Item 1. Business
ITEM 1. BUSINESS.
Overview
Asset
Entities is a technology company providing social media marketing and content delivery services across Discord, TikTok, and other social
media platforms. We also design, develop and manage servers for communities on Discord. Based on the rapid growth of our Discord servers
and social media following, we have developed three categories of services. First, we have established and developed large communities
with subscription upgrades to premium content on our investment education and entertainment servers on Discord. Second, we develop, codevelop
and execute influencer social media and marketing campaigns for clients. Third, we design, develop and manage Discord servers for clients
under our “AE.360.DDM” brand. All of these services – our Discord investment education and entertainment, social media
and marketing, and AE.360.DDM services – are therefore based on our effective use of Discord as well as other social media including
TikTok, Twitter, Instagram, and YouTube.
Our
Background
In
2020, Mr. Arshia Sarkhani, our Chief Executive Officer and President, and Mr. Kyle Fairbanks, our Executive Vice-Chairman, had been actively
investing and developing social influencer followings on their own when they had a vision: Bring Wall Street trading education and entertainment
to the Generation Z masses through social media through the community-based platform known as Discord. Mr. Sarkhani and Mr. Fairbanks
sensed that social media could empower retail investors, as later demonstrated in the extreme by recent developments such as the GameStop
meme stock phenomenon. Based on their vision and personal investing experience, Mr. Sarkhani and Mr. Fairbanks founded our company with
fellow investors and social influencers Jackson Fairbanks, our Chief Marketing Officer, and Arman Sarkhani, our Chief Operating Officer.
Our company initially focused on providing social media and marketing campaigns and consulting services for clients.
By
October 2020, we had determined that the social media platform Discord, which focuses on users’ shared interests and features premium
content instead of advertisements, would be the most effective forum for our vision. We formed a stock investing education and entertainment
Discord server, with the server name “STOCKS”. Subsequently, in 2021, we formed similar servers focusing on cryptocurrencies
and nonfungible tokens, or NFTs, with the server names “CRYPTOS” and “NFTS”, respectively. We also recently launched
a real estate Discord server in May 2022, with the server name “REALTY”, to provide similar content on various aspects of
residential and commercial real estate investing. We believe it is significant, and shows the pioneering vision of our founders, that
we were able to obtain the Discord domain names of “STOCKS”, “CRYPTOS”, “NFTS”, and “REALTY”
for their four main Discord communities. We believe that each of our servers is one of the first of its kind on Discord.
As
of March 2023, our Discord servers had approximately 260,000 members combined, consisting of approximately 160,000, 53,000, 43,000, and
5,100 members on our STOCKS, REALTY, CRYPTOS, and NFTS servers, respectively. We plan to launch servers with other popular investment
themes in the future. Through the consistent release of relevant content, cross-marketing, and strategic subscription pricing, we anticipate
that our various Discord communities will continue to grow rapidly.
Our
record of growth on Discord has also depended and will continue to depend on a massive social media following. Since deciding to
form our Discord communities, our social influencers’ effective use of TikTok and other social media has fueled their rapid
growth. Since August 2020, as a result of social media campaigns helping to promote our Discord servers in the financial education
and entertainment space, our social media presence has grown organically from fewer than 50,000 members and followers, to 2 million
by March 2023. Our social media reach across all platforms has accumulated over 1 billion interactions. We expect even faster growth
on Discord with the recent launch of our real estate-themed server and other services in 2022 due to our continued skilled use of
social media as well as our investment education and entertainment content.
Our
Current Business
Our
Discord investment education and entertainment service is designed primarily by and for enthusiastic Generation Z, or Gen Z, retail investors,
creators and influencers. Gen Z is commonly considered to be people born between 1997 and 2012. Our investment education and entertainment
service focuses on stock, real estate, cryptocurrency, and NFT community learning programs designed for the next generation. While we
believe that Gen Z will continue to be our primary market, our recently-expanded Discord server offering also features education and
entertainment content covering real estate investments, which is expected to appeal strongly to older generations as well.
1
We
initially developed our Discord community and other social media following for our company through the talents, insights and efforts
of our executive social influencers, Messrs. Arshia and Arman Sarkhani and Messrs. Kyle and Jackson Fairbanks. Our executive team has
also offered social media and marketing campaign services to business clients. To the end of further capitalizing on our management’s
social influencer backgrounds, we developed our “SiN” or “Social Influencer Network,” our team of social influencer
independent contractors. Our SiN social influencer independent contractors can perform social media and marketing campaign services to
expand our clients’ Discord server bases and drive traffic to their businesses, as well as increase membership in our own servers.
In forming thriving community groups on Discord, we designed and developed
four Asset Entities server communities and manage a combined server user membership of approximately 260,000 as of March 2023. As a result,
we have developed a high level of expertise in designing, developing, and managing Discord servers. Having developed multiple Discord
servers in a variety of fields, we have positioned ourselves as experts in the Discord space. Further capitalizing on this experience,
since January 2022, we have formally offered our “AE.360.DDM, Design Develop Manage” service, or “AE.360.DDM”.
AE.360.DDM is a suite of services to individuals and companies seeking to create a server on Discord. We believe we are the first company
to provide “Design, Develop and Manage,” or DDM, services for any individual, company, or organization that wishes to join
Discord and create their own community. We liken this service to that provided by companies like Register.com and Godaddy.com during the
dot.com era in the 1990s for companies looking to register their domain names, develop webpages and websites, and manage and host those
websites. With our AE.360.DDM rollout, we believe we are uniquely positioned to offer DDM services in the growing market for Discord servers.
Our
Historical Performance
The Company had an accumulated deficit of $627,118
at December 31, 2022 and a net loss of $645,255 during the year ended December 31, 2022. However, in February 2023, the Company
completed an equity offering which generated net proceeds of $6.6 million. Consequently, the Company’s existing cash resources
and the cash received from the equity offering are expected to provide sufficient funds to carry out the Company’s planned operations
through the next 12 months.
Industry
Overview
The
social influencer and online media presence on various platforms are expanding and evolving. More than any previous generation, Generation
Z is immersed in social media platforms like TikTok, Twitter, and Meta Platforms’ Facebook and Instagram. This trend has generated
opportunities for young adults to become social influencers and to gain financial success. Many kids now want to be “tiktokers”,
“instagrammers”, and social media influencers. In addition to these platforms, the Reddit-based campaigns behind the GameStop,
AMC and Koss meme stock phenomena of 2021 demonstrated the power of social media to generate and destroy financial wealth relatively
quickly. We believe that these developments are together giving way to a new type of social media community. Social media was once occupied
by influencers who were showing off their latest snacks, clothes, makeup brands, and other products and services, but now, a new breed
of influencers focus on other subjects that are gaining mass interest, especially with Generation Z, including personal finance and investing.
