UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended:
For the transition period from ______ to_______
Commission
File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| (Address of Principal Executive Offices) |
| ( |
| (Registrant’s Telephone Number, Including Area Code) |
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
| Title of Each Class | Trading Symbol | Name of each Exchange on which Registered | ||
| N/A |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer ☐ | |
| Accelerated Filer ☐ | Smaller
Reporting Company |
| Emerging
growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Exchange Act. ☐
Indicate
by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐
There were shares of the registrant’s common stock outstanding as of as of Oct 31, 2023.
STRATEGIC ACQUISITIONS, INC.
FORM 10-Q
For the Quarterly Period Ended September 30, 2023
TABLE OF CONTENTS
| 1 |
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STRATEGIC ACQUISITIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Assets | ||||||||
| Cash | $ | $ | ||||||
| Collateral receivable due from lender | ||||||||
| Loan receivable | ||||||||
| Accrued interest receivable | ||||||||
| Prepaid expenses | ||||||||
| Deferred income tax assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and shareholders’ equity (deficit) | ||||||||
| Liabilities | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Due to related party (noninterest bearing, due on demand) | ||||||||
| Note payable, net of unamortized origination fee of $ | ||||||||
| Digital asset collateral due to customer | ||||||||
| Deferred income tax liability | ||||||||
| Total liabilities | ||||||||
| Shareholders’ Equity (Deficit) | ||||||||
| Common stock, $$ par value; shares authorized; shares issued and outstanding as of September 30, 2023 and December 31, 2022 | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings (accumulated deficit) | ( | ) | ||||||
| Total shareholders’ equity (deficit) | ( | ) | ||||||
| Total liabilities and shareholders’ equity (deficit) | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
| 2 |
STRATEGIC ACQUISITIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September
30, | From (Inception) through September 30, | |||||||||||||
| Revenues | ||||||||||||||||
| Loan administrative service fees | $ | $ | $ | $ | ||||||||||||
| Interest income | ||||||||||||||||
| Total revenues | ||||||||||||||||
| Operating expenses | ||||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense), net | ||||||||||||||||
| Fair value adjustment on repledged collateral | ( | ) | ||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Amortization of loan origination fee | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other income (expense), net | ( | ) | ||||||||||||||
| Income (loss) before income taxes provision (benefit) | ( | ) | ||||||||||||||
| Income taxes expense (benefit) | ( | ) | ||||||||||||||
| Net income (loss) | $ | $ | $ | ( | ) | $ | ||||||||||
| Net income (loss) per share - basic and diluted | $ | $ | $ | ) | $ | |||||||||||
| Weighted average shares outstanding - basic and diluted | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
| 3 |
STRATEGIC ACQUISITIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT
(UNAUDITED)
| Retained | Total | |||||||||||||||||||
| Additional | Earnings | Shareholders’ | ||||||||||||||||||
| Common Stock | Paid-in | (Accumulated | Equity | |||||||||||||||||
| Shares | Amount | Capital | Deficit) | (Deficit) | ||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | ||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Net loss | - | |||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Retained | Total | |||||||||||||||||||||||
| Additional | Earnings | Shareholders’ | ||||||||||||||||||||||
| Common Stock | Subscription | Paid-in | (Accumulated | Equity | ||||||||||||||||||||
| Shares | Amount | Receivable | Capital | Deficit) | (Deficit) | |||||||||||||||||||
| Balance at March 16, 2022 (inception) | $ | $ | $ | $ | $ | |||||||||||||||||||
| Subscription to shares of Exworth Union Inc common stock (equivalent to shares of Strategic Acquisitions Inc. common stock) by Exworth Management LLC | ( | ) | ( | ) | ||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance at March 31, 2022 | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||
| Collection of Subscription Receivable from Exworth Management LLC | - | |||||||||||||||||||||||
| Subscription to shares of Exworth Union Inc common stock (equivalent to shares of Strategic Acquisitions Inc. common stock) by World Class Global Technology PTE LTD. | ||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Net loss | - | |||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | $ | |||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
| 4 |
STRATEGIC ACQUISITIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Nine Months Ended September 30, 2023 | From March 16, 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Fair value adjustment on repledged collateral | ( | ) | ||||||
| Deferred income tax (benefit) expense | ( | ) | ||||||
| Amortization of loan origination fees | ||||||||
| Change in operating assets and liabilities: | - | |||||||
| Interest receivable | ( | ) | ||||||
| Loan receivable, net | ( | ) | ||||||
| Prepaid expenses | ( | ) | ||||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from note payable | ||||||||
| Shares subscription | ||||||||
| Repayment of due to related party | ( | ) | ||||||
| Net cash (used in) provided by financing activities | ( | ) | ||||||
| Net change in cash and cash equivalents | ( | ) | ||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| 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 | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
| 5 |
STRATEGIC ACQUISITIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Organization and Nature of Operations
Organization
Strategic Acquisitions, Inc. (“STQN”) was organized January 27, 1989 under the laws of the State of Nevada. On November 29, 2022, STQN incorporated a subsidiary, STQN Sub, Inc. (“STQN Sub”). Since inception to December 22, 2022, STQN did not engage in any business activities other than organizational efforts, the sale of stock, and the evaluation of potential acquisition targets with active business operations.
