UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended:December 31, 20182020
¨◻TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File No.001-35561
IDEANOMICS, INC.
(Exact name of registrant as specified in its charter)
Nevada | 20-1778374 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
551441 Broadway, 19th Floor, Suite 5116, New York, NY 1000610018
(Address of principal executive offices)
(212) (212) 206-1216
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered |
Common Stock, par value $0.001 per share | Nasdaq Capital Market |
Securities registered pursuant to Section 12(g) of the Exchange Act:None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes¨⌧Nox
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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¨◻Nox
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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 preceding 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.
Yesx⌧No¨
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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 such files).
Yesx⌧No¨
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.¨
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act
Large Accelerated Filer | Accelerated Filer |
Non-Accelerated Filer | Smaller Reporting Company |
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes¨◻ Nox
⌧
As of June 30, 20182020 (the last business day of the registrant’s most recently completed second fiscal quarter as of the original date of this filing), the market value of the shares of the registrant’s common stock held by non-affiliates (based upon the closing price of shares as reported by Nasdaq) was approximately $73,955,570.$388,199,635. Shares of the registrant’s common stock held by each executive officer and director and each by each person who owns 10% or more of the outstanding common stock have excluded from the calculation in that such persons may be deemed to be affiliates of the registrant. This determination affiliate status is not necessarily a conclusive determination for other purposes.
There were a total of 134,061,959419,314,800 shares of the registrant’s common stock outstanding as of April 1, 2019.March 29, 2021.
DOCUMENTS INCORPORATED BY REFERENCE
None.
IDEANOMICS, INC.
Annual Report on FORM 10-K
For the Fiscal Year Ended December 31, 20182020
TABLE OF CONTENTS
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| MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | | 28 | | |
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| CHANGES IN AND DISAGREEMENTS WITH ACCOUNTS ON ACCOUNTING AND FINANCIAL DISCLOSURE | | 53 | | |
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| SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS | | 63 | | |
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| CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE | | 64 | | |
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Special Note Regarding Forward Looking Statements
In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act (as defined below), and Section 21E of the Exchange Act (as defined below). We use words such as “believe,” “expect,” “anticipate,” “project,” “target,” “plan,” “optimistic,” “intend,” “aim,” “will” or similar expressions which are intended to identify forward-looking statements. Such statements include, among others, those concerning our transition to become a next-generation financial technology company; our expectations regarding the market for our new and existing products and industry segment growth; our expectations regarding demand for and acceptance of our new and existing products or services; our expectations regarding our partnerships and joint ventures, acquisitions, investments; our beliefs regarding the potential benefits and opportunities from integrating digital artificial intelligence and blockchain technology as part of our product and services offerings; our business strategies and goals; any projections of sales, earnings, revenue, margins or other financial items; any statements regarding the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; uncertainties related to conducting business in the PRC; and all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including, and without limitation, those identified in Item 1A—“Risk Factors” included herein, as well as assumptions, which, if they were to ever materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance, or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. The forward-looking statements included herein are made as of the date of this report. We undertake no obligation to update any of these forward-looking statements, whether written or oral, that may be made, from time to time, after the date of this report to conform our prior statements to actual results or revised expectations.
Use of Terms
Except as otherwise indicated by the context, references in this report to “we,” “us,” “our,” “our Company,” “the Company,” “IDEX,” or “Ideanomics,” are to the business of Ideanomics, Inc. (formerly known as “Seven Star Cloud Group, Inc.,” “SSC” and “Wecast Network, Inc.,”), a Nevada corporation, and its consolidated subsidiaries and variable interest entities.
In addition, unless the context otherwise requires and for the purposes of this report only:
“CB Cayman” refers to our wholly-owned subsidiary China Broadband, Ltd., a Cayman Islands company; |
“Exchange Act” refers to the Securities Exchange Act of 1934, as amended; |
“EV” refers to electric vehicles, particularly battery operated electric vehicles; |
● | “FINRA” refers to the Financial Industry Regulatory Authority; |
“HK SAR” refers to the Hong Kong Special Administrative Region of the People’s Republic of China; |
“Hua Cheng” refers to Hua Cheng Hu Dong (Beijing) Film and Television Communication Co., Ltd., a PRC company that is 39% owned by Sinotop Beijing and is a 20% owner of Zhong Hai Media; |
“Intelligenta” refers to the BDCG investment which was rebranded as Intelligenta; |
● | “Legacy YOD” |
“MEG” refers to Mobile Energy Global the subsidiary that holds all of the Company’s EV; |
● | “PRC,” “China,” and “Chinese,” refer to the People’s Republic of China; |
● |
“Renminbi” and “RMB” refer to the legal currency of the PRC; |
“SEC” refers to the United States Securities and Exchange Commission; |
“Securities Act” refers to the Securities Act of 1933, as amended; |
“Sinotop Beijing” refers to Beijing Sino Top Scope Technology Co., Ltd., a PRC company controlled by YOD Hong Kong through contractual arrangements; |
“U.S. dollars,” “dollars,” “USD,” “US$,” and “$” refer to the legal currency of the United States; |
“U.S. Tax Reform” refers to the Tax Cuts and Jobs Act, enacted by the United States of America on December 22, 2017; |
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“VOD” refers to video on demand, which includes near video on demand (“ |
“WFOE” refers to Beijing China Broadband Network Technology Co., Ltd., a PRC company and a “wholly foreign-owned enterprise,” which we previously wholly owned and which was sold during the quarter ended March 31, 2014; |
“YOD Hong Kong” refers to YOU On Demand (Asia) Limited, formerly Sinotop Group Limited, a Hong Kong company, which is wholly- owned by CB Cayman; |
“YOD WFOE” refers to YOU On Demand (Beijing) Technology Co., Ltd., a PRC company and a “wholly foreign-owned enterprise,” which is wholly-owned by YOD Hong Kong; and |
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PART I
ITEM 1.
BUSINESS |
Overview
Ideanomics, Inc. (“Ideanomics” or the “Company”) (Nasdaq: IDEX) was incorporated in the State of Nevada on October 19, 2004. From 2010 through 2017, our primary business activities have beenwere providing premium content video on demand (“VOD”) services, with primary operations in the PRC, through our subsidiaries and variable interest entities (“VIEs”) under the brand name You-on-Demand (“YOD”YOD.”). In our We closed the YOD business we provide premium content and integrated value-added service solutions for the delivery of VOD and paid video programming to digital cable providers, Internet protocol television (“IPTV”) providers, Over-the-Top (“OTT”) streaming providers, mobile manufacturers and operators, as well as direct customers.
during 2019.