As
Bloomberg has reported (“Influencers Are Luring Investors Flummoxed by Meme Stonks and Options,” June 18, 2021), in the U.S.,
there is relatively little formal personal-finance education. Only seven states require – or are in the process of mandating –
a standalone high school course on the topic, according to the advocacy group Next Gen Personal Finance. For most students, learning
about money means learning about topics like budgeting, understanding compound interest or opening a savings account. While this information
might be useful, there are many more complex and risky financial opportunities available to young, inexperienced investors who are digital
natives, i.e., most of Generation Z. Only $1 or less can be used to open financial accounts and buy fractions of shares or portions of
cryptocurrencies through companies like Robinhood, Cash App and others. With slightly more in their investment accounts, people can get
access to higher-risk strategies such as margin or option trading. Meanwhile, there is new vocabulary to decipher every day if investors
want to understand chatter about the markets, from “diamond hands” to NFTs. While banks and mutual fund companies offer advisory
services to their members, they tend to reserve advisory services for higher-net-worth individuals, and generally do not make their advice
particularly entertaining or accessible to Generation Z consumers.
2
With
the rise of free, fast trading online and by phone, demand has surged for information about investing and markets, creating opportunities
for a new generation of financial influencers who are rushing to fill the gap in traditional education. With a massive, younger, financially
uneducated market desperate to learn about the financial markets, a deluge of new companies and their influencer leaders are fighting
to be the first place individuals turn to chat about stocks, budgets or finances.
More
broadly, this trend towards relying on social media and influencers means that skilled social media marketers and influencers can parlay
their brands into multiple streams of revenue including subscription-only content, promotional campaign contracts for business clients,
and related consulting services. As argued by a guest contributor’s article on Nasdaq.com (“How Gen Z Influencers Can Transform
the Nature of Investing,” June 2, 2021), Generation Z is asserting more influence over the social media influencer market, which
has already surpassed $13 billion in market size worldwide according to a research report published by Statista (“Influencer Marketing
Worldwide - Statistics & Facts,” September 27, 2021), and shows no signs of abating. Internet users look to niche influencers
they trust as their go-to source for new information and product recommendations, and 74% of consumers say they would spend up to $629
on a product recommended by an influencer. With such authority over the way consumers spend their money on commercial goods, Gen Z influencers
are bound to sway their followers’ interests in the area of financial education.
Gen
Z’s social media habits are distinctive from other generations. Their most-used social media platforms are Instagram, Snapchat,
and TikTok, according to a 2021 Pew Research survey. TikTok’s quick ascension to Gen Z dominance at comparable levels to other
well-established online titans has captivated potential investors, e-marketers, and others looking to profit from this bustling and youthful
platform.
Given
the growth of the influencer industry across social media like Instagram and TikTok, the rapid influx of young retail investors into
the stock and cryptocurrency markets, and recent phenomena like meme stocks, we believe the stage is set for Gen Z to seek dedicated
online community-based investment education and entertainment services.
At
the same time, a relatively new social media app, Discord, has emerged and demonstrated unique appeal to younger people. As reported
by The New York Times (“How Discord, born from an obscure game, became a social hub for young people,” December 29,
2021), driven in part by the COVID-19 pandemic, Discord “has exploded into the mainstream.” While parents working from home
flocked to Zoom, many of their children were downloading the Discord app to socialize with other young people through text and audio
and video calls in groups known as servers. As of March 2023, the platform has more than 150 million active users each month –
up from 56 million in 2019. It has expanded from gamers to many other groups including music aficionados, students, art communities,
and cryptocurrency enthusiasts. According to Bloomberg, on September 15, 2021, Discord’s valuation doubled from $7 billion in 2020
to about $15 billion based on a $500 million capital raise.
Discord
is split into servers – essentially chat rooms similar to the workplace tool Slack – which facilitate casual, free-flowing
conversations about shared interests such as gaming, music, art, school, and memes. Some servers are large and open to the public; others
are private and invitation-only. Another feature that significantly differentiates Discord from the established social media platforms
like Facebook is that the service does not have advertisements. It makes money through premium subscriptions that give users access to
features like custom emoji for $5 or $10 per month. Discord also began experimenting in December 2021 with allowing some users to charge
for access to their server, up to $100 a month, of which Discord takes 10%.
Based on the above, social influencers can generate
revenues from Discord user subscriptions by drawing users in with their investment education and entertainment content. Expert influencers
on Discord and other social media can simultaneously use their social media expertise and brands to generate social media marketing campaigns
for business clients looking to attract more Generation Z consumers. Services, such as “AE.360.DDM, Design Develop Manage”,
covering all aspects of the design and implementation of the Discord servers themselves can attract subscribers and, therefore, create
a new source of revenue. We believe that we are a leading provider of all of these services, and that demand for all of our services
will continue to grow.
3
Our
Services
We
offer three types of services that utilize Discord and other social media to younger generations and other social media users.
Discord
Communities . Our investment education and entertainment service aims to serve as an education and entertainment platform
for investments in a way that is accessible to Generation Z and other social media users. As one of the largest community-based education
and entertainment platforms on Discord, with four separate servers with a combined user membership of approximately 260,000 as of March
2023, we provide financial literacy education and entertainment on trading and investment. Our largest Discord server focuses on stock
investing education and entertainment, and we have smaller but growing real estate, cryptocurrency and NFT education and entertainment
Discord servers. One of the unique aspects of Discord is that the base access to certain materials is free to all users. Our Discord
server subscription fees currently range from $4.99 to $59.99, with a planned $99.99 tier forthcoming.
For
monthly fees, paying subscribers to our Discord servers can get access to live trading diaries, premium prerecorded investing and trading
education video content, and paying subscriber-only private group discussion channels relating to the general investment and trading
education content on the Company’s Discord servers. All members may watch nonpremium video education content, watch live day trading
sessions during market hours, and participate in live chat sessions with other members. We upload and manage all content on our Discord
servers. There are no formal requirements for our investment education and entertainment materials; however, we are selective with the
content that we post on our servers.
We
comply with Discord’s terms of service, including minimum age requirements. Discord requires all users to be at least 13 years
old, and we require users to be at least 18 years old in order to participate in community discussions. Discord is in the process of
creating a gateway to require age verification. In addition, we maintain a set of community behavior rules for its servers which include
bans on hate speech, harassment, spam, illegal activities, and false information. All members must confirm that they have read and accept
these rules in order to enter our Discord servers. Our Discord moderators enforce these rules.
Social
Media and Marketing . We offer white-label marketing, content creation, content management, TikTok promotions, and TikTok
consulting to clients in any industry or market. Fees under our social media and marketing agreements are expected to range from $2,000
for small, short projects to $50,000 for more intricate and labor-intensive campaigns. Pricing depends on the amount of social media
posts, length of the campaign, and product placement.
Through
social media, we have conducted marketing and other social media campaigns on behalf of clients in investing, gaming, recreation, cryptocurrency
assets, NFTs, and other areas through our growing team of social media influencers, which we call our “Social Influencer Network,”
or “SiN”.
We
utilize our “SiN” or “Social Influencer Network,” our social influencer independent contractors, in part to increase
social media reach for our clients’ Discord servers or to drive traffic to their businesses. Both we and our clients generally
have the right to preapprove and remove the influencer’s posts at our and our clients’ discretion. They are generally paid
on a commission-only basis. Typical payment terms are a dollar amount for a certain number of new member signups, or in some cases a
percentage, subject to a dollar cap, on the server’s subscription net revenue. We or our clients may also commission the influencer
to provide premium video education series with revenue-sharing provisions for any related subscription fees. Depending on the particular
contract, we, our client, or both may own the content produced by our SiN influencers. Depending on each contract, we may require weekly
meetings with the influencer. Our SiN contractors’ work for clients are terminable by either us or our clients on 30 days’
notice, and are subject to customary confidentiality, nondisclosure, and noncompete provisions.