Effective
December 22, 2022, STQN completed a reverse acquisition of Exworth Union Inc (“Union”) (the “Transaction”) through
a share exchange with the two shareholders of Union. To complete the Transaction, STQN issued a total of shares of STQN common
stock (representing
The Transaction was accounted for as a “reverse recapitalization” in accordance with accounting principles generally accepted in the United States (“GAAP”). Under this method of accounting, STQN was treated as the “acquired” company for financial reporting purposes and Union was determined to be the accounting acquirer based on the terms of the Transaction and other factors including: (i) Union’s stockholders having a majority of the voting power of the combined company and (ii) the operations of Union comprising all of the ongoing operations of the combined entity. Operations prior to the Transaction are those of Union.
Subsequent to the Transaction, the Company conducts its operations through Union, a Delaware corporation, which was formed on March 16, 2022. Union provides loans that are collateralized by digital assets such as Bitcoin and will accept as collateral other types of alternative assets such as eCommerce accounts receivable, recursive payments of software as service (SAAS) subscriptions, IP and copyrights.
STQN and Union are collectively referred to as the “Company”.
Nature of Operations
Loans made by the Company are collateralized with digital assets of such kind and in such amounts as the Company determines from time to time to be acceptable. As of September 30, 2023 and December 31, 2022, the only digital asset the Company accepted as collateral was 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 options to obtain a 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 rather than selling them. 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 a borrower’s loan, the digital asset collateral is returned to the borrower.
Also, under the loan agreements with borrowers, the Company has the right to repledge collateral to secure transactions, including 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 loan arrangements.
The Company also provides loan administration services to borrowers and lenders. The Company is responsible for processing loan payments, forwarding information to counterparties, responding to inquiries, keeping loan profile records, preparing loan statements, and managing bank accounts and collateral accounts.
| 6 |
Note 2 – Summary of Significant Accounting Policies
Basis of presentation
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) as determined by the Financial Accounting Standards Board (“FASB”) within its Accounting Standards Codification (“ASC”) and under the rules and regulations of the SEC for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete annual financial statements. In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments, consisting only of normal, recurring adjustments, that are necessary for the fair presentation of the Company’s balance sheet, results of operations and statements of cash flows for the periods presented. The unaudited interim condensed consolidated financial statements are not necessarily indicative of the results to be expected for the full year or any other period.
These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Form 10-K filed with the SEC pursuant to Section 12(g) under the Securities Exchange Act of 1934, on March 7, 2023.
Principles of consolidation
These accompanying unaudited interim condensed consolidated financial statements include the financial statements of STQN and its subsidiaries. All significant intercompany transactions and balances between the Company and its subsidiaries are eliminated upon consolidation.