Starting in early 2017, while continuing to support our YOD business, we began transitioning ourthe Company transitioned its business model to become a next-generation financial technology (“fintech”) company, with the intention of offering customized products and services based on best-in-class blockchain, artificial intelligence (“AI”) and other technologies to mature and emerging businesses across various industries. To do so, we are building a technology ecosystem through license agreements, joint ventures and strategic acquisitions, which we refer to as our “Fintech Ecosystem.” In parallel, through strategic acquisitions, equity investments and joint ventures, we are buildingcompany. The Company built a network of businesses, operating across industry verticals,principally in the trading of petroleum products and electronic components that we believe havethe Company believed had significant potential to recognize benefits from blockchain and AIartificial intelligence (“AI”) technologies including for example, enhancing operations, addressing cost inefficiencies, improving documentation and standardization, unlocking asset value and improving customer engagement. During 2018, the Company ceased operations in the petroleum products and electronic components trading businesses and disposed of the businesses during 2019. As we looked to deploy fintech solutions in late 2018 and into 2019, we identified a unique opportunity in the Chinese Electric Vehicle (“EV”) industry to facilitate large scale conversion of fleet vehicles from internal combustion engines to EV. This led us to establish our Mobile Energy Global (“MEG”) business unit. Fintech continues to be a sector of interest to us as we look to invest in and develop businesses that can improve the financial services industry, particularly as it relates to deploying blockchain and AI technologies.
Principal Products or Services and Their Markets
Our coreOverview
Ideanomics Mobility
Ideanomics Mobility is driving EV adoption by assembling a synergistic ecosystem of subsidiaries and investments across the 3 key pillars of EV: Vehicles, Charging, and Energy. These three pillars provide the foundation for Ideanomics Mobility’s planned offering of unique business strategysolutions such as Charging as a Service (“CaaS”) and Vehicle as a Service (“VaaS.”)
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Each operating company within Ideanomics Mobility offers its own unique products and participates in a shared services ecosystem fulfilling Ideanomics’ Sales-to-Financing-to-Charging (“S2F2C”) model, with centralized supply chain operations and marketing expertise designed to accelerate growth and business opportunities across the group.
The combination of products from within its subsidiaries and investments, coupled with Ideanomics Mobility’s shared services, will provide the Company with the opportunity to bring to market unique business solutions intended to drive commercial fleet electrification such as Charging-as-a-Service and Vehicle-as-a-Service. These solutions offer fleet operators an opportunity to benefit from an OpEx-driven model which lowers the barrier to entry for the adoption of zero emissions fleets.
The Company believes that the EV market is poised for rapid growth. Bloomberg NEF estimates that global commercial EV sales will reach 1.2 million units in 2023. The global EV charging infrastructure market is expected to grow at a compound annual growth rate of 33.4% from 2021 to 2028 to $144.97 billion. President Biden’s administration is supportive of EV with a goal to achieve a 100% clean-energy economy and states such as California have accelerated timelines to phase out internal combustion engine (“ICE”) vehicles.
Ideanomics Mobility’s mission is to promoteleverage its ecosystem of synergistic operating companies to generate efficiencies and increase business opportunities across the group. With a diverse commercial EV product offering, the company plans to use developmentEV and advancementEV battery sales and financing solutions to attract commercial fleet operators that will generate large scale demand for energy. The Company operates as an end-to-end solutions provider for the procurement, financing, charging and energy management needs for fleet operators of blockchain-commercial EV. Ideanomics Mobility focuses on commercial EV rather than passenger personal EV, as commercial EV is on an accelerated adoption path when compared to consumer EV adoption – which is expected to take between ten to fifteen years. We focus on four distinct commercial vehicle types with supporting income streams: 1) Closed-area heavy commercial, in sectors such as Mining, Airports, and AI-based technologies,Sea Ports 2) Last-mile delivery light commercial 3) Buses and Coaches 4) Taxis. The vehicle financing solutions (such as purchase or leasing) would generate fee-based revenues whereas the charging and energy management would yield recurring revenue streams.
Ideanomics Mobility’s revenues are generated from its S2F2C operating model. The Company’s planned EV revenues will come from the sale of EVs under our positioningMedici Motor Works and Treeletrik brands outside of the China and within China through our MEG operating units sale of other manufacturers vehicles and batteries.
The Company’s presence in the fintech industry overall,China market creates a deep knowledge of the logistics and supply chain for the manufacture of EVs, batteries and related components; this in turn enables the sourcing of high quality components at competitive prices for the Company’s operations outside of China.
Within the Ideanomics Mobility business unit there are four operating companies:
Mobile Energy Global (“MEG”)
The Company’s MEG business operates in China where government clean air regulations and subsidy programs provide a strong impetus for the adoption of commercial EV. The Company competes in China using its S2F2C. Using this model the Company helps the customer find the best vehicle for its needs and earns fees for every completed sale; revenue is derived from the spread between group buying of vehicles and price sold, fees for the arrangement of financing, and payments from subsequent charging and energy management.
Tree Technologies Sdn. Bhd. (“Tree Technologies”)
Tree Technologies is headquartered in Kuala Lumpur, Malaysia and through its Treeletrik brand sells EV bikes, scooters, and batteries throughout the ASEAN region. Two-wheel bikes and scooters form a large part of the transport infrastructure in the ASEAN region; according to Deloitte Consulting, there were 13.7 million motor bikes sold in the six major ASEAN countries in 2019. Environmental regulations in the ASEAN region help accelerate the adoption of EV bikes. The Company has also started to import Treeletrik brand EV bikes into the United States.
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Medici Motor Works
Medici Motor Works plans to sell its own brand vehicles in the United States, Latin America and Europe. Presently, the Company is working with manufacturers based in China to design and build trucks, buses and closed-area vehicles for mining, airports and seaports.
Solectrac, Inc. (“Solectrac”)
On October 21, 2020 the Company acquired 15%, and on November 23, 2020 the Company subsequently increased its ownership to 24% in California-based Solectrac, Inc. Solectrac develops, assembles and distributes 100% battery-powered electric tractors—an alternative to diesel tractors—for agriculture and utility operations.
According to Research And Markets, the global agricultural tractor market is currently valued at $75 billion, with the North American agricultural tractor market expected to reach $20 billion by bringing technology leaders together with industry leaders2023. The largest segment for agricultural tractors is the below-40HP segment, where Solectrac's initial three models address the broad needs of the market. Its tractors are specifically designed to serve the needs of community-based farms, vineyards, orchards, equestrian arenas, greenhouses, and creating synergies betweenhobby farms.
Founded in 2012 to take electric tractors into commercial production, Solectrac was incorporated as a California Benefit Corp in 2019. It has received grants from the businesses in our expanding Fintech EcosystemIndian U.S. Science and Technology Fund and the businessesNational Science Foundation. In 2020, Solectrac received the World Alliance Solar Impulse Efficient Solutions label from the Solar Impulse Foundation. The label was awarded for being one of the one thousand most efficient and profitable solutions that can transition society to being economically viable while being environmentally sustainable.
Recent Developments Since December 31, 2020
Since December 31, 2020 the Company has completed a number of transactions that have expanded the scope of the Company’s EV activities.