Under
our social media and marketing agreements, we typically agree to produce a certain minimum number of posts, streams, or other social
media and marketing content, at a minimum required frequency for the agreed-upon period. We may agree to promote the products or services
of the client by mentioning the client or its products or services a certain number of times per post or stream, using products or service
in our content in a designated manner, or not using, mentioning or promoting competing products or services. Clients must generally preapprove
our promotion-containing content, subject to their reasonable discretion. Clients typically own any data generated by promotional posts
or streams; however, we retain the right to use the content created. Our social media and marketing agreements are subject to customary
confidentiality, non-disparagement, indemnification and other standard terms and social media policy compliance requirements. Other than
as otherwise noted above, our influencers are not exclusive to any social media and marketing client.
AE.360.DDM,
Design Develop Manage . AE.360.DDM is a suite of services to individuals and companies seeking to create their own server
on Discord. We believe that we are the first company to provide a full range of Discord DDM services for any individual, company, or
organization that wishes to join Discord. Since November 2021, we have worked with various communities on how to better manage their
presence on Discord and have designed servers for businesses and celebrities. We tailor our fees to the services requested and can range
from set prices of $497 to $5,000 for each Discord server design project. However, our fees may be higher based on the expected complexity,
size, and management responsibilities for the server. They may also be based on a percentage split of subscription revenues.
4
On
Discord servers managed by our company on behalf of clients, clients generally provide and own their servers’ content and control
all rights to their servers, while we provide management or other contracted services. If we are managing the Discord server under the
AE.360.DDM service, we may upload content for the server owner. The server owner may always upload content. Other server users may also
upload content, but the server owner’s moderators may remove it.
AE.360.DDM
is a proprietary service that is summarized below. The list of services below is not inclusive of our full suite of the AE.360.DDM services
and processes by which we design, develop and manage Discord servers on behalf of clients.
Our
AE.360.DDM service includes any or all of the following:
● “360.DD
Level 1, 2 or 3” Design and Development service: We design and establish the client’s
Discord server under one of the following three “levels” of service:
● Level
1 includes a simple setup of the client’s server with base, or general-purpose, channels
and basic bots. Discord channels are topic-based chatrooms. Discord bots are user-like computer-simulated
members of the server that can automate various actions. Bots use Discord’s public
application programming interface, or API, to perform actions like send messages, modify
roles, or automate moderation.
● Level
2 includes both Level 1 services and more advanced server features.
● Level
3 includes Level 1 and Level 2 services, and adds the following key features:
● Enhancements
taking advantage of premium Discord features.
● Setup
of a number of private channels. A private channel on Discord only allows selected members
to join it or limits what users may view and post without special permissions. Discord server
members who are not added to the channel will not be able to see it on the server’s
sidebar. Private chat channels may be used to offer premium content to users.
● Third-party
integrations, which may be used to integrate the use of complimentary apps into the Discord
server such as other social media platforms, productivity or data-management apps, and others.
● Special-purpose
community bot and chat features.
● External
links to websites that a client wishes to promote may also be included.
● “360.M”
Management service: We will act as the lead moderator and community manager of the client’s
Discord server. Features may include the following:
● Moderating
and interacting in daily chats;
● Answering
support tickets;
● Acting
as a moderator and team leader. Team leaders usually have the ability to create channels,
create and delete roles, and perform other administrative functions
● Provide
informative, fun, and interactive announcements;
● Make
suggestions on how to improve the Discord community based on performance over time;
● Add
all necessary bots for security, gaming, fun and so on.
● Managing
the Discord server through moderation and maintenance through a proprietary process.
5
COVID-19
Pandemic
On
March 11, 2020, the World Health Organization declared the novel coronavirus COVID-19 a global pandemic and recommended containment and
mitigation measures worldwide. From our founding, we have been a highly efficient remote-first company, which has been able to continue
to function as normal even with pandemic-related stay at home orders and other regulations. We have also exploited certain trends related
to the COVID-19 pandemic, including its acceleration of global growth in virtual services. However, the COVID-19 pandemic has adversely
impacted global economic activity and has contributed to significant volatility and negative pressure in financial markets. The resulting
global deterioration in economic conditions and financial volatility may have an adverse impact on discretionary consumer spending or
investing, could also impact our business and demand for our services.
For more information on the impacts of COVID-19
on our business and related risks, please refer to the sections entitled “Item 1A. Risk Factors – Risks Related to Our
Business and Industry – The COVID-19 pandemic may cause a material adverse effect on our business.” and Item 7. “ Management’s
Discussion and Analysis of Financial Condition and Results of Operations – Impact of COVID-19 Pandemic ”. We cannot predict
the extent to which the ongoing COVID-19 pandemic or related regulatory or legislative activity may impact us.
Our
Market Opportunity and Customers
We
market our services primarily to “Generation Z” users and businesses seeking to market their services to these users. As
the first generation to have grown up with access to the Internet and portable digital technology from a young age, members of Generation
Z have been dubbed “digital natives”. Around the world, it has been reported that members of Generation Z are spending more
time on electronic devices and less time reading books than before, with implications for their attention span and vocabulary, as well
as their future in the modern economy. As discussed above, Gen Z users are often bereft of the financial literacy needed to invest, in
spite of growing demand for financial services especially in an era of meme stocks and stock trading apps like Webull, Robinhood, and
E*Trade. With our emphasis on video, chat, and other social media education, entertainment and marketing, and deep knowledge of Discord
server design and trending investment topics, we have positioned ourselves to attract younger investors and businesses seeking to market
to them.
We
are also now targeting millennials, Generation X, and older generations. Our most prominent example of this effort is our real estate
Discord server, registered under the Discord domain name “REALTY”, which we launched in May 2022. We expect to attract more
diverse subscribers interested in learning about real estate alternatives to traditional finance.
Sales,
Marketing and Customer Acquisition
We
will continue to seek customers by producing content for our Discord servers and other social media accounts and using our Social Influencer
Network to increase our Discord members. To that end, we frequently engage in social media campaigns for our Discord servers by posting
free videos, tweets, and other social media content on Discord, TikTok, Twitter, Instagram, and YouTube. We will use search engine optimization,
or SEO, to gain further reach in acquiring paying subscribers and other members to our Discord servers and potential customers of our
other services. We expect that we will increase sales and revenues from increased Discord members and customers of our paid services
from the recent launch and expansion of our AE.360.DDM service, the recent launch of our REALTY Discord server, and expansion of our
STOCKS, CRYPTOS, and NFTS Discord servers.
One
of the ways we can increase our Discord users and customer base is to utilize our “SiN” or “Social Influencer Network,”
our social influencer independent contractors. Each of our SiN social influencer independent contractors can perform social media outreach
to expand our Discord server bases and increase membership in our Discord servers. When we use our social influencers to increase our
user base, we have the right to preapprove and remove the influencer’s posts at our discretion. They are generally paid on a commission-only
basis. Typical payment terms are a dollar amount for a certain number of new member signups, or, with respect to our REALTY Discord server,
a percentage, subject to a dollar cap, on the server’s subscription net revenue. We may also commission them to provide premium
video education series with revenue-sharing provisions for any related subscription fees. We generally own all content produced by our
SiN influencers. Depending on each contract, we may require weekly meetings with the influencer. Our SiN contracts are terminable on
30 days’ notice our SiN and have customary confidentiality, nondisclosure, and noncompete provisions.