Subsidiaries are those entities in which the Company, directly or indirectly, controls more than one half of the voting power; or has the power to govern the financial and operating policies, to appoint or remove a majority of the members of the board of directors, or to cast a majority of votes at the meeting of directors.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. 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 and the allowance for loan losses. 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 (“FDIC”) insures accounts up to $
| 7 |
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 each borrower specifies that the borrower transfers and assigns to the Company the 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 a 3rd party designated custody wallet address that is under the control of the Company. Although the Company maintains control of the collateral, according to the loan agreement entered between each borrower and the Company, the borrower has the unilateral ability to cause the Company to return the collateralized digital assets upon full repayment of the loan, related borrower fees and other applicable fees at maturity. As a result, the transfer of digital assets by a 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 FASB 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 Statement of Operations.
Allowance for Loan Losses
FASB 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 losses when it is probable that the company will be unable to collect all amounts due, including both the contractual borrower 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 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 a company’s finance receivables and loan portfolio, changes to a company’s loss estimation techniques including consideration of forecasted economic assumptions, and other factors, both within and outside of control, may require an increase in the allowance for loan losses.
Revenue recognition
Borrower Fee
The Company offers U.S. Dollar loans collateralized by digital assets to a broad range of customers and generates revenue from interest income and fees earned on loans. Revenue derived from borrower fees 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 borrower 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.
Loan administration services
The Company provides loan administration services to customers (see Note 9). The Company serves as a third party that acts as a liaison between the lender and borrower of a loan. The Company has two performance obligations, which consist of a servicing part and a reporting part. For servicing, the Company is generally responsible for processing loan payments, forwarding information to counterparties, responding to inquiries, and managing banking and collateral accounts. Revenue is based on a fixed percentage of the loan principal and is recognized at closing of a loan. For reporting, the Company is generally responsible for keeping records of a loan profile, and preparing drawdown, disbursement, and amortization details on a monthly statement for customer’s review. Revenue is generally a fixed monthly charge and recognized over the life of a loan until fully repaid.
| 8 |
Income Taxes
The Company follows Accounting Standards Codification subtopic 740, Income Taxes (“ASC 740”), which requires the Company to use the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities at currently enacted tax rates. Under this accounting standard, the effect on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion, or all, of a deferred tax asset will not be realized.
ASC 740-10, Accounting for Uncertainty in Income Taxes, defines uncertainty in income taxes and the evaluation of a tax position as a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that tax position. The second step is to measure a tax position that meets the more likely than not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet the more likely than not recognition threshold should be recognized in the first subsequent period in which the threshold is met. The Company will continue to monitor its tax positions in the applicable jurisdictions and adjust this liability accordingly. The Company has evaluated whether or not there are uncertain tax positions that require financial statement recognition and has determined that no uncertain tax positions related to federal and state income taxes existed as of September 30, 2023 and December 31, 2022.
Basic net income (loss) per share is calculated based upon the weighted average number of shares of common stock outstanding during the relevant period. Diluted net income (loss) per share is calculated based upon the weighted average number of shares of common stock outstanding and dilutive securities (such as stock options, warrants and convertible debt) outstanding during the relevant period. Diluted securities having an anti-dilutive effect on dilutive net income (loss) per share are excluded from the calculation.
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 the 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. The adoption of ASU 2019-12 is not expected to have a significant effect on the Company’s 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. The adoption of ASU 2019-12 did not have a significant effect on the Company’s financial statements.
| 9 |
Note 3 - Fair Value Measurement
Fair value is defined as the price that would be received upon sale of an asset or paid to transfer a liability (i.e., the ‘exit price’) in an orderly transaction between market participants at the measurement date.
GAAP utilizes a fair value hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs reflect the Company’s assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.
The fair value hierarchy is categorized into three levels based on the inputs as follows:
Level 1 – Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, these valuations do not entail a significant degree of judgment.
Level 2 – Valuations based on quoted prices, other than those in Level 1, for identical assets or liabilities in markets that are not active or for similar assets and liabilities for which significant inputs are observable, either directly or indirectly.
Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
The Company’s financial instruments include cash and cash equivalents, accounts payable and accrued expenses, due to related party, note payable, and digital asset collateral due to customer. The fair values of cash and cash equivalents, accounts payable and accrued expenses, due to related party, and note payable approximate their stated amounts because of the short maturity of these financial instruments.
