listed in Item 304(a)(l)(v) of Regulation S-K.
We provided Berkower with a copy of the disclosure contained in this Current Report on Form 8-K reporting the dismissal of Berkower and requested in writing that it furnish us with a letter addressed to the SEC stating whether or not it agrees with such disclosures. Berkower provided a letter, dated December 22, 2022, stating its agreement with such statements, which is attached as Exhibit 16.1 hereto.
(b) Engagement of Michael T. Studer CPA. P.C.
Our Board of Directors approved the appointment of Michael T. Studer CPA. P.C. to serve as our independent registered public accountant for the year ended December 31, 2022, effective December 22, 2022, immediately following consummation of the Merger. During our most recent fiscal years ended December 31, 2021 and 2020 and subsequent interim periods through the date of appointment, neither we nor anyone on our behalf has consulted with Michael T. Studer CPA P.C.. with respect to: (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our consolidated financial statements, or (ii) any other matter or reportable events listed in Items 304(a)(2)(i) and (ii) of Regulation S-K. Michael T. Studer CPA P.C.. has served as the independent registered public accountant of Exworth Union Inc since October 14, 2022. |
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements and pro forma financial information relating to Exworth Union contained in Item 9.01 of this Current Report on Form 8-K, which are incorporated herein by reference.
| -36- |
Our audited financial statements for the fiscal years ended December 31, 2021 and 2020 are available in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on April 15, 2022, and are incorporated herein by reference. Our unaudited financial statements for the nine and three month periods ended September 30, 2022 were filed with the SEC on November 14, 2022, and are incorporated herein by reference.
Item 3.02 Recent Sales of Unregistered Securities.
As more fully described in Item 2.01 above, in connection with the Merger Agreement, the Company issued a total of 3,960,000 shares of our common stock to the former stockholders of Exworth Union. Reference is made to the disclosures set forth under Item 2.01 of this Form 8-K, which disclosures are incorporated herein by reference. The issuance of the common stock to the former stockholders of Exworth Union pursuant to the Merger Agreement was exempt from registration in reliance upon Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D.
Item 4.01 Changes in registrant’s Certifying Accountant
Reference is made to the disclosure set forth Item 2.01 of this Current Report under the caption “Change in Registered Independent Certified Public Accountant,” which disclosure is incorporated by reference into this section.
Item 5.01. Changes in Control of Registrant.
Reference is made to the disclosures set forth in Items 1.01 and 2.01 of this Current Report on Form 8-K, which disclosures are incorporated by reference into this Item 5.01. Other than the transactions and agreements described in such Items, our officer and director know of no arrangements that may result in a change in control of the Company at a subsequent date.
On August 31, 2022, Strategic Acquisitions, Inc., (the “Company” or the “Registrant”) underwent a change in control. In a private transaction, Exworth Management LLC (“Exworth”) purchased an aggregate of 2,013,000 shares of the Company’s common stock, par value $0.001 (“Common Stock”) from the following sellers: 1,525,000 shares from the previous controlling shareholder, NextCoal International, Inc.; 453,000 shares from the Company’s President, John P. O’Shea; 10,000 shares from the Company’s Secretary/Treasurer, Marika X. Tonay; and 25,000 shares from an individual not engaged as an officer or director of the Company. The aggregate consideration for such shares was $650,005.16 and the source of funds was from the working capital of Exworth Management LLC.
As of August 31, 2022, the Company had 2,715,000 Common Shares issued and outstanding. The 2,013,000 Common Shares acquired by Exworth Union represented approximately 74.1% of the Common Stock of the Company then outstanding.
Item 5.06 Change in Shell Company Status
We have determined that, as the result of the consummation of the transaction contemplated by the Merger Agreement as described above under Item 2.01 of this Current Report on Form 8-K, we have ceased to be a shell company as that term is defined in Rule 12b-2 promulgated under the Exchange Act. Reference is made to the disclosures set forth in Item 2.01 of this Current Report on Form 8-K, which disclosures are incorporated by reference into this Item 5.06.
Item 9.01 Financial Statements and Exhibits
Reference is made to our acquisition of all of the outstanding shares of Exworth Union accomplished pursuant to the Merger Agreement, as described in Item 2.01. As a result of the consummation the Merger, our primary operations consist of the business and operations of Exworth Union. Accordingly, we are presenting the audited financial statements of Exworth Union for the period ended September 30, 2022.
(a) Financial statements of business acquired.
The audited financial statements of Exworth Union as of and for the period ended September 30, 2022, including the notes to such financial statements, are incorporated herein by reference to Exhibit 99.1 of this Current Report on Form 8-K.
(b) Pro forma financial information.
| -37- |
The unaudited pro forma financial information of the Company and its wholly-owned subsidiary Exworth Union are incorporated herein by reference to Exhibit 99.2 of this Current Report on Form 8-K.
(c) Shell company transactions.
Reference is made to the disclosure set forth in Items 9.01(a) and 9.01(b), which disclosure is incorporated herein by reference.
Exhibit No. |
Description | |
| 2.1 | Agreement and Plan of Merger (1) | |
| 3.1 | Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 to Form 10-SB filed January 18, 2000) | |
| 3.2 | Certificate of Merger (1) | |
| 3.3 | By-Laws (Incorporated by reference to Exhibit 3.2 to Form 10-SB filed January 18, 2000) | |
| 4.1 | Form of Warrant Agreement (1) | |
10.1 |
||
| 10.2 | Master Pledge Agreement dated May 28, 2022. Portions of the Master Pledge Agreement containing the identity of the lender have been omitted (1) | |
| 10.3 | Addendum to Master Loan Agreement (1) | |
| 16.1 | Letter from Berkower LLC (1) | |
| 21.1 | Subsidiaries (1) | |
| 99.1 | Audited financial statements of Exworth Union Inc as of and for the period ended September 30, 2022 (1) | |
| 99.2 | Unaudited pro forma financial information of the Company and its wholly-owned subsidiary Exworth Union Inc (1) | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
(1) Filed herewith
| -38- |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
| Strategic Acquisitions, Inc. | ||
| Date: December 22, 2022 | By: | /s/ John P. O’Shea |
| John P. O’Shea, President | ||
| -39- |
Exhibit 2.1
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of December 22, 2022 (this “Agreement”), by and among Strategic Acquisitions, Inc., a Nevada corporation (“Parent”), STQN Sub, Inc., a Delaware corporation and a direct wholly-owned subsidiary of Parent (“Sub”), Exworth Union Inc, a Delaware corporation (the “Company”), and the other signatories to this Agreement (each, individually, a “Stockholder”, collectively, the “Stockholders”).
R E C I T A L S:
Upon the terms and subject to the conditions set forth in this Agreement, Parent, Sub and the Company will enter into a business combination pursuant to which the Company will merge with Sub (the “Merger”), with the Company continuing as the surviving corporation and a wholly-owned subsidiary of Parent (the “Surviving Corporation”); and
The board of directors of each of Parent, Sub and the Company have determined that the Merger would be fair to and in the best interests of their respective stockholders and approved this Agreement and the transaction contemplated hereby; and
The Stockholders own all of the outstanding capital stock of the Company; and
For Federal income tax purposes, it is intended that the Merger shall qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder (the “Code”); and
WHEREAS, Parent, Sub, Stockholders and the Company desire to make certain representations, warranties, covenants and agreements in connection with the Merger and also to prescribe various conditions to the Merger.
NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and agreements herein contained, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.1 Definitions. For purposes of this Agreement, the following terms shall have the meanings set forth below:
“Affiliate” shall mean, with respect to any Person, any other Person directly or indirectly controlling, controlled by or under common control with such Person.
“Business Day” shall mean a day other than a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to close.
“Code” shall have the meaning set forth in the recitals to this Agreement.
“Company Common Stock” shall mean shares of the common stock, par value $0.01, of the Company.
Contract” shall mean any contract, agreement, indenture, note, bond, loan, instrument, lease, conditional sales contract, mortgage, deed of trust, security agreement, royalty, license, franchise or insurance policy.
“DGCL” shall mean the General Corporation of the State of Delaware.
“Default” shall mean (a) any breach or violation of, default under, contravention of, or conflict with, any Contract, Law, Order, or Permit, (b) any occurrence of any event that with the passage of time or the giving of notice or both would constitute a breach or violation of, default under, contravention of, or conflict with, any Contract, Law, Order, or Permit, or (c) any occurrence of any event that with or without the passage of time or the giving of notice would give rise to a right of any Person to exercise any remedy or obtain any relief under, terminate or revoke, suspend, cancel, or modify or change the current terms of, or renegotiate, or to accelerate the maturity or performance of, or to increase or impose any Liability under, any Contract, Law, Order, or Permit.
“ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended, and the applicable regulations promulgated thereunder.
“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.
“GAAP” shall mean generally accepted accounting principles in effect in the United States of America as of the date of the applicable determination.
“Governmental Authority” shall mean any foreign, Federal, state, municipal or other governmental department, commission, administration, board, bureau, agency or instrumentality.
“Indebtedness” shall mean, with respect to any Person, any indebtedness, secured or unsecured, (i) in respect of borrowed money (whether or not the recourse of the lender is to the whole of the assets of such Person or only to a portion thereof), and evidenced by bonds, notes, debentures or similar instruments or letters of credit, to the extent of the face value thereof (or, in the case of evidence of indebtedness issued at a discount, the current accredit value thereof) or (ii) representing the balance deferred and unpaid of the purchase price of property or services (other than accounts payable (including trade payables) in the ordinary course of business) and shall also include, to the extent not otherwise included, (A) any capitalized lease obligations and (B) the face value of guaranties of items of other Persons which would be included within this definition for such other Persons (whether or not such items would appear upon the balance sheet of the guarantor). No item constituting Indebtedness under any of the definitions set forth above shall be counted twice by virtue of the fact that it constitutes “Indebtedness” under more than one of such definitions.
“Intellectual Property” shall mean (a) all inventions (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereto, and all patents, patent applications, and patent disclosures, together with all reissuances, continuations, continuations-in-part, revisions, extensions, and reexaminations thereof, (b) all trademarks, service marks, trade dress, logos, trade names, and corporate names, together with all translations, adaptations, derivations, and combinations thereof and including all goodwill associated therewith, and all applications, registrations and renewals in connection therewith, (c) all copyrightable works, all copyrights, and all applications, registrations and renewals in connection therewith, (d) all mask works and all applications, registrations and renewals in connection therewith, (e) all trade secrets and confidential information (including ideas, research and development, know-how, formulas, compositions, manufacturing and production processes and techniques, technical data, designs, drawings, specifications, customer and supplier lists, pricing and cost information, and business and marketing plans and proposals), (f) all Software (including data and related documentation), (g) all other proprietary rights, and (h) all copies and tangible embodiments thereof (in whatever form or medium).
“IRS” shall mean the United States Internal Revenue Service.
“Law” shall mean any code, directive, law (including common law), ordinance, regulation, reporting or licensing requirement, rule, or statute applicable to a Person or its assets, liabilities, or business, including those promulgated, interpreted or enforced by any Governmental Authority.
“Legal Proceedings” shall mean any judicial, administrative or arbitral actions, suits, proceedings (public or private) or governmental proceedings.
“Material Adverse Effect” shall mean, with respect to any Person, any change or effect that is or is reasonably likely to have a material adverse effect on the business, results of operations, properties, assets, condition (financial or otherwise) or prospects of such Person and its Subsidiaries taken as a whole.
“Merger” shall have the meaning set forth in the recitals to this Agreement.
“Order” shall mean any order, injunction, judgment, decree, ruling, writ, assessment or arbitration award.
“Ordinary Course of Business” means the ordinary course of business consistent with past custom and practice.
“Parent Common Stock” shall mean shares of Common Stock, par value $0.001 per share, of Parent.
“Permit” shall mean any permit, license, franchise, concession, authorization, approval, exemption or similar right.
“Permitted Encumbrances” means (a) any Lien for Taxes which are not yet due, (b) any carrier’s, warehouseman’s, mechanic’s, materialman’s, repairman’s, landlord’s or similar statutory or inchoate Lien incidental to the ordinary conduct of business which involves an obligation that is not yet due or (c) minor encroachments and defects in title which, in the aggregate, would not have a material impact on the value or intended use of any of the Company’s property.
“Person” shall mean an individual, corporation, limited liability company, partnership, trust or unincorporated organization or a government or any agency or political subdivision thereof.
“SEC” shall mean the Securities and Exchange Commission.
“Securities Act” shall mean the Securities Act of 1933, as amended.
“Software” shall mean any and all computer software, including, but not limited to, source code, object code, screens, user interfaces, report formats, firmware, development tools, templates, menus, buttons and icons, and all materials, manuals, design notes and other documentation related thereto or associated therewith.
“Subsidiary” shall mean, with respect to any Person, (i) each corporation, partnership, joint venture or other legal entity of which such Person owns, either directly or indirectly, more than 50% of the stock or other equity interests the holders of which are generally entitled to vote for the election of the board of directors or similar governing body of such corporation, partnership, joint venture or other legal entity, (ii) each partnership in which such Person or another Subsidiary of such Person is the general or managing partner and (iii) each limited liability company in which such Person or another Subsidiary of such Person is the managing member or otherwise controls (by contract, through ownership of membership interests or otherwise).
“Tax” or “Taxes” shall mean all taxes, charges, fees, imposts, levies or other assessments by any Governmental Authority, including all net income, gross receipts, capital, sales, use, ad valorem, value added, transfer, franchise, profits, inventory, capital stock, license, withholding, payroll, employment, social security, unemployment, excise, severance, stamp, occupation, property and estimated taxes, customs duties, fees, assessments and charges of any kind whatsoever, together with any interest and any penalties, fines, additions to tax or additional amounts imposed by any taxing authority (domestic or foreign) and shall include any liability in respect of Taxes as a transferee or as an indemnitor, guarantor, surety or in a similar capacity under any contract, arrangement, agreement, understanding or commitment (whether oral or written).
“Technology” shall mean, collectively, all designs, formulas, algorithms, procedures, methods, techniques, ideas, know-how, Software, programs, subroutines, tools, materials, specifications, processes, inventions, apparatus, ideas, creations, improvements, works of authorship and other similar materials, and all recordings, graphs, drawings, reports, analyses, and other writings, and other tangible embodiments of the foregoing, in any form whether or not specifically listed herein, and all related technology, that are used in, incorporated in, embodied in, displayed by or relate to, or are used or useful in the design, development, manufacture, maintenance, modification or use of any of the products developed by the Company.
“Third Party” shall mean any Person unaffiliated with any of Parent, Sub or the Company.
ARTICLE II
THE MERGER
2.1 The Merger; Effects of the Merger. Upon the terms and subject to the conditions set forth in this Agreement, and in accordance with the DGCL, the Company shall merge with Sub at the Effective Time. At the Effective Time, the separate corporate existence of Sub shall cease, and the Company shall continue as the Surviving Corporation and shall succeed to and assume all of the rights, properties, franchises, liabilities and obligations of Sub in accordance with the DGCL and this Agreement.
2.2 Closing. Unless this Agreement shall have been terminated and the transactions herein contemplated shall have been abandoned, the closing of the Merger (the “Closing”) shall take place at 10:00 a.m., Eastern Time, at the offices of counsel to the Parent, on December 22, 2022 or such other place or time or on such other date as Parent and the Stockholder Representative may agree in writing or as Parent may determine, in its sole and absolute discretion, to be necessary to permit the fulfillment or waiver of the conditions set forth in Sections 9.2(e) or (g) (the “Closing Date”).
2.3 Effective Time. Subject to the provisions of this Agreement, the parties hereto shall cause the Merger to be consummated by filing a certificate of merger (the “Certificate of Merger”) with the Office of the Secretary of State of the State of Delaware, as provided in the DGCL, as soon as practicable on or after the Closing Date. The Merger shall become effective upon such filing or at such time thereafter as is provided in the Certificate of Merger (the “Effective Time”). Parent undertakes to cause the Certificate of Merger to be filed promptly upon execution and delivery thereof by the Company.
2.4 Directors; Officers; Certificate of Incorporation; Bylaws. (a) The directors of Sub immediately prior to the Effective Time shall be the directors of the Surviving Corporation until their successors have been duly elected and qualified, or until their earlier death, resignation or removal in accordance with the Surviving Corporation’s certificate of incorporation and bylaws.
(b) The officers of Sub immediately prior to the Effective Time shall be the officers of the Surviving Corporation until their successors have been duly appointed and qualified, or until their earlier death, resignation or removal in accordance with the Surviving Corporation’s certificate of incorporation and bylaws.
(c) The certificate of incorporation of the Company shall be the certificate of incorporation of the Surviving Corporation.
(d) The bylaws of the Company as in effect immediately prior to the Effective Time shall be the bylaws of the Surviving Corporation until thereafter amended as provided by the DGCL and the Surviving Corporation’s certificate of incorporation and bylaws.
ARTICLE III
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF
THE CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES
3.1 Effect on Capital Stock. At the Effective Time, by virtue of the Merger and without any action on the part of the holder of any shares of Company Common Stock or the holder of any shares of capital stock of Sub:
(a) Capital Stock of Sub. Each share of each class of capital stock of Sub issued and outstanding immediately prior to the Effective Time shall remain outstanding and no consideration shall be delivered or deliverable in exchange therefor.
(b) Conversion of Outstanding Company Common Stock. At the Effective Time, each issued and outstanding share (excluding treasury stock which shall be cancelled) of Company Common Stock shall be converted into the right to receive 3,600 shares of Parent Common Stock (“Merger Consideration”). If the number of shares to be issued to any Company Common Stockholder includes a fraction, it will be rounded up to the nearest whole number (the “Exchange Ratio”).
(c) Cancellation of Company Common Stock. As a result of the Merger and without any action on the part of any holder of Company Common Stock, at the Effective Time all shares of Company Common Stock shall cease to be outstanding and shall be cancelled and retired and shall cease to exist, and each holder of shares of Company Common Stock shall thereafter cease to have any rights with respect to such shares of Company Common Stock, except the right to receive, without interest, the Merger Consideration. The Parent Common Stock comprising the Merger Consideration, when issued pursuant to this Agreement, will be duly authorized, validly issued, fully paid, non-assessable and not subject to preemptive rights created by statute, Parent’s certificate of incorporation or bylaws, or any agreement to which Parent is a party or by which Parent is bound.
3.2 Exchange of Certificates. (a) Upon receipt by Parent of written evidence that the Certificate of Merger has been properly filed, Parent subject to surrender to Parent or the Surviving Corporation of certificates representing outstanding shares of Company Common Stock (“Certificates”) for cancellation, promptly shall give (or cause to be given) irrevocable instructions to its transfer agent to issue to the Stockholders certificates representing that number of shares of Parent Common Stock determined pursuant to Section 3.1(b).
(b) Upon surrender of a Certificate for cancellation, the holder of such Certificate shall be entitled to receive in exchange therefor a certificate representing that number of shares of Parent Common Stock determined pursuant to Sections 3.1(b) and the Certificate so surrendered shall forthwith be canceled. Until surrendered as contemplated by this Section 3.2(b), each Certificate shall be deemed at any time after the Effective Time to represent only the right to receive upon such surrender a certificate representing the Merger Consideration.
(c) In the event that any Certificate for shares of Company Stock shall have been lost, stolen or destroyed, Parent promptly shall issue in exchange therefor, upon the making of an affidavit of that fact by the holder thereof, such shares of Parent Common Stock as may be required pursuant to this Agreement; provided, however, that Parent may, in its discretion, require the delivery of the indemnity of the holder of such shares but not a bond securing such indemnity.
(d) All shares of Parent Common Stock issued upon the surrender for exchange of shares of Company Common Stock in accordance with the terms hereof shall be deemed to have been issued in full satisfaction of all rights pertaining to such Company Common Stock, and there shall be no further registration of transfers on the stock transfer books of the Surviving Corporation of the shares of Company Common Stock which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to Parent or the Surviving Corporation for any reason, they shall be canceled and exchanged as provided in this Article III.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF THE STOCKHOLDERS
Each Stockholder hereby severally represents and warrants to Parent and Sub that the statements contained in this Article IV are correct and complete as of the date hereof and will be correct and complete as of the Closing Date except as otherwise contemplated hereby.
4.1 Authorization of Transaction. Such Stockholder has full power and authority to execute and deliver this Agreement and to perform such Stockholder’s obligations hereunder. This Agreement constitutes the valid and legally binding obligation of such Stockholder, enforceable in accordance with its terms and conditions, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ rights generally and to general principles of equity. Such Stockholder is not required to give any notice to, make any filing with, or obtain any Licenses and Permits of any Governmental Authority in order to consummate the transactions contemplated by this Agreement, except in connection with the filing of the Certificate of Merger with the Secretary of State of the State of Delaware.
4.2 Non-contravention. Neither the execution and the delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify or cancel, or require any notice under any agreement, contract, lease, license, instrument or other arrangement to which the Company Common Stock owned by such Stockholder is subject.
4.3 Investment. Such Stockholder (i) understands that the shares of Parent Common Stock to be acquired by such Stockholder pursuant to this Agreement have not been registered under the Securities Act, or under any state securities laws, and are being exchanged in reliance upon federal and state exemptions for transactions not involving a public offering, (ii) is acquiring the shares of Parent Common Stock solely for his own account for investment purposes, and not with a view towards the distribution thereof, and has been advised that additional information regarding Parent is available on the EDGAR website of the SEC and has had the opportunity to obtain additional information as desired in order to evaluate the merits and the risks inherent in holding shares of Parent Common Stock.
4.4 Company Common Stock. Such Stockholder holds of record and owns beneficially the number of shares of Company Common Stock set forth next to such Stockholder’s name on the signature page to this Agreement, free and clear of any Encumbrances (other than any restrictions under the Securities Act and state securities laws) and Taxes. Such Stockholder is not a party to any option, warrant, purchase right, or other contract or commitment that could require such Stockholder to sell, transfer, or otherwise dispose of any Company Common Stock and is not a party to any voting trust, proxy, or other agreement or understanding with respect to the voting of any of the Company Common Stock (other than pursuant to this Agreement).
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDERS
The Company and the Stockholders hereby jointly and severally represent and warrant to Parent and Sub that the statements contained in this Article V are correct and complete as of the date hereof and will be correct and complete as of the Closing Date except as otherwise contemplated hereby:
5.1 Organization and Authority of the Company. (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, with all requisite power and authority to enable it to own, lease and operate its assets and properties and to conduct its business as currently being conducted, and is qualified and in good standing to do business in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties owned or leased by it requires such qualification, except to the extent the failure so to qualify would not have a Material Adverse Effect with respect to the Company. Complete and correct copies of the certificate of incorporation and bylaws, each as amended to date, of the Company have been delivered to Parent. Such certificate of incorporation and bylaws are in full force and effect.