As
discussed above, we likewise offer the services of our SiN independent contractors to current and potential social media and marketing
customers. We are also working to expand our user base by contracting with trained social media analysts in order to develop larger and
more long-term campaigns to promote our business. We expect that these offerings may accelerate growth in client contracts for our social
media and marketing customer services.
Our
AE.360.DDM service is expected to grow through multiple avenues including the use of SEO with Facebook and Google Ads, as well as our
targeted outreach to venture capitalists, social media influencers, digital technology brands, and other businesses. We also expect that
revenues from this service will increase organically by showing our expertise in Discord design, development and management through our
own growing Discord communities. In February 2023, we initiated an online marketing campaign and expanded use of SEO, Facebook Ads, Google
Ads and Google Analytics to accelerate customer acquisition for our AE.360.DDM service.
6
Competition
While
we do not have any competitors that compete with us across our business in its entirety, we face competition in certain aspects of our
business. Our products and services face competition from different businesses depending on the offering.
The
education components of our investment education and entertainment services have the following primary competitors:
● Xtrades
Discord Server – Stocks and options trading communities with real traders providing
analysis; fees range from $38/month to $988 for a lifetime membership. Their Discord server
had approximately 141,000 members as of March 2023.
● WallStreetBets
Discord Server and Subreddit – These are generally free services where anyone can
offer advice on high-risk investing in stocks, options, and futures trading. Their Discord
server has approximately 563,000 members and their subreddit had approximately 13.8 million
registered users as of March 2023.
● Eagle
Investors – An online investment education service provided by investment advisory
firm Eagle Investments LLC. They manage a Discord server which includes a free investor community,
a number of channels on diverse topics, and free webinars. They also offer premium-only content
for $27 or $87 per month for different levels of access to trading alerts on their Discord
server. They also offer paid stocks and options training courses for $400 per course not
including discounts, and private one-on-one sessions ranging from one to eight hours with
expert traders at varying prices. Their Discord server had approximately 260,000 members
as of March 2023.
Our
social media marketing and advertising competitors primarily include social media influencers who are the owners of alternative Discord
servers and social media education and entertainment services, which may detract from our current and potential paying subscriber base
and customers of our other services. These competitors include:
● @Fourtoeight
– A social influencer who is the owner of the Discord server Wiseguyinvesting.
Wiseguyinvesting offers several payment plans for investment education resources and other
features. Its community size is similar to ours. Its plans range from $25 per week to $800
per year.
● @DannyDevan
– Another social influencer who has more than 800,000 TikTok followers. He also
has a free community of approximately 87,000 members on Discord on his Finture Discord server.
● @moneylinemark
– Owns the “StockVIP” Discord server with approximately 280,000 members.
Their revenue model relies 100% on Discord memberships.
We
are not aware of any competitors for our AE.360.DDM suite of services.
We
believe that we have other competitive strengths, some of which are discussed below, that position us favorably in each aspect of our
business. However, the technology industry is evolving rapidly and is increasingly competitive. A variety of business models are being
pursued or may be considered for the provision of digital learning tools, some of which may be more profitable or successful than our
business model.
Our
Strengths
We
believe that we have competitive strengths, some of which are discussed below, that position us favorably in each aspect of our business.
We believe our key competitive strengths include the following:
● Superior
Social Influencer Team . We believe that our greatest competitive strength is our
people. Our blend of young, dynamic, entrepreneurial executive social influencers are part
of Generation Z and understand their needs and interests. Moreover, our executive team includes
professionals with two or more decades of accounting, legal and management experience including
our Executive Chairman, who has practiced law for over 25 years, our Chief Financial Officer,
a Certified Public Accountant, or CPA, with over ten years of experience in finance and accounting,
and our Chief Experience Officer, who has been in the technology and marketing management
field for over two decades. We believe that we have a unique combination of knowledge, global
experience and business acumen to sustain long-term growth.
● First-Mover
Advantage . We believe that our AE.360.DDM service is a first-of-its-kind business
developed by our company to design, develop, and manage Discord servers for customers wanting
to create their own Discord communities for their business. With our superior understanding
of the Discord platform, we can provide the technology and speed to market which customers
require to set up successful Discord servers.
● Best-in-Class
Investment Education, Entertainment and Technology . Our insights into compelling
investment education and entertainment methods and subjects for Gen Z and other types of
interested customers; experience creating communities for Gen Z and social media consumers;
and our growing social influencer network, or “SiN”, and related content publishing
network, are some of the hallmarks of our business.
● Service
Synergy . Each of our operating business categories has the ability to be a standalone
business, but all are housed within our single Asset Entities enterprise. With each deployment
of additional services, we have historically experienced organic growth in our other businesses.
7
Our
Growth Strategies
The
key elements of our strategy to expand our business include the following:
● Expand
Our Social Influencer Network . Our growth has been grounded on our team of social
influencers. In order to generate even greater momentum for the growth of our services, we
will continue to expand our “SiN” social influencer network. We plan to bring
top current and former athletes, celebrities, and rising and high-profile social influencers
into our SiN network to promote our established and newer Discord servers. We have also begun
utilizing our SiN network to accelerate the growth of our social media and marketing service.
● Leverage
Discord Server Community Outreach . We will continue to seek accelerated growth in
Discord server paying subscriber revenues from strategic pricing of varying levels of access
to our Discord communities. Moreover, we will leverage our Discord servers to help increase
our social media reach and cross-market to our other services.
● Market
and Leverage Synergies from the AE.360.DDM Service . In February 2023, we initiated
an online marketing campaign and expanded use of SEO, Facebook Ads, Google Ads and Google
Analytics to accelerate customer acquisition for our AE.360.DDM service. We will further
use this service to create synergies and income-producing revenue streams that complement
our other business categories.
Intellectual
Property
On
January 12, 2021, we submitted an application to the United States Patent and Trademark Office, or USPTO, for a trademark for our logo
containing the phrase “Asset Entities Where Assets Are Created”. The USPTO requested certain information to support this
trademark filing. On January 21, 2022, we responded to the USPTO’s initial request. On February 25, 2022, the USPTO requested additional
information to support this trademark filing. The original deadline to address this request, August 25, 2022, was extended. As of October
31, 2022, the Company had determined to submit an application for a new trademark. On January 28, 2022, we submitted an application for
a trademark for “AE 360 DDM” and its corresponding logo. We also expect to file for a trademark on “SiN”, for
our “Social Influencer Network”, or our social influencer independent contractors. These trademarks are central to several
of our marketing efforts, and we believe they are important to how prospective customers identify our brand. We also own rights to the
assetentities.com Internet domain name.
Human
Capital
As
of March 31, 2023, we had seven full-time employees and 28 independent contractors. Our independent contractors include approximately 27
Discord server moderators, analysts, and server developers. We expect to hire up to approximately 50 other independent contractors, as
needed, for our Discord-based social media and services with some of the proceeds of this offering. None of our personnel are represented
by labor unions, and we believe that we have an excellent relationship with everyone who works with us. We operate the Company under
remote-first principles.
Seasonality
We
do not experience significant seasonality in our sales cycle.