The availability of valuation techniques and observable inputs can vary by investment. To the extent that valuations are based on sources that are less observable or unobservable in the market, the determination of fair value requires more judgment. Fair value estimates do not necessarily represent the amounts that may be ultimately realized by the Company.
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, 2023 (unaudited) | ||||||||||||
| Fair Value Measurements | ||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||
| Liabilities | ||||||||||||
| Digital asset collateral due to customer | $ | $ | $ | |||||||||
| December 31, 2022 | ||||||||||||
| Fair Value Measurements | ||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||
| Liabilities | ||||||||||||
| Digital asset collateral due to customer | $ | $ | $ | |||||||||
The
Company determined the fair value per Bitcoin to be $
Note 4– Collateralized Loans Receivable and Allowance for Loan Losses
As
of September 30, 2023 and December 31, 2022, the Company had one loan receivable in the principal amount of $
| 10 |
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, 2023 and December 31, 2022, the only digital asset the Company accepted as collateral was
Bitcoin. Borrowers make principal payments at maturity and make interest payments quarterly. The interest 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’s Custody Wallet”) and funds are disbursed to the borrower’s
bank account. During the term of the loan, the Company may repledge a borrower’s collateral and move it out of the Company’s
Custody Wallet. Total borrower collateral repledged of $
The
Company does not recognize its digital asset-backed loans extended as sale transactions as defined by FASB 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 plus borrower
fees and any unpaid interest and to 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 $
| Future Principal Payments As Of | ||||
| Receipt of Payments | September 30, 2023 (unaudited) | |||
| 0 to 12 months | $ | |||
| 12 to 24 months | ||||
| Total | $ | |||
The
LTV ratio on the one loan receivable at September 30, 2023 and December 31, 2022 was
On
September 30, 2023 and December 31, 2022, the fair value of the collateral received to secure the loan receivable balance was $
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 the principal of a loan 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 periods presented.
| 11 |
Management classifies loans into 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 the Company’s 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 the Company’s control. Although the Company has not experienced any losses on the portfolio to date, any combination of the previously described factors may affect its loan portfolio resulting in potential loan losses and could require an allowance for loan loss, which could impact future periods.
As
of September 30, 2023 and December 31, 2022, management has not liquidated any collateral and the Company has not incurred any losses
on the outstanding portfolio. The Company also over collateralizes its loans with digital assets, which allow the Company to liquidate
the pledged collateral for an amount at least equal to the principal owed. As of September 30, 2023 and December 31, 2022, the Company
had one loan receivable and this loan had an
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 a 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 monthly basis. For the three months and nine months ended September 30,
2023, a fair value adjustment of $
Note 6 – Note Payable
On
July 14, 2022, the Company entered and executed a master loan agreement with a lender. The loan has a term of
The following table summarizes the Company’s notes payable:
September 30, 2023 (unaudited) | ||||||||||||||||
| Currency | Note Issued | Note Payments | Balance as of September 30, | |||||||||||||
| Note Payable | USD | $ | $ | $ | ||||||||||||
| December 31, 2022 | ||||||||||||||||
| Currency | Note Issued | Note Payments |
Balance as of December
31, |
|||||||||||||
| Note Payable | USD | $ | $ | $ | ||||||||||||
A summary of notes payable by expected future cash repayments is presented below.
| Repayment of Notes Payable | Future | |||
| 0 to 12 months | $ | |||
| 12 to 24 months | ||||
| Total | $ | |||
| 12 |
Note 7 - Shareholders’ Equity
On
March 28, 2022 and April 3, 2022, Union issued a total of shares of its common stock to Exworth Management LLC, managing entity
of Union, at a price of $ per share or $
On
June 8, 2022, Union issued
shares of its common stock to World Class Global Technology PTE LTD. (“World Class”) at an amended price of $
per share or $
Effective
August 31, 2022, STQN issued a total of
On December 22, 2022, STQN completed a reverse acquisition transaction with the two shareholders of Union (See Note 1). Exworth Management received shares of STQN common stock in exchange for the shares of Union common stock it owned and World Class received shares of STQN common stock in exchange for the shares of Union common stock it owned.