(b) The Company, subject to obtaining the necessary approval of its shareholders and directors, has all requisite corporate power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all requisite corporate action on the part of the Company and the Stockholders. This Agreement has been duly executed and delivered by the Company, and this Agreement constitutes, the legal, valid and binding obligation of the Company, enforceable against it in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ rights generally and to general principles of equity.
(c) The Company does not, and will not at the Closing, directly or indirectly, own any capital stock of or other equity interests in any corporation, partnership or other Person and the Company is not a member of or participant in a partnership, joint venture or similar Person.
5.2 Capitalization. (a) As of the date hereof, the authorized capital stock of the Company consists of fifteen hundred (1,500) shares of Company Common Stock, of which (A) one thousand one hundred (1,100) shares are issued and outstanding, all of which are duly authorized, validly issued, fully paid and non-assessable and not subject to preemptive rights created by statute, the Company’s certificate of incorporation or bylaws or any agreement to which the Company is a party or by which the Company is bound and (B) no shares are held in the treasury of the Company.
(b) No shares of the capital stock of the Company are authorized, issued or outstanding, or reserved for any purpose, and there are no options, warrants, convertible or exchangeable securities or other rights (including tag-along, right of first refusal, buy-sell, repurchase, redemption, registration or similar rights), agreements, arrangements or commitments of any character to which the Company is a party relating to the issued or unissued capital stock of the Company or obligating or which could obligate the Company to grant, issue or sell any shares of capital stock of the Company. There are no voting trusts, stockholders’ agreements or other agreements or understandings with respect to the voting of Company Capital Stock or which grant the holder thereof the right to vote with the holders of the Company Common Stock on any matter.
5.3 No Conflicts. Subject to obtaining the consent of the Stockholders and directors of the Company, the Company’s execution and delivery of this Agreement does not and the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or to loss of a material benefit under, or result in the creation of any Encumbrances upon any of the properties or assets of the Company under any provision of (i) the certificate of incorporation, bylaws or other organizational document of the Company; (ii) any material Contract or Permit to which the Company is a party or by which the Company or its assets are bound; (iii) any Order of any court, Governmental Authority or arbitrator applicable to the Company or its assets; or (iv) any Applicable Laws.
5.4 Stockholder Vote. The affirmative vote of the holders of a majority of the outstanding shares of Company Common Stock entitled to vote (the “Stockholder Approval”) is the only approval of holders of any class or series of Company Capital Stock necessary or required to approve this Agreement and the transactions contemplated hereby, including the Merger. The Company shall obtain the requisite Stockholder Approval no later than December [**], 2022.
5.5 Consents. Except for the filing of the Certificate of Merger with the Secretary of State of the State of Delaware, no consents, approvals, licenses, permits, orders or authorizations of, or registrations, declarations, notices or filings with, any Governmental Authority or any Third Party are required to be obtained or made by or with respect to the Company in connection with (A) the execution, delivery and performance of this Agreement, the consummation of the transactions contemplated hereby or the taking by the Company of any other action contemplated hereby or thereby, (B) the continuing validity and effectiveness immediately following the Effective Time of any material Contract or Permit of the Company, or (C) the conduct by the Surviving Corporation of the business of the Company as conducted immediately following the Closing as conducted on the date hereof.
5.6 Compliance; No Defaults. The Company is in compliance in all material respects with all statutes, laws, ordinances, rules, Orders or regulations of any Governmental Authority applicable to its business or operations (“Applicable Laws”), and has not received any notice or been charged with any violation of or, to its knowledge, is under investigation with respect to compliance with, any Applicable Laws, and there are no facts or circumstances which could form the basis for any such violation. The Company has all Permits which are material to the operation of the businesses of the Company as conducted on the date hereof. The Company is not in default or violation (and no event has occurred which, with notice or the lapse of time or both, would constitute a default or violation) of any term, condition or provision of any material Permit or Contract to which it is a party or by which its properties or assets are bound.
5.7 Financial Statements; Undisclosed Liabilities. (a) The Company was organized on March 6, 2022, and has delivered to Parent copies of its most recent audited financial statements, which include, an audited balance sheet of the Company as at September 30, 2022 and the related audited statements of income and retained earnings and cash flows of the Company for the period commencing March 16, 2022, and ending September 30, 2022 (such statements, including the related notes and schedules thereto, are referred to herein as the “Financial Statements”). The Financial Statements are complete and correct in all material respects, have been prepared in accordance with GAAP consistently applied throughout the periods presented, and presents fairly the financial position, results of operations, cash flows and stockholders’ equity of the Company as at the dates and for the periods indicated.
(b) Except (i) as disclosed in the most recent Financial Statements or (ii) incurred in the Ordinary Course of Business since the date of the most recent financial statements, as of the date hereof, the Company does not have any material Indebtedness, obligations or liabilities of any kind (whether accrued, absolute, contingent or otherwise, and whether due or to become due, asserted or unasserted).
5.8 Absence of Changes or Events. Since the date of the most recent Financial Statements, there has not been any event, change, occurrence or circumstance outside the Ordinary Course of Business or that has had or could reasonably be expected to have a Material Adverse Effect on the Company. Without limiting the generality of the foregoing, since the date of the most recent Financial Statements:
(a) the Company has not sold, leased, transferred, or assigned any of its assets, tangible or intangible, other than routine purchase orders and other sales made in the Ordinary Course of Business;
(b) the Company has not entered into any Contract (or series of related Contracts) involving more than $50,000 outside the Ordinary Course of Business, other than loans made in accordance with the Company’s business plan;
(c) the Company has not agreed to the imposition of any Encumbrance upon any of its assets, tangible or intangible;
(d) the Company has not made any capital expenditure (or series of related capital expenditures) either involving more than $50,000 or outside the Ordinary Course of Business;
(e) the Company has not issued any note, bond or other debt security or created, incurred, assumed, or guaranteed any Indebtedness;
(f) the Company has not delayed or postponed the payment of accounts payable and other Liabilities outside the Ordinary Course of Business;
(g) the Company has not canceled, compromised, waived or released any right or claim (or series of related rights and claims) outside the Ordinary Course of Business;
(h) the Company has not issued, sold, or otherwise disposed of any of its capital stock, or granted any options, warrants, or other rights to purchase or obtain (including upon conversion, exchange, or exercise) any of its capital stock, as the case may be;
(i) the Company has not experienced any damage, destruction or loss (whether or not covered by insurance) to its property in excess of $50,000;
(j) the Company has not made any loan to, or entered into any other transaction with, any of its stockholders, directors, officers or employees;
(k) the Company has not granted any increase in the compensation of any of its directors, officers, or employees or made any other change in employment terms for any of its directors, officers or employees or in the terms of its agreements with any independent contractors outside the Ordinary Course of Business;
(l) the Company has not adopted, amended, modified or terminated any bonus, profit-sharing, incentive, stock option, severance, or other plan, contract, or commitment for the benefit of any of its directors, officers, and employees (or taken any such action with respect to any other employee benefit plan);
(m) there has not been any change in the Tax or accounting principles, methods, practices, elections or procedures followed by the Company in connection with the business of the Company or any change in the depreciation or amortization policies or rates theretofore adopted by the Company in connection with the business of the Company; or
(n) the Company has not entered into any obligation, whether written or oral, to do any of the foregoing.
5.9 Taxes. (a) (i) All Federal, state, local and foreign Tax returns, declarations, reports, information or other filings (“Tax Returns”) required to be filed by or on behalf of the Company have been filed on a timely basis with the appropriate Governmental Authorities in all jurisdictions in which such Tax Returns are required to be filed (after giving effect to any valid extensions of time in which to make such filings), and all such Tax Returns were true, correct and complete in all material respects; (ii) all Taxes due and payable have been fully and timely paid or are adequately provided for in the Financial Statements; (iii) no waivers of statutes of limitations have been given or requested with respect to any Tax Returns of the Company; and (iv) the Company has duly and timely withheld and paid over to the appropriate taxing authorities all amounts required to be so withheld and paid over for all periods under all Applicable Laws. There are no federal, state, local or foreign tax liens upon any of the property or assets of the Company, except for current Taxes not yet due and payable.
(b) No Tax audits or other administrative or court proceedings are pending with regard to any Taxes for which the Company may be liable and no written notice of any such audit has been received by the Company.
(c) The Company has not been notified by any taxing authority that the Company may be required to file a Tax Return or similar document in any jurisdiction in which the Company does not currently file a Tax Return.
5.10 Employee Benefits. (a) The Company has no employees and maintains no “employee benefit plans,” as defined in Section 3(3) of ERISA or any other compensatory plan or arrangement, including healthcare, life, dental or vision insurance, or savings, pension or retirement plan (collectively, “Benefit Plans”) for the benefit of any individual.
5.11 Litigation. There are no Legal Proceedings against or affecting the Company or its properties or assets pending or, to the knowledge of the Company, threatened, and to the Company’s knowledge, there are no facts or circumstances which could form the basis for any such Legal Proceeding. The Company is not a party or subject to or in default under any Order of any Governmental Authority applicable to it or to its properties or assets.
5.12 Intellectual Property. (a) The Company is the sole and exclusive owner of, and has a valid right to use, all Intellectual Property and Technology material to its operations (the “Intellectual Property Rights”), free and clear of all Encumbrances, except for the license terms of any licensed Intellectual Property, Technology or Software.
(b) The Company is not, nor as a result of the execution and delivery of this Agreement, the consummation of the transactions contemplated hereby or the performance by the Company of its obligations hereunder will it be, in breach of any contract relating to the Intellectual Property Rights, except for such breaches as would not, individually or in the aggregate, have a Material Adverse Effect.
(c) Each patent, trademark, service mark and copyright owned by the Company which is necessary for or otherwise material to the Company’s business as currently conducted is subsisting, valid and enforceable and has not been cancelled, expired or abandoned; (ii) the Company as of the date hereof is not the subject of any pending or, to the Company’s knowledge, threatened Legal Proceedings which involve a claim of infringement of, claim of unauthorized use or claim of violation of any Intellectual Property of any Third Party or challenging the ownership, use, validity or enforceability of any of the Intellectual Property Rights or received notice of any such threatened claim, and to the Company’s Knowledge there are no facts or circumstances which could form the basis for any such Legal Proceedings; (iii) to the Company’s knowledge, the manufacturing, marketing, licensing or sale of the Company’s Products in the manner currently manufactured, marketed, sold or licensed, and the conduct of the business as presently conducted do not infringe, constitute an unauthorized use of or violate any Intellectual Property of any Third Party.
(d) The principal Intellectual Property Rights material to the business of the Company as presently conducted are rights relating to know-how utilized in the course of its operations. The Company has taken reasonable steps to protect such know-how.
(e) No Third Party, to the knowledge of the Company, is infringing upon, violating, misusing or misappropriating the Intellectual Property Rights and no such claims have been made against a Third Party by the Company. To the Knowledge of Company, no infringement claims are pending against any Intellectual Property used but not owned by the Company.
(f) The consummation of the transactions contemplated hereby will not result in the loss or impairment, in any material respect, of the Surviving Company’s right to own or use any of the Intellectual Property Rights.
5.13 Related Party Transactions. No director or officer of the Company, nor any Stockholder or other Affiliate of the Company or of any such director or officer (i) has borrowed any money from or has outstanding, directly or indirectly, any Indebtedness or other similar obligations to the Company; (ii) owns any direct or indirect interest in, or controls or is a director, officer or partner of, or consultant or lender to, or borrower from, or has the right to participate in the profits of, any Person which is a competitor, supplier, customer, landlord, tenant, lessor, lessee, creditor or debtor of the Company; or (iii) is a party to any Contract with the Company.
5.14 Brokers’ Fees. Neither the Company, any of its officers, directors or employees, nor any Stockholder has taken any action or entered into any agreement likely to result in any Liability or obligation on the part of the Company or Parent to pay any fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement.
5.15 Disclosure. The Company has afforded Parent the opportunity to conduct such due diligence investigation of the Company as Parent deemed appropriate. None of the material presented to Parent during the course of such investigation contained any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements and information provided to parent not misleading.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Parent and Sub jointly and severally represent and warrant to the Company that the statements contained in this Article VI are correct and complete as of the date hereof.
6.1 Organization and Authority. (a) Each of Parent and Sub is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation with all requisite power to enable it to own, lease and operate its assets and properties and to conduct its business as currently being conducted and is qualified and in good standing to do business in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties owned or leased by it requires such qualification, except to the extent the failure so to qualify would not have a Material Adverse Effect with respect to Parent. Complete and correct copies of the articles or certificate of incorporation and bylaws, each as amended to date, of Parent and Sub have been made available to the Company. Such articles or certificates of incorporation and bylaws are in full force and effect.
(b) Each of Parent and Sub has all requisite corporate power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all requisite corporate action on the part of Parent and Sub. This Agreement has been duly executed and delivered by each of Parent and Sub and this Agreement constitutes the legal, valid and binding obligation of Parent and Sub, enforceable against Parent and Sub in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ rights generally and general principles of equity.
6.2 Capitalization. (a) The authorized capital stock of Parent consists of 50,000,000 shares of Parent Common Stock, of which, 2,715,000 shares are issued and outstanding, all of which are duly authorized, validly issued, fully paid and non-assessable. Except as disclosed in the Parent SEC Documents, no shares of the capital stock of Parent are authorized, issued or outstanding, or reserved for any other purpose, and there are no options, warrants, convertible or exchangeable securities or other rights, agreements, arrangements or commitments of any character to which Parent is a party relating to the issued or unissued capital stock of Parent or any obligation of Parent to grant, issue or sell any shares of capital stock of Parent by sale, lease, license or otherwise. Except as disclosed in the Parent SEC Documents, Parent has no outstanding bonds, debentures, notes or other obligations the holders of which have the right to vote or which are convertible into or exercisable for securities having the right to vote with the stockholders of Parent on any matter. To Parent’s knowledge, there are no voting trusts or other agreements or understandings with respect to the voting of the capital stock of Parent.
(b) As of the date hereof, the authorized capital stock of Sub consists of 100 shares of common stock, par value $0.001 per share, of which 1 share is issued and outstanding and held by Parent, and such issued and outstanding share has been duly authorized and validly issued, and is fully paid and non-assessable.
(c) The shares of Parent Common Stock issued to the Stockholders upon the consummation of the Merger will be, when issued, duly authorized, validly issued, fully paid and non-assessable and will not be subject to preemptive rights created by statute, Parent’s articles of incorporation or bylaws or any Contract to which Parent is a party or by which Parent is bound.
6.3 No Conflicts. Subject to obtaining the consent of the Board of Directors of Parent and Sub, and Parent in its capacity as the shareholder of Sub, the execution and delivery of this Agreement by Parent and Sub do not and the consummation by Parent and Sub of the transactions contemplated hereby and compliance with the terms hereof will not, conflict with, or result in any violation of or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or to loss of a material benefit under, or to the increased, additional, accelerated or guaranteed rights or entitlements of any Person under, or result in the creation of any Encumbrances upon any of the properties or assets of Parent or Sub under, any provision of (i) the articles or certificate of incorporation and bylaws of Parent and Sub, (ii) any Contract or Permit to which Parent or Sub is a party or by which any of their properties or assets may be bound or subject, (iii) any Order of any court, Governmental Authority or arbitrator applicable to Parent or Sub or their properties or assets, or (iv) any law, statute, rule, regulation or judicial or administrative decision applicable to Parent or Sub; except in the case of clauses (ii), (iii) and (iv), such conflicts, violations and defaults, termination, cancellation and acceleration rights and entitlements and Encumbrances that in the aggregate would not hinder or impair the consummation of the transactions contemplated hereby or have a Material Adverse Effect with respect to Parent.
6.4 Consents. Except for (i) the consent of the Board of Directors of Parent and Sub, and Parent in its capacity as the shareholder of Sub, (ii) the filing of such reports required under the Exchange Act and (iii) the filing of the Certificate of Merger with the Secretary of State of the State of Delaware (the items in clauses (i) through (iii) being collectively referred to herein as “Parent Consents”), no consents, approvals, licenses, permits, orders or authorizations of, or registrations, declarations, notices or filings with, any Governmental Authority or any Third Party are required to be obtained or made by or with respect to Parent or Sub in connection with the execution, delivery and performance of this Agreement, consummation of the transactions contemplated hereby or the taking by Parent or Sub of any other action contemplated hereby, which, if not obtained or made, would have a Material Adverse Effect with respect to Parent.
6.5 Parent SEC Documents. Parent has filed on a timely basis all required reports, schedules, registration statements and definitive proxy statements with the SEC since January 1, 2022 (as such documents have since the time of their filing been amended, the “Parent SEC Documents”). As of their respective dates, the Parent SEC Documents (including any financial statements filed, to be filed or required to have been filed as a part thereof) complied in all material respects with the requirements of the Securities Act or the Exchange Act, as applicable, and the rules and regulations of the SEC thereunder applicable to such Parent SEC Documents, and none of the Parent SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of Parent included in the Parent SEC Documents comply as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with GAAP applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto) and fairly present (subject, in the case of the unaudited financial statements, to normal, recurring audit adjustments, which were not individually or in the aggregate material) the consolidated financial position of Parent and its consolidated Subsidiaries as at the dates thereof and the consolidated results of their operations and cash flows for the periods then ended.
6.6 Absence of Changes or Events. Except as disclosed in the Parent SEC Documents, since the date of the most recent financial statements included in the Parent SEC Documents, there have not occurred any changes, occurrences or other events or conditions of any character that, in the aggregate, have or would reasonably be expected to have, a Material Adverse Effect with respect to Parent or on the ability of Parent to perform its material obligations under this Agreement.
6.7 Brokers and Intermediaries. Neither Parent, Sub nor any of their respective officers, directors or employees has employed any broker or finder or incurred any liability for any brokerage fees, commissions or finders’ fees in connection with the transactions contemplated by this Agreement.
6.8 Disclosure. The representations and warranties contained in this Article VI do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements and information contained in this Article VI not misleading.
ARTICLE VII
COVENANTS RELATING TO CONDUCT OF BUSINESS
7.1 Conduct of Business of the Company. Except as otherwise expressly permitted by the terms of this Agreement, from the date hereof to the Effective Time, the Company shall carry on its business in the ordinary course in substantially the same manner as presently conducted and use its reasonable best efforts consistent with past practices to preserve its relationships with customers, suppliers and others with whom the Company deals. The Company shall not take any action that would, or that is reasonably likely to, result in any of the representations and warranties of the Company set forth in Article V being untrue in any material respect as of the Effective Time or in any of the conditions to the consummation of the Merger set forth herein not being satisfied.
7.2 Access to Information. (a) From the date hereof until the Closing Date, the Company shall permit Parent and its representatives to have access to the management, facilities, customers, suppliers, accounts, books, stock transfer records and other records (including budgets, forecasts and personnel files and records), Contracts and other materials of the Company reasonably requested by Parent or such representatives and to make available to Parent and its representatives the officers, employees and independent accountants of the Company for interviews for the purpose, among other things, of verifying the information furnished to Parent. Such access shall be conducted by Parent and its representatives during normal business hours, upon reasonable advance notice and in such a manner as not to interfere unreasonably with the business or operations of the Company.
(b) Each of the Company and Parent agrees that it will not and will cause each of their respective Affiliates and representatives not to use any information obtained pursuant hereto (the “Confidential Information”) for any purpose unrelated to the consummation of the transactions contemplated by this Agreement. Each party will treat refrain from using any of the Confidential Information except in connection with this Agreement, and deliver promptly to the other party or destroy, at the request and option of such other party, all tangible embodiments (and all copies) of the Confidential Information which are in its possession. In the event that any party is requested or required (by oral question or request for information or documents in any legal proceeding, interrogatory, subpoena, civil investigative demand, or similar process) to disclose any Confidential Information, such party will notify the other party promptly of the request or requirement so that such other party may seek an appropriate protective order or waive compliance with the provisions of this Section 7.2. If, in the absence of a protective order or the receipt of a waiver hereunder, such party is, on the advice of counsel, compelled to disclose any Confidential Information to any tribunal or else stand liable for contempt, then such party may disclose the Confidential Information to such tribunal; provided, however, that such party shall use its best efforts to obtain, at the reasonable request of the other party, an order or other assurance that confidential treatment will be accorded to such portion of the Confidential Information required to be disclosed as the other party shall designate. The foregoing provisions shall not apply to any information which is generally available to the public immediately prior to the time of disclosure.
ARTICLE VIII
ADDITIONAL AGREEMENTS
8.1 Reasonable Efforts. Each of the parties hereto agrees to use reasonable efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable under Applicable Laws and regulations to consummate and make effective the transactions contemplated by this Agreement, including (a) the obtaining of all necessary actions, waivers, consents and approvals from Governmental Authorities and the making of all necessary registrations and filings and the taking of all reasonable steps as may be necessary to obtain an approval or waiver from, or to avoid an action or proceeding by, any Governmental Authorities, (b) the obtaining of all necessary consents, approvals or waivers from Third Parties and (c) the execution and delivery of any additional instruments necessary to consummate the transactions contemplated by this Agreement. In furtherance of the foregoing, Parent and the Company each shall furnish to the other such necessary information and reasonable assistance as the other may request in connection with obtaining any consents required to be obtained by it hereunder.
8.2 Announcements. Prior to the Closing, neither the Company nor Parent will issue any press release or otherwise make any public statement with respect to this Agreement and the transactions contemplated hereby without the prior consent of the other (which consent shall not be unreasonably withheld), except as may be required by Applicable Law (including, without limitation, pursuant to the Federal securities laws), in which event the party required to make the release or announcement shall allow the other party reasonable time, in light of the circumstances, to comment on such release or announcement in advance of such issuance.
8.3 No Solicitation. (a) The Company and the Stockholders shall immediately cease and cause to be terminated any existing solicitation, initiation, encouragement, activity, discussion or negotiation with any parties conducted heretofore by the Company or any Company Representatives (as hereinafter defined) with respect to any acquisition proposal. From the date hereof until the Effective Time, the Company shall not, nor shall it authorize or permit any of its officers, directors, employees, agents, stockholders or representatives (collectively, “Company Representatives”) to, directly or indirectly, solicit, initiate or encourage (including by way of furnishing information or assistance) the making of any acquisition proposal from any Third Party.
8.4 No Trading. From the date hereof until the earlier of thirty (30) days after the termination of this Agreement and two days after the Closing Date the Stockholders will not trade in the securities of the Parent including entering into short selling or hedging transactions nor shall they advise others to do so.