Government
Regulation
We
are subject to several laws and regulations that affect companies conducting business on the Internet, many of which are still evolving
and could be interpreted in ways that could harm our business. The way existing laws and regulations will be applied to the Internet
and how they will relate to our business, are often unclear. For example, we often cannot be certain how existing laws will apply in
the e-commerce and online context, including with respect to such topics as privacy, defamation, pricing, credit card fraud, advertising,
taxation, sweepstakes, promotions, content regulation, quality of products and services, and intellectual property ownership and infringement.
8
Numerous
laws and regulatory schemes have been adopted at the national and state level in the United States, and in some cases internationally,
that have a direct impact on our business and operations. For example:
The
Credit Card Accountability Responsibility and Disclosure Act of 2009, and similar laws and regulations adopted by several states regulate
credit card and gift certificate use fairness, including expiration dates and fees. Our business also requires that we comply with payment
card industry data security and other standards. We are subject to payment card association operating rules, certification requirements,
and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply.
If we fail to comply with these rules or requirements, or if our data security systems are breached or compromised, we may be liable
for card issuing banks’ costs, subject to fines and higher transaction fees, and lose our ability to accept credit and debit card
payments from our customers, process electronic funds transfers, or facilitate other types of online payments, and our business and results
of operations could be adversely affected.
The
Digital Millennium Copyright Act provides relief for claims of circumvention of copyright protected technologies and includes a safe
harbor intended to reduce the liability of online service providers for hosting, listing, or linking to third-party content that infringes
copyrights of others.
The
Communications Decency Act provides that online service providers will not be considered the publisher or speaker of content provided
by others, such as individuals who post content on an online service provider’s website.
The
California Consumer Privacy Act (“CCPA”), which went into effect on January 1, 2020, provides consumers the right to know
what personal data companies collect, how it is used, and the right to access, delete, and opt out of the sale of their personal information
to third parties. It also expands the definition of personal information and gives consumers increased privacy rights and protections
for that information. The CCPA also includes special requirements for California consumers under the age of 16. In addition, the European
Union and United Kingdom have adopted the General Data Protection Regulation (“GDPR”), which likewise impose significant
data protection obligations on enterprises, including limitations on data uses and constraints on certain uses of sensitive data. Effective
January 1, 2023, we also became subject to the California Privacy Rights Act, which expands upon the consumer data use restrictions,
penalties and enforcement provisions under the California Consumer Privacy Act, and Virginia’s Consumer Data Protection Act, another
comprehensive data privacy law. Effective July 1, 2023, we will also become subject to the Colorado Privacy Act and Connecticut’s
An Act Concerning Personal Data Privacy and Online Monitoring, which are also comprehensive consumer privacy laws. Effective December
31, 2023, we will also become subject to the Utah Consumer Privacy Act, regarding business handling of consumers’ personal data.
Investment
Advisers Act of 1940
Under
the Investment Advisers Act of 1940 (the “Investment Advisers Act”), and the rules adopted under that statute, a person
or firm is required to register with the SEC if the person or firm is:
● an
“investment adviser” under Section 202(a)(11) of the Investment Advisers Act;
● not
excepted from the definition of investment adviser by Section 202(a)(11)(A) through (E) of
the Investment Advisers Act;
● not
exempt from SEC registration under Section 203(b) of the Investment Advisers Act; and
● not
prohibited from SEC registration by Section 203A of the Investment Advisers Act.
Applicable
state laws may have similar registration requirements.
Subject
to certain limited exclusions, Section 202(a)(11) of the Investment Advisers Act generally defines an “investment adviser”
as any person or firm that: (1) for compensation; (2) is engaged in the business of; (3) providing advice, making recommendations, issuing
reports, or furnishing analyses on securities, either directly or through publications. A person or firm must satisfy all three elements
to be regulated under the Investment Advisers Act.
9
The
SEC’s Division of Investment Management construes these elements broadly. For example, with respect to “compensation,”
the receipt of any economic benefit suffices. To be deemed compensation, a fee need not be separate from other fees charged, it need
not be designated as an advisory fee, and it need not be received directly from a client. With respect to the “business”
element, an investment advisory business need not be the person’s or firm’s sole or principal business activity. Rather,
this element is satisfied under any of the following circumstances: the person or firm holds himself or itself out as an investment adviser
or as providing investment advice; the person or firm receives separate or additional compensation for providing advice about securities;
or the person or firm typically provides advice about specific securities or specific categories of securities. Finally, a person or
firm satisfies the “advice about securities” element if the advice or reports relate to securities. The Division has stated
that providing one or more of the following also could satisfy this element: advice about market trends; advice in the form of statistical
or historical data (unless the data is no more than an objective report of facts on a non-selective basis); advice about the selection
of an investment adviser; advice concerning the advantages of investing in securities instead of other types of investments; and a list
of securities from which a client can choose, even if the adviser does not make specific recommendations from the list. An employee of
an SEC-registered investment adviser does not need to register separately, so long as all of the employee’s investment advisory activities
are within the scope of his employment.
One
of the statutory exclusions from the definition of “investment adviser” is the “publisher’s exclusion”.
Under Section 202(a)(11)(D) of the Investment Advisers Act, “the publisher of any bona fide newspaper, news magazine or business
or financial publication of general and regular circulation” is excluded from the “investment adviser” definition.
This “publisher’s exclusion” requires that product or service offerings must be: (1) of a general and impersonal nature,
in that the research provided is not adapted to any specific portfolio or any client’s particular needs; (2) “bona fide”
or genuine, in that it contains disinterested discussion and analysis as opposed to promotional material; and (3) of general and regular
circulation, in that it is not timed to specific market activity or to events affecting, or having the ability to affect, the securities
industry. The basis for reliance on such exclusion will depend on a facts-and-circumstances analysis.
Certain
services provided by the Company may cause the Company to meet the definition of “investment adviser” in the Investment Advisers
Act and similar state laws. Under the Investment Advisers Act, an “investment adviser” is defined as a “person who,
for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of
securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular
business, issues or promulgates analyses or reports concerning securities.” In particular, certain of the content on the Company’s
Discord servers, such as trading diaries posted by the Company’s personnel, and other content available on the Company’s
social media channels, may constitute investment advice. In addition, in general, disclaimers, such as those included with the Company’s
posts on Discord and other social media, do not change the character of the advice provided for Investment Advisers Act purposes. The
Company relies on the “publisher’s exclusion” from the definition of “investment adviser” under Section
202(a)(11)(D) of the Investment Advisers Act, as described above and as interpreted by legal precedent. We intend at all times to operate
our business in a manner as to not become inadvertently subject to the regulatory requirements under the Investment Advisers Act.
If
we meet the definition of “investment adviser” in the Investment Advisers Act, and do not meet the requirements for reliance
on the “publisher’s exclusion” from the definition of “investment adviser” or another exclusion, exemption,
or exception from the registration requirements under the Investment Advisers Act, we will have to register as an investment adviser
with the SEC pursuant to the Investment Advisers Act and potentially with one or more states under similar state laws. Registration requirements
for investment advisers are significant. If we are deemed to be an investment adviser and are required to register with the SEC and potentially
one or more states as an investment adviser, we will become subject to the requirements of the Investment Advisers Act and the corresponding
state laws. The Investment Advisers Act requires: (i) fiduciary duties to clients; (ii) substantive prohibitions and requirements; (iii)
contractual requirements; (iv) record-keeping requirements; and (v) administrative oversight by the SEC, primarily by inspection. Requirements
and obligations imposed on investment advisers can be burdensome and costly. If it is deemed that we are out of compliance with such
rules and regulations, we may also be subject to civil and/or criminal penalties. Applicable state laws may have similar or additional
requirements. If we are required to register under these laws, we may no longer be able to continue to offer our investment education
and entertainment services, which may have a significant adverse impact on our business and results of operations.