WAVE
On January 15, 2021 acquired 100% of privately held Wireless Advanced Vehicle Electrification, Inc. ("WAVE.")
Founded in our network2011, and headquartered in Salt Lake City, Utah, WAVE is a leading provider of industry verticals, which we referinductive (wireless) charging solutions for medium and heavy-duty EVs. Embedded in roadways and depot facilities, the WAVE system automatically charges vehicles during scheduled stops. The hands-free WAVE system eliminates battery range limitations and enables fleets to as our “Industry Ventures.” Specifically, we believeachieve driving ranges that match that of internal combustion engines.
Deployed since 2012, WAVE has demonstrated the technologies being developedcapability to develop and integrate high-power charging systems into heavy-duty EVs from leading commercial EV manufacturers. With commercially available wireless charging systems up to 250kW and higher power systems in our Fintech Ecosystem can be customizeddevelopment, WAVE provides custom fleet solutions for mass transit, logistics, airport and leveragedcampus shuttles, drayage fleets, and off-road vehicles at ports and industrial sites.
Wireless charging systems offer several compelling benefits over plug-in-based charging systems, including reduced maintenance, improved health and safety, and expedited energy connection and are important to address various use cases presented by our Industry Ventures, which we believe will not only enhance the performancedeployment of our Industry Ventures, butautonomous driving vehicles. Furthermore, wireless in-route charging enables greater route lengths or smaller batteries while also enhancemaintaining battery life, thereby reducing costs for fleet operators. WAVE customers include what is currently the capabilitieslargest EV bus system in the U.S., the Antelope Valley Transit Authority, and its partnerships include Kenworth, Gillig, BYD, Complete Coach Works and the Department of our Fintech Ecosystem. For example, in 2017, we acquired a crude oil trading businessEnergy.
Energica Motor Company, S.P.A. (“Energica”)
On March 3, 2021 the Company purchased 20% of Energica, the world's leading manufacturer of high-performance electric motorcycles and a consumer electronics trading businessthe sole manufacturer of the FIM Enel MotoE™ World Cup. Energica has combined zero emission EV technology with the goalpedigree of gaining experiencehigh-performance mobility synonymous with Italy’s Motor Valley to create a range of exceptional products for the high-performance motorcycle market. To support its products, it has developed proprietary EV battery and DC fast-charging in-house that has applications and synergies with Ideanomics’ broader interests in the traditional logistics managementglobal EV sector.
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Silk EV Cayman LP (“Silk”)
On January 28, 2021, the Company invested $15.0 million in Silk EV via a promissory note. Silk is an Italian engineering and financing business,design services company that has recently partnered with FAW to form a new company (Silk-FAW) to produce fully electric, luxury vehicles for the Chinese and Global auto markets. Silk-FAW has exclusive rights to develop Hongqi-S brand high-end electric sports cars. The Hongqi brand is the most well-known luxury auto brand in China. Silk-FAW vehicles are being designed in Italy’s Motor Valley and is attracting talent from the luxury and high-performance auto market. Partnering with Silk provides access to Silk-FAW’s Innovation Centers providing an initial use case for technologies in our Fintech Ecosystem,us insight into technological advancements and enabling the application of our learning from operating these businessesall best-in-breed technology evaluated at those centers to support the development of an AI-high-performance sportscars (battery tech, power management systems, high performance motors.)
Ideanomics Capital
Ideanomics Capital is the Company's fintech business unit, which focuses on leveraging technology and blockchain-enabledinnovation to improve efficiency, transparency, and profitability for the financial services industry.
Technology Metals Market Limited (“TM2”)
TM2 is a London based digital commodities issuance and trading platform for more efficient logistics managementtechnology metals. It connects institutional investors, proprietary traders and finance generally.
We referretail investors with metals suppliers – miners, refiners, recyclers and mints. The platform focuses specifically on new metals that currently don’t have an active trading marketplace, such as rhodium, lithium, cobalt, rhenium, etc. The Company’s ownership interest in TM2 provides valuable data and insight into the global technology metals market, which is critical to our YOD business as our legacy YOD segment and all our other operations, including the development of our Fintech Ecosystem and our Industry Ventures, as our Wecast Services segment, to suggest the wide net we are casting in identifying promising technologies and use cases for operations as a next-generation fintech company. The commodities trading componentfuture of the logistics managementCleantech and financing businesses we acquiredEV industries. TM2 connects both pillars of Cleantech and Fintech. The types of metals and materials traded on the TM2 platform are critical to Cleantech (for EV battery production, energy storage systems, solar cells, etc.,) while the Fintech platform is innovative in 2017 provided 99.7%representing these commodities which do not exist on traditional exchanges.
On January 28, 2021, the Company entered into a simple agreement for future equity with TM2 pursuant to which Ideanomics invested $2.1 million. This investment is a follow-on investment further the Company’s prior investment of our revenue$1.2 million in stock-based consideration in December 2019.
Delaware Board of Trade (“DBOT”)
The Delaware Board of Trade (“DBOT”) is a broker dealer that also operates an Alternative Trading System (“ATS,”) presently DBOT is not trading; the business remains in full regulatory compliance. Recent developments have pointed to increased recognition of digital securities’ relevance in regulated global capital markets. As well, regulatory easing of certain restrictions such as the threshold for private securities (Reg A+), along with good demand for products such as pre-IPO issuance, provide good tailwind for the year ended December 31, 2018. As we further develop our FinTech services business and this business continues to mature, we have been gradually phasing out of our logistics management and financing businessbroker dealers business. The Company has filed a continuing membership application for strategic reasons, as further describedprivate placement activities in the Management Discussion and Analysis. During the fourth quarter of 2018 we began experiencing marketprimary markets. The Company believes that growing demand for non-logistics management revenue generating opportunitiesprivate placements, along with increased attention in digital securities, provide a favorable environment for DBOT’s future growth.
Timios
On January 8, 2021 the Company acquired 100% of privately-held Timios Holdings Corp. ("Timios.") Timios, a nationwide title and have begun focusing our efforts on these new market FinTechescrow services opportunities, while phasing out of the oil tradingprovider, which has been expanding in recent years through offering innovative and electronics trading businesses. These new FinTech services market opportunities are in line with our FinTech Ecosystem and Industry Ventures strategy. While we intend to continue to capitalize on our efforts and learnings from the overall logistics management business it is not intended to be our core business. Various other aspects of the development of our Fintech Ecosystem and our Industry Ventures, as described below, are still in the planning and testing phase and are generally not operational or revenue generating.
Fintech Ecosystem
We primarily rely upon third-party intellectual property (“IP”) for the AI and blockchain technology being developed for our Wecast Services segment. In evaluating prospective technologies we seek to acquire, in-license or promote through joint ventures, we are focused on identifying industry leaders with strong and established engineering teams and technologies that are substantially developed. In doing so, we believe we can reduce the risks of reliance on a single technology with speculative functionality and adoption potential, while enhancing our flexibility and adaptability in a rapidly evolving technological environment.