8.5 Parent Common Stock. (a) Each certificate issued to the Stockholders representing the Parent Common Stock will be imprinted with a legend substantially in the following form:
| THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, IN RELIANCE UPON THE EXEMPTION FROM REGISTRATION AND IN RELIANCE UPON THE REPRESENTATION BY THE HOLDER THAT THEY HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY AND NOT WITH A VIEW TO RESALE OR FURTHER DISTRIBUTION IN VIOLATION OF APPLICABLE LAW. SUCH SHARES MAY NOT BE OFFERED FOR SALE, SOLD, DELIVERED AFTER SALE, HYPOTHECATED, NOR WILL ANY ASSIGNEE OR ENDORSEE HEREOF BE RECOGNIZED AS AN OWNER HEREOF BY THE ISSUER FOR ANY PURPOSE, UNLESS A REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION WITH RESPECT TO SUCH SHARES SHALL THEN BE IN EFFECT OR UNLESS THE AVAILABILITY OF AN EXEMPTION FROM REGISTRATION SHALL BE ESTABLISHED TO THE REASONABLE SATISFACTION OF COUNSEL OF THE ISSUER. |
(b) At such time as any Stockholder desires to transfer any of the Parent Common Shares received in connection with the Merger and such shares are eligible for sale pursuant to Rule 144, subject to applicable law, Parent, at its expense, shall cause its counsel promptly after a request therefore to cooperate with the Shareholder to effectuate the transfer and to issue an opinion to the effect that such Shareholder may transfer the Parent Common Shares as desired without registration under the Securities Act.
8.6 Further Assurances. Each of the parties hereto shall execute such documents and other instruments and take such further actions as may be reasonably required or desirable to carry out the provisions hereof and to evidence the consummation of the transactions contemplated by this Agreement.
8.7 Expenses. The Company shall pay all reasonable costs, including legal and accounting fees and expenses, incurred by the Company, Parent and Sub in connection with the negotiation, documentation and consummation of this Agreement, including costs incurred in connection with the preparation of the Report on Form the 8-K to be filed by Parent with the Securities and Exchange Commission advising of the completion of the Merger. If the Merger shall not be consummated for any reason other than the willful breach by Parent or Sub of its obligations hereunder or a determination of the Board of Directors not to consummate the Merger, the Company shall pay all reasonable costs, including legal and accounting fees and expenses, incurred by the Company, Parent and Sub in connection with the negotiation, documentation and consummation of this Agreement, including costs incurred in connection with the preparation of the Report on Form 8-K referred to above.
ARTICLE IX
CONDITIONS PRECEDENT
9.1 Conditions to Each Party’s Obligation to Effect the Merger. The respective obligation of each party to effect the Merger shall be subject to the satisfaction prior to the Closing Date of the following conditions:
(a) No Injunctions or Restraints. No statute, rule, regulation, injunction, restraining order or decree of any court or Governmental Authority of competent jurisdiction shall be in effect which restrains or prevents the transactions contemplated hereby.
9.2 Conditions to Obligations of Parent and Sub. The obligations of Parent and Sub to effect the Merger are subject to the satisfaction of the following conditions, any or all of which may be waived in whole or in part by Parent:
(a) Representations and Warranties. The representations and warranties of the Stockholders and the Company made hereunder shall be true and correct in all material respects on and as of the Closing Date as if made on the Closing Date (except to the extent such representations and warranties speak as of an earlier date).
(b) Agreements. The Company shall have performed and complied in all material respects with all of its respective undertakings, covenants, conditions and agreements required by this Agreement to be performed or complied with by it prior to or at the Closing.
(c) No Material Adverse Change. There shall not have occurred any fact, change, condition or occurrence which had, or which is reasonably likely to cause, a material adverse effect on the business, results of operations, properties, assets, condition (financial or otherwise) or prospects of the Company.
(d) No Adverse Proceedings. There shall not be in effect any action, suit, or Legal Proceedings before any court or Governmental Authority or before any arbitrator wherein an unfavorable injunction, judgment, order, decree, ruling, or charge that would (A) prevent consummation of any of the transactions contemplated by this Agreement, (B) cause any of the transactions contemplated by this Agreement to be rescinded following consummation, (C) affect adversely the right of Parent to own the capital stock of the Surviving Corporation, or (D) affect adversely the right of the Surviving Corporation to own the all of assets of the Company and to operate the entire business of the Company (and no such injunction, judgment, order, decree, ruling, or charge is in effect).
(e) Consents. All consents required to be obtained by the Company shall have been obtained, except where the failure to obtain any such consent would not have a Material Adverse Effect with respect to the Company or Parent, as the case may be.
(f) FIRPTA Affidavits. Each of the Stockholders shall have provided Parent with an affidavit of non-foreign status that complies with Section 1445 of the Code.
(g) Corporate Proceedings and Documents. All corporate proceedings taken by the Company in connection with the transactions contemplated hereby and all documents incident thereto shall be reasonably satisfactory in all material respects to Parent and Parent shall have received all such counterpart originals or certified or other copies of such documents as it may reasonably request.
9.3 Conditions to Obligations of the Company. The obligation of the Company to effect the Merger is subject to the satisfaction of the following conditions, any or all of which may be waived in whole or in part by the Company:
(a) Representations and Warranties. The representations and warranties of Parent and Sub made hereunder shall be true and correct in all material respects on and as of the Closing Date as if made on the Closing Date (except to the extent such representations and warranties speak as of an earlier date).
(b) Agreements. Parent and Sub shall have performed and complied in all material respects with all of their respective undertakings, covenants, conditions and agreements required by this Agreement to be performed or complied with by Parent and Sub prior to or at the Closing.
(c) Corporate Proceedings and Documents. All corporate proceedings taken by Parent and Sub in connection with the transactions contemplated hereby and all documents incident thereto shall be reasonably satisfactory in all material respects to the Company and the Company’s counsel, and the Company and the Company’s counsel shall have received all such counterpart originals or certified or other copies of such documents as they may reasonably request.
ARTICLE X
TERMINATION AND AMENDMENT
10.1 Termination. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time:
(a) by mutual written consent of the Company, on the one hand, and Parent on the other hand;
(b) by Parent, if any of the conditions set forth in Section 9.1 or 9.2 shall have become incapable of fulfillment, and shall not have been waived by Parent, or if the Company shall breach in any material respect any of its representations, warranties or obligations hereunder;
(c) by the Company, if any of the conditions set forth in Section 9.1 or 9.3 shall have become incapable of fulfillment, and shall not have been waived by the Company, or if Parent or Sub shall breach in any material respect any of their representations, warranties or obligations hereunder;
(d) by either the Company or Parent, if the Merger shall not have been consummated on or before February 1, 2023.
Notwithstanding the foregoing, a party shall not be permitted to terminate this Agreement pursuant to clause (b), (c) or (d) hereof if such party is in breach of any of its representations, warranties, covenants or agreements contained in this Agreement and such breach would have a Material Adverse Effect on such party or on the ability of such party to consummate the Merger pursuant to the terms hereof.
10.2 Effect of Termination. In the event of termination by the Company or Parent pursuant to Section 10.1, written notice thereof shall promptly be given to the other parties and, except as otherwise provided herein, the transactions contemplated by this Agreement shall be terminated, without further action by any party. Notwithstanding the foregoing, nothing in this Section 10.2 shall be deemed to release any party from any liability for any breach by such party of the terms and provisions of this Agreement or to impair the right of the Company, on the one hand, and Parent and Sub, on the other hand, to compel specific performance of the other party of its or their obligations under this Agreement.
10.3 Amendment. This Agreement may be amended, modified or supplemented only by written agreement of Parent, Sub, the Company and the Stockholder Representative at any time prior to the Effective Time with respect to any of the terms contained herein.
ARTICLE XI
INDEMNIFICATION
11.1 Non-Tax Indemnification by Stockholders. Except to the extent provided for in Section 11.6, the Stockholders shall, jointly and severally, indemnify Parent, Sub and the Surviving Corporation (each, a “Parent Indemnitee”, and collectively, the “Parent Indemnitees”) in respect of, and hold the Parent Indemnitees harmless against, any and all Liabilities, monetary damages, judgments, fines, fees, penalties, interest obligations, deficiencies, losses and expenses, including amounts paid in settlement, interest, court costs, reasonable costs of and expenses of attorneys incurred by the Parent Indemnitees (“Damages”) arising out of or resulting from (i) the untruth, inaccuracy or breach of any representation or warranty of the Stockholders or the Company contained in this Agreement or (ii) any breach, non-fulfillment or failure to perform any agreement or covenant of the Stockholders or Company contained in this Agreement; except that the Stockholders only shall be severally liable for the representations and warranties contained in Article IV.
11.2 Indemnification by Parent. Parent shall indemnify the Stockholders in respect of, and hold such holders harmless against any and all Damages incurred or suffered by such holders arising out of or resulting from (i) the untruth, inaccuracy or breach of any representation or warranty of Parent or Sub contained in this Agreement, (ii) any breach, non-fulfillment or failure to perform any agreement or covenant of Parent or Sub contained in this Agreement, or (iii) the operation of the business of the Surviving Corporation after the close of business on the Closing Date.
11.3 Method of Asserting Claims. (a) Claims by Parent Indemnitee. All claims for indemnification (“Indemnity Claims”) made by a Parent Indemnitee pursuant to Sections 11.1 or 11.6 shall be made in accordance with the provisions of this Article XI. All Indemnity Claims made by a Parent Indemnitee pursuant to this Article XI shall be made to the Stockholder Representative who shall have responsibility and authority to advise the Stockholders thereof and to take any action under this Article XI on behalf of the Stockholders with respect to such claim, including settling such claim or acknowledging any Liability of the Stockholders pursuant to this Article XI.
(b) Claims by Stockholders. All Indemnity Claims made by the Stockholders pursuant to this Article XI shall be made by the Stockholder Representative on behalf of such Stockholders, and the Stockholder Representative shall have full power and authority to act as “Indemnitee” hereunder on behalf of the Stockholders and to take any action under this Article XI on behalf of the Stockholders with respect thereto, including settling or withdrawing such claim.
(c) Third Party Claims. If Parent, on behalf of any Parent Indemnitee, or the Stockholder Representative seeks to be indemnified pursuant to this Article XI (in each case, an “Indemnitee”), it shall give prompt written notification to the party against whom indemnification is sought (the “Indemnifying Party”) of the assertion of any third party claim or commencement of any action, suit or proceeding relating to a third party claim for which indemnification pursuant to this Article XI may be sought, but the failure of an Indemnitee to give prompt notice to the Indemnifying Party shall not affect the rights of the Indemnitee to indemnification hereunder, except (i) as provided in Section 11.4 below and (ii) if (and then only to the extent that) the Indemnifying Party incurs additional expenses or the Indemnifying Party is actually prejudiced by reason of such failure to give timely notice. Within 20 days after delivery of such notification, the Indemnifying Party may, upon written notice thereof to the Indemnitee, assume control of the defense of such claim, action, suit or proceeding with counsel reasonably satisfactory to the Indemnitee, provided that the Indemnifying Party acknowledges in writing, and in form and substance acceptable, to the Indemnitee that any damages, fines, costs, judgments or other liabilities that may be assessed against the Indemnitee in connection with such action, suit or proceeding constitute Damages for which the Indemnitee shall be entitled to indemnification pursuant to this Article XI; and provided, further, that Parent shall have the right to control the defense to the extent of any claim or demand seeking equitable relief or remedial action on the part of a Parent Indemnitee. If the Indemnifying Party does not so assume control of such defense, the Indemnitee shall control such defense. The party not controlling such defense may participate therein at its own expense; provided that if the Indemnifying Party assumes control of such defense and the Indemnitee reasonably concludes that the Indemnifying Party and the Indemnitee have a conflict of interest or different defenses available with respect to such action, suit or proceeding, the reasonable fees and expenses of counsel to the Indemnitee shall be considered “Damages” for purposes of this Agreement. The party controlling such defense shall keep the other party advised of the status of such action, suit or proceeding and the defense thereof and shall consider in good faith recommendations made by the other party with respect thereto. The Indemnitee shall not agree to any settlement of such claim, action, suit or proceeding without the prior written consent of the Indemnifying Party. The Indemnifying Party shall not agree to any settlement of such action, suit or proceeding without the prior written consent of the Indemnitee, which shall not be unreasonably withheld.
(d) Direct Claims. With respect to claims other than third party claims, the Indemnitee shall use reasonable efforts promptly to notify the Indemnifying Party of such claims, but the failure of the Indemnitee so to give notice to the Indemnifying Party shall not affect the rights of Indemnitee to indemnification hereunder, except (i) as provided in Section 11.4 below and (ii) if (and then only to the extent that) the Indemnifying Party incurs additional expenses or the Indemnifying Party is actually prejudiced by reason of such failure to give timely notice.
11.4 Survival of Representations, Warranties and Agreements. The representations and warranties in this Agreement shall survive the Effective Time until the close of business on the first anniversary of the Effective Time, except that (i) the representations and warranties in Sections 4.1 and 4.4 shall survive and remain in full force and effect indefinitely; provided, however, that if notice of any claim for indemnification is given before expiration of such period, then notwithstanding the expiration of such time period, the representation, warranty, covenant or agreement applicable to such claim shall survive until but only for purposes of the resolution of such claim. Any claim for indemnification pursuant to this Article must be made no later than December 1, 2024.
11.5 Stockholder Representative. (a) The Stockholders agree that [**] shall act as the Stockholder Representative, and approval of this Agreement by the Stockholders shall constitute ratification and approval of such designation. The Stockholder Representative may be removed by the vote of Persons which collectively owned more than 50% of the Company Common Stock at the Effective Time of the Merger (“Majority Holders”). In the event of the death, resignation or removal of the Stockholder Representative, a new Stockholder Representative shall be appointed by a vote of Majority Holders. Any failure by the Majority Holders to appoint a new Stockholder Representative upon the death, resignation or removal of the Stockholder Representative shall not have the effect of releasing the Stockholders from any liability under this Agreement, the Escrow Agreement or otherwise.
(b) The Stockholder Representative shall have such powers and authority as are necessary to carry out the functions assigned to them under this Agreement (including with respect to claims for indemnification pursuant to this Article XI); provided, however, that the Stockholder Representative will have no obligation to act on behalf of the Stockholders, except as expressly provided herein and in the Escrow Agreement.
(c) Parent shall have the right to rely conclusively upon all actions taken or omitted to be taken by the Stockholder Representative pursuant to this Agreement and any instrument, agreement or document relating hereto or thereto all of which actions or omissions shall be legally binding upon the Stockholders.
(d) The parties shall treat any indemnification payment under Article XI as an adjustment to the Merger Consideration. To the extent that any such indemnification payment is treated as other than an adjustment to the Merger Consideration and is determined to be taxable to the party receiving such payment by any taxing authority, the paying party shall also indemnify the party receiving such payment for any Taxes incurred by reason of the receipt of such payment and any related costs incurred by the party receiving such payment in connection with such Taxes (or any asserted deficiency, claim, demand, action, suit, proceeding, judgment or assessment, including the defense or settlement thereof, relating to such Taxes).
(e) Cooperation with Respect to Tax Returns. Parent and the Stockholders agree to furnish or cause to be furnished to each other, and each at their own expense, as promptly as practicable, such information (including access to books and records) and assistance relating to the Company as is reasonably necessary for the filing of any Tax Return, for the preparation for any audit, and for the prosecution or defense of any claim, suit or proceeding relating to any adjustment or proposed adjustment with respect to Taxes.
(f) Transfer Taxes. The Stockholders shall be liable for and shall pay (and shall indemnify and hold harmless the Indemnitees against) all sales, use, stamp, documentary, filing, recording, transfer or similar fees or taxes or governmental charges (including, without limitation, real property transfer gains taxes, UCC-3 filing fees, FAA, ICC, DOT, real estate and motor vehicle registration, title recording or filing fees and other amounts payable in respect of transfer filings) as levied by any taxing authority or governmental agency in connection with the transactions contemplated by this Agreement (other than taxes measured by or with respect to income imposed on the Stockholders or on Parent or its Affiliates). The Stockholders hereby agree to file all necessary documents (including, but not limited to, all Tax Returns) with respect to all such amounts in a timely manner. Notwithstanding the foregoing, the Stockholders shall be permitted to cause the Company to pay the Connecticut conveyance tax payable as a result of this transaction provided the same results in an adjustment to the Working Capital of the Company and the Surviving Corporation shall pay the vehicle registration fees and taxes which shall not give rise to an adjustment to the Working Capital of the Company.
11.7 Limitation on Stockholders’ Liability. Notwithstanding anything to the contrary contained herein, except with respect to claims based on fraud or intentional or deliberate misrepresentation, (a) the Stockholders shall not be liable (i) under this Article until the aggregate amount of all Damages incurred or suffered with respect to all claims made by Parent Indemnitees hereunder exceeds $25,000 (the “Stockholder Threshold Amount”). If after the aggregate of all Damages suffered or incurred exceeds the Threshold Amount, Parent shall be entitled to receive one and one-half ($1.50) dollars in respect of each one dollar of indemnified claims in excess of the Stockholder Threshold Amount. The Stockholder Threshold Amount shall not apply to claims concerning Sections 4.4 (Title to Company Capital Stock) and 5.9 (Taxes). The aggregate liability of the Stockholders hereunder for Damages shall not exceed $400,000 and the liability of each individual Stockholder for Damages shall not exceed his pro-rata portion of such $400,000 based upon the proportion of the shares of Company Common Stock owned by him at the Closing Date, notwithstanding the foregoing, the limit of the liability of a Stockholder for a breach of the representation and warranty contained in Sections 4.1, 4.3 and 4.4 shall equal the value of the consideration received for his shares.
ARTICLE XII
GENERAL PROVISIONS
12.1 Frustration of the Closing Conditions. Neither the Company nor Parent or Sub may rely on the failure of any condition precedent set forth in Article IX to be satisfied if such failure was caused by such party’s (or parties’) failure to act in good faith or to use its reasonable best efforts to consummate the transactions contemplated by this Agreement in accordance with Sections 8.1 and 8.2(c).
12.2 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York without reference to choice of law principles, including all matters of construction, validity and performance, except that the provisions hereof with respect to any corporate or stockholder action required under the laws of the State of Connecticut to effect the Merger shall be governed by the laws of the State of Connecticut.
12.3 Notices. All notices, requests, permissions, waivers, and other communications hereunder shall be in writing and shall be deemed to have been duly given, (a) five business days following sending by registered or certified mail, postage prepaid, (b) when sent if sent by e-mail; provided that the e-mail is promptly confirmed by notice delivered by overnight courier, (c) when delivered, if delivered personally to the intended recipient and (d) one business day following sending by overnight delivery via a national courier service, and in each case, addressed to a party at the following address for such party:
(i) If to the Parent, to:
Strategic Acquisitions Inc.
30 Broad Street
14th Floor
New York, New York 10005
Attn: President
(ii) If to the Company, a Stockholder or the Stockholder Representative:
Exworth Union Inc
51 JFK Parkway
Suite 135
Short Hills, New Jersey 07078
Attn:
Such names and addresses may be changed by notice given in accordance with this Section.
12.4 Entire Agreement. This Agreement (including the Exhibits attached hereto, all of which are a part hereof) contain the entire understanding of the parties hereto and thereto with respect to the subject matter contained herein and therein, supersede and cancel all prior agreements, negotiations, correspondence, undertakings and communications of the parties, oral or written, respecting such subject matter. There are no restrictions, promises, representations, warranties, agreements or undertakings of any party hereto with respect to the transactions contemplated by this Agreement other than those set forth herein or in the Escrow Agreement or the Closing Agreements or made hereunder or thereunder.
12.5 Headings; References. The article, section and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. All references herein to “Articles”, “Sections” or “Exhibits” shall be deemed to be references to Articles or Sections hereof or Exhibits hereto unless otherwise indicated.
12.6 Counterparts. This Agreement may be executed in multiple counterparts and each counterpart shall be deemed to be an original, but all of which shall constitute one and the same original.
2.7 Parties in Interest; Assignment. Neither this Agreement nor any of the rights, interest or obligations here-under shall be assigned by any of the parties hereto without the prior written consent of the other parties; provided, however, that Sub shall have the right to assign this Agreement to any other wholly-owned Subsidiary of Parent. This Agreement shall inure to the benefit of and be binding upon the Stockholders, Company, Parent and Sub and shall inure to the sole benefit of the Stockholders, Company, Parent and Sub and their respective successors and permitted assigns. Except as set forth in Article XI, nothing in this Agreement, express or implied, is intended to confer upon any other Person any rights or remedies under or by reason of this Agreement.
12.8 Severability; Enforcement. The invalidity of any portion hereof shall not affect the validity, force or effect of the remaining portions hereof. If it is ever held that any restriction hereunder is too broad to permit enforcement of such restriction to its fullest extent, each party agrees that a court of competent jurisdiction may enforce such restriction to the maximum extent permitted by law, and each party hereby consents and agrees that such scope may be judicially modified accordingly in any proceeding brought to enforce such restriction.
12.9 Specific Performance. The parties hereto agree that the remedy at law for any breach of this Agreement will be inadequate and that any party by whom this Agreement is enforceable shall be entitled to specific performance in addition to any other appropriate relief or remedy. Such party may, in its sole discretion, apply to a court of competent jurisdiction for specific performance or injunctive or such other relief as such court may deem just and proper in order to enforce this Agreement or prevent any violation hereof and, to the extent permitted by Applicable Law, each party waives any objection to the imposition of such relief.
12.10 Jurisdiction. Each party to this Agreement hereby irrevocably agrees that any legal action, suit or proceeding arising out of or relating to this Agreement or the Escrow Agreement shall be brought in the United States District Court for the Southern District of New York or the Supreme Court of the State of New York and each party hereto agrees not to assert, by way of motion, as a defense or otherwise, in any such action, suit or proceeding any claim that it is not subject personally to the jurisdiction of such court, that the action, suit or proceeding is brought in an inconvenient forum, that the venue of the action, suit or proceeding is improper or that this Agreement or the Escrow Agreement, or the subject matter hereof or thereof may not be enforced in or by such court. Each party hereto further and irrevocably submits to the jurisdiction of such court in any action, suit or proceeding.