Corporate
Structure and History
Formation
and Merger into Asset Entities Inc.
We
began our operations as a general partnership on August 1, 2020. Asset Entities Limited Liability Company, a California limited liability
company (“California LLC”), was formed on October 20, 2020 to operate our business. Asset Entities Inc., a Nevada corporation,
was incorporated on March 9, 2022. Immediately after the incorporation of Asset Entities Inc., all of the issued and outstanding stock
of Asset Entities Inc. was purchased by California LLC in exchange for $1.00. On March 28, 2022, in accordance with Sections 17710.01-17710.19,
inclusive, of the California Corporation Code and Chapter 92A of the Nevada Revised Statutes, California LLC was merged with and into
Asset Entities Inc. As a result of the merger, Asset Entities Inc. acquired the business of California LLC. Pursuant to the Agreement
and Plan of Merger, the units of California LLC were automatically converted into shares of Asset Entities Inc. in the same proportion
as the percentage interests of California LLC represented by such units. As a result and as further provided in the Agreement and Plan
of Merger, on March 28, 2022, Asset Entities Holdings, LLC (“AEH”), which owned 97.56% of California LLC’s units, became
the holder of 9,756,000 shares of Class A Common Stock of Asset Entities Inc., or 97.56% of the total issued and outstanding post-merger
shares of common stock of Asset Entities Inc., and a holder of 2.44% of California LLC’s units became the holder of 244,000 shares
of Class B Common Stock of Asset Entities Inc., or 2.44% of the total issued and outstanding post-merger shares of common stock of Asset
Entities Inc.
10
Dual
Class Structure
Under
our articles of incorporation, we are authorized to issue two classes of common stock, Class A Common Stock and Class B Common Stock,
and any number of classes of preferred stock. Class A Common Stock is entitled to ten votes per share on proposals requiring or requesting
stockholder approval, and Class B Common Stock is entitled to one vote on any such matter. A share of Class A Common Stock may be voluntarily
converted into a share of Class B Common Stock. A transfer of a share of Class A Common Stock will result in its automatic conversion
into a share of Class B Common Stock upon such transfer, subject to certain exceptions, including that the transfer of a share of Class
A Common Stock to another holder of Class A Common Stock will not result in such automatic conversion. Class B Common Stock is not convertible.
Other than as to voting and conversion rights, the Company’s Class A Common Stock and Class B Common Stock have the same rights
and preferences and rank equally, share ratably and are identical in all respects as to all matters.
In
the IPO, we offered and sold shares of Class B Common Stock to public investors (see “ — Initial Public Offering ”
below). AEH owns all of the 8,385,276 shares of our outstanding Class A Common Stock, which amounts to 83,852,760 votes. The shares of
Class A Common Stock held by AEH are controlled by its officers and board of managers, all of whom are also some of our officers and
directors. Prior to the IPO, there were 8,385,276 shares of Class A Common Stock outstanding representing voting power of 83,852,760
votes, 2,364,724 shares of Class B Common Stock outstanding representing voting power of 2,364,724 votes, and no shares of preferred
stock outstanding. As a result, out of a total of 10,750,000 shares of outstanding common stock representing total voting power of 86,217,484
votes, AEH controlled approximately 97.3% of the voting power before the IPO. Following the IPO and as of the date of this report, there
are 5,275,724 shares of Class B Common Stock issued and outstanding, 1,411,000 of which are held by officers and directors as a result
of grants of restricted stock under the Asset Entities Inc. 2022 Equity Incentive Plan (the “Equity Incentive Plan” or the
“Plan”) that were made upon the closing of the IPO pursuant to their employment or consulting agreements. Stockholders that
are not officers and directors therefore currently own 3,864,724 shares of Class B Common Stock, representing approximately 4.3% of total
voting power. Combining their control of AEH’s shares of Class A Common Stock and their Class B Common Stock, our officers and
directors collectively maintain controlling voting power in the Company based on having approximately 95.7% of all voting rights. This
concentrated control may limit or preclude the ability of others to influence corporate matters including significant business decisions
for the foreseeable future.
Transfers
and Conversions of Class A Common Stock
On
April 21, 2022, we entered into a Cancellation and Exchange Agreement with each of AEH, the holder of 9,756,000 shares of Class A Common
Stock, GKDB AE Holdings, LLC (“GKDB”), the holder of 200,000 units of membership interests in AEH representing 20.0% ownership
of AEH, and certain holders of an aggregate of 790,000 units of membership interests in GKDB (the “Former GKDB Holders”)
representing 39.5% ownership in GKDB. In accordance with these agreements, we and AEH agreed to convert 770,724 shares of AEH’s
Class A Common Stock into 770,724 shares of Class B Common Stock and transfer such shares to GKDB, in exchange for GKDB’s agreement
to cancel and surrender 79,000 of GKDB’s 200,000 units of membership interests in AEH, representing the Former GKDB Holders’
39.5% share of GKDB’s total ownership interest in AEH. GKDB in turn agreed to the cancellation of 79,000 of its AEH units and transfer
of the 770,724 shares of Class B Common Stock to the Former GKDB Holders in proportion to their former ownership interests in GKDB, in
exchange for the Former GKDB Holders’ agreement to cancel and surrender all of their units of membership interests in GKDB. The
770,724 shares of Class B Common Stock transferred to the Former GKDB Holders were derived from the Former GKDB Holders’ 7.9% nominal
indirect interest in AEH’s 9,756,000 shares of Class A Common Stock, which in turn was derived from the Former GKDB Holders’
39.5% ownership of GKDB and, in turn, their nominal indirect interest in 79,000 of GKDB’s 200,000 units, or 20.0% ownership of
AEH. The Former GKDB Holders’ nominal indirect interest in AEH’s 9,756,000 shares of Class A Common Stock was therefore automatically
converted into ownership of 770,724 shares of Class B Common Stock upon the conversion and transfer of this number of Class A Common
Stock that were held by AEH to the Former GKDB Holders. As a result of these transactions, AEH held 8,985,276 shares of Class A Common
Stock and the Former GKDB Holders held a total of 770,724 shares of Class B Common Stock.
11
On
October 6, 2022, under a Cancellation Agreement, each of Kyle Fairbanks, Jackson Fairbanks, Arman Sarkhani, and Arshia Sarkhani, each
being a member of AEH, agreed to cancel 15,375 units of membership interests in AEH, which represented each such member’s nominal
indirect interest in approximately 150,000 of AEH’s 8,985,276 shares of Class A Common Stock. In exchange, AEH agreed to transfer
150,000 shares of Class A Common Stock to each of the four transferees designated by these members of AEH, for a transfer of a total
of 600,000 shares of Class A Common Stock. AEH thereupon executed gift letters to each of the transferees of such shares of Class A Common
Stock. Upon the transfer of such shares of Class A Common Stock to the transferees, such transferred shares automatically converted to
shares of Class B Common Stock. As a result of these transfers, AEH held 8,385,276 shares of Class A Common Stock.