Our strategy is to leverage the technology and teams that comprise our Fintech Ecosystem to create customizedfreedom-of-choice-friendly solutions for the use cases presented to us by our Industry Ventures.real estate transactions. The customization of these business applications would be undertaken by our acquired subsidiaries or the joint ventures, as applicable, with the business development efforts of our parent company focused on expanding the network of technologies in our Fintech Ecosystemproducts include residential and facilitating other synergies between our Fintech Ecosystemcommercial title insurance, closing and our Industry Ventures. While the development and expansion of our Fintech Ecosystem is primarily driven by a desire to match specific technologies with specific use applications in our Industry Ventures, we believe that many of the technologies in our Fintech Ecosystem will have applications outside of our own Industry Ventures, and that the work in customizing technology to our Industry Ventures can be leveraged to develop products and services for third parties.
BDCG Joint Venture
Between December 2017 and April 2018, we formed BBD Digital Capital Group Ltd., a New York corporation (“BDCG”), as a joint venture with management partner Seasail, an affiliate of Big Business Data (“BBD”). We hold approximately 60% of the equity interest of BDCG and have the power to appoint three of the five directors of the board of BDCG. BDCG intends to capitalize on commodity and energy providers’ needs for more precise risk management services, more informed operational planning and more strategic decision-making, specifically in the trading of index funds, futures and commodities. BDCG focuses on developing AI-driven financial datasettlement services, as well as building transactional platformsspecialized offerings for index, futuresthe mortgage process industry.
Ideanomics expects that Timios will become one of the cornerstones of Ideanomics Capital. Timios combines difficult to obtain local and derivativestate licenses, a knowledgeable and experienced team, and a scalable platform to deliver best-in-class services through both centralized processing and localized branch networks. Ideanomics will assist Timios in scaling its business in various ways, including referring client acquisitions and product innovation.
Founded in 2008 by real estate industry veteran Trevor Stoffer, Timios' vision is to bring transparency to real estate transactions. The company offers title and settlement, appraisal management, and real-estate-owned (“REO”) title and closing services in 44 states and currently serves more than 280 national and regional clients.
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Non-Core Assets
The Company has identified a number of business units that it considers non-core and is evaluating strategies for divesting these assets. The non-core assets are Grapevine, a marketing and ecommerce platform focused on influencer marketing, and FinTech Village a 58-acre development site in West Hartford, Connecticut.
On January 28, 2021, the Company’s Board of Directors accepted an offer of $2.75 million for Fintech Village, and subsequently signed a non-binding sale contract on March 15, 2021. The Company believes that Fintech Village met the criteria for held for sale classification on January 28, 2021.
Sources and Availability of Raw Materials
The Company’s Tree Technologies business located in Malaysia and its WAVE business located in Utah, United States, (acquired in the first quarter of 2021 – see Recent Developments section) assemble and manufacture motor bikes and inductive charging systems respectively. These businesses depend on a ready supply of components that are sourced domestically and internationally and any interruption to the supply of components could have an adverse impact on the Company’s results. The Company’s suppliers that manufacture EVs and batteries depend on a ready supply of raw materials and components, consequently a shortage of raw materials or components could adversely impact their manufacturing process and, potentially, impact the Company’s revenues as it may not be able to complete orders that it had received. The Company may also be adversely impacted if global logistic and supply chains are interrupted.
Seasonality
The Company expects that orders and sales will be influenced by the amount and timing of budgeted expenditure by its customers. Typically, the Company would expect to see higher sales at the start of the year when companies start executing on their capital programs and at the end of the year when companies are spending any surplus or uncommitted budget before the new budget cycle commences. The Company’s operating businesses are in the early stage of their development and consequently do not have sufficient trading histories to project seasonal buying patterns with any degree of confidence.
Working Capital Requirements
As the Company expands its business the need for both global commodity and energy clients. Planned financial data services also include risk management solutions, platforms for trading derivatives and indices, and debt and credit product offerings,working capital will continue to grow. From time to time the Company’s MEG operating division in China has the opportunity to purchase a large number of vehicles at a favorable price, the terms of the purchase contract frequently require the Company to pay some or all of the cost in advance of the delivery of the vehicles with the primary objective being enhancing trading and risk management strategies.
BDCG leverages Pluto, Seasail’s AI technology, which Seasail licensesresultant need to BDCG.Pluto takes in dynamic, multi-variable inputs, such as, in the casecommit material amounts of crude oil, information regarding trading, production origination, economic data and weather,and processes them according to flexible programmed models. For debt and credit products, BDCG has focused on data collection and integration capabilities based on “massive public data” and “acquired third-party data,” including credit and multi-party loans. BBD has accumulated the information of over 100 million companies. Such information contains more than 150 data tables and over 3,700 data fields, and the amount of data continues to grow rapidly. BDCG can use the data accumulated by BBD to create risk and index models. Once these models are layered into a rating and risk management system and loan approval system for trade finance, the AI system can make informed recommendations as to trading and risk management. Pluto is then sold and licensed to third party financial product stakeholders for these services.
We believe we can leverage BDCG’s AI services for the creation of financial products, risk ratings and indexing, and selection and recommendation systems on behalf of key stakeholders. By using AI technology to analyze the digital securitized assets we intend to develop, we aim to elevate not only the quality of the financial product, but also interactions amongstakeholders. We also intend to design thedigital securitized assets we develop to have data attributes that can be integrated into BDCG’s approach for processing financial data.
Fundamental Interactions
In June 2018, we entered into a non-exclusive, royalty-bearing licensing agreement with Fundamental Interactions, Inc. (“FI”), which currently expires on June 25, 2021, with respect to certain blockchain technologies, including FI’s Velocity Ledger, a blockchain-based, software-as-a-service (SaaS) platform that operates as a private blockchain solution for financial services. Through this agreement, we intend to leverage core FI technology and the Velocity Ledger platformworking capital. The Company’s Tree Technologies subsidiary requires working capital to support the tokenization, secondary tradingassembly of EV motor bikes and settlement of new blockchain-based securities.
FinTalk
In September 2018, we entered into an agreementscooters for the acquisition of FinTalk, a secure mobile messaging, collaborationASEAN market. The Company acquired WAVE and information services platform that delivers encrypted text and media messaging, with high performance large file transfer capabilities.
Industry Ventures
We believe there are a number of industries that can benefit from the application of next-generation technologies, such as blockchain, AI, machine learning and big data. Our strategy is not only to promote the development of promising technologies through our Fintech Ecosystem, but also to acquire, invest in and form joint ventures with businessesSolectrac in the various industries that we believe canfirst quarter of 2021 (see the Recent Developments section), both of these businesses will require working capital to fund the purchase of components for the assembly of wireless charging systems and electric tractors, respectively. The Company will continue to raise both debt and equity capital to support the working capital needs of these businesses and its U.S. Head Office functions.