[The remainder of this page is intentionally left blank]
[MERGER AGREEMENT SIGNATURE PAGE]
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written.
| Strategic Acquisitions, Inc. | Exworth Union Inc | |||
| By: | /s/ John P. O’Shea | By: | /s/ Yuanyuan Huang | |
| John P. O’Shea | Yuanyuan Huang | |||
| President | An Authorized Officer | |||
| STQN Sub, Inc. | ||||
| By: | /s/ John P. O’Shea | |||
| John P. O’Shea | ||||
| President | ||||
| The Stockholders: | ||||
| Exworth Management LLC | World Class Technology LLC | |||
| By: | /s/ Yuanyuan Huang | By: | /s/ Yuejiao Zhang | |
| Yuanyuan Huang | Yuejiao Zhang | |||
| An Authorized Officer | An Authorized Party | |||
| Holder of 1,000 shares of Exworth Union Inc: | Holder of 100 shares of Exworth Union Inc: | |||
Exhibit 3.2
STATE OF DELAWARE CERTIFICATE OF MERGER OF DOMESTIC CORPORATIONS
Pursuant to Title 8, Section 251(c) of the Delaware General Corporation Law, the undersigned corporation executed the following Certificate of Merger:
FIRST: The name of the surviving corporation is Exworth Union LLC and the name of the corporation being merged into this surviving corporation is SAC Merger Sub Inc.
SECOND: The Agreement of Merger has been approved, adopted, certified, executed and acknowledged by each of the constituent corporations.
THIRD: The name of the surviving corporation is Exworth Union Inc, a Delaware corporation.
FOURTH: The Certificate of Incorporation of the surviving corporation shall be its Certificate of Incorporation.
FIFTH: The merger is to become effective on filing of this Certificate of Merger with Secretary of State of the State of Delaware.
SIXTH: The Agreement of Merger is on file at 51 JFK Parkway, Suite 135, Short Hills, New Jersey 07078, the place of business of the surviving corporation.
SEVENTH: A copy of the Agreement of Merger will be furnished by the surviving corporation on request, without cost, to any stockholder of the constituent corporations.
IN WITNESS WHEREOF, said surviving corporation has caused this certificate to be signed by an authorized officer the day of December 22, 2022.
| Exworth Union Inc | ||
| By: | /s/ Yuanyuan Huang | |
| An Authorized Officer | ||
| Name: | Dr. Yuanyuan Huang | |
| Title: | Secretary | |
Exhibit 4.1
| WARRANT | ||
N0.000 |
STRATEGIC ACQUISITIONS, INC. |
____Shares |
|
WARRANT TO PURCHASE COMMON STOCK |
||
VOID AFTER 5:30 P.M., EASTERN TIME, ON THE EXPIRATION DATE |
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), AND MAY NOT BE SOLD, PLEDGED, HYPOTHECATED, DONATED OR OTHERWISE TRANSFERRED WITHOUT COMPLIANCE WITH THE REGISTRATION OR QUALIFICATION PROVISIONS OF APPLICABLE FEDERAL AND STATE SECURITIES LAWS OR APPLICABLE EXEMPTIONS THEREFROM.
FOR VALUE RECEIVED, STRATEGIC ACQUISITIONS, INC., a Nevada corporation (the “Company”), hereby agrees to sell upon the terms and on the conditions hereinafter set forth, but no later than 5:30p.m., Eastern Time, on the Expiration Date (as hereinafter defined) to _____________ or registered assigns (the “Holder”), under the terms as hereinafter set forth, 5 (five) years from issuance date (August 31, 2022) fully paid and non-assessable shares of the Company’s Common Stock, par value $0.0001 per share (the “Warrant Stock”), at a purchase price of$1.20 (the “Exercise Price”), to the warrant holder pursuant to this warrant (this “Warrant”). The number of shares of Warrant Stock to be so issued and the Exercise Price are subject to adjustment in certain events as hereinafter set forth. The term “Common Stock” shall mean, when used herein, unless the context otherwise requires, the stock and other securities and property at the time receivable upon the exercise of this Warrant.
Exercise of Warrant.
a. The Holder may exercise this Warrant according to its terms by surrendering this Warrant to the Company at the address set forth in Section 11, the Notice of Exercise attached hereto having then been duly executed by the Holder, accompanied by cash, certified check or bank draft in payment of the purchase price, in lawful money of the United States of America, for the number of shares of the Warrant Stock specified in the Notice of Exercise, or as otherwise provided in this Warrant, prior to 5:30p.m., Eastern Time, on September 1, 2027(the “Expiration Date”).
b. Cashless Exercise. This Warrant may be exercised, in whole or in part, at such time by means of a “cashless exercise” in which the Holder shall be entitled to receive a certificate for the number of shares of Warrant Stock equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:
(A) =the VWAP on the Trading Day immediately preceding the date on which Holder elects to exercise this Warrant by means of a “cashless exercise,” as set forth in the applicable Notice of Exercise;
(B)= the Exercise Price of this Warrant, as adjusted hereunder; and
(X)= the number of shares of Warrant Stock that would be issuable upon exercise of this Warrant in accordance with the terms of this Warrant if such exercise were by means of a cash exercise rather than a cashless exercise.
For purposes of this Warrant, “VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market (as defined below), the daily volume weighted average price of the Common Stock for the ten (10) trading days prior to such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30a.m. New York City time to 4:02p.m. New York City time); (b) if the Common Stock is then quoted on the OTC Markets or QX is not a Trading Market, the volume weighted average price of the Common Stock for the ten (10) trading days prior to such date (or the nearest preceding date) on such market; (c) if the Common Stock is not then listed or quoted on the OTC Markets or QX (or a similar organization or agency succeeding to its functions of reporting prices), the average bid price per share of the Common Stock so reported for the twenty (20) trading days prior to such date; or (d) in all other cases, the fair market value of a share of Common Stock as determined in good faith by the Company’s board of directors. For purposes of this Warrant, “Trading Market” means the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the American Stock Exchange, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New York Stock Exchange or the OTC or QX Markets.
c. This Warrant may be exercised in whole or in part so long as any exercise in part hereof would not involve the issuance of fractional shares of Warrant Stock. If exercised in part, the Company shall deliver to the Holder a new Warrant, identical in form, in the name of the Holder, evidencing the right to purchase the number of shares of Warrant Stock as to which this Warrant has not been exercised, which new Warrant shall be signed by the Chairman, Chief Executive Officer. The term Warrant as used herein shall include any subsequent Warrant issued as provided herein.
d. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. The Company shall pay cash in lieu of fractions with respect to the Warrants based upon the fair market value of such fractional shares of Common Stock (which shall be the closing price of such shares on the exchange or market on which the Common Stock is then traded or quoted) at the time of exercise of this Warrant.
e. In the event of any exercise of the rights represented by this Warrant, a certificate or certificates for the Warrant Stock so purchased, registered in the name of the Holder, shall be delivered to the Holder within a reasonable time after such rights shall have been so exercised. The person or entity in whose name any certificate for the Warrant Stock is issued upon exercise of the rights represented by this Warrant shall for all purposes be deemed to have become the holder of record of such shares immediately prior to the close of business on the date on which the Warrant was surrendered and payment of the Exercise Price (except in case of a cashless exercise) and any applicable taxes was made, irrespective of the date of delivery of such certificate, except that, if the date of such surrender and payment is a date when the stock transfer books of the Company are closed, such person shall be deemed to have become the holder of such shares at the opening of business on the next succeeding date on which the stock transfer books are open. The Company shall pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Common Stock on exercise of this Warrant.
2. Disposition of Warrant Stock and Warrant.
a. The Holder hereby acknowledges that this Warrant and any Warrant Stock purchased pursuant hereto are, as of the date hereof, not registered: (i) under the Securities Act of 1933, as amended (the “Act”), on the ground that the issuance of this Warrant is exempt from registration under Section 4(2) of the Act as not involving any public offering or under Rule 903 of Regulation S promulgated under the Act or (ii) under any applicable state securities law because the issuance of this Warrant does not involve any public offering; and that the Company’s reliance on the Section 4(2) exemption of the Act or Rule 903 of Regulation S promulgated under the Act, as the case may be, and under applicable state securities laws is predicated in part on the representations hereby made to the Company by the Holder that it is acquiring this Warrant and will acquire the Warrant Stock for investment for its own account, with no present intention of dividing its participation with others or reselling or otherwise distributing the same, subject, nevertheless, to any requirement of law that the disposition of its property shall at all times be within its control.
The Holder hereby agrees that it will not sell or transfer all or any part of this Warrant and/or Warrant Stock unless and until it shall first have given notice to the Company describing such sale or transfer and furnished to the Company either (i) an opinion, reasonably satisfactory to counsel for the Company, of counsel (skilled in securities matters, selected by the Holder and reasonably satisfactory to the Company) to the effect that the proposed sale or transfer may be made without registration under the Act and without registration or qualification under any state law, or (ii) an interpretative letter from the Securities and Exchange Commission to the effect that no enforcement action will be recommended if the proposed sale or transfer is made without registration under the Act, or (iii) the Company may elect not to require (i) or (ii).
b. If, at the time of issuance of the shares issuable upon exercise of this Warrant, no registration statement is in effect with respect to such shares under applicable provisions of the Act, the Company may at its election require that the Holder provide the Company with written reconfirmation of the Holder’s investment intent and that any stock certificate delivered to the Holder of a surrendered Warrant shall bear legends reading substantially as follows:
“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 OR AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER OF THIS CERTIFICATE THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT.”
In addition, so long as the foregoing legend may remain on any stock certificate delivered to the Holder, the Company may maintain appropriate “stop transfer” orders with respect to such certificates and the shares represented thereby on its books and records and with those to whom it may delegate registrar and transfer functions.
3. Reservation of Shares. The Company hereby agrees that at all times there shall be reserved for issuance upon the exercise of this Warrant such number of shares of its Common Stock as shall be required for issuance upon exercise of this Warrant. The Company further agrees that all shares which may be issued upon the exercise of the rights represented by this Warrant will be duly authorized and will, upon issuance and against payment of the exercise price, be validly issued, fully paid and nonassessable, free from all taxes, liens, charges and preemptive rights with respect to the issuance thereof, other than taxes, if any, in respect of any transfer occurring contemporaneously with such issuance and other than transfer restrictions imposed by federal and state securities laws.
4. Exchange. Transfer or Assignment of Warrant. This Warrant is exchangeable, without expense, at the option of the Holder, upon presentation and surrender hereof to the Company or at the office of its stock transfer agent, if any, for other Warrants of different denominations, entitling the Holder or Holders thereof to purchase in the aggregate the same number of shares of Common Stock purchasable hereunder. Upon surrender of this Warrant to the Company or at the office of its stock transfer agent, if any, with the Assignment Form annexed hereto duly executed and funds sufficient to pay any transfer tax, the Company shall, without charge, execute and deliver a new Warrant in the name of the assignee named in such instrument of assignment and this Warrant shall promptly be canceled. This Warrant may be divided or combined with other Warrants that carry the same rights upon presentation hereof at the office of the Company or at the office of its stock transfer agent, if any, together with a written notice specifying the names and denominations in which new Warrants are to be issued and signed by the Holder hereof.
5. Capital Adjustments.
a. Share Issuance Event. For a period of twenty-four (24) months from the date of issuance of this Warrant dated August 31, 2022, if the Company shall issue any Common Stock, prior to the complete exercise of this Warrant for a consideration, then the 120% of issued price of such latest issued Common stock will be the new Exercise Price. For purposes of this adjustment, the issuance of any security or debt instrument of the Company carrying the right to convert such security or debt instrument into Common Stock or of any warrant, right or option to purchase Common Stock shall result in an adjustment to the Exercise Price, and upon such issuance and again at any time upon any actual, permitted, optional, or allowed issuances of shares of Common Stock upon any actual, permitted, optional, or allowed exercise of such conversion or purchase rights, then the 120% of such effective issued price of such latest issued Common Stock will be the new Exercise Price. Other than capital adjustment as described in this Section, Common Stock issued or issuable by the Company for no consideration will be deemed issuable or to have been issued for $0.001 per share of Common Stock. After twenty-four months from the date of issuance of this warrant, the Exercise Price of any unexcised warrant will not be adjusted pursuant to Section 5.a herein.
b. Recapitalization. Reclassification and Succession. If any recapitalization of the Company or reclassification of its Common Stock or any merger or consolidation of the Company into or with a corporation or other business entity, or the sale or transfer of all or substantially all of the Company’s assets or of any successor corporation’s assets to any other corporation or business entity (any such corporation or other business entity being included within the meaning of the term “successor corporation”) shall be effected, at any time while this Warrant remains outstanding and unexpired, then, as a condition of such recapitalization, reclassification, merger, consolidation, sale or transfer, lawful and adequate provision shall be made whereby the Holder of this Warrant thereafter shall have the right to receive upon the exercise hereof as provided in Section 1 and in lieu of the shares of Common Stock immediately theretofore issuable upon the exercise of this Warrant, such shares of capital stock, securities or other property as may be issued or payable with respect to or in exchange for a number of outstanding shares of Common Stock equal to the number of shares of Common Stock immediately theretofore issuable upon the exercise of this Warrant had such recapitalization, reclassification, merger, consolidation, sale or transfer not taken place, and in each such case, the terms of this Warrant shall be applicable to the shares of stock or other securities or property receivable upon the exercise of this Warrant after such consummation.
c. Subdivision or Combination of Shares. If the Company at any time while this Warrant remains outstanding and unexpired shall subdivide or combine its Common Stock, the number of shares of Warrant Stock purchasable upon exercise of this Warrant and the Exercise Price shall be proportionately adjusted
d. Stock Dividends and Distributions. If the Company at any time while this Warrant is outstanding and unexpired shall issue or pay the holders of its Common Stock, or take a record of the holders of its Common Stock for the purpose of entitling them to receive, a dividend payable in, or other distribution of, Common Stock, then (i) the Exercise Price shall be adjusted in accordance with Section 5(£) and (ii) the number of shares of Warrant Stock purchasable upon exercise of this Warrant shall be adjusted to the number of shares of Common Stock that the Holder would have owned immediately following such action had this Warrant been exercised immediately prior thereto
e. Stock and Rights Offering to Shareholders. If the Company shall at any time after the date of issuance of this Warrant distribute to all holders of its Common Stock any shares of capital stock of the Company (other than Common Stock) or evidences of its indebtedness or assets (excluding cash dividends or distributions paid from retained earnings or current year’s or prior year’s earnings of the Company) or rights or warrants to subscribe for or purchase any of its securities (excluding those referred to in the immediately preceding paragraph) (any of the foregoing being hereinafter in this paragraph called the “Securities”), then in each such case, the Company shall reserve shares or other units of such Securities for distribution to the Holder upon exercise of this Warrant so that, in addition to the shares of the Common Stock to which such Holder is entitled, such Holder will receive upon such exercise the amount and kind of such Securities which such Holder would have received if the Holder had, immediately prior to the record date for the distribution of the Securities, exercised this Warrant.
f. Exercise Price Adjustment. Except as otherwise provided herein, whenever the number of shares of Warrant Stock purchasable upon exercise of this Warrant is adjusted, as herein provided, the Exercise Price payable upon the exercise of this Warrant shall be adjusted to that price determined by multiplying the Exercise Price immediately prior to such adjustment by a fraction (i) the numerator of which shall be the number of shares of Warrant Stock purchasable upon exercise of this Warrant immediately prior to such adjustment, and (ii) the denominator of which shall be the number of shares of Warrant Stock purchasable upon exercise of this Warrant immediately thereafter.
g. Certain Shares Excluded. The number of shares of Common Stock outstanding at any given time for purposes of the adjustments set forth in this Section 5 shall exclude any shares then directly or indirectly held in the treasury of the Company.
h. Deferral and Cumulation of De Minimis Adjustments. The Company shall not be required to make any adjustment pursuant to this Section 5 if the amount of such adjustment would be less than one percent (1%) of the Exercise Price in effect immediately before the event that would otherwise have given rise to such adjustment. In such case, however, any adjustment that would otherwise have been required to be made shall be made at the time of and together with the next subsequent adjustment which, together with any adjustment or adjustments so carried forward, shall amount to not less than one percent (1%) of the Exercise Price in effect immediately before the event giving rise to such next subsequent adjustment.
i. Duration of Adjustment. Following each computation or readjustment as provided in this Section 5, the new adjusted Exercise Price and number of shares of Warrant Stock purchasable upon exercise of this Warrant shall remain in effect until a further computation or readjustment thereof is required.
6. Removed and Reserved.
7. Limitation on Exercises. The Company shall not effect the exercise of this Warrant, and the Holder shall not have the right to exercise this Warrant, to the extent that after giving effect to such exercise, the Holder (together with such Holder’s affiliates) would beneficially own in excess of 4.99% of the shares of Common Stock outstanding immediately after giving effect to such exercise. For purposes of the foregoing sentence, the aggregate number of shares of Common Stock beneficially owned by such Holder and its affiliates shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which the determination of such sentence is being made, but shall exclude shares of Common Stock which would be issuable upon (A) exercise of the remaining, unexercised portion of this Warrant beneficially owned by such Holder and its affiliates and (B) exercise or conversion of the unexercised or unconverted portion of any other securities of the Company beneficially owned by such Person and its affiliates (including, without limitation, any convertible notes or convertible preferred stock or warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein. Except as set forth in the preceding sentence, for purposes of this paragraph, beneficial ownership shall be calculated in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended. To the extent that the limitation contained in this Section 6 applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any affiliate) and of which portion of this Warrant is exercisable shall be in the sole discretion of the Holder, and the submission of a Notice of Exercise shall be deemed to be the Holder’s determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any affiliate) and of which portion of this Warrant is exercisable, in each case subject to such aggregate percentage limitation, and the Company shall have no obligation to verify or confirm the accuracy of the determination. For purposes of this Warrant, in determining the number of outstanding shares of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as reflected in (1) the Company’s most recent Form 10-K, Form 10-Q, Current Report on Form 8-K or other public filing with the Securities and Exchange Commission, as the case may be, (2) a more recent public announcement by the Company or (3) any other notice by the Company setting forth the number of shares of Common Stock outstanding. For any reason at any time, upon the written or oral request of the Holder, the Company shall within one (1) business day confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by the Holder and its affiliates since the date as of which such number of outstanding shares of Common Stock was reported. The restriction described in this Section 7 may be waived, in whole or in part, upon sixty-one (61) days prior notice from the Holder to the Company to increase such percentage up to 9.99%, but not in excess of9.99%. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 7 to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended beneficial ownership limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation.
8. Notice to Holders.
a. Notice of Record Date. In case:
(i) the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time receivable upon the exercise of this Warrant) for the purpose of entitling them to receive any dividend (other than a cash dividend payable out of earned surplus of the Company) or other distribution, or any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right;
(ii) of any capital reorganization of the Company, any reclassification of the capital stock of the Company, any consolidation with or merger of the Company into another corporation, or any conveyance of all or substantially all of the assets of the Company to another corporation; or
(iii) of any voluntary dissolution, liquidation or winding-up of the Company;
then, and in each such case, the Company will mail or cause to be mailed to the Holder hereof at the time outstanding a notice specifying, as the case may be, (i) the date on which a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (ii) the date on which such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up is to take place, and the time, if any, is to be fixed, as of which the holders of record of Common Stock (or such stock or securities at the time receivable upon the exercise of this Warrant) shall be entitled to exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, conveyance, dissolution or winding-up. Such notice shall be mailed at least thirty (30) days prior to the record date therein specified, or if no record date shall have been specified therein, at least thirty (30) days prior to such specified date, provided, however, failure to provide any such notice shall not affect the validity of such transaction.
b. Certificate of Adjustment. Whenever any adjustment shall be made pursuant to Section 5 hereof, the Company shall promptly make a certificate signed by its Chairman, Chief Executive Officer, President, Vice President, Chief Financial Officer or Treasurer, setting forth in reasonable detail the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated and the Exercise Price and number of shares of Warrant Stock purchasable upon exercise of this Warrant after giving effect to such adjustment, and shall promptly cause copies of such certificates to be mailed (by first class mail, postage prepaid) to the Holder of this Warrant.
9. Loss, Theft. Destruction or Mutilation. Upon receipt by the Company of evidence satisfactory to it, in the exercise of its reasonable discretion, of the ownership and the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, of indemnity reasonably satisfactory to the Company and, in the case of mutilation, upon surrender and cancellation thereof, the Company will execute and deliver in lieu thereof, without expense to the Holder, a new Warrant of like tenor dated the date hereof.
10. Warrant Holder Not a Stockholder. The Holder of this Warrant, as such, shall not be entitled by reason of this Warrant to any rights whatsoever as a stockholder of the Company.
11. Notices. Any notice required or contemplated by this Warrant shall be deemed to have been duly given if transmitted by registered or certified mail, return receipt requested, or nationally recognized overnight delivery service, to the Company at its principal executive offices located at 30 Broad Street, 14th, New York, New York 1000451 t Attention: Yuanyuan Huang, Treasurer, Secretary and Director, or to the Holder at the name and address set forth in the Warrant Register maintained by the Company.
12. Choice of Law. THIS WARRANT IS ISSUED UNDER AND SHALL FOR ALL PURPOSES BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
13. Jurisdiction and Venue. The Company and Holder hereby agree that any dispute which may arise between them arising out of or in connection with this Warrant shall be adjudicated before a court located in New York County, New York and they hereby submit to the exclusive jurisdiction of the federal and state courts of the State of York located in New York County with respect to any action or legal proceeding commenced by any party, and irrevocably waive any objection they now or hereafter may have respecting the venue of any such action or proceeding brought in such a court or respecting the fact that such court is an inconvenient forum, relating to or arising out of this Warrant or any acts or omissions relating to the sale of the securities hereunder, and consent to the service of process in any such action or legal proceeding by means of registered or certified mail, return receipt requested, in care of the address set forth herein or such other address as either party shall furnish in writing to the other.
IN WITNESS WHEREOF, the Company has duly caused this Warrant to be signed on its behalf, in its corporate name and by its duly authorized officers, as of this 31 day of August, 2022.
| STRATEGIC ACQUISITIONS, INC., | ||
| Name: | Yuanyuan Huang | |
| Title: | Treasurer, Secretary and Director | |
NOTICE OF EXERCISE
TO: STRATEGIC ACQUISITIONS, INC.
30 Broad Street, 14th
New York, New York 10004
Attn: Yuan Huang
Tel: (757) 645-6019
Fax: (908) 728-6500
(1) The undersigned hereby elects to purchase shares of Warrant Stock of the Company pursuant to the terms of the attached Warrant to Purchase Common Stock, and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.
(2) Payment shall take the form of (check applicable box): D in lawful money of the United States; and/or
D if the provisions of subsection 1(b) of this Warrant are in effect, the cancellation of such portion of the attached Warrant as is exercisable for a total of Warrant Shares (using a Fair Market Value of $ per share for purposes of this calculation); and/or
D if the provisions of subsection 1(b) of this Warrant are in effect, the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 1(b), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 1(b).
