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
Effective December 22, 2022, we entered into and consummated an Agreement and
Plan of Merger ("Merger Agreement") whereby we acquired all of the outstanding
shares of Exworth Union and it became our wholly-owned subsidiary. Immediately
prior to consummation of the Merger Agreement Exworth Management owned 74% of
our outstanding shares of common stock and 91% of the outstanding shares of
Exworth Union. Exworth Union is engaged in providing loans collateralized by
digital assets. Prior to the Merger, we were a "shell" company with no
commercial operations and had generated no revenues other than nominal interest
income. The transaction effected through the Merger Agreement was accounted for
as a reverse recapitalization. Exworth Union was determined to be the accounting
acquirer and we, Strategic, were treated as the acquired company for financial
reporting purposes
The discussion below pertains to our financial results for the period commencing
March 16, 2022, the date Exworth Union was formed and ending December 21, 2022.
For a discussion and analysis of our financial condition and results of
operations prior to the formation of Exworth Union please refer to filings made
with the U.S. Securities and Exchange Commission before consummation of the
Merger Agreement.
Exworth Union, a Delaware corporation, was formed on March 16, 2022. It 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, though the
only form of collateral that has been accepted to date is Bitcoin. The target
customers 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 lines or business loans from conventional financial
institutions. We provide term loans, up to two years, to these individuals and
commercial enterprises.
Results of Operations
Revenue
Interest income, our major source of income, was $25,203 for the period ended
December 31, 2022. As of December 31, 2022, we have 1 loan in our loan
portfolio, a consumer loan secured by Bitcoin. The LTV ratio of our loan
portfolio as of December 31, 2022 was 83%. The LTV ratio has as high as 87% and
as low as 56% during the period from inception of the loan to December 31, 2022.
On certain days in November 2022, our LTV ratio rose above 85% but the ratio
dropped below 85% on the next trading day. As the LTV recovered within the
agreed upon grace period, no margin call was made.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the period ended December 31,
2022 were $161,574, primarily legal and professional expenses related to the
consummation of the Merger Agreement and legal and professional expense related
to initialize our loan business. We expect our legal and professional expenses
to increase as we are no longer a shell company.
Fair Value Adjustment on Repledged Collateral
Fair value adjustment on repledged collateral for the year ended December 31,
2022 was $505,154, which was attributable to the decline in the price of
repledged 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 ended December 31, 2022 was $15,911, 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 margin call was initiated by our lender
during the period from inception of the loan to December 31, 2022.
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Amortization of Loan Origination Fee
Our lender charged 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 for the period ended December 31, 2022 was $3,182.
Net Income
Our net income was $248,672 for the period ended December 31, 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; and
5) The allowance for loan loss of our loans.
Liquidity and Capital Resources
As of December 31, 2022, we had cash of $241,727. The accompanying condensed
financial statements have been prepared assuming that we 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 we be unable to continue as a going concern. To date, we have financed
our operations through a private placement of equity raising approximately
$350,000. We 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 December 31, 2022 is $1,377,872, net
of unamortized origination fee of $10,704 and collateralized with 100 Bitcoins.
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 have no commitments for the purchase of our equity and, should we need
to raise capital, 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.
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Cash Flow
The following summarizes key components of our cash flows for the year ended
December 31, 2022:
Net cash (used in) operating activities $ (1,493,374 )
Net cash (used in) investing activities
-
Net cash provided by financing activities 1,735,101
Net increase in cash 241,727
Cash, beginning -
Cash, ending $ 241,727
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 $1,493,374
for the year ended December 31, 2022. Cash consumed in operations reflects our
net income of $248,672, less non-cash items including a fair value adjustment on
repledged collateral of $505,154, increases in interest receivable of $11,456
and loan receivable of $1,374, 691, offset by deferred income tax expense of
$101,018 and changes in accounts payable and accrued expenses of $45,055.
Investing Activities
There were no investing activities during the year ended December 31, 2022.
Financing Activities
Net cash provided by financing activities was $1,735,101 for the year ended
December 31, 2022, consisting of proceeds from the issuance of a note payable of
$ 1,374,690 and sales of Exworth Union's common stock of $350,100 in private
placements in June 2022, and a recapitalization for reverse merger amounting to
$10,311.
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.
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