Trade marks, Patents and Licenses
The Company’s Intelligenta business operates under a license granted by Seasail Ventures Limited (“Seasail.”) The license does not have a stated term.
Customer Concentration
The Company is in the process of building out its Ideanomics Mobility unit and has not yet reached a stage of development where the loss of any single customer would have a material adverse effect on the Company.
Reliance on Government Contracts
The Company does not contract directly with the government of the PRC, however it does have investments, partnerships and agreements with the State Own Entities (“SOE”) described above. Additionally, the rate at which commercial fleets convert to EV is heavily
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influenced by federal and provincial policies in the PRC as they relate to clean air and adoption of EV technology. Consequently, the Company’s results may be well servedadversely impacted by our Fintech Ecosystem. In so doing, we believe that we can benefit both from growthchanges in regulations in the PRC.
Competitive Business Conditions, Competitive Position in the Industry Ventures themselves, as well as fromand Methods of Competition
Ideanomics Mobility
Purchasers of commercial vehicles have the enhanced potential for monetizing the technologies in our Fintech Ecosystem that would come with refining these technologies for our Industry Ventures.
Logistics Managementchoice between traditional ICE vehicles and Financing
Our first group of Industry Ventures has focused on the logistics managementEVs and financing industry. Logistics managementthis is the component of supply chain management that helps organizations plan, manage and implement processes to store and move goods from origin to destination. Logistics financing supports businesses where the order-to-delivery cycle may not correlate with cash flow needs. We believe that by ensuring that information is transparent, accurate and verifiable at various stages during the shipping process, blockchain-enabled logistics management platforms can streamline and standardize the product flow from sellers to buyers and eliminate standard transactional intermediaries in the freight and shipping industry. Further, we believe that by decreasing middle-man costs, we can greatly improve the efficiency of capital utilization, expand margins and accelerate inventory turnover for companies shipping and ordering goods. In addition, we believe that the transparency and security provided by blockchain technologies, combined with the computing power of AI technologies, can reduce existing logistics financing costs, including by improving risk management and decision making, and enable alternative logistics financing solutions.
To support the development of blockchain- and AI-based technologies for the logistics management and financing industries, we entered the commodities trading business, with the primary goal of learning about the needs of buyers and sellers in industries that rely heavily on the shipment of goods to inform our understanding of the features a blockchain platform would need in order to serve this industry vertical. Specifically, we elected to focus on the crude oil and consumer electronics businesses, which are industries that we estimate are sufficiently commoditized and high volume, in order to (i) serve as meaningful controls, (ii) identify inefficiencies in the logistics management and finance industries and (iii) generate data to support the potential future application of AI solutions.
Our crude oil trading business commenced in October 2017, when we formed our Singapore joint venture, Seven Stars Energy Pte. Ltd. (“SSE”), which is 51% owned by us. The other partner in the joint venture is a businessman based in Singapore with extensive experience in the oil trading industry and ownership or control of several large oil tankers. Our consumer electronics trading business commenced on January 2017, and is operated by our subsidiary Amer Global Technology Limited (“Amer”), in which we have a 55% interest. The end customers in our crude oil and consumer electronics trading businesses include about 15 to 20 corporations across the world. Our crude oil trading business does not currently integrate blockchain- or AI-based logistics solutions.
While we have begun phasing out of the crude oil trading business and the electronics trading business, we intendlikely to continue to capitalize on our efforts and learning from these businesses so that we can leveragefor at least the applications of our technologies and FinTech Ecosystem across this business and as part of our Industry Ventures strategy.
Consumer Digital Products
Our second group of Industry Ventures focuses on consumer digital products. We believe that existing communities of consumers, merchants and service providers can significantly benefit from platforms that leverage blockchain technologies to aggregate content and services and products, such as blockchain-based digital membership cards, digital wallets, and loyalty programs that offer cash or other token-based rewards to users within these communities.
In September 2018, we purchased a 65.65% equity interest in Grapevine Logic Inc. (“Grapevine”), and an affiliate of Dr. Bruno Wu, our Chairman of the Board has an option to require us to acquire the remaining stake in Grapevine. Grapevine is an end-to-end influencer marketing platform that facilitates collaboration between advertisers and brands with video based social influencers and content creators. Through the Grapevine platform, more than 4,700 companies have been able to hire the services of over 177,000 social influencers, ultimately helping these companies to promote their products and strengthen their brand. We believe that Grapevine will help us develop strength in the consumer digital products industry vertical by providing the platform for connecting brands with content-producing influencers and their large-scale audience of consumer-driven followers to whom digital tokens, loyalty and discount cards, multi-purpose digital wallets, and other services may be marketed via Grapevine on behalf of Ideanomics, brand advertisers and influencers, all according to a follower’s areas of interest.
Also in September 2018, we announced the proposed joint venture with Asia Times Holdings (“AT”), a Hong Kong company which owns the Asia Times newspaper, to be named Asia Times Financial Limited (“ATF”). Effective February 20, 2019, the Company and AT agreed to terminate their subscription agreement so that the Company will retain approximately 4.0% interest in AT, and not be obligated to make any further investment into AT. In addition, the parties have agreed to terminate the Shareholder’s Agreement for the joint venture, Asia Times Financial.
Financial Services
As evidenced by the proliferation of offerings of blockchain-based tokens in recentnext five years and the rapid growth of an industry to support these offerings, we believe that a core use case for blockchain and AI technology lies in financial services, digital asset securitization, and blockchain-enabled trading platforms. We plan to provide consulting services to companies seeking financing both through the sales of blockchain based instruments, such as securitized assets represented by digital tokens, which we refer to as “digital securitized assets,” as well as through conventional means, such as sales of traditional equity and debt securities. We believe that this dual approach to financial transactions, coupled with a related AI and blockchain enabled financial services platform, will provide us with flexibility to address the needs of issuers and investors. We also aim to use AI-powered analytics from our technology investments for different use cases, such as the trading, pricing, indexing and ratings of digital tokens (including digital securitized assets). Although we do not yet offer products or services in this industry vertical, we believe that ultimately, the Industry Ventures we form, acquire, or invest in this area will become the core of our business.
DigitalAsset Securitization
We believe that we can use AI- and blockchain-enabled technology to provide a seamless method and platform for the creation and trading of digital securitized assets. Specifically, we plan to facilitate the securitization of tangible and intangible assets, such as data and IP, into new financial products, to “tokenize” these financial products by digitally recording them on a blockchain, to enable advanced platforms and capabilities using AI and blockchain technology, and to support the distribution and monetization of digital securitized assets. In so doing, we can be a leader in the transition of traditional financial products, such as commodities, currencies, credit, leasing, real estate and other asset classes, into the asset digitalization era.
Creating digital securitized assets requires the conversion of illiquid, tangible and intangible assets into blockchain enabled securities that we anticipate will, subject to future regulatory approval, be easily traded via exchanges, and as such, are more liquid than the underlying asset. We refer to this process as “digital asset securitization.”