(3) Please issue a certificate or certificates representing said shares of Warrant Stock in the name of the undersigned or in such other name as is specified below:
The shares of Warrant Stock shall be delivered to the following DWAC Account Number, if permitted, or by physical delivery of a certificate to:
(4) Accredited Investor. The undersigned is an “accredited investor” as defined in Regulation D promulgated under the Securities Act of 1933, as amended or the undersigned satisfies the requirements under Regulation S promulgated under the Securities Act of 1933, as amended.
ASSIGNMENT FORM
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.)
FOR VALUE RECEIVED, all of or shares of the foregoing Warrant and all rights evidenced thereby are hereby assigned to
——————————-whose address is
Dated: ,
| Holder’s Name: |
| Holder’s Signature: |
| Name and Title of Signatory: |
| Holder’s Address: |
| Signature Guaranteed: |
NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.
Exhibit 10.1
CERTAIN IDENTIFIED INFORMATION HAS BEEN OMITTED FROM THIS DOCUMENT BECAUSE IT IS BOTH NOT MATERIAL AND WOULD BE COMPETITIVELY HARMFUL IF PUBLICLY DISCLOSED, AND HAS BEEN MARKED WITH “[***]” TO INDICATE WHERE OMISSIONS HAVE BEEN MADE.
MASTER LOAN AGREEMENT
This Master Loan Agreement is by and between Exworth Union Inc having an address of John F. Kennedy Parkway, Suite 135, Short Hills, NJ 07078 (the “Borrower”) and [***], a [***] limited liability company having a place of business at [***] (the “Lender”).
WITNESSETH
WHEREAS, the Borrower has requested that the Lender provide a loan, and subsequent loans in tranches, to be secured by collateral of the Borrower;
WHEREAS, the Lender is willing to furnish such loan or loans, but only upon the terms and conditions contained herein, including, without limitation, the execution and delivery of certain agreements; and
NOW THEREFORE, in consideration of the mutual covenants contained herein, and other good and valuable consideration, the receipt of which is hereby acknowledged, it is hereby agreed as follows:
SECTION 1
DEFINITIONS
1.1 Defined Terms. As used in this Agreement, the following terms shall have the following meanings:
“Agreement” shall mean this Master Loan Agreement, including any Exhibits or Schedules hereto, and as amended or supplemented from time-to-time, or as incorporated by reference into subsequent Tranche Agreements executed under Section 2.1(b).
“Balance Payment” for a Tranche means the Loan Principal Amount for that Tranche minus (less) the Advanced Funds and any Origination Fee, costs or expenses, if applicable then due and as set forth in the Closing Statement for that Tranche.
“Bitcoin” shall mean Bitcoin transferred as specified in Section 2.1 and any related Bitcoin resulting from a “soft” or “hard” fork in the Bitcoin blockchain, a revision or upgrade to the Bitcoin software code, reclassification, or other like change of the Pledged Collateral.
“Closing” shall have the meaning given to it in Section 2.6.
“Closing Date” means the date (being no later than the business day following the date of delivery of the Closing Statement) upon which the remaining Loan Principal Amount is delivered to the Borrower.
“Closing Statement” shall mean a statement in the form attached to this Agreement as Exhibit 1, which Closing Statement shall be delivered by the Lender to the Borrower contemporaneously with the final funding of the Loan.
“Currency Exchange Price” the parties agree to calculate the Bitcoins exchange price based on the Bloomberg Bitcoin United States Dollar Spot XBT Currency page
“Default Floor” The Default Floor is, initially, seventy percent (70%) of the FMP of the Pledged Collateral per the Closing Statement. Following the cure of a Valuation Event, the Default Floor shall be the FMP of the Pledged Collateral used to calculate the deficit that resulted in the Valuation Event.
“Digital Wallet” shall mean a software program that stores public and private keys and interfaces with the Bitcoin blockchain in order to allow users to send and receive Bitcoin.
“Event of Default” shall mean any of the events specified in Section 8.1 hereof.
“Fair Market Price” (“FMP”) shall mean with respect to the assets provided as Pledged Collateral the average of the last sale price on three (3) consecutive business days quoted using the Bloomberg Generic Price (“BGN”) as posted by Bloomberg on the Bitcoin United States Dollar Spot XBT Currency page at 6pm EST. For purposes of determining the Loan Principal Amount prior to Closing, the first day of pricing shall be the Verification Day. That average price shall be the per-unit price of the Pledged Collateral used to establish its Fair Market Value.
“Fair Market Value” (“FMV”) shall mean the amount, expressed in dollars, equating to the FMP for each unit of the Pledged Collateral multiplied by the number of Bitcoin comprising the Pledged Collateral.
“Lien” shall mean, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset.
“Loan Documents” shall mean collectively, this Agreement, the Pledge Agreement, the Closing Statement, and any other agreements, documents, instruments, exhibits or financial statements delivered in connection with the Loan. Each such document shall be contemporaneously executed and read and construed together in a manner so as to give meaning and effect to all their provisions.
“Loan Principal Amount” shall mean the amount of monies borrowed by Borrower from Lender under Section 2.1 hereof.
“Obligations” shall mean all obligations and liabilities of the Borrower to Lender of every kind, nature and description, arising out of the Master Loan Agreement or Master Pledge Agreement or any documents delivered pursuant to either of them including, without limitation, the payment in full when due of the Loan and all interest thereon, the payment of all amounts payable by the Borrower to the Lender under the terms of the Loan Agreement or any other obligation.
| 2 |
“Person” shall mean any individual, corporation, partnership, trust or other duly formed business entity.
“Pledge Agreement” shall mean the Master Pledge Agreement dated the date hereof between Borrower and Lender, by which the Pledged Collateral is pledged to the Lender.
“Pledged Collateral” shall mean the 100 Bitcoins and any related units resulting from a “soft” or “hard” fork in the Bitcoin blockchain, a revision or upgrade to the Bitcoin software code, reclassification, or other like change. For the avoidance of doubt, Pledged Collateral shall not include any blockchain assets distributed to Lender’s Digital Wallet by third parties (i.e., “airdrops”) on the basis that such Digital Wallet holds Pledged Collateral.
“Valuation Event” shall mean that, initially, the Fair Market Price of the Pledged Collateral has fallen to less than seventy percent (70%) of the Fair Market Price per the Closing Statement or as subsequently adjusted from time-to-time in accordance with section 8.1(g).
“Verification Day” shall mean the business day after the Pledged Collateral is received in the Lender’s Digital Wallet prior to Closing.
1.2 Use of Defined Terms. All terms defined in this Agreement shall have such defined meanings when used herein and in the Pledge Agreement or other documents made or delivered in conjunction with this Agreement.
1.3 Lender’s Discretion. The Lender has the discretion and right to elect to not proceed with any loan with the Borrower at any time up until the Closing.
1.4 Statements as to Knowledge. Any statements, representations or warranties which are based upon the knowledge of the Borrower shall be deemed to have been made after due inquiry with respect to the matter in question but without Borrower being required to seek an opinion of counsel with respect thereto.
1.5 Currency. All loans and related fees and payments shall be priced, closed and funded in United States of American Dollars (“USD”).
| 3 |
SECTION 2
AMOUNT AND TERMS OF LOAN
2.1 Loan Principal Amount.
| (a) | Subject to all of the terms and conditions of this Agreement, the Lender agrees to lend to the Borrower funds equal to 70% of the current Fair Market Value (the “Loan-to-Value Ratio”) of 100 Bitcoins (the “Loan Principal Amount”). The Loan Principal Amount shall be funded no later than the Closing Date and shall be memorialized in a Closing Statement in the form of Exhibit 1 hereto, which is hereby incorporated by reference. |
| (b) | The Borrower and Lender have discussed that they each may elect to enter into additional loan transactions pursuant to this Agreement collateralized by an additional number of Bitcoin. The Lender agrees to make its best efforts to fund additional loans contingent upon market conditions such as the price and trading volume of Bitcoin for example. Any subsequent additional loan collateralized by additional Bitcoin will be subject to the same terms and conditions as set forth in this Agreement except that: |
| (i) | The Loan-to-Value Ratio and the number of Bitcoin shall be mutually agreed on by the parties on each and every subsequent loan tranche; and |
| (ii) | the new starting date for the new loan shall be memorialized in the Tranche Loan Agreement form attached hereto as Exhibit 2. |
The Lender has the discretion and right to elect to not proceed with any loan transaction with the Borrower up until the completion of the Closing.
2.2 Interest Rate.
| (a) | The Borrower shall pay to the Lender simple interest on the Loan Principal Amount for the term of the Loan at a rate of 2.50% per annum. The interest payment shall be paid in cash in the amount established at Closing. |
| (b) | The Loan shall bear interest on the Loan Principal Amount for each day from the Closing Date until the Maturity Date. Interest on the Loan Principal Amount shall be computed on the basis of a 360-day year for the actual number of days elapsed and shall be due and payable quarterly commencing ninety (90) days from the Closing Date for the preceding three months. |
| 4 |
| (c) | The payment of interest will be overdue if not received by the Lender within ten (10) calendar days of the due date. Any overdue interest payment shall incur a penalty of seven percent (7%) of the amount due. If the overdue interest payment is not received by the Lender within thirty (30) days of the original due date the Lender will send a notice to the Borrower advising the Borrower that the Loan will terminate under the default provisions of this Agreement if the payments due are not received by the Lender within five (5) business days from the date such final notice was sent. |
2.3 Prepayment. There is no prepayment of the Loan Principal Amount or of any interest due under the Loan permitted during the Loan Term. The Borrower acknowledges that if the Loan or any interest due under the Loan are paid for any reason prior to the Maturity Date, the Lender will incur losses and damages and will be deprived the benefit of its bargain.
2.4 Loan Origination Fee. Contemporaneous with the funding of the Loan by the Lender on the Closing Date, the Borrower shall pay to the Lender an agreed upon loan origination fee of 1% of the Loan Principal Amount. The Lender is authorized to deduct the loan origination fee from the Loan Principal Amount, if a fee is charged.
2.5 Term of Loan and Maturity Date of Loan.
| (a) | The Loan shall mature, and the Loan Principal Amount together with all accrued interest thereon shall be due and payable twenty-four (24) months subsequent to the occurrence of the Closing Date (the “Maturity Date” or “Maturity”). No prepayment of the Loan Principal Amount or of any interest due under the Loan is allowed. |
| (b) | For each successive tranche, the Maturity Date will be twenty-four (24) months subsequent to the Closing Date, unless the tranches will mature less than thirty (30) days apart, in which case the Maturity Date will be twenty-four (24) months from the Closing Date plus thirty (30) days subsequent to the Maturity Date of the previous tranche. |
| (c) | The Maturity Date may be extended by the Lender if agreed to by the Lender in writing. If Borrower wishes to request such an extension, they must notify Lender ninety (90) calendar days prior to such date. A fee in the amount of 1% of the Loan Principal Amount (the “Extension Fee”) shall be due and payable within sixty (60) calendar days of the original Maturity Date if the Lender agrees to extend such Maturity Date. If the Lender has not received the Extension Fee by no later than fifty-eight (58) calendar days prior to the original Maturity Date, this shall be an Event of Default under Section 8, which shall lead to termination and forfeiture of the Pledged Collateral. |
| 5 |
| (d) | The term of the Loan and this Agreement shall begin on the Closing Date and end on the Maturity Date (the “Loan Term”). The Closing Date shall be set in accordance with Section 2.6 of this Agreement and the Closing Statement shall identify the Closing Date. |
| (e) | No later than ninety (90) calendar days prior to the Maturity Date, the Borrower shall communicate to the Lender in writing whether it intends to repay the Loan Principal Amount on the Maturity Date. No later than sixty (60) calendar days prior to the Maturity Date, the Borrower shall provide proof of funds to repay the Loan Principal Amount plus any other Obligations due to the Lender (as detailed in Section 2.9) on the Maturity Date (the “Proof of Funds”). Acceptable Proof of Funds includes (i) bank statements, (ii) brokerage statements, or (iii) third party verification from an Accountant or CPA detailing current funds available. If the Lender has not received the Proof of Funds by no later than fifty-eight (58) calendar days prior to the Maturity Date, this shall be an Event of Default under Section 8, which shall lead to termination and forfeiture of the Pledged Collateral. |
2.6 Closing. On the same day that the Pledged Collateral is delivered to the Lender’s account, a portion of the Loan Principal Amount, One Million Dollars ($1,000,000 USD) (the “Advanced Funds”) will be settled (paid) to the Borrower’s account per the following instructions:
| Bank/Institution Name | JPMorgan Chase Bank |
| Swift No. | [***] |
| Account Number | [***] |
| Account Name | Exworth Union Inc. |
The Closing Date shall be no later than four (4) business days from the Verification Day, assuming the conditions to Lender’s Obligations set forth in Section 7 herein are satisfied. The Balance Payment shall be paid on the Closing Date. The Balance Payment shall mean the Loan Principal Amount minus (less) the Advanced Funds, any Origination Fee, costs or expenses, if applicable and as set forth in the Closing Statement, not satisfied in cash by the Borrower. Lender shall provide the Closing Statement to the Borrower prior to the Closing Date. The Balance Payment shall be settled (paid) to the Borrower’s account per the following instructions:
| Bank/Institution Name | JPMorgan Chase Bank |
| Swift No. | [***] |
| Account Number | [***] |
| Account Name | Exworth Union Inc. |
| 6 |
2.7 Application of Payments. Any funds received as payment from or on behalf of the Borrower (whether pursuant to any of the terms and provisions of the Loan Documents or otherwise) shall be applied by Lender to the following items in the following manner:
| (i) | first, if applicable, to the payment to or reimbursement of Lender for any reasonable fees and expenses for which it is entitled to be paid or reimbursed pursuant to the Loan Documents; |
| (ii) | second, to the payment of any accrued and unpaid interest due under the Agreement (after taking into account any other distributions received with respect to the Pledged Collateral); and |
| (iii) | third, if such sums are paid at maturity to repay the Loan Principal Amount and any other Obligations. |
2.8 Authority and Rights of the Pledged Collateral. The Borrower acknowledges that the Lender has all rights, title, ownership and interest associated with the Pledged Collateral during the term of this Agreement.
2.9 Payment of Principal Amount and Interest on Maturity Date. Repayment of the Loan Principal Amount plus any other Obligations due to the Lender, including but not limited to interest due on the Loan Principal Amount, shall be made on the Maturity Date. If the Lender has not received the full Loan Principal Amount and all other Obligations due to the Lender in immediately available funds before the close of business within ten (10) calendar days after the Maturity Date, Borrower shall pay to Lender a late charge equal to the five percent (5%) of the amount of the Loan Principal Amount that is then due. Such late charges shall be assessed only once, but shall be in addition to and cumulative with all other interest charges, rights, benefits and remedies available to Lender under any of the Loan Documents on account of any default by Borrower. If the overdue Loan Principal Amount and other Obligations are not received by the Lender within thirty (30) days of the original due date, the Lender will send a notice to the Borrower advising the Borrower that the Loan will terminate under the default provisions of this Agreement if the payments due are not received by the Lender within five
(5) business days from the date such final notice was sent.
| 7 |
The Lender is not required to apply the proceeds of the sale of any Pledged Collateral that may occur during the term of the Loan to reduce the Loan Principal Amount or any other Obligations.
2.10 Loan Termination and Redelivery of the Pledged Collateral. This Agreement shall terminate when all of the Borrower’s Obligations have been paid in full. The Lender confirms and will maintain its full ability to return the Pledged Collateral at Maturity. Within five (5) business days of the Borrower’s satisfaction of the Obligations, the Lender shall reassign all right, title, ownership and interest in Bitcoins of an identical class, which Bitcoins are equal to the number of Bitcoins which Borrower would have owned as of the date of the repayment to Lender. Provided, however, that this Agreement shall be reinstated if any payment in respect of the Obligations is rescinded, invalidated, declared to be fraudulent or preferential or otherwise required to be restored or returned by the Lender for any reason (other than due to the default, fraud or negligence of the Lender). Any additional Bitcoins tendered to cure the Valuation Event do become part of the Pledged Collateral, and such Bitcoins or cash payment are subject to redelivery at Maturity.
SECTION 3
NATURE OF LOAN AND PLEDGE
3.1 Non-Recourse Loan and Pledge. Subject to the qualification below, the Lender agrees, for itself, its representatives, successors and assigns that: (i) the Lender, and any such representative, successor or assignee, shall look only to the property identified in the Pledge Agreement for payment of the Obligations and will not make any claim or institute any action or proceeding against the Borrower, or any representatives, successors, assigns or affiliate of the Borrower, for any deficiency remaining after collection of the Pledged Collateral; and (ii) the Borrower shall have no personal liability for the Obligations except as provided below.
Provided, however, notwithstanding the foregoing, the Borrower is and will remain personally liable for any deficiency remaining after collection against the Pledged Collateral to the extent of any loss suffered by the Lender, or its representatives, successors, endorsees or assigns, is caused by the Borrower based in whole or in part upon damages arising from any fraud, misrepresentations or the breach of any representation, warranty or agreement in the Loan Documents.
SECTION 4
REPRESENTATIONS AND WARRANTIES OF BORROWER
Borrower represents and warrants to Lender that:
4.1 No Liens or Restrictions. As of the date of this Agreement, the Bitcoins constituting the Pledged Collateral is owned by the Borrower free and clear of any Liens and said Bitcoins are free of any restriction, are freely tradable and transferable Bitcoins and do not have any restrictive legend.
| 8 |
4.2 Consents. This Agreement and all the other Loan Documents executed by and to be executed by the Borrower constitute valid and binding obligations of the Borrower enforceable in accordance with its respective terms and are to be construed and interpreted as a whole, the same being part of an integrated transaction. To the Borrower’s knowledge, no consent of any other party and no consent, license, approval, or authorization of any governmental authority is required in connection with the borrowing by the Borrower hereunder, the execution, delivery, and performance of this Agreement, and any of the other Loan Documents executed or to be executed in connection herewith.
4.3 No Conflicts. The borrowing by the Borrower hereunder and the execution and delivery by the Borrower of this Agreement and any other Loan Documents executed and to be executed by the Borrower, do not conflict with or result in the breach of any agreement, mortgage or similar instrument under which Borrower is bound, or, to the Borrower’s knowledge, any law, rule, or regulation of any governmental agency applicable to it.
4.4 No Default. The Borrower is not in default under any note, bond, mortgage or indenture, contract, agreement, lease, sublease, license, permit, franchise or other instrument or arrangement to which the Borrower is a party or by which the Borrower or the Pledged Collateral (if applicable) are bound or affected or which would have an effect on the ability of the Borrower to consummate the transactions contemplated by this Agreement.
4.5 No Additional Liens. The Borrower covenants that so long as the Loan or any Obligations to the Lender remain outstanding and unpaid, the Borrower shall not create, assume or suffer to exist any Lien of any kind upon any of the Pledged Collateral.
4.6 Anti-Money Laundering Program. Borrower represents and warrants that (i) it did, now does, and will continue to comply with anti-money laundering laws and regulations and (ii) it has established and maintains an anti-money laundering program, consisting of, at a minimum, written internal policies, procedures and controls including a means for detecting and reporting unusual or potentially suspicious activity, the designation of an anti-money laundering compliance officer, an ongoing employee training program, an independent audit function to test such programs annually, and any additional requirements set forth in the rules of any regulatory or self-regulatory organization which has jurisdiction over Borrower. At the request of Lender, Borrower shall provide such written further assurances as Lender may reasonably request that Borrower maintains an anti-money laundering program. Borrower further represents and warrants that where Borrower pledges the Bitcoin hereunder none of the Bitcoin being pledged to Lender violated, or were otherwise suspected of violating, Borrower’s anti-money laundering program.
| 9 |
4.7 OFAC. Borrower hereby agrees and acknowledges that it is obligated to and hereby represents and warrants that it did, now does, and will continue to comply with rules and regulations enforced by the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”). Borrower represents and warrants that neither it nor any person who controls Borrower bears a name that appears on the List of Specially Designated Nationals and Blocked Persons maintained by OFAC from time to time. Borrower hereby represents and warrants that none of the Bitcoin pledged to Lender hereunder came from a third party that violated, or otherwise would violate, the provisions of any rules, regulations, or laws administered by OFAC, or be subject to other restriction based on such relevant government lists as may be published from time to time.
4.8 Source and Use of Pledged Collateral. Borrower represents and warrants that (i) none of the Bitcoin it pledges to Lender hereunder were sourced from a third party that is/was engaged in unlawful activities under state, federal or non-U.S. statutes (e.g., the Federal Controlled Substances Act) and (ii) any Bitcoin it pledges to Lender hereunder has been lawfully obtained and has not been, is not, and will not be, used in any illegal activities. In addition, Borrower represents and warrants that neither it nor any person who controls Borrower resides in or whose subscription funds are transferred from or through an account in a Non-Cooperative Jurisdiction. For purposes of this Agreement, a “Non-Cooperative Jurisdiction” shall mean any country or territory that has been designated as non-cooperative with international anti-money laundering principles or procedures by an intergovernmental group or organization, such as the Financial Action Task Force on Money Laundering, of which the United States is a member and with which designation the United States representative to the group or organization continues to concur.
4.9 Foreign Shell Bank. Borrower represents and warrants that neither it nor any person who controls Borrower is a Foreign Bank without a Physical Presence in any country, but does not include a regulated affiliate. For purposes of this Agreement, a “Foreign Bank” shall mean an organization that (i) is organized under the laws of a foreign country, (ii) engages in the business of banking, (iii) is recognized as a bank by the bank supervisory or monetary authority of the country of its organization or principal banking operations, (iv) receives deposits to a substantial extent in the regular course of its business, and has the power to accept demand deposits, but does not include the U.S. branches or agencies of a foreign bank. In addition, “Physical Presence” shall mean a place of business that is maintained by a Foreign Bank and is located at a fixed address, other than solely a post office box or an electronic address, in a country in which the Foreign Bank is authorized to conduct banking activities, at which location the Foreign Bank (i) employs one or more individuals on a full-time basis, (ii) maintains operating records related to its banking activities, and (iii) is subject to inspection by the banking authority that licensed the Foreign Bank to conduct banking activities.
4.10 No Material Information. There is no material fact known to the Borrower regarding any Bitcoin pledged to Lender hereunder which materially adversely affects or is likely or is anticipated to materially adversely affect such Bitcoin.
| 10 |
SECTION 5
REPRESENTATIONS AND WARRANTIES OF LENDER
The Lender represents and warrants to the Borrower that:
5.1 Compliance. The lending of the Loan by the Lender to the Borrower and the execution and delivery by the Lender of this Agreement and any other Loan Documents executed and to be executed by the Lender, do not conflict with or result in the breach of any agreement, mortgage or similar instrument under which the Lender is bound, or, to the Lender’s knowledge, any law, rule, or regulation of any governmental agency applicable to it.