Private
Placements of Class B Common Stock
On
June 9, 2022, October 7, 2022, and October 21, 2022, we conducted private placements of shares of Class B Common Stock and entered into
certain subscription agreements with a number of investors. Pursuant to the agreements, we issued 750,000 shares of Class B Common Stock
at $1.00 per share for a total of $750,000. The shares were subject to certain lockup provisions until 365 days after the commencement
of trading of our Class B Common Stock, subject to certain exceptions. However, these lockup provisions have been fully waived. If the
Company’s common stock had not been listed on a national securities exchange on or before the first anniversary of the final closing
of the private placement, then all of the private placement investors would have been entitled to receive one additional share for each
share originally purchased. Boustead Securities, LLC (“Boustead”), which was also the representative of the underwriters
in the IPO (see “— Initial Public Offering ” below), acted as placement agent in each private placement. Pursuant
to our engagement letter agreement with Boustead, dated November 29, 2021 (the “Boustead Engagement Letter”), in addition
to payments of a success fee of $52,500, or 7% of the total purchase price of the shares sold in the private placements, and a non-accountable
expense allowance of $7,500, or 1% of the total purchase price of the shares sold in the private placement, we agreed to issue Boustead
five-year warrants to purchase up to 52,500 shares of Class B Common Stock in aggregate, exercisable on a cashless basis, with an exercise
price of $6.25 per share, subject to adjustment.
The
warrants also provide that if the Company declares or makes any dividend or other distribution of its assets (or rights to acquire its
assets) to holders of shares of common stock, by way of return of capital or otherwise (including, without limitation, any distribution
of cash, stock or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement, scheme
of arrangement or other similar transaction) (a “Distribution”), at any time after the issuance of the warrants, then, in
each such case, the holder shall be entitled to participate in such Distribution to the same extent that the holder would have participated
therein if the holder had held the number of shares of common stock acquirable upon a complete exercise of the warrant (without regard
to any limitations on exercise hereof) immediately before the date on which a record is taken for such Distribution, or, if no such record
is taken, the date as of which the record holders of shares of common stock are to be determined for the participation in such Distribution.
Notwithstanding the Boustead Engagement Letter, the warrants do not contain piggyback registration rights and do not contain anti-dilution
provisions for future stock issuances, etc., at a price or at prices below the exercise price per share, or provide for automatic exercise
immediately prior to expiration. A copy of each warrant issued to Boustead as partial compensation for each of the above private placements,
dated June 9, 2022, October 7, 2022 and October 21, 2022, and of the Form of Private Placement Subscription Agreement, is attached hereto
as Exhibit 4.2, Exhibit 4.3, Exhibit 4.4, and Exhibit 10.23 to this Annual Report on Form 10-K (“Annual Report”), respectively,
and the description above is qualified in its entirety by reference to each such exhibit. See “ —Initial Public Offering ”
below for a description of related terms of the Boustead Engagement Letter.
Initial
Public Offering
On
February 2, 2023, we entered into an underwriting agreement (the “Underwriting Agreement”) with Boustead, as representative
of the underwriters named on Schedule 1 thereto, relating to the IPO, in which we offered to the public 1,500,000 shares (the “IPO
Shares”) of the Company’s Class B Common Stock, $0.0001 par value per share (“Class B Common Stock”). Pursuant
to the Underwriting Agreement, in exchange for Boustead’s firm commitment to purchase the IPO Shares, the Company agreed to sell
the IPO Shares to Boustead at a purchase price (the “IPO Price”) of $4.65 (93% of the public offering price per share of
$5.00, after deducting underwriting discounts and commissions and before deducting a 0.75% non-accountable expense allowance). The Company
also granted Boustead a 45-day over-allotment option to purchase up to an additional 225,000 shares of Class B Common Stock at the IPO
Price, less the non-accountable expense allowance, from the Company, representing 15% of the IPO Shares. Pursuant to the Underwriting
Agreement, on February 7, 2023, the Company issued Boustead one or more warrants to purchase a number of shares of Class B Common Stock
which is equal to 7% of the aggregate number of shares of Class B Common Stock sold in the IPO (the “Representative’s Warrant”).
The Representative’s Warrant will have an exercise price of $6.25 per share, which is equal to 125% of the public offering price,
subject to adjustment, a cashless exercise provision, and may be exercised at any time for five years following the date of issuance.
12
The
closing of the IPO took place on February 7, 2023. At the closing, the Company sold the IPO Shares for total gross proceeds of $7,500,000.
After deducting underwriting discounts and commissions, the non-accountable expense allowance, and other expenses from the IPO, the Company
received net proceeds of approximately $6.6 million. The Company also issued the Representative’s Warrant to Boustead for the purchase
of 105,000 shares of Class B Common Stock.
The
IPO Shares were offered and sold, and the Representative’s Warrant was issued, pursuant to the Company’s Registration Statement
on Form S-1 (File No. 333-267258), as amended (the “Registration Statement”), initially filed with the Securities and Exchange
Commission (the “SEC”) on September 2, 2022, and declared effective by the SEC on February 2, 2023, and the final prospectus,
dated February 2, 2023, filed with the SEC on February 6, 2023 pursuant to Rule 424(b)(4) of the Securities Act of 1933, as amended (the
“Securities Act”). The Company intends to use the net proceeds from the IPO for investment in corporate infrastructure, marketing
and promotion of Discord communities, social campaigns, and the Company’s “AE.360.DDM” Discord design, development
and management service, expansion of “SiN”, the Company’s social influencer network, increasing staff and company personnel,
and general working capital, operating, and other corporate expenses.
Under
the Boustead Engagement Letter, during the 12-month period following the termination or expiration of the Boustead Engagement letter,
which will occur no earlier than February 7, 2024 (see below), we must also compensate Boustead for any transaction with a party, including
any investor in a private placement in which Boustead served as placement agent or in the IPO, or any party who became aware of the Company
or who became known to the Company prior to the termination or expiration of the Boustead Engagement Letter. Such party will include,
but not be limited to, Company officers, directors, employees, consultants, advisors, shareholders, members, and partners. The Boustead
Engagement Letter will expire upon the later to occur of February 7, 2024 (12 months from the completion date of the IPO) or mutual written
agreement of the Company and Boustead.
We
also agreed to provide Boustead a right of first refusal (“Right of First Refusal”) for two years following the expiration
of the Boustead Engagement Letter to act as financial advisor, lead managing underwriter, book runner, placement agent, or to act as
joint advisor, managing underwriter, book runner, or placement agent on at least equal economic terms, on any public or private financing
(debt or equity), merger, business combination, recapitalization or sale of some or all of the equity or assets of the Company.
In the event that we engage Boustead to provide such services, Boustead will be compensated consistent with the Boustead Engagement Letter,
as described below, unless we mutually agree otherwise.