Note 8- Income Taxes
The components of the provision for (benefit from) income taxes are as follows:
For the | From
| |||||||
| (unaudited) | (unaudited) | |||||||
| Current | $ | $ | ||||||
| Deferred | ( | ) | ||||||
| Total provision for (benefit from) income taxes | $ | ( | ) | $ | ||||
The
reconciliation between income taxes at the U.S. federal statutory rates of approximately
For the | From | |||||||
| (unaudited) | (unaudited) | |||||||
| Computed “expected” tax expense (United States statutory rate) | ( | ) | ||||||
| Increase (decrease) in tax expense resulting from: | ||||||||
| State tax expense, net of Federal benefit | ( | ) | ||||||
| Change in valuation allowance | ||||||||
| Effective rate | ( | |||||||
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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) are as follows:
September 30, | December 31, 2022 | |||||||
| (unaudited) | ||||||||
| Deferred income tax assets: | ||||||||
| Net operating loss carryforwards | $ | $ | ||||||
| Unrealized loss on repledged collateral fair value adjustment | ||||||||
| Less: Valuation allowance | ( | ) | ( | ) | ||||
| Total deferred income tax assets | ||||||||
| Deferred income tax liabilities | ||||||||
| Unrealized gain on repledged collateral fair value adjustment | ( | ) | ||||||
| Total deferred income tax liabilities | ( | ) | ||||||
| Net deferred income tax asset (liability) | $ | $ | ( | ) | ||||
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.
For
United States income tax purposes, STQN has
Union
has a United States net operating loss carry forward of approximately $
Note 9 –Related Party Transactions
For the three ended, | ||||||||
| Name | Relationship | Nature | September 30, 2023 | |||||
| (Unaudited) | ||||||||
| Exworth Global Inc. | An entity controlled by Exworth Holdings Inc., a majority shareholder of the Company | Loan administrative services fees | $ | |||||
Note 10 – 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
One
lender represented
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ITEM 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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 three months and nine months ended September 30, 2023 and for the period commencing March 16, 2022, the date Exworth Union was formed and ending September 30, 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.
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Results of Operations
Revenue
Interest income, our major source of income, was $13,747 and $41,241 for the three and nine months ended September 30, 2023, respectively, $11,456 and$11,456 for the three months ended September 30, 2023 and the period from the inception to September 30, 2022. As of September 30, 2023 and 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 September 30, 2023 and December 31, 2022 was 51% and 83%, respectively. The LTV ratio was as high as 83% and as low as 44% during the nine months ended September 30, 2023.
Loan admin service income, was nil and $3,950 for the three and nine months ended September 30, 2023, and nil for the period from the inception to September 30, 2022. The Company provides loan admin services to a related party. The Company serves as a third party that acts as a liaison between the lender and borrower of a loan.
Selling, General and Administrative Expenses
Selling, general and administrative expenses was $33,892 and $132,229 for the three and nine months ended September 30, 2023, respectively, and $21,552 for the three months ended September 30, 2022 and $82,352 for period from the inception to September 30, 2022. For the period from the inception to September 30, 2022 it primarily includes the legal and professional expenses related to the consummation of the Merger Agreement
Fair Value Adjustment on Repledged Collateral
Fair value adjustment on repledged collateral for the three and nine months ended September 30, 2023 was $351,642 and $(1,042,840), respectively, $216,674 and $216,674 for the three months ended September 30, 2022, and the period from the inception to September 30, 2022. The loss in the nine months ended September 30, 2023 was attributable to the increase 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 was $8,679 and $26,036 for the three and nine months ended September 30, 2023, respectively, $7,232 and $7,232 for the three months ended September 30, 2022 and the period from the inception to September 30, 2022, 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 September 30, 2023.
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 was $1,736 and $5,207 for the three and nine months ended September 30, 2023, respectively, and $1,446 and $1,446 for the three months period ended September 30, 2022 and the period from the inception to September 30, 2022.