SECTION 6
RISK FACTORS
Borrower has carefully reviewed, acknowledged, understands and assumes the following risks, as well as all other risks associated with Pledged Collateral (including those not discussed herein), all of which could render Bitcoin worthless or of little value:
6.1 Liquidity. There is no guarantee or representation of liquidity and/or transferability of Pledged Collateral in the future.
6.2 Security. Pledged Collateral may be subject to expropriation and/or theft, intentional or unintentional bugs or weaknesses that may negatively affect the Pledged Collateral or result in loss or ability to access Pledged Collateral.
6.3 Access to Private Keys. Loss of private key(s) associated with the Borrower’s Digital Wallet or vault will result in loss of Pledged Collateral.
6.4 Uncertain Regulatory Framework. The regulatory status of cryptographic tokens, digital assets and blockchain technology is unclear or unsettled in many jurisdictions. It is difficult to predict how or whether governmental authorities will regulate such technologies. It is likewise difficult to predict how or whether any governmental authority may make changes to existing laws, regulations and/or rules that will affect cryptographic tokens, digital assets, blockchain technology and its applications. Such changes could negatively impact the Pledged Collateral in various ways.
| 11 |
SECTION 7
CONDITIONS TO LENDER’S OBLIGATIONS
The obligation of the Lender to make the Loan is subject to the satisfaction of the following conditions precedent (to the satisfaction of the Lender):
7.1 Pre-Closing Deliveries. The Borrower shall have delivered to the Lender:
| (a) | the Master Loan Agreement and Master Pledge Agreement duly executed by the Borrower; and |
| (b) | the Bitcoin representing the Pledged Collateral. Delivery instructions for the wallet-to-wallet transfer of Bitcoin to Lender, including Lender’s Digital Wallet address(es) for receiving the Pledged Collateral will be provided at the time of transfer of the Pledged Collateral. |
7.2 Legal Matters. All matters and all documentation and other instruments in connection with the Loan shall be satisfactory in form and substance to the Lender and the Borrower and their respective counsels, and counsel to the Lender shall have received copies of all documents which it may reasonably request in connection with the Loan.
7.3 Regulations. The making of the Loan by Lender to Borrower and the execution, delivery and performance of any documents or agreements shall be in compliance with any applicable laws and government regulations imposed upon Lender and the Borrower.
SECTION 8
EVENTS OF DEFAULT AND REMEDIES
8.1 Events of Default. An “Event of Default” shall exist if any one or more of the following shall occur:
| (a) | Failure by the Borrower to pay the interest, Extension Fee, Loan Principal Amount or any other Obligations when due whether on the original due date, the Maturity Date, any earlier date resulting from acceleration subject to the additional time provided in Section 2.2(c) and Section 2.9 of this Agreement to cure the late payment; or |
| (b) | If any representation or warranty made by the Borrower in this Agreement or in any statement furnished at or in contemplation of the Closing Date or pursuant to this Agreement or any other Loan Document shall prove to have been knowingly untrue or misleading in any material respect at the time made; or |
| (c) | Default by the Borrower in the performance of or observance of any covenant or agreement contained in this Agreement or default in any other Loan Document which is not cured within a reasonable time; or |
| 12 |
| (d) | If the Bitcoin ceases, or all trading is otherwise halted, on all exchanges globally, centralized and de-centralized, for more than three (3) consecutive business days for any other reason; or |
| (e) | If the Borrower shall make a general assignment for the benefit of creditors or consent to the appointment of a receiver, liquidator, custodian, or similar official of all or substantially all of its properties, or any such official is placed in control of such properties, or the Borrower admits in writing its inability to pay its debts as they mature; or |
| (f) | If documents shall at any time after their execution and delivery for any reason cease to be in full force and effect or shall be declared null or void, or the validity or enforceability thereof shall be contested by the Borrower or by any other Person; or |
| (g) | If a Valuation Event occurs and Borrower fails to cure such Valuation Event as provided herein: |
| (1) | A Valuation Event occurs when the Fair Market Price (“FMP”) of the Pledged Collateral has fallen to below the Default Floor. |
| (2) | If a Valuation Event occurs, the Lender shall provide written notice of such event to the Borrower, and, upon receipt of such written notice, Borrower shall have five (5) business days commencing on the date the written notice is received to top up the collateral and cure the deficiency in value in United States Dollars (USD) or Bitcoin equivalent. Within such cure period, the Borrower must cure this default by the delivery to the Lender of additional USD or Bitcoin in the amount equal to such deficiency. The Lender shall have the right to demand the payment of USD and shall have no obligation to accept Bitcoin if the Lender elects to demand a cure in the form of USD. |
| (3) | The provision of additional USD or Bitcoin serves to reduce, or buy down, the Default Floor to a new lower Default Floor for the Pledged Collateral. Any additional Bitcoin tendered to cure the Valuation Event do become part of the Pledged Collateral, and such Bitcoin or USD payments are subject to redelivery at Maturity. |
| (h) | If the Lender does not receive the Borrower’s written Proof of Funds under Section 2.5(e) no later than fifty-eight (58) calendar days prior to the Maturity Date. |
| 13 |
| (i) | If the Lender does not receive the Extension Fee under Section 2.5(c) no later than fifty-eight (58) days prior to the original Maturity Date. |
8.2 Rights Upon an Uncured Event of Default. If at any time an Event of Default has occurred and is continuing beyond any applicable cure period, the non-defaulting party shall issue a written notice to the defaulting party specifying the relevant Event of Default (a “Default Notice”), and designate a day not earlier than the day such notice is effective as an early termination date due to an Event of Default (“Early Termination Date”).
This Agreement and all obligations of the Lender and the Borrower hereunder shall terminate on the Early Termination Date due to default. In the event of any claim whatsoever or howsoever made by the Lender against the Borrower under or in connection with this Agreement, other than resulting from fraud or from misrepresentation, the Lender releases and discharges the Borrower from any such claim and the Lender will have recourse only to the Pledged Collateral, any proceeds derived therefrom, from time to time, and the aggregate amount realized from any liquidation of or enforcement against the Pledged Collateral.
SECTION 9
ARBITRATION
9.1 Arbitration of Claims, Disputes, or Controversies. The parties shall endeavor to settle any dispute, controversy or claim arising out of or relating to this Agreement including the existence, validity, interpretation, performance, breach or termination thereof, or any dispute regarding non-contractual obligations arising out of or relating to it (“Dispute”) first by direct negotiation between managing directors or similar senior executives within 30 days after written notice has been sent by one party to the other party (the “Consultation Period”). However if direct negotiation does not result in a resolution of the Dispute within the Consultation Period, either Party may require that the Dispute be referred to and finally resolved by arbitration administered by the Hong Kong International Arbitration Centre under the Hong Kong International Arbitration Centre Administered Arbitration rules in force when the Notice of Arbitration is submitted by three (3) arbitrators. In such a case, each Party to the arbitration shall, in accordance with the said rules, appoint one (1) arbitrator and the arbitrators so appointed by the Parties shall in turn mutually select one (1) additional arbitrator. The place of arbitration shall be Hong Kong and the proceedings shall be conducted in the English language. The award shall be final and legally binding on the Parties and shall be subject to enforcement in any courts having jurisdiction over the Parties.
| 14 |
SECTION 10
INDEMNITY AND LIMITATION OF LIABILITY
10.1 Either party shall indemnify and hold the other party harmless against any and all claims, demands, proceedings, suits, actions, damages, liabilities, losses, expenses and costs (which shall include, but not limited to all costs of defense, investigation and accounting and legal fees) to which the other party may become subject as a result of the defaulting party’s fraud, negligence, willful misconduct or breach of any obligation under this Agreement.
10.2 Neither party shall be liable for any indirect, incidental or consequential loss or damages, including loss revenue or profits or losses arising from its normal course of business, even if a party has been advised of the possibility of such damages.
10.3 Each provision of this Section operates independently and survives the termination of this Agreement.
SECTION 11
MISCELLANEOUS
11.1 Notices. All notices, requests or other communications to either of the parties by the other shall be in writing, sent by overnight mail by a reputable commercial carrier, or by electronic mail and shall be deemed duly given on the earlier of the date the same is delivered in person or when deposited in the mail, postage prepaid, to the following addresses, or to such other addresses as the addressee has by prior notice to the sender specified for the purpose in writing:
If to the Lender:
[***]
If to the Borrower:
Exworth Union Inc.
JFK Parkway, Suite 135
Short Hills, NJ 07078
Either party may designate by notice in writing to the other a new address to which notices, requests and other communications hereunder shall be given.
11.2 Governing Law. This Agreement and all instruments delivered hereunder shall be governed by and construed in accordance with the laws of the Hong Kong Special Administrative Region of the People’s Republic of China. Any and all claims, controversies, and causes of action arising out of or relating to this agreement, whether sounding in contract, tort, or statute, shall be governed by the laws of the Hong Kong Special Administrative Region of the People’s Republic of China, including its statutes of limitations, without giving effect to any conflict-of-laws rule that would result in the application of the laws of a different jurisdiction.
| 15 |
11.3 Further Assurances. The Borrower hereby agrees to execute and deliver such further instruments and documents as may be reasonably requested by the Lender in order to carry out fully the intent and accomplish the purposes of this Agreement and the transactions referred to herein. The Borrower agrees to take any action which the Lender may reasonably request in order to obtain and enjoy the full rights and benefits granted to the Lender by this Agreement and each other agreement, instrument and document delivered to the Lender in connection herewith.
11.4 Survival of Agreements. Except as herein provided, all agreements, representations and warranties made herein and in any certificate delivered pursuant hereto, shall survive the execution and delivery of this Agreement.
11.5 Waivers. No failure to exercise and no delay in exercising, any right, power or privilege under this Agreement or any agreement or instrument delivered to either party hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, power or privilege preclude any other or further exercise thereof or the exercise of any other right, power or privilege. No waiver of any provision of this Agreement shall be effective unless agreed to in writing by the parties and any such waiver shall not constitute a waiver in the future of any of the provisions of any of the foregoing documents, except as may be specifically provided in any such waiver. No course of dealing between the Borrower and the Lender shall operate as a waiver of any of the rights of the parties under this Agreement.
11.6 Gender and Number. Unless the context otherwise requires, when used herein, the singular includes the plural, and vice-versa, and the masculine includes the feminine and neuter, and vice-versa.
11.7 Captions. Captions used herein are inserted for convenience only and shall not be given any legal effect.
11.8 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement.
11.9 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Lender and the Borrower and its respective successors and assigns.
| 16 |
11.10 Confidentiality. This Agreement is to be kept confidential and is not to be reproduced in any manner whosoever for persons other than the parties hereto. Each party agrees not to circumvent the legitimate interests of the other party and to maintain this transaction in strict confidentiality.
Each Party (Receiving Party) agrees that in the course of performance of this Agreement it may obtain or otherwise become aware of information of a confidential nature pertaining to the business, finances, trade, operations or other information (Confidential Information) belonging to or pertaining to the other party (Disclosing Party). The Receiving Party shall not disclose any part of the Confidential Information to any person other than whose knowledge is essential for the performance of this Agreement. The obligations specified in this clause do not apply to any Confidential Information to the extent that it is now or subsequently becomes publicly available through no fault of the Receiving Party or which the Receiving Party can demonstrate was known to it before receipt from the Disclosing Party, or which is or has been received from another source without obligation as to confidentiality, or which is required to be disclosed by law or regulating authority, or which is or has been independently developed by the Receiving Party without reference to the information disclosed to it by the Disclosing Party. The provisions of this Section 11.10 shall survive the termination of this Agreement.
11.11 Force Majeure. Notwithstanding any provision of this Agreement, neither party shall be liable for its inability in performing any of its obligations hereunder (other than an obligation to make payment) if such inability is caused by or arises as a result of a Force Majeure Event. For the purposes of this clause a Force Majeure Event means any circumstances beyond the reasonable control of the relevant party including, without limitation, inability or delay caused through acts of God, fire, flood, riot, industrial dispute of any kind (other than disputes involving that party’s own employees or the employees of an affiliate of that party), lightning, explosion, civil commotion, malicious damage, storm, tempest, acts or omissions of communications carriers or any third party, act of government or other regulatory authority, acts or omissions of persons or bodies for whom the party affected thereby is not responsible, and any other circumstances beyond the reasonable control of the relevant party.
The party affected by the Force Majeure Event shall promptly notify the other of the estimated extent and duration of such inability to perform its obligations hereunder and in the event that this Agreement cannot be performed according to its terms for a continuous period of one (1) month by reason of such Force Majeure Event, the affected Party shall be entitled to terminate this Agreement forthwith without any liability whatsoever to the other.
11.12 Assignment. This Agreement cannot be assigned nor transferred by a party without the prior written consent of the other party. Such consent shall not to be unreasonably withheld.
11.13 Entire Agreement. This Agreement contains the entire agreement between the parties hereto and may be amended, changed or terminated only by an instrument in writing signed by the parties hereto. The parties hereby acknowledge and represent that they have not relied on any representation, assertion, guarantee, explanation, warranty, collateral contract or other assurance, except those set out in this agreement, made by or on behalf of any other party or any other person or entity whatsoever, prior to the execution of this agreement. The parties hereby waive all rights and remedies, at law or in equity, arising or which may arise as the result of a party’s reliance on such representation, assertion, guarantee, explanation, warranty, collateral contract or other assurance.
11.14 Amendments. Amendments to this Agreement (including the adding or updating of any Annex, appendices, annexures or schedule) shall not be effective unless in writing and signed by authorized signatories on behalf of both parties.
| 17 |
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year written below. It is specifically agreed and understood that this Agreement shall not be binding upon the parties until the date it is actually signed by the Lender, and that shall be the effective date of this Agreement.
| BORROWER: | |
| EXWORTH UNION INC. | |
| /s/ Zhihao Chen | |
| Signature | |
| Zhihao Chen | |
| Printed Name | |
| Director | |
| Title | |
| May 28, 2022 | |
| Date | |
| LENDER: | |
| [***] | |
| Signature | |
| Printed Name | |
| Title | |
| Date |
| 18 |
[***]
Closing Statement
___________________, 20 ___
| Re: | Master Loan Agreement (the “Master Agreement”) by and between Exworth Union Inc. (“Borrower”) and [***] (“Lender”) |
| To: | Exworth Union Inc. |
| JFK Parkway, Suite 135 | |
| Short Hills, NJ 07078 | |
| [email protected] |
This comprises the Closing Statement referred to in the Master Agreement. Capitalized terms used but not defined herein shall have the meanings given to such terms in the Master Agreement. No further or additional Closing Statement shall be provided with respect to the Loan set forth in the Master Agreement. The Closing Date of the Loan shall be _________________, 20__.
On _________________, 20 , you delivered 100 Bitcoins to the Lender’s specified Digital Wallet address(es) pursuant to the Master Agreement as collateral of the Loan and in accordance with the provisions under the Master Pledge Agreement by and between the Borrower and Lender. The average of the last sale price on three consecutive business days beginning on the Verification Day of ____($____ USD, $_____ USD, and $_____ USD) is $____ USD. Accordingly, and calculated based upon a 70% LTV, the loan proceeds to be distributed to the Borrower on the Closing Date under the Master Agreement will be as follows:
| Principal Amount of the Loan | $ | USD |
| Loan Origination Fee (1%) | $ | USD |
| Less Advanced Funds | ($1,000,000.00) | USD |
| Net Loan Proceeds to Borrower | $ | USD |
The Loan shall mature, and the Loan Principal Amount together with all accrued interest thereon shall be due and payable twenty-four (24) months subsequent to the Closing Date in accordance with Section 2.5.
The Net Loan Proceeds will be transmitted to you on the Closing Date in accordance with the payment instructions provided in Section 2.6 of the Master Agreement. Specifically, to the following:
| Bank/Institution Name | JPMorgan Chase Bank |
| Swift No. | [***] |
| Account Number | [***] |
| Account Name | Exworth Union Inc. |
The first quarterly interest payment due under the Master Agreement will be due on , 20 . All interest payments will be in United States Dollars and the amount of interest due each quarter is $ . Please ensure timely payment of this interest payment.
[***] appreciates your business and please do not hesitate to contact us at any time should you have any questions or concerns.
| 19 |
EXHIBIT 1
| 20 |
[***]
TRANCHE #[•] LOAN AGREEMENT
The Borrower and Lender hereby agree as follows:
1) That each has elected to proceed with a new additional loan transaction collateralized by additional Bitcoin, as defined in the Master Loan Agreement;
2) That each agrees to hereby incorporate by reference the Master Loan Agreement and the Master Pledge Agreement into this Tranche Loan Agreement so as to contain the full terms and conditions of their mutual agreement substituting only the following new terms in the Master Loan Agreement, Section 2.1, Loan Principal Amount and the Master Pledge Agreement, Recitals, Section B and Section 2.1, Pledge by Pledgor, regarding the Loan-to-Value Ratio offered on the new Pledged Collateral and a new agreed upon number of Bitcoin constituting the Pledged Collateral;
| i) | the Loan-to-Value Ratio shall be 70%; |
| ii) | the number of Bitcoins shall be _____________________; and |
| iii) | the Origination Fee shall be 1%; |
| iv) | the Advanced Funds amount will be $ ______________________USD; |
| v) | the Maturity Date for this Tranche Loan Agreement shall be ____________________ subsequent to the occurrence of the Closing Date of Tranche # . |
3) That each agrees this Tranche Loan Agreement is a new loan and the effective dates in the Master Loan Agreement and the Master Pledge Agreement shall be reset in accordance with Section 2.5 of the Master Loan Agreement and commence from the final full execution date of the last signatory of this Tranche Loan Agreement.
| 21 |
| BORROWER: | LENDER: | |
| EXWORTH UNION INC. | [***] | |
| Not for signature – EXHIBIT ONLY | ||
| Signature | Signature | |
| Printed Name | Printed Name | |
| Title | Title | |
| Date | Date |
| 22 |
EXHIBIT 2
| 23 |
Exhibit 10.2
CERTAIN IDENTIFIED INFORMATION HAS BEEN OMITTED FROM THIS DOCUMENT BECAUSE IT IS BOTH NOT MATERIAL AND WOULD BE COMPETITIVELY HARMFUL IF PUBLICLY DISCLOSED, AND HAS BEEN MARKED WITH “[***]” TO INDICATE WHERE OMISSIONS HAVE BEEN MADE.
MASTER PLEDGE AGREEMENT
BETWEEN
Exworth Union Inc., Pledgor
and
[***], as Lender
This Master Pledge Agreement is by and between Exworth Union Inc. having an address of 51 John F. Kennedy Parkway, Short Hills, Suite 135, Short Hills, NJ 07078(the “Pledgor”) and [***], a [***] limited liability company, with its principal office located at [***] (the “Lender”).
RECITALS:
A. The Pledgor and the Lender are entering into a Master Loan Agreement contemporaneously herewith (the “Master Loan Agreement”) providing for the making of a loan to the Pledgor in the amount, and subject to the terms and conditions, specified in the Master Loan Agreement.
B. The Pledgor is the sole legal and beneficial owner of the Bitcoins (the “Pledged Collateral”).
C. The execution and delivery of this Master Pledge Agreement and the pledge by the Pledgor to the Lender of its rights in the Pledged Collateral (as hereinafter defined) constitute conditions precedent to the obligation of the Lender to make a loan to the Pledgor pursuant to the terms of the Master Loan Agreement.
ACCORDINGLY, in consideration of and in order to induce the Lender to execute and deliver the Master Loan Agreement and to make and maintain a loan thereunder, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Pledgor hereby agrees as follows:
SECTION 1
DEFINITIONS
1.1 Defined Terms. Capitalized terms that are not defined herein have the respective meanings ascribed to them in the Master Loan Agreement. The Definitions Section from the Master Loan Agreement, Section 1, executed contemporaneous with this Master Pledge Agreement, is hereby incorporated by reference into the Master Pledge Agreement as if fully set forth herein.
1.2 Use of Defined Terms. Unless otherwise expressly specified herein, defined terms denoting the singular number shall, when in the plural form, denote the plural number of the matter or item to which such defined terms refer, and vice-versa. The Section, Schedule and Exhibit headings used in this Master Pledge Agreement are descriptive only and shall not affect the construction or meaning of any provision of this Master Pledge Agreement. Unless otherwise specified, the words “hereof,” “herein,” “hereunder” and other similar words refer to this Master Pledge Agreement as a whole and not just to the Section, subsection or clause in which they are used; and the words “this Master Agreement” refer to this Master Pledge Agreement. Unless otherwise specified, references to Sections, Recitals, Schedules and Exhibits are references to Sections of, and Recitals, Schedules and Exhibits to this Master Agreement.
1.3 Statements as to Knowledge. Any statements, representations or warranties which are based upon the knowledge of the Pledgor shall be deemed to have been made after due inquiry with respect to the matter in question but without the Pledgor being required to seek an opinion of counsel with respect thereto.
SECTION 2
PLEDGE
2.1 Pledge by Pledgor. The Pledgor hereby pledges and assigns to the Lender, and hereby transfers to the Lender, all right, title, ownership and interest in and to the following described property: 100 Bitcoins (the “Pledged Collateral”) and all cash, or other property representing a distribution in respect of the Pledged Collateral, or resulting from a split-up, revision, reclassification or other like change of the Pledged Collateral or otherwise received in exchange therefore (collectively, the “Pledged Collateral”).
SECTION 3
NATURE OF LOAN AND PLEDGE
3.1 Non-Recourse Loan and Pledge. Subject to the qualification below, Lender agrees, for itself, its representatives, successors and assigns that: (i) the Lender, and any representative, successor or assignee, shall look only to the property identified in this Pledge Agreement for payment of the Obligations and will not make any claim or institute any action or proceeding against the Pledgor, or any representatives, successors, assigns or affiliate of the Pledgor, for any deficiency remaining after collection upon the Pledged Collateral, and (ii) the Pledgor shall have no personal liability for the Obligations except as provided below.