Under
the Boustead Engagement Letter, in connection with a transaction as to which Boustead duly exercises the Right of First Refusal or is
entitled to the Tail Rights, Boustead shall receive compensation as follows:
● other
than normal course of business activities, as to any sale, merger, acquisition, joint venture,
strategic alliance, license, research and development, or other similar agreements, Boustead
will accrue compensation under a percentage fee of the Aggregate Consideration (as defined
in the Boustead Engagement Letter) calculated as follows:
o 10.0%
for Aggregate Consideration of less than USD$10,000,000; plus
o 8.0%
for Aggregate Consideration between $10,000,000 - $25,000,000; plus
o 6.0%
for Aggregate Consideration between $25,000,001 - $50,000,000; plus
o 4.0%
for Aggregate Consideration between $50,000,001 - $75,000,000; plus
o 2.0%
for Aggregate Consideration between $75,000,001 - $100,000,000; plus
o 1.0%
for Aggregate Consideration above $100,000,000;
● for
any investment transaction including any common stock, preferred stock, ordinary shares,
convertible stock, LLC or LP memberships, debt, convertible debentures, convertible debt,
debt with warrants, stock warrants, stock options (excluding issuances to Company employees),
stock purchase rights, or any other securities convertible into common stock, any form of
debt instrument involving any form of equity participation, and including the conversion
or exercise of any securities sold in any transaction, Boustead shall receive upon each investment
transaction closing a success fee, payable in (i) cash, equal to 7% of the gross amount to
be disbursed to the Company from each such investment transaction closing, plus (ii) a non-accountable
expense allowance equal to 1% of the gross amount to be disbursed to the Company from each
such investment transaction closing, plus (iii) warrants equal to 7% of the gross amount
to be disbursed to the Company from each such investment transaction closing, including shares
issuable upon conversion or exercise of the securities sold in any transaction, and in the
event that warrants or other rights are issued in the investment transaction, 7% of the shares
issuable upon exercise of the warrants or other rights, and in the event of a debt or convertible
debt financing, warrants to purchase an amount of Company stock equal to the 7% of the gross
amount or facility received by the Company in a debt financing divided by the warrant exercise
share. The warrant exercise price will be the lower of: 1.) the fair market value price per
share of the Company’s common stock as of each such financing closing date; 2.) the
price per share paid by investors in each respective financing; 3.) in the event that convertible
securities are sold in the financing, the conversion price of such securities; or 4.) in
the event that warrants or other rights are issued in the financing, the exercise price of
such warrants or other rights;
13
● any
such warrants will be transferable in accordance with FINRA rules and SEC regulations, exercisable
from the date of issuance and for a term of five years, contain cashless exercise provisions,
be non-callable and non-cancelable with immediate piggy-back registration rights, have customary
anti-dilution provisions and any future stock issuances, etc., at a price(s) below the exercise
price per share, at terms no less favorable than the terms of any warrants issued to participants
in the related transaction, and provide for automatic exercise immediately prior to expiration;
and
● reasonable
out-of-pocket expenses in connection with the performance of its services, regardless of
whether a transaction occurs.
Pursuant
to the Underwriting Agreement, as of February 3, 2023, we are subject to a lock-up agreement that prevents, subject to certain exceptions,
selling or transferring any of our shares of capital stock of the Company for up to 12 months. In addition, our officers, directors and
beneficial owners of approximately 78.0% of our common stock agreed to be locked up for a period of 12 months. Holders of approximately
7.2% of our outstanding common stock agreed to be locked up for a period of nine months, and a holder of approximately 2.3% of our outstanding
Class B Common Stock prior to this offering has agreed to be locked up for a period of six months with respect to approximately 0.9%
of the outstanding common stock held by such holder, subject to certain exceptions. The remaining shares are not subject to lock-up provisions
or such lock-up provisions have been waived.
The
Underwriting Agreement and Boustead Engagement Letter contain other customary representations, warranties and covenants by the Company,
customary conditions to closing, indemnification obligations of the Company and Boustead, including for liabilities under the Securities
Act, other obligations of the parties, and termination provisions. The representations, warranties and covenants contained in the Underwriting
Agreement and Boustead Engagement Letter were made only for purposes of such agreement and as of specific dates, were solely for the
benefit of the parties to such agreement, and may be subject to limitations agreed upon by the contracting parties.
In
addition, the Registration Statement registered for resale a total of 1,500,000 shares of Class B Common Stock by the selling
stockholders named in the Registration Statement. Any sales of these shares occurred at a fixed price of $5.00 per share until the
Class B Common Stock was listed on The Nasdaq Stock Market LLC (“Nasdaq”) on February 3, 2023. Thereafter, these sales
will occur at fixed prices, at market prices prevailing at the time of sale, at prices related to prevailing market prices, or at
negotiated prices. The Company will not receive any proceeds from the sale of Class B Common Stock by the selling stockholders. The
Company has no knowledge of whether any of the shares of Class B Common Stock that may be sold by the selling stockholders have been
sold.
In
total, the Registration Statement registered for sale shares of Class B Common Stock with a maximum aggregate offering price of $8,625,000,
representing the right to sell up to 1,725,000 shares of Class B Common Stock at the IPO Price upon full exercise of the over-allotment
option; the Representative’s Warrant; shares of Class B Common Stock underlying the Representative’s Warrant with a maximum
aggregate offering price of $754,687.50, representing rights to purchase up to 120,750 shares of Class B Common Stock at the exercise
price of $6.25 per share, upon full exercise of the over-allotment option; and 1,500,000 shares of Class B Common Stock on
behalf of certain selling stockholders. As of the date of this report, the IPO Shares were sold for aggregate gross proceeds of
$7,500,000 and the Representative’s Warrant was issued with the right to purchase up to 105,000 shares of Class B Common Stock
at $6.25 per share for gross proceeds of up to $656,250. As of the date of this report, the underwriter’s over-allotment option
has not been exercised and the securities issuable upon exercise of the Representative’s Warrant have not been sold.
The
Company’s officers, directors, and certain stockholders who, prior to the IPO, held shares of Class B Common Stock or the Class
A Common Stock, have agreed, subject to certain exceptions, not to offer, issue, sell, contract to sell, encumber, grant any option for
the sale of or otherwise dispose of any shares of Class A Common Stock or Class B Common Stock or other securities convertible into or
exercisable or exchangeable for shares of Class A Common Stock or Class B Common Stock for a period of 6 months, 9 months or 12 months,
as applicable, without the prior written consent of Boustead.
14
A
copy of each of the Underwriting Agreement and the Representative’s Warrant is filed as Exhibit 10.24 and Exhibit 4.5 to this Annual
Report, respectively, and the description above is qualified in its entirety by reference to each such exhibit.
Organizational
Structure
The
following diagram depicts our organizational structure as of the date of this report. This diagram includes our controlling stockholder
of Class A Common Stock, stockholders of Class B Common Stock subject to restrictions on transfer, as a group, and our public stockholders
of Class B Common Stock, as a group. The Class A Common Stock and Class B Common Stock holdings of these stockholders is also depicted.
As
of the date of this report, we have no subsidiaries.
Our
principal executive offices are located at 100 Crescent Ct, 7th Floor, Dallas, TX 75201 and our telephone number is (214) 459-3117. We
maintain a website at https://www.assetentities.com/. Information available on our website is not incorporated by reference in and is
not deemed a part of this report. Our fiscal year ends December 31. Neither we nor any of our predecessors have been in bankruptcy,
receivership or any similar proceeding.
15