As a first step in this process, we are identifying and engaging in discussions, negotiations and, in some cases, joint ventures, with third parties that own the specific tangible and intangible assets to be securitized, who we refer to as “asset originators,” or that have relationships with asset originators. We may also elect to securitize assets owned by our Company. Next, we will work with domestic and international securities market professionals, including licensed broker-dealers, merchant banks, ratings agencies and financial institutions, to structure and document the securitization of the assets, creating an asset backed financial product that can be more easily distributed and traded. This securitization process may include the pooling of assets, whether within the same asset class or across asset classes or asset originator types, or fractionalization of ownership of individual assets.
Once assets have been securitized, the new asset backed financial product will be represented in the form of digital, blockchain based tokens. We refer to this process as “digital tokenization.” Digital tokens are representative units of value, analogous to a stock certificate or a book-entry position, each of which reflects a holder’s ownership of a security, the terms of which are established in the investment documentation. Each of these tokens will be created by a “smart contract,” a self-executing agreement whose lines of code will reflect the economic and governance terms determined in the asset securitization process.
We intend for our digital tokenization process largely to rely upon technologies already in use and accessible in today’s blockchain market, such as Ethereum’s ERC-20 tokens, thus reducing the need, costs and execution risks of new technology development. We also intend to enter into leverage our Fintech Ecosystem to use blockchains that may be optimized for tokenization of assets in specific industry verticals, including, potentially basing these technologies on FI’s Velocity Ledger. We believe there are myriad benefits that can potentially be afforded by tokenizing securities via Velocity Ledger, including new product creation and market exposure, competitive fees, fast deal execution, and access to institutional investors and broker dealers.
Trading and Financial Services Platforms
We believe that regulated alternative trading systems (“ATSs”) and sophisticated risk management software arepossibly longer. The most important drivers for the development of trading marketsthe commercial fleet EV market are federal and provincial regulations relating to clean air and electronic vehicles including subsidies and incentives to help owners of fleets of commercial vehicles to convert from combustion engines to EV. The speed at which fleet operators convert to EV is highly correlated with government regulations, targets and related subsidies and incentives. If the governments, or municipalities, change the regulations, targets, incentives or subsidies then the rate at which fleet operators convert their vehicles to EV could slow down which in turn may lead to lower revenues for blockchain based digital tokens, including the digital securitized assets we planCompany. Additionally, the rate, and form in which, the commercial fleet EV market develops is dependent upon technological developments in battery and charging systems; deployment of the charging infrastructure to originate as part of our financial services business. Accordingly, we are making strategic investments that are intended to promotesupport widespread commercial EV use and the development of regulated ATSsnew financing and lending structures that will enhanceaddress the blockchain token trading ecosystemdifferent collateral and AI-based ratings systems to enhance the market viability of our digital securitized assets.
Between August 2017 and December 2018, we acquired approximately 36.92%resale values of the capital stockbattery and vehicle versus internal combustion engine vehicles.
In addition to its directly owned operations the Company operates through a network of Delaware Boardinvestment arrangements, partnerships and formal and informal alliances; consequently, its competitive position could be adversely impacted if one of Trade Holdings, Inc. (“DBOT”), which is a FINRA member firm and has filed an initial operations report on Form ATSthe members of the alliance was not able to give notice of operations of DBOT ATS, LLC (“DBOT ATS”), and which we believe is well positioned to develop blockchain-enabled transactional platforms. DBOT operates three business lines, (i) DBOT ATS, which is intended to be an ATS for equity securities not listed onmeet the New York Stock Exchange or the Nasdaq, (ii) DBOT Issuer Services LLC, which is focused on setting and maintaining issuer standards, as well as the provision of issuer services to DBOT designated issuers, and (iii) DBOT Technology Services LLC, which is focused on the provision of market data and marketplace connectivity.
DBOT has entered into agreements with FI (which is also a licensor to Ideanomics), pursuant to which FI is developing a blockchain enabled primary issuance and secondary trading platform for DBOT ATS using the Velocity Ledger. Under the agreements, DBOT will maintain licensing rights for the technology.
Our Fintech Revenue Model:
As part of our transitioning to a next-generation fintech company, we began developing our revenue and business model to be closely aligned with the technologies and industries that we support in our FinTech Ecosystem and Industry Ventures in a way that we can capitalize on the market demand for theseits products, and services.
Our FinTech business and revenue model is directly connected with the agreements and partnerships that we engage in. The underlying economics vary on a case by case basis (due to the particular industry that they are a part of, and specific facts and circumstances for each agreement), but generally they have the following characteristics:
Digital Assets, Blockchain and AI:
Asia Operations:
Lease Financing:
U.S. Operations:
Licensing of Technologies / FinTech Village:
Equity Investments:
Additionally, we benefit from the various equity interests that we have in our various subsidiaries, joint ventures, and partnerships across our Fintech Ecosystem and Industry Ventures. In cases where valuable intellectual property is generated by through these strategic investments, the Company will consider strategic licensing agreements and additional business models in exchange for our services to further enhance revenue.
Legacy YOD Segment
Since 2010, we have provided premium content and integrated value-added service solutions for the delivery of VOD and paid video programming to digital cable providers, IPTV providers, OTT streaming providers, mobile manufacturers and operators, as well as direct customers. The core revenues were generated from both minimum guarantee payments and revenue sharing arrangements with distribution partners as well as subscription or transactional fees from subscribers.
In October 2016, we signed an agreement to form a five year partnership with Zhejiang Yanhua Culture Media Co., Ltd., a company organized under the laws of the PRC (“Yanhua”), where Yanhua will act as the exclusive distribution operator (within the territory of PRC) of our licensed library of major studio films (the “Yanhua Partnership”). We entered into the Yanhua Partnership and exclusive distribution agreement in order to offset losses from high upfront minimum guarantee licensing fees to studios. The Yanhua Partnership modified and improved our legacy major studio paid content business model by moving from a framework that included high and fixed costs and upfront minimum guaranteed payments, rising content costs from major Hollywood studios and low margins to a structure that will now include relatively nominal costs to our Company and the opportunity to reach an even wider audience. With the Yanhua Partnership, Yanhua assumed all sales and marketing costs and will pay us a minimum guarantee in exchange for a percentage of the total revenue share.
Pursuant to the Yanhua Partnership, the existing legacy Hollywood studio paid content as well as other IP content specified in the agreement, along with the corresponding authorized rights letter that we are entitled to, were transferred to Yanhua for RMB13,000,000 (approximately $2 million), to be paid in two equal installments in the amount of RMB6,500,000 (approximately $1 million). The first installment was received on December 30, 2016 and was recognized as revenue in 2017 based on the relative fair value of licensed content delivered to Yanhua. The second installment will be paid if the license content fees due to studios for the existing legacy Hollywood paid contents are settled. To date, the legacy Hollywood studio paid content and other IP hasdecides not been transferred, as the second installment was not yet made.