Provided, however, notwithstanding the foregoing, the Pledgor is and will remain personally liable for any deficiency remaining after collection against the Pledged Collateral to the extent of any loss suffered by Lender, or its representatives, successors, endorsees or assigns, is caused by Pledgor based in whole or in part upon damages arising from any fraud, misrepresentations or the breach of any representation, warranty or agreement in the Loan Documents.
| 2 |
SECTION 4
SCOPE OF PLEDGE AND REDELIVERY OF THE PLEDGED COLLATERAL
4.1 Pledge Absolute. The Pledgor hereby agrees that this Master Pledge Agreement shall be binding upon the Pledgor and any representatives, heirs, successors and assigns and that the Pledge of the Pledged Collateral hereunder shall be irrevocable and unconditional. The Lender may take any actions with respect to the Pledged Collateral as expressly permitted under this Master Pledge Agreement as the Lender, in its sole and absolute discretion, may deem to be advisable.
4.2 Termination and Redelivery of the Pledged Collateral. The Master Pledge Agreement shall terminate when all of the Pledgor’s Obligations have been paid in full. Within five (5) business days of the Pledgor’s satisfaction of the Obligations, the Lender shall reassign all right, title, ownership and interest in identical Bitcoins. Provided, however, that this Master Pledge Agreement shall be reinstated if any payment in respect of the Obligations is rescinded, invalidated, declared to be fraudulent or preferential or otherwise required to be restored or returned by the Lender for any reason (other than due to the default, fraud or negligence of the Lender), including without limitation by reason of the insolvency or bankruptcy of the Pledgor. For the purpose of this Master Pledge Agreement and the Loan Documents, a return of identical Bitcoins means a return of the Pledged Collateral as modified as a result of any split-up, revision, reclassification or other like change of the Pledged Collateral. Any additional Bitcoins tendered to cure the Valuation Event do become part of the Pledged Collateral, and such Bitcoins or cash payment are subject to redelivery at Maturity.
4.3 Risk of Loss. This Master Pledge Agreement and the Loan Documents are not intended to, nor do they, reduce the risk of loss or opportunity for gain for the Pledgor. The Pledgor retains all opportunity for gain or loss on the Bitcoins over the term of the agreements until maturity and termination.
SECTION 5
REPRESENTATIONS AND WARRANTIES
5.1 Representations and Warranties. The Pledgor hereby represents and warrants as follows to the best of its knowledge and belief:
(a) The Pledgor has legal title to the Pledged Collateral and is the sole record and beneficial owner of the Pledged Collateral. The Pledgor has good and lawful authority to pledge all of the Pledged Collateral in the manner hereby done or contemplated. The Pledged Collateral is not now subject to any Liens, security interests, charges or encumbrances of any kind or nature. The Pledged Collateral is not subject to any contractual, statutory, regulatory or other restriction upon the transfer thereof, and no right, warrant or option to acquire any of the Pledged Collateral exists in favor of any other Person.
| 3 |
(b) The Pledged Collateral is freely transferable and no authorizations, approvals and consents, and no filings or registrations with any governmental or regulatory authority or agency or any other Person are necessary for the execution, delivery or performance by the Pledgor of this Master Agreement or for the validity or enforceability hereof.
(c) Any information furnished by the Pledgor to the Lender in connection with the negotiation and preparation of the Loan Documents do not contain any omissions or misstatements of fact which would make the statements contained therein misleading or incomplete in any material respect.
(d) This Master Pledge Agreement constitutes the legal, valid and binding obligation of the Pledgor, enforceable against the Pledgor in accordance with its terms.
SECTION 6
APPOINTMENT OF AGENTS AND ACTIONS BY LENDER
6.1 Lender’s Appointment of Agent and Lender’s Rights. The Lender shall have the right to appoint one or more agents for the purpose of receiving possession of the Pledged Collateral, which may be held in the name of the Lender or any nominee of the Lender or any agent appointed by the Lender. The Lender may combine the Pledged Collateral with other assets and is under no obligation to sequester or escrow the Pledged Collateral.
6.2 Authority and Rights of the Pledged Collateral. The Pledgor acknowledges that the Lender has all rights associated with the Pledged Collateral, including any distributions associated with the Pledged Collateral, during the term of this Master Pledge Agreement.
6.3 No Obligation to Apply Money or Funds Received Resulting from the Use of Pledged Collateral. The Lender has no obligation to apply money or funds resulting from the use, trading investment, or other disposition of any Pledged Collateral to reduce the Loan Principal Amount or another Obligation under the Master Loan Agreement.
SECTION 7
EVENTS OF DEFAULT AND REMEDIES
7.1 Events of Default. An “Event of Default” shall exist if any one or more of the events set out in Section 8.1 of the Master Loan Agreement shall occur with respect to the Pledgor.
7.2 Rights Upon an Uncured Event of Default. If at any time an Event of Default has occurred and is continuing beyond any applicable cure period, the non-defaulting party shall issue a written notice to the defaulting party specifying the relevant Event of Default (a “Default Notice”), and designate a day not earlier than the day such notice is effective as an early termination date due to default (“Early Termination Date”).
| 4 |
This Master Pledge Agreement and all obligations of the Lender and the Pledgor hereunder shall terminate on the Early Termination Date. In the event of any claim whatsoever or howsoever made by the Lender against the Pledgor under or in connection with this Master Pledge Agreement, other than resulting from fraud or from misrepresentation, the Lender releases and discharges the Pledgor from any such claim and the Lender will have recourse only to the Pledged Collateral, any proceeds derived therefrom, from time-to-time, and the aggregate amount realised from any liquidation of or enforcement against the Pledged Collateral.
SECTION 8
APPLICATION OF PROCEEDS OF PLEDGED COLLATERAL IN EVENT OF DEFAULT
8.1 Application of Proceeds of Collateral Upon Sale. If the Loan terminates due to an Event of Default, the Lender shall apply the proceeds of the sale of any Pledged Collateral held by the Lender at the time that the Lender chooses to exercise its rights in an Event of Default as follows:
| (i) | first, to the payment of any amounts due and unpaid under the Master Loan Agreement; and |
| (ii) | second, to satisfy the Obligations and to such other use as the Lender may elect. |
This section does not require that the Lender apply the proceeds of the sale of any Pledged Collateral that may occur during the term of the Loan to reduce the Loan Principal Amount or any other Obligations.
SECTION 9
ARBITRATION
Arbitration in the Event of Dispute
9.1 Section 9 of the Master Loan Agreement shall mutatis mutandis, apply to this Master Pledge Agreement.
SECTION 10
INDEMNITY AND LIMITATION OF LIABILITY
10.1 Either party shall indemnify and hold the other party harmless against any and all claims, demands, proceedings, suits, actions, damages, liabilities, losses, expenses and costs (which shall include, but not limited to all costs of defense, investigation and accounting and legal fees) to which the other party may become subject as a result of the defaulting party’s fraud, negligence, wilful misconduct or breach of any obligation under this Master Pledge Agreement.
| 5 |
10.2 Neither party shall be liable for any indirect, incidental or consequential loss or damages, including loss revenue or profits or losses arising from its normal course of business, even if a party has been advised of the possibility of such damages.
10.3 Each provision of this Section operates independently and survives the termination of this Master Pledge Agreement.
SECTION 11
MISCELLANEOUS
11.1 Notices. All notices, requests or other communications to either of the parties by the other shall be in writing, sent by overnight mail by a reputable commercial carrier, or by electronic mail and shall be deemed duly given on the earlier of the date the same is delivered in person or when deposited in the mail, postage prepaid, to the following addresses, or to such other addresses as the addressee has by prior notice to the sender specified for the purpose in writing:
If to the Lender:
[***]
If to the Pledgor:
Exworth Union Inc. 51
JFK Parkway, Suite 135
Short Hills, NJ 07078 [email protected]
Either party may designate by notice in writing to the other a new address to which notices, requests and other communications hereunder shall be given.
11.2 Governing Law. This Agreement and all instruments delivered hereunder shall be governed by and construed in accordance with the laws of the Hong Kong Special Administrative Region of the People’s Republic of China. Any and all claims, controversies, and causes of action arising out of or relating to this agreement, whether sounding in contract, tort, or statute, shall be governed by the laws of the Hong Kong Special Administrative Region of the People’s Republic of China, including its statutes of limitations, without giving effect to any conflict-of-laws rule that would result in the application of the laws of a different jurisdiction.
| 6 |
11.3 Further Assurances. The Pledgor hereby agrees to execute and deliver such further instruments and documents as may be reasonably requested by the Lender in order to carry out fully the intent and accomplish the purposes of this Agreement and the transactions referred to herein. The Pledgor agrees to take any action which the Lender may reasonably request in order to obtain and enjoy the full rights and benefits granted to the Lender by this Master Pledge Agreement and each other agreement, instrument and document delivered to the Lender in connection herewith.
11.4 Survival of Agreements. Except as herein provided, all agreements, representations and warranties made herein and in any certificate delivered pursuant hereto, shall survive the execution and delivery of this Master Pledge Agreement.
11.5 Waivers. No failure to exercise and no delay in exercising, any right, power or privilege under this Master Pledge Agreement or any agreement or instrument delivered to either party hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, power or privilege preclude any other or further exercise thereof or the exercise of any other right, power or privilege. No waiver of any provision of this Master Pledge Agreement shall be effective unless agreed to in writing by the parties and any such waiver shall not constitute a waiver in the future of any of the provisions of any of the foregoing documents, except as may be specifically provided in any such waiver. No course of dealing between the Pledgor and the Lender shall operate as a waiver of any of the rights of the parties under this Agreement.
11.6 Unless the context otherwise requires, when used herein, the singular includes the plural, and vice-versa, and the masculine includes the feminine and neuter, and vice-versa.
11.7 Captions. Captions used herein are inserted for convenience only and shall not be given any legal effect.
11.8 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement.
11.9 Confidentiality. This Master Pledge Agreement is to be kept confidential and is not to be reproduced in any manner whosoever for persons other than the parties hereto. Each party agrees not to circumvent the legitimate interests of the other party and to maintain this transaction in strict confidentiality.
Each Party (Receiving Party) agrees that in the course of performance of this Master Pledge Agreement it may obtain or otherwise become aware of information of a confidential nature pertaining to the business, finances, trade, operations or other information (Confidential Information) belonging to or pertaining to the other party (Disclosing Party). The Receiving Party shall not disclose any part of the Confidential Information to any person other than whose knowledge is essential for the performance of this Master Pledge Agreement. The obligations specified in this clause do not apply to any Confidential Information to the extent that it is now or subsequently becomes publicly available through no fault of the Receiving Party or which the Receiving Party can demonstrate was known to it before receipt from the Disclosing Party, or which is or has been received from another source without obligation as to confidentiality, or which is required to be disclosed by law or regulating authority, or which is or has been independently developed by the Receiving Party without reference to the information disclosed to it by the Disclosing Party. The provisions of this Section 11.9 shall survive the termination of this Master Pledge Agreement.
| 7 |
11.10 Force Majeure. Notwithstanding any provision of this Master Pledge Agreement, neither party shall be liable for its inability in performing any of its obligations hereunder (other than an obligation to make payment) if such inability is caused by or arises as a result of a Force Majeure Event. For the purposes of this clause a Force Majeure Event means any circumstances beyond the reasonable control of the relevant party including, without limitation, inability or delay caused through acts of God, fire, flood, riot, industrial dispute of any kind (other than disputes involving that party’s own employees or the employees of an affiliate of that party), lightning, explosion, civil commotion, malicious damage, storm, tempest, acts or omissions of communications carriers or any third party, act of government or other regulatory authority, acts or omissions of persons or bodies for whom the party affected thereby is not responsible, and any other circumstances beyond the reasonable control of the relevant party.
The party affected by the Force Majeure Event shall promptly notify the other of the estimated extent and duration of such inability to perform its obligations hereunder and in the event that this Master Pledge Agreement cannot be performed according to its terms for a continuous period of one (1) month by reason of such Force Majeure Event, the affected Party shall be entitled to terminate this Master Pledge Agreement forthwith without any liability whatsoever to the other.
11.11 Assignment. This Master Pledge Agreement cannot be assigned nor transferred by a party without the prior written consent of the other party. Such consent shall not to be unreasonably withheld.
11.12 Entire Agreement. This Master Pledge Agreement contains the entire agreement between the parties hereto and may be amended, changed or terminated only by an instrument in writing signed by the parties hereto. The parties hereby acknowledge and represent that they have not relied on any representation, assertion, guarantee, explanation, warranty, collateral contract or other assurance, except those set out in this agreement, made by or on behalf of any other party or any other person or entity whatsoever, prior to the execution of this agreement. The parties hereby waive all rights and remedies, at law or in equity, arising or which may arise as the result of a party’s reliance on such representation, assertion, guarantee, explanation, warranty, collateral contract or other assurance.
11.13 Amendments. Amendments to this Master Pledge Agreement (including the adding or updating of any Annex, appendices, annexures or schedule) shall not be effective unless in writing and signed by authorized signatories on behalf of both parties.
| 8 |
IN WITNESS WHEREOF, the Pledgor has duly executed this Master Pledge Agreement and it is effective as of the date executed.
| PLEDGOR: | |
| EXWORTH UNION INC. | |
| /s/ Zhihao Chen | |
| Signature | |
| Zhihao Chen | |
| Printed Name | |
| Director | |
| Title | |
| May 28, 2022 | |
| Date |
| 9 |
Exhibit 10.3
Exhibit 16.1
 |
517 Route One, Suite 4103 Iselin, NJ 08830
Berkower.io |
(732) 781-2712
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549
We have read the statements made by Strategic Acquisitions, Inc. (the “Company”), which we understand will be filed with the Securities and Exchange Commission. Pursuant to Item 4.01 of Form 8-K. We are in agreement with the statements contained in Item 4.01 insofar as they related to Berkower LLC.
Very truly yours,
/s/Berkower LLC
December 22, 2022.
Miami · Los Angeles · Cayman Islands
Exhibit 21.1
Subsidiaries
| Name | Jurisdiction of Incorporation | Percentage Ownership | ||||||
| Exworth Union Inc | Delaware | 100 | % | |||||
Exhibit 99.1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Exworth Union Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheet of Exworth Union Inc. (the “Company”) as of September 30, 2022 and the related statements of operations, changes in stockholders’ equity, and cash flows for the period March 16, 2022 (inception) through September 30, 2022, 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 Exworth Union Inc. as of September 30, 2022 and the results of its operations and cash flows for the period March 16, 2022 (inception) through September 30, 2022 in conformity with accounting principles generally accepted in the United States.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s 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 audit 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 audit 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 judgments. We determined that there were no critical audit matters.
| /s/ Michael T. Studer CPA P.C. | |
| Michael T. Studer CPA P.C. |
Freeport, New York
December 19, 2022
We have served as the Company’s auditor since 2022.
EXWORTH UNION INC
BALANCE SHEET
SEPTEMBER 30, 2022
| September 30, | ||||
| 2022 | ||||
| Assets | ||||
| Cash | $ | 267,748 | ||
| Collateral receivable due from lender | 2,158,254 | |||
| Loan receivable | 1,374,691 | |||
| Accrued interest receivable | 11,456 | |||
| Total assets | $ | 3,812,149 | ||
| Liabilities and shareholders’ equity | ||||
| Accounts payable and accrued expenses | $ | 7,232 | ||
| Note payable, net of unamortized origination fee of $12,439 | 1,376,137 | |||
| Digital asset collateral due to customer | 1,941,580 | |||
| Deferred income tax liability | 39,265 | |||
| Total liabilities | 3,364,214 | |||
| Shareholders’ Equity | ||||
| Common stock, $0.01 par value; 1,500 shares authorized; 1,100 shares issued and outstanding as of September 30, 2022 | 11 | |||
| Additional paid-in capital | 350,089 | |||
| Retained earnings | 97,835 | |||
| Total shareholders’ equity | 447,935 | |||
| Total liabilities and shareholders’ equity | $ | 3,812,149 | ||
See notes to financial statements.
EXWORTH UNION INC
STATEMENT OF INCOME
FOR THE PERIOD FROM MARCH 16, 2022 (INCEPTION) THROUGH SEPTEMBER 30, 2022
| From March 16, 2022 (Inception) through September 30, 2022 | ||||
| (Unaudited) | ||||
| Revenues | ||||
| Interest income | $ | 11,456 | ||
| Total revenues | 11,456 | |||
| Operating expenses | ||||
| Selling, general and administrative expenses | 82,352 | |||
| Total operating expenses | 82,352 | |||
| Loss from operations | (70,896 | ) | ||
| Other income, net | ||||
| Fair value adjustment on repledged collateral | 216,674 | |||
| Interest expense | (7,232 | ) | ||
| Amortization of loan origination fee | (1,446 | ) | ||
| Total other income, net | 207,996 | |||
| Income before income taxes | 137,100 | |||
| Income taxes | 39,265 | |||
| Net income | $ | 97,835 | ||
| Net income per share - basic and diluted | $ | 88.94 | ||
| Weighted average shares outstanding - basic and diluted | 1,100 | |||
See notes to financial statements.
EXWORTH UNION INC
STATEMENT OF SHAREHOLDERS’ EQUITY
FOR THE PERIOD FROM MARCH 16, 2022 (INCEPTION) THROUGH SEPTEMBER 30, 2022
| Additional | Total | |||||||||||||||||||
| Common Stock | Paid-in | Retained | Shareholders’ | |||||||||||||||||
| Shares | Amount | Capital | Earnings | Equity | ||||||||||||||||
| Balance at March 16, 2022 (inception) | - | $ | - | $ | - | $ | - | $ | - | |||||||||||
| Sale of Common Stock | 1,100 | 11 | 350,089 | - | 350,100 | |||||||||||||||
| Net income | - | - | - | 97,835 | 97,835 | |||||||||||||||
| Balance at September 30, 2022 | 1,100 | $ | 11 | $ | 350,089 | $ | 97,835 | $ | 447,935 | |||||||||||
See notes to financial statements.
EXWORTH UNION INC
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM MARCH 16, 2022 (INCEPTION) THROUGH SEPTEMBER 30, 2022
| From March 16, 2022 (Inception) through September 30, 2022 | ||||
| Cash flows from operating activities: | ||||
| Net income | $ | 97,835 | ||
| Adjustments to reconcile net income to net cash used in operating activities: | ||||
| Fair value adjustment on repledged collateral | (216,674 | ) | ||
| Deferred income tax expense | 39,265 | |||
| Change in operating assets and liabilities: | ||||
| Interest receivable | (11,456 | ) | ||
| Loan receivable, net | (1,374,691 | ) | ||
| Accounts payable and accrued expenses | 7,232 | |||
| Net cash used in operating activities | (1,458,489 | ) | ||
| Cash flows from financing activities: | ||||
| Proceeds from note payable | 1,376,137 | |||
| Proceeds from sale of common stock | 350,100 | |||
| Net cash provided by financing activities | 1,726,237 | |||
| Net change in cash and cash equivalents | 267,748 | |||
| Cash, beginning of period | - | |||
| Cash, end of period | $ | 267,748 | ||
| Supplemental disclosure of cash flow information: | ||||
| Cash paid during the period for: | ||||
| Interest | - | |||
| Income taxes | - | |||
| Non-cash investing and financing activities | ||||
| Non-cash collateral receivable due from lender and repledged collateral due to customer | $ | 2,158,254 | ||
See notes to financial statements.
EXWORTH UNION INC
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD MARCH 16, 2022 (INCEPTION) THROUGH SEPTEMBER 30, 2022
Note 1 - Organization and Nature of Operations
Exworth Union Inc (the “Company”), a Delaware corporation, was formed on March 16, 2022. The Company provides loans that are collateralized by digital assets such as Bitcoin, and will accept other type of alternative assets such as eCommerce account receivables, recursive payments of subscriptions, IP and copyrights as collateral.
Loans are over-collateralized with digital assets the Company determines from time to time to be acceptable collateral. As of September 30, 2022, the digital assets the Company accepted as collateral included Bitcoin only. The Company’s target markets are individuals and commercial enterprises that hold digital assets and are seeking liquidity without selling their digital assets, with limited or no options to obtain credit line or business loans from conventional financial institutions. The Company provides term loans, up to two years, to these individuals and commercial enterprises.
The Company originates U.S. dollar denominated loans and offers loans to both individual and business borrowers who own digital assets and desire to borrow against such digital assets without selling their digital assets portfolio. Borrowers that receive loans from the Company are required to transfer a specified value of digital assets to the Company to be held as collateral and security for the repayment of the loans. Upon maturity and repayment of the loan, the digital asset collateral is returned to borrowers.
Also, under the loan agreements with borrowers, the Company has the right to repledge collateral. Borrower collateral may also be repledged to secure transactions, including short-term loans that the Company maintains with third parties for capital management purposes and market neutral trading strategies to generate investment returns. See Note 6 – Notes Payable for a description of these short-term loan arrangements.
Note 2 – Summary of Significant Accounting Policies
Basis of presentation
The Company prepares its financial statements in conformity with accounting principles generally accepted in the United States of America as determined by the Financial Accounting Standards Board (the “FASB”) within its Accounting Standards Codification (“ASC”) and under the rules and regulations of the United States Securities and Exchange Commission (“SEC”).
Use of Estimates
The most significant accounting estimates inherent in the preparation of the Company’s financial statements include calculations of the fair values of repledged borrowers’ digital asset collateral. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
The Federal Deposit Insurance Corporation (“EDIC”) insures accounts up to $250,000 per Federally insured institution. At September 30, 2022, the Company had $267,748 cash in one United States bank account.
Borrower Collateral and Custody Assets
The Company requires loans to have certain collateral levels at origination and throughout the term of the loan. The loan agreement with the borrower specifies that the borrower transfers and assigns to the lender absolutely all such collateral together with all rights and interests attached or accruing thereto (including without limitation accrued dividends and distributions declared, made or paid after the relevant date of delivery). Borrowers deposit the collateral into 3rd party designated custody wallet addresses that are under the control of the Company. Although the Company maintains control of the collateral, according to the loan agreement entered by and between the borrower and the Company, the borrower has unilateral ability to cause the Company to return the collateralized digital assets upon full repayment of the loan, related borrow fee and other applicable fees at maturity. As a result, the transfer of digital assets by borrower does not qualify as a sale and as such they are not included in the financial statements of the Company.
When a transfer of digital assets does not qualify as a sale, the transfer is to be accounted for as a secured borrowing with a pledge of collateral in accordance with ASC 310, Receivables (“ASC 310”). When the collateral is repledged by the Company to a lender, the Company records the collateral at fair value as “Collateral receivable” and “Digital asset collateral due to customers” on the Balance Sheet. The repledged collateral is remeasured at period end, with the change in fair value captured in the fair value adjustment on repledged collateral within the Statements of Income.