Net Income and Loss
Our net income was $215,590 and our net loss was $(898,797), for the three and nine months ended September 30, 2023, respectively, and our net income was $139,466 and $97,835 for the three months ended September, 2022 and for the period from the inception to September 30, 2022, respectively. The net loss for the nine months ended September 30, 2023 was primarily driven by the increase 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.
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Liquidity and Capital Resources
As of September 30, 2023 and December 31, 2022, we had cash of $93,663 and $241,727, respectively. 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 September 30, 2023 and December 31, 2022 is $1,383,080 and $1,377,872, net of unamortized origination fee of $5,496 and $10,704, respectively, 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.
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 our cash flows for the nine months ended September 30, 2023 and for the period from the inception to September 30, 2022:
For the | From March 16, 2022 (Inception) through September 30, 2022 | |||||||
| Net cash (used in) operating activities | $ | (135,564 | ) | $ | (1,457,043 | ) | ||
| Net cash (used in) provided by financing activities | (12,500 | ) | 1,724,791 | |||||
| Net (decrease) increase in cash | (148,064 | ) | 267,748 | |||||
| Cash, beginning | 241,727 | - | ||||||
| Cash, ending | $ | 93,663 | $ | 267,748- | ||||
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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 $135,564 for the nine months ended September 30, 2023. Cash consumed in operations reflects our net loss of $898,797, offset by non-cash items including a fair value adjustment on repledged collateral of $1,042,840, and less deferred income tax benefit of $262,324 and changes in prepaid expenses of $2,696, and accounts payable and accrued expenses of $19,794.
Net cash used in operating activities was $1,457,043 for the period from the inception to September 30, 2022, which was primarily from operating expenses for the operation of our digital asset-backed loan business as well as general and administrative expenses. 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.
Investing Activities
There were no investing activities for the nine months ended September 30, 2023 and for the period from the inception to September 30, 2022.
Financing Activities
Net cash (used in) provided by financing activities was $(12,500) for the nine months ended September 30, 2023, which related to the (repayment to) Exworth Management for business operation. Net cash provided by financing activities was $1,724,791 during the period from inception to September 30, 2022, consisting of proceeds from the issuance of a note payable of $1,374,691 (after netting off the origination fee) 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.
ITEM 4 CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on this evaluation, the Principal Executive Officer and Principal Financial Officer concluded for the reasons discussed below that our disclosure controls and procedures were not effective as of June 30, 2023.
| 18 |
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) of the Securities Exchange Act of 1934, as amended. A company’s internal control over financial reporting is a process designed by a company’s principal executive and principal financial officers, or persons performing similar functions, and effected by a company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that:
| ● | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; |
| ● | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and |
| ● | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, including our President and Principal Financial Officer, has conducted an evaluation of the effectiveness of our internal control over financial reporting as of September 30, 2023. Management’s evaluation of the effectiveness of the Company’s internal control over financial reporting is based on the framework described in “Internal Control — Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Based on its assessment, management concluded that the Company’s internal control over financial reporting was not effective as of September 30, 2023, with the following aspects being noted as the potential material weakness: due to the lack of an oversight committee, insufficient accounting personnel for appropriate segregation of duties and a lack of personnel with familiarity with U. S. generally accepted accounting principles.
This Quarterly Report does not include an attestation report of our Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the SEC that permit our Company to provide only management’s report in this Quarterly Report.
This report shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liabilities of that section, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting or in other factors identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the quarter ended September 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
The following exhibits are filed with this Report or incorporated by reference:
EXHIBIT LIST
| Exhibit Number |
Description | |
| 31.1 | Certification of the Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 | Certification of the Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS | Inline XBRL Instance Document | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | Inline XBRL Taxonomy Extension Labels Linkbase Document | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
| 20 |
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 thereunto duly authorized.
| STRATEGIC ACQUISITIONS, INC. | ||
| Date: November 8, 2023 | By: | /s/ YUANYUAN HUANG |
| YUANYUAN HUANG | ||
| Secretary and | ||
| Treasurer Office | ||
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