We still run our legacy YOD segment with limited resources and plan to continue to run it throughcooperate with the Yanhua Partnership, where Yanhua will act asCompany, or goes out of business.
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Ideanomics Capital
The Company’s Ideanomics Capital business unit operates in sectors that are undergoing rapid change.
DBOT is a broker dealer that also operates an ATS. In April 2020 the exclusive distribution operator (withinCompany ceased trading OTC equities, terminated the PRC) of our licensed library of major studio films. We launched our legacy VOD service through the acquisition of YOD Hong Kong (formerly Sinotop Group Limited) on July 30, 2010, by China CB Cayman. Through a series of contractual arrangements, YOD WFOE, the subsidiary of YOD Hong Kong, controls Sinotop Beijing, a corporation established in the PRC. Sinotop Beijing was the 80% owner of Zhong Hai Media until June 30, 2017, through which we provided: (1) integrated value–added business–to–business (“B2B”) service solutions for the delivery of VOD and enhanced premium content for digital cable; (2) integrated value–added business–to–business–to–customer (“B2B2C”) service solutions for the delivery of VOD and enhanced premium content for IPTV and OTT providers; and (3) a directemployees assigned to user, or business-to-customer (“B2C”), mobile video service app. We sold Zhong Hai Media on June 30, 2017 to Hanghzou for a nominal amount.
Management Team with Significant FinTech, Blockchain and AI Experience
To support our transition to a next-generation AI and blockchain enabled fintech company, we have strategically secured a management team with diversified expertise in operations, technology, fintech, blockchain, AI, capital marketsDBOT and the financial services industry,needed to operate the business. The Company has continued to maintain DBOT’s regulatory licenses and largely transitioned our operations toward the United States, having 18 U.S. employees as of December 31, 2018 comparedrequired regulatory capital. The Company has applied for regulatory approval to three as of December 31, 2017. As of the date ofbroker digital securities and tokens, this filing, key members of our management team include:
Dr. Bruno Wu. Our Chairman of the Board is an experienced investor, technology and media entrepreneur, and philanthropist. Dr. Wu has been actively involved with blockchain enabled and big data technologies since October 2011. After four years of investment and research, in 2015, Dr. Wu and Beijing Sun Seven Stars Culture Development Limited (“SSS”), an affiliate of Dr. Wu and a significant shareholder in our Company, proceeded to execute the strategy of becoming a leader in fintech and asset digitization services by aggregating AI, blockchain and other big data and cloud-based technologies, carefully sourced and selected on a global basis through joint ventures and partnerships. These partnerships focus on customizing and enabling actual business use case applications. Dr. Wu actively participated in the build out of a leading big data hub in Guiyang, China, particularly by endorsing the integration of AI and blockchain. Dr. Wu has committed to transforming our Company into a fintech and asset digitization services flagship, with multiple use case technology engines to be rolled out.
Mr. Alf Poor. Our Chief Executive Officer, and President of the Connecticut Fintech Village, is a former Chief Operating Officer at Global Data Sentinel, a cybersecurity company that specializes in identity management, file access control, protected sharing, reporting and tracking, AI and thread response, and backup and recovery. He isnascent market which the former President and Chief Operating Officer of Agendize Services Inc., a company with an integrated suite of applications that help businesses generate higher quality leads, improve business efficiency and customer engagement. Mr. Poor is a client-focused and profitability-driven management executive with a track record of success at both rapidly-growing technology companies and large, multi-national, organizations.
Mr. Federico Tovar. Our Chief Financial Officer is a seasoned business professional and subject matter expert in AI, fintech, blockchain, IoT and cybersecurity. He was previously the Chief Financial and Strategy Officer of Global Data Sentinel Inc, a privately held and high growth cybersecurity and AI technology company that supports data security across domains, including network, cloud, mobile and IoT, with AI capabilities and next-generation applications in fintech, blockchain, energy, insurance, healthcare, and media industries, amongst others. Mr. TovarCompany believes has developed strategic plans and business models, structured various IP and technology licensing deals, closed on various M&A transactions and debt and equity financing rounds, and formulated corporate growth and financial strategies for technology companies which have resulted in measurable execution strategies.
Ms. Kate Lam is Managing Director, Digital Capital Markets. Ms. Lam has more than twenty years of financial markets experience in marketing multiple asset classes to Propellr, a fintech platform for multi-asset financing. She successfully obtained the SEC broker dealer license for Propellr Securities and integrated regulatory best practices into the platform. As CEO of the broker dealer, she worked closely with engineers and product managers to design specifications for investor vetting, as well as perform due diligences on financing deals. She was also the Head of Institutional Sales and Investor Relations for the company. Prior to Propellr, Ms. Lam held senior management positions at Deutsche Bank, Bear Stearns and Standard Chartered Bank with a client base spanning central banks, global and regional banks, asset managers, global insurance companies and hedge funds.
Dr. George Yuan. Dr. George Yuan is the Chief Technology Officer of BBDCG. Dr. Yuan is a world leading expert on dynamic ontology for credit risk assessment and risk management. He served as the leader for risk management consulting at KPMG (US) and the Director of China / Hong Kong Deloitte Financial Consulting. Dr. Yuan was selected as a National Distinguished Expert in Shanghai’s and Sichuan’s “The Thousand Talents Plan” in 2013 and 2018, and he is the Chief Editor for The Journal of Financial Engineering. Dr. Yuan’s is leading BDCG’s focus on AI driven financial data services as well as transactional platforms for index, futures and derivative trading, for both global commodity and energy clients. Dr. Yuan is the Chief Risk Officer and Chief Engineer of BDCG. Dr. Yuan has held a professorship at the Institute of Risk Management at Tongji University. Dr. Yuan’s study and work has centered around the valuation of financial derivatives and value-at-risk (“VaR”) modeling for market risk, credit risk and operational risk under the framework of the Basel II (Basel III) Accord, financial and credit derivatives pricing, portfolio optimization, risk limit design, commodity forward price curve design, complex position, commodity price risk assessment and asset valuation.
good long term potential.
Corporate Structure
The following chart depicts our corporate structure as of December 31, 2018: 2020:
(1) | In 2020, the |
(2) | In 2020, the Company renamed You On Demand (Beijing) Information Consulting Co., Limited. to Beijing | |
Medici New Energy Automobile Co,, Ltd.
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(3)
In |
(4) | In 2020, the Company renamed Shanghai |
VIE Structure and Arrangements
The Company consolidated certain VIEs located in the PRC in which it held variable interests and was the primary beneficiary through contractual agreements. The Company was the primary beneficiary because it had the power to direct activities that most significantly affected their economic performance and had the obligation to absorb or right to receive the majority of their losses or benefits. The results of operations and financial position of these VIEs are included in the consolidated financial statements for the year ended December 31, 2019. A shareholder in one of the VIEs is the spouse of Bruno Wu (“Dr. Wu,”) the former Chairman of the Company.