Allowance for Loan Loss
ASC 310, Receivables (“ASC 310”) and ASC 450-20, Contingencies – Loss Contingencies (“ASC 450”) address evaluating loan losses and impairments in loan portfolios. A company should recognize an allowance for loan loss when it is probable that the company will be unable to collect all amounts due, including both the contractual borrow fee and principal payments under the loan agreement. Based on current information and events, if it is probable that a loan loss has been or will be incurred and the amount of the loss can be reasonably estimated, a loan loss should be recorded.
The process for determining the amount of the allowance requires subjective and complex judgments about the future, including forecasts of economic or market conditions that might impair the ability of our borrowers to repay their loans. Changes in economic conditions affecting borrowers, revisions to accounting rules and related guidance, new qualitative or quantitative information about existing loans, identification of additional problem loans, changes in the size or composition of our finance receivables and loan portfolio, changes to our loss estimation techniques including consideration of forecasted economic assumptions, and other factors, both within and outside of our control, may require an increase in the allowance for loan losses.
The Company overcollateralizes its loans with digital assets, which allows the Company to liquidate the principal owed and limits market volatility in the event of a liquidation. At September 30, 2022, the Company had one loan receivable and this loan had a 71% Loan to Value (“LTV”) ratio. As a result, the Company recorded no allowance for loan loss as of September 30, 2022.
Borrow Fee
The Company offers U.S. Dollar loans collateralized by digital assets to a broad range of customers and generates revenue from interest income earned on loans. Revenue derived from the borrow fee on loans is outside the scope of ASC 606, Revenue from Contracts with Customers (“ASC 606”) and is recognized ratably over the life of the loan. The applicable borrow fee rates for loans will vary based on several factors including the originating loan-to-value ratio, loan duration and jurisdiction. Liquidation handling fees, late fees, stabilization fees, or conversion fees may apply in the case of a collateral sale and are recognized at the time the liquidation, late payment, stabilization, or conversion occurs.
Income Taxes
The Company follows Accounting Standards Codification subtopic 740-10, Income Taxes (“ASC 740-10”) for income taxes. Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability during each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change. Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. The Company currently has not filed its initial income tax returns.
Recently Issued Accounting Pronouncements
The Company continually assesses any new accounting pronouncements to determine their applicability. When it is determined that a new accounting pronouncement affects the Company’s financial reporting, the Company undertakes a study to determine the consequences of the change to its financial statements and assures that there are proper controls in place to ascertain that the Company’s financial statements properly reflect the change.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments, that changes the impairment model for most financial assets and certain other instruments. For receivables, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowance for losses. In addition, an entity will have to disclose significantly more information about allowances and credit quality indicators. The new standard is effective for the Company for fiscal years beginning after December 15, 2022 for Emerging Growth Companies. The Company is currently in the process of assessing the impact of this new standard on its financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (ASC 740): Simplifying the Accounting for Income Taxes, which is part of the FASB’s initiative to reduce complexity in accounting standards. The proposed ASU eliminates certain exceptions to the general principles of ASC 740, Income Taxes, and simplifies income tax accounting in several areas. The implementation of this new standard applies to annual reporting periods beginning after December 15, 2021 and interim periods with fiscal years beginning after December 15, 2022 for Emerging Growth Companies. Early adoption is permitted. ASU 2019-12 has not had a significant effect on the Company’s financial statements.
Note 3 - Fair Value Measurement
The Company’s financial instruments include cash and cash equivalents, accounts payable, and accrued expenses, and notes payable. The fair values of cash and cash equivalents, accounts payable and accrued expenses, and notes payable approximate their stated amounts because of the short maturity of these financial instruments.
The following table presents the fair value hierarchy for those assets and liabilities the Company measured at fair value on a recurring basis:
| September 30, 2022 | ||||||||||||
| Fair Value Measurements | ||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||
| Liabilities | ||||||||||||
| Digital asset collateral due to customer | $ | - | $ | 1,941,580 | $ | - | ||||||
Note 4– Collateralized Loans Receivable and Allowance for Loan Losses
As of September 30, 2022, the Company had one loan receivable in the principal amount of $1,374,691. The receivable bears interest at 4% per annum, is due in July 2024, and is secured by 100 Bitcoin.
At the time of origination, loans are secured and over-collateralized with digital assets the Company determines from time to time to be acceptable collateral. As of September 30, 2022, the digital assets the Company accepted as collateral included Bitcoin only. Borrowers make principal and borrow fee payments at maturity. The borrow rate is set by the Company and is impacted by loan terms and amounts. Once a loan application is approved, a loan is created when a borrower sends collateral to the Company’s collateral wallet (the “The Company Custody Wallet”) and funds are disbursed to the borrower’s bank account. During the term of the loan, the Company may repledge borrower’s collateral and move it out of the the Company Custody Wallet. Total borrower collateral repledged of $ 1,941,580 is presented at fair value on the Balance Sheet as of September 30, 2022. During the term of the loan, borrowers are required to maintain a certain level of LTV ratio, which is the value of loan amount divided by real time fair value of the collateral (“LTV”). If at any time the LTV reaches the LTV margin call level, borrowers are required to deposit additional collateral to the Company so that the LTV drops to the required level. According to its loan agreements, the Company has the ability to sell or liquidate the borrowers’ collateral assets to repay the loan principal if a margin call is not cured as required under the contractual terms. If the threshold for collateral liquidation is surpassed, the Company may liquidate partial or all of the collateral assets. The liquidation handling fee is generally 2.00% of the principal amount of the loan. Since inception, the Company has not received any liquidation fees.
The Company does not recognize its digital asset-backed loans extended as sale transactions as defined by ASC 860. Upon the maturity of a digital asset-backed loan, the Company expects to receive back the borrowed amount it originally extended as a loan and the Company will return the borrower’s collateral.
The Company values its collateralized outstanding loans at par, shown at principal values. Interest receivable on loans in the amount of $11,456 is presented on the Balance Sheet as of September 30, 2022. Loans are secured by digital assets, and represent the collateral for loans. The Company originates loans at various LTVs to over-collateralize the loan. A margin call notice is triggered when an LTV of 85% is breached and notifies the borrower to post additional collateral or make a payment to cure the margin call to an LTV of 85% within 24 hours of notice. Otherwise, the Company may at its sole and absolute discretion sell, transfer, liquidate or otherwise dispose all or a part of the collateral and apply the net proceeds to the discharge of borrower’s obligations. A summary of loans receivable by expected future cash flows is presented below:
| Principal Payments As Of | ||||
| Receipt of Payments | September 30, 2022 | |||
| 0 to 12 months | $ | - | ||
| 12 to 24 months | 1,374,691 | |||
| Total | $ | 1,374,691 | ||
The LTV ratio on the one loan receivable on September 30, 2022 was 71%.
On September 30, 2022, the fair value of the collateral received to secure the loan receivable balance was $ 1,941,580. As of September 30, 2022, all of the collateral balance was repledged, resulting in a corresponding liability of $ 1,941,580, which is included as “Digital asset collateral due to customer” on the Balance Sheet. There is a risk that financing made with borrower collateral could be worth less than the underlying borrower collateral, in which case the Company would have to purchase additional digital assets to repay borrower collateral.
Allowance for Loan Losses
An allowance for loan losses is established with respect to loans held for investment through periodic charges to the provision for loan losses. Loan losses are charged against the allowance for loan losses when management believes that the future collection of principal is unlikely. To date, the Company does not have any experience with losses on the portfolio and therefore has not recorded an allowance for loan losses in the period presented.
Management classifies loans into small, risk categories based on their original LTV and monitors the current LTV on a recurring basis. The allowance is subjective as it requires material estimates, including such factors as historical trends. Other qualitative factors considered may include items such as uncertainties in the digital asset market, changes in the composition of our lending portfolio, business conditions and emerging trends. Recovery of the carrying value of loans is dependent to a great extent on conditions that may be beyond our control. Although the Company has not experienced any losses on the portfolio to date, any combination of the previously described factors may affect our loan portfolio resulting in potential loan losses and could require an allowance for loan loss, which could impact future periods.
As of September 30, 2022, management has not liquidated any collateral and the Company has not incurred any losses on the outstanding loans of the portfolio. The Company also over collateralizes its loans with digital assets, which allows the Company to liquidate the principal owed and limits market volatility in the event of a liquidation. As of September 30, 2022, the Company had one loan receivable and this loan had a 71% LTV. As a result, the Company recorded no allowance for loan loss as of September 30, 2022.
Note 5 - Collateral Receivable
Digital Asset Collateral Receivable
In July 2022, the Company repledged its customer collateral by entering into a master loan agreement with counterparty lender (see Note 6). In accordance with ASC 860, upon repledging, the Company recognizes an asset for the collateral receivable from the counterparty (within “Collateral receivable” on the balance sheet) and a liability for the collateral due to customer. The receivable is recorded at cost and the liability is marked-to-market on a quarterly basis. From March 16, 2022 (Inception) through September 30, 2022, a fair value adjustment of $216,674 was recorded. As of September 30, 2022, the balance of the digital asset collateral receivable was $2,173,112 and the balance of the digital asset collateral due to customer (at Fair Value) was $ 1,941,580.
Note 6 – Notes Payable
On July 14, 2022, the Company entered and executed a master loan agreement with a lender. The loan has a term of 24 months and bears an interest rate of 2.5%. The loan is non-recourse and collateralized using repledged customer collateral. The balance on the loan as of September 30, 2022 is $1,388,576 ($1,376,137 net of unamortized origination fee of $12,439) with 100 Bitcoin as collateral. The balance of collateral included in collateral receivable on the Balance Sheet is $2,173,112
The following table summarizes the Company’s notes payable:
| September 30, 2022 | ||||||||||||||
| Currency | Notes Issued | Note Payments | Balance as of September 30, 2022 | |||||||||||
| Note Payable | USD | $ | 1,388,576 | $ | - | $ | 1,388,576 | |||||||
Future principal repayments are as follows:
| Amount | ||||
| Remainder of 2022 | $ | - | ||
| 2023 | - | |||
| 2024 | 1,388,576 | |||
| Total | $ | 1,388,576 | ||
Note 7 - Shareholders’ Equity
On March 28, 2022 and April 3, 2022, the Company issued a total of 1,000 shares of Company common stock to Exworth Management LLC, managing entity of the Company, at a price of $0.10 per share or $100 total.
On June 8, 2022, the Company issued 100 shares of Company common stock to World Class Global Technology PTE LTD. (“World Class”) at a price of $3,500 per share (as amended August 11, 2022 from $10,000 per share on April 23, 2022) or $350,000 total (as amended August11, 2022 from $1,000,000 total on April 23, 2022).
Note 8- Income Taxes
The components of the provision for income taxes is as follows:
| From March 16, 2022 (Inception) through September 30, 2022 | ||||
| Current | $ | - | ||
| Deferred | 39,265 | |||
| Total provision for income taxes | $ | 39,265 | ||
The reconciliation between the statutory and effective tax rates is comprised of the following:
| From March 16, 2022 (Inception) through September 30, 2022 | ||||
| Computed “expected” tax expense (United States statutory rate) | 21.00 | % | ||
| Increase (decrease) in tax expense resulting from: | ||||
| State tax expense, net of Federal benefit | 7.64 | % | ||
| Effective rate | 28.64 | % | ||
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred income tax assets and (liabilities) is as follows:
| September 30, | ||||
| 2022 | ||||
| Deferred income tax assets: | ||||
| Net operating loss carryforwards | 25,087 | |||
| Less: Valuation allowance | - | |||
| Total deferred income tax assets | 25,087 | |||
| Deferred income tax liabilities | ||||
| Unrealized losses on repledged collateral fair value adjustment | (64,352 | ) | ||
| Total deferred income tax liabilities | (64,352 | ) | ||
| Net deferred income tax liability | (39,265 | ) | ||
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will be realized. The ultimate realization of certain deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible. Management considers the scheduled reversal of domestic deferred tax liabilities, projected future taxable income and taxing strategies in making this assessment. No Valuation allowance has been made by Management for the deferred tax assets identified.
Note 9 – Risk and Uncertainties
The Company’s investing activities expose it to various types of risk that are associated with the financial instruments and markets in which it invests. The significant types of financial risks to which the Company is exposed include, but are not limited to market risk, industry risk, liquidity risk, concentration risk, credit risk and digital asset risk. Certain aspects of those risks are addressed below:
Concentration Risk
One borrower represented 100% of the Company’s total loan receivable balance at September 30, 2022 and 100% of the Company’s total interest income for the period March 16, 2022 (inception) through September 30, 2022.
One lender represented 100% of the Company’s note payable balance at September 30, 2022 and 100% of the Company’s total interest expense for the period March 16,2022 (inception) through September 30, 2022.
Note 10 – Subsequent Events
Effective December 22, 2022, the Company was acquired by Strategic Acquisitions, Inc. (“STQN”), a Nevada corporation formed on January 27, 1989, in a reverse acquisition transaction. STQN issued a total of 3,960,000 shares of STQN common stock (representing 59.3% of STQN issued and outstanding common shares after the transaction) to the two shareholders of the Company in exchange for the 1,100 shares of the Company common stock (representing 100% of the Company common stock) held by the two shareholders of the Company. Prior to the transaction since August 31. 2022, Exworth Management LLC (managing entity of the Company and owner of approximately 91% of Company common Stock outstanding prior to the transaction) owned approximately 74% of the STQN common stock outstanding.
Exhibit 99.2
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
Introduction
The Company is providing the following unaudited pro forma combined financial information to aid you in your analysis of the financial aspects of the Merger (as defined below).
The unaudited pro forma combined balance sheet as of September 30, 2022 gives pro forma effect to the Merger as if it had been consummated as of that date. The unaudited pro forma combined statement of operations for the nine months ended September 30, 2022 gives pro forma effect as if the Merger took place on January 1, 2022. This information should be read together with the audited and unaudited financial statements and related notes thereto of Exworth Union Inc filed as an Exhibit to this Report on Form 8-K, and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information included elsewhere in this 8-Kand the historical financial statements of Strategic Acquisitions, Inc. included in its periodic reports previously filed with the SEC.
The unaudited pro forma combined balance sheet as of September 30, 2022 has been prepared using the following:
| ● | Exworth Union Inc’s audited consolidated balance sheet as of September 30, 2022, as included elsewhere in this 8-K; and | |
| ● | Strategic Acquisitions, Inc’s unaudited consolidated balance sheet as of September 30, 2022, as included in its Report on Form 10-Q for the three and nine months ended September 30, 2022. |
The unaudited pro forma combined statement of operations for the period ended September 30, 2022 has been prepared using the following:
| ● | Exworth Union Inc’s audited consolidated statements of operations and comprehensive income for the nine months ended September 30, 2022, as included elsewhere in this 8-K; and | |
| ● | Strategic Acquisition Inc’s unaudited consolidated statement of operations and comprehensive loss for the nine months ended September 30, 2022, included in its Report on Form 10-Q for the three and nine months ended September 30, 2022. |
Description of the Transactions
On December 22, 2022, we, Strategic Acquisitions, Inc. (“we”, “us” or the “Company”), and STQN Sub, Inc., our recently formed wholly owned subsidiary (“Merger Sub”) entered into and consummated an Agreement and Plan of Merger (“Merger Agreement”) with Exworth Union Inc (“Exworth Union”) and the owners of all of its outstanding shares of capital stock — Exworth Management LLC (“Exworth Management”) and World Class Global Technology LLC (“World Class,” collectively with Exworth Management, the “Stockholders”). Pursuant to the Merger Agreement, Exworth Union merged with and into Merger Sub, with Exworth Union being the surviving corporation and becoming our wholly owned subsidiary (the “Merger”). We issued an aggregate of 3,960,000 shares of our common stock (“Common Stock”), par value $0.001 per share (the “Merger Consideration”) to the Stockholders in exchange for their shares in Exworth Union. Exworth Union, based in Short Hills, New Jersey, is engaged in providing loans collateralized by digital assets. Currently, Bitcoin is the only digital currency Exworth Union is accepting as collateral for loans.
On August 31, 2022, Exworth Management purchased an aggregate of 2,013,000 shares of the Common Stock of Strategic Acquisitions, Inc., representing approximately 74% of the shares of Common Stock then outstanding. Immediately prior to the Merger, Exworth Management owns approximately 91% of the outstanding shares of Exworth Union.
As a result of the receipt of 3,960,000 shares of Common Stock in connection with the Merger, Exworth Management now owns 5,613,000 shares of our Common Stock, approximately 82% of the outstanding shares of our Common Stock. In addition, Yuanyuan Huang, a Director of our Company, who also serves as our Secretary and Treasurer, and Wei Wang, a Director of our Company, are managers of Exworth Union.
Accounting for the Transactions
The Merger will be accounted for as a reverse merger in accordance with U.S. GAAP. Under this method of accounting, Strategic Acquisitions, Inc will be treated as the “acquired” company for financial reporting purposes. This determination was primarily based on the fact that the holders of Exworth Union have a majority of the voting power of the post-combination company, that Exworth Union’s senior management comprise substantially all of the senior management of the post-combination company, the relative size of Exworth Union compared to Strategic Acquisitions, and Exworth Union’s operations comprising the ongoing operations of the post-combination company. Accordingly, for accounting purposes, the Merger will be treated as the equivalent of Exworth Union issuing shares for the net assets of Strategic Acquisitions, accompanied by a recapitalization. The net assets of Strategic Acquisitions will be stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the Merger will be those of Exworth Union.
PRO
FORMA COMBINED BALANCE SHEET
AS OF September 30, 2022
(UNAUDITED)
(A) Exworth Union Inc. | (B) Strategic | Pro Forma Adjustments |
Pro Forma Combined | ||||||||||||||
| Assets | |||||||||||||||||
| Cash | $ | 267,748 | $ | 12,100 | $ | - | $ | 279,848 | |||||||||
| Collateral receivable due from lender | 2,158,254 | - | - | 2,158,254 | |||||||||||||
| Loan receivable | 1,374,691 | - | - | 1,374,691 | |||||||||||||
| Accrued interest receivable | 11,456 | - | - | 11,456 | |||||||||||||
| Total assets | $ | 3,812,149 | $ | 12,100 | $ | - | $ | 3,824,249 | |||||||||
| Liabilities and shareholders’ equity | |||||||||||||||||
| Accounts payable and accrued expenses | $ | 7,232 | $ | - | $ | - | $ | 7,232 | |||||||||
| Note payable, net of unamortized origination fee of $12,439 | 1,376,137 | - | - | 1,376,137 | |||||||||||||
| Digital asset collateral due to customer | 1,941,580 | - | - | 1,941,580 | |||||||||||||
| Deferred income tax liability | 39,265 | - | - | 39,265 | |||||||||||||
| Total liabilities | 3,364,214 | - | - | 3,364,214 | |||||||||||||
| Shareholders’ Equity | |||||||||||||||||
| Common stock | 11 | 2,715 | (11 | ) | (a) | 6,675 | |||||||||||
| 3,960 | (b) | ||||||||||||||||
| Additional paid-in capital | 350,089 | 634,088 | (3,960 | ) | (b) | 355,525 | |||||||||||
| (624,703 | ) | (c) | |||||||||||||||
| 11 | (a) | ||||||||||||||||
| Retained earnings (accumulated deficit) | 97,835 | (624,703 | ) | 624,703 | (c) | 97,835 | |||||||||||
| Total shareholders’ equity | 447,935 | 12,100 | - | 460,035 | |||||||||||||
| Total liabilities and shareholders’ equity | $ | 3,812,149 | $ | 12,100 | $ | - | $ | 3,824,249 | |||||||||
| (A) | Derived from the audited consolidated balance sheet of Exworth Union as of September 30, 2022. See Exworth Union’s audited consolidated financial statements and the related notes appearing elsewhere in this Form 8-K. |
| (B) | Derived from the unaudited consolidated balance sheet of Strategic Acquisitions as of September 30, 2022. See Strategic Acquisitions’ consolidated financial statements and the related notes in its Report on Form 10-Q for the quarter ended September 30, 2022. |
| (a) | To reflect the cancellation of 1100 shares of Exworth Union Inc. |
| (b) | To reflect the insurance of 3,960,000 common shares of STQN in connection with the Merger. |
| (c) | To reflect the reclassification of Strategic Acquisition Inc’s accumulated deficit to additional paid-in capital |
PRO
FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022
(UNAUDITED)
(A) Exworth | (B) Strategic | Pro Forma Adjustments |
Pro Forma Combined | ||||||||||||||
| (Unaudited) | |||||||||||||||||
| Revenues | $ | 11,456 | $ | - | $ | - | $ | 11,456 | |||||||||
| Operating expenses | |||||||||||||||||
| Selling, general and administrative expenses | 82,352 | 84,035 | - | 166,387 | |||||||||||||
| Total operating expenses | 82,352 | 84,035 | - | 166,387 | |||||||||||||
| Loss from operations | (70,896 | ) | (84,035 | ) | - | (154,931 | ) | ||||||||||
| Other income, net | |||||||||||||||||
| Fair value adjustment on repledged collateral | 216,674 | - | - | 216,674 | |||||||||||||
| Interest (expense) Income | (7,232 | ) | 3 | - | (7,229 | ) | |||||||||||
| Amortization of loan origination fee | (1,446 | ) | - | - | (1,446 | ) | |||||||||||
| Total other income, net | 207,996 | 3 | - | 207,999 | |||||||||||||
| Income before income taxes | 137,100 | (84,032 | ) | - | 53,068 | ||||||||||||
| Income taxes | 39,265 | - | - | 39,265 | |||||||||||||
| Net income | $ | 97,835 | $ | (84,032 | ) | $ | - | $ | 13,803 | ||||||||
| Net income per share - basic | $ | 88.94 | $ | (0.03 | ) | $ | (88.91 | ) | $ | 0.00 | |||||||
| Net income per share - diluted | $ | 88.94 | $ | (0.03 | ) | $ | (88.91 | ) | $ | 0.00 | |||||||
| Weighted average shares outstanding - basic | 1,100 | 2,715,000 | 3,958,900 | (d) | 6,675,000 | ||||||||||||
| Weighted average shares outstanding - diluted | 1,100 | 2,731,484 | 3,958,900 | (d) | 6,691,484 | ||||||||||||
| (A) | Derived from the audited statement of income of Exworth Union for the nine months ended September 30, 2022. See Exworth Union’s audited consolidated financial statements and the related notes appearing elsewhere in this Form 8-K | |
| (B) | Derived from the unaudited consolidated statements of operations of Strategic Acquisitions, Inc. for the nine months ended September 30, 2022. See Strategic Acquisitions’ financial statements and the related notes in its Report on Form 10-Q for the quarter ended September 30, 2022. | |
| (d) | To reflect the cancellation of 1,100 common shares of Exworth Union and issuance of 3.96 million common shares of Strategic Acquisition. |