ToRefer to Note 10 of the Notes to Consolidated Financial Statements included in Part IV, Item 8 of this Annual Report on Form 10-K for further information.
The contractual agreements listed below, which collectively granted the Company the power to direct the VIEs activities that most significantly affected their economic performance, as well to cause the Company to have the obligation to absorb or right to receive the majority of their losses or benefits, were terminated by all parties on December 31, 2019. As a result, the Company deconsolidated the VIEs as of December 31, 2019. The deconsolidation resulted in a net loss of $2.0 million recorded in “Gain (loss) on disposal of subsidiaries, net” in the consolidated statements of operations, and a statutory income tax of $0.2 million in the year ended December 31, 2019.
For these consolidated VIEs, their assets were not available to the Company and their creditors did not have recourse to the Company. Prior to December 31, 2019, in order to operate certain legacy business in the PRC and to comply with PRC laws and regulations that prohibit or restrict foreign ownership of companies that provideprovides value-added telecommunication services, we provide services through Sinotop Beijing and SSF, which hold the licenses and approvals to provide digital distribution and Internet content services in the PRC. We have the ability to control Sinotop Beijing and SSF throughCompany entered into a series of contractual agreements as described below, entered into among YOD WFOE, YOD Hong Kong, Sinotop Beijing, SSF and the respective legal shareholders of Sinotop Beijing and SSF.
Through these contractual arrangements, we have acquired both control over and rights to, 100% of the economic benefit of Sinotop Beijing and SSF. Accordingly, Sinotop Beijing and SSF are each considered a VIE, and are therefore consolidated in our financial statements. Pursuant to the belowwith two VIEs. These contractual agreements YOD WFOE can have the assets transferred freely out of each VIE without any restrictions. Therefore, YOD WFOE considers that there is no asset of the respective VIE that can be used onlywere initially set to settle obligation of such VIE, except for the registered capital of each respective VIE, amounting to RMB10.6 million (approximately $1.6 million) for Sinotop Beijing,expire in March 2030 and RMB27.6 million (approximately $4.2 million) has been injected as of December 31, 2018. As Sinotop BeijingApril 2036, respectively, and SSF are incorporated as limited liability companies under PRC Company Law, creditors of these two entities do not have recourse to the general credit of our other entities.
The following is a summary of the common contractual arrangements that provide us with effective control our VIEs and that enable us to receive substantially all of the economic benefits from their operations:
Equity Pledge Agreement
Pursuant to the Equity Pledge Agreement among YOD WFOE and the respective nominee shareholders, the nominee shareholders pledge all of their capital contribution rights in the VIEs to YOD WFOE as security for the performance of the obligations of the VIEs to make all the required technical service fee payments pursuant to the Technical Services Agreement and for performance of the nominee shareholders’ obligation under the Call Option Agreement. The terms of the Equity Pledge Agreement expire upon satisfaction of all obligations under the Technical Services Agreement and Call Option Agreement.
Call Option Agreement
Pursuant to the Call Option Agreement among YOD WFOE, the VIEs and the respective nominee shareholders, the nominee shareholders grant an exclusive option to YOD WFOE, or its designee, to purchase, at any time and from time to time, to the extent permitted under PRC law, all or any portion of the nominee shareholders’ equity in the VIEs. The exercise price of the option shall be determined by YOD WFOE at its sole discretion, subject to any restrictions imposed by PRC law. The term of the agreement is until all of the equity interest in the VIEs held by the nominee shareholders is transferred to YOD WFOE, or its designee and may not be terminated by any party to the agreement without consent of the other parties.
Power of Attorney
Pursuant to the Power of Attorney agreements among YOD WFOE, each VIE and each of the respective nominee shareholders, each nominee shareholder grants YOD WFOE the irrevocable right, for the maximum period permitted by law, to all of its voting rights as shareholder of the VIE. The nominee shareholders may not transfer any of their equity interest in the VIE to any party other than YOD WFOE. The Power of Attorney agreements may not be terminated except until all of the equity in the VIE has been transferred to YOD WFOE or its designee.
Technical Service Agreement
Pursuant to the Technical Service Agreement, between YOD WFOE and each VIE, YOD WFOE has the exclusive right to provide technical service, marketing and management consulting service, financial support service and human resource support services to VIE, and VIE is required to take all commercially reasonable efforts to permit and facilitate the provision of the services by YOD WFOE. As compensation for providing the services, YOD WFOE is entitled to receive service fees from VIE equivalent to YOD WFOE’s cost plus 20-30% of such costs as calculated on accounting policies generally accepted in the PRC. YOD WFOE and VIE agree to periodically review the service fee and make adjustments as deemed appropriate. The term of the Technical Services Agreement is perpetual, and may only be terminated upon written consent of both parties.
Spousal Consent
Pursuant to the Spousal Consent, undersigned by the respective spouse of the nominee shareholders, the spouses unconditionally and irrevocably agree to the execution of the Equity Pledge Agreement, Call Option Agreement and Power of Attorney agreement. The spouses agree to not make any assertions in connection with the equity interest of VIE and to waive consent on further amendment or termination of the Equity Pledge Agreement, Call Option Agreement and Power of Attorney agreement. The spouses further pledge to execute all necessary documents and take all necessary actions to ensure appropriate performance under these agreements upon YOD WFOE’s request. In the event the spouses obtain any equity interests of VIE which are held by the nominee shareholders, the spouses agreed to be bound by the VIE agreements, including the Technical Services Agreement, and comply with the obligations thereunder, including sign a series of written documents in substantially the same format and content as the VIE agreements.
Letter of Indemnification
Pursuant to the Letter of Indemnification among YOD WFOE and each nominee shareholder, YOD WFOE agrees to indemnify such nominee shareholder against any personal, tax or other liabilities incurred in connection with their role in equity transfer to the greatest extent permitted under PRC law. YOD WFOE further waives and releases the nominee shareholders from any claims arising from, or related to, their role as the legal shareholder of the VIE, provided that their actions as a nominee shareholder are taken in good faith and are not opposed to YOD WFOE’s best interests. The nominee shareholders will not be entitled to dividends or other benefits generated therefrom, or receive any compensation in connection with this arrangement. The Letter of Indemnification will remain valid until either the nominee shareholder or YOD WFOE terminates the agreement by giving the other party hereto sixty (60) days’ prior written notice.
Management Services Agreement
In addition to VIE agreements described above, our subsidiary and the parent company of YOD WFOE, YOU On Demand (Asia) Limited, a company incorporated under the laws of Hong Kong (“YOD Hong Kong”) has entered into a Management Services Agreement with each VIE.
Pursuant to such Management Services Agreement, YOD Hong Kong has the exclusive right to provide to the VIE management, financial and other services related to the operation of the VIE’s business, and the VIE is required to take all commercially reasonable efforts to permit and facilitate the provision of the services by YOD Hong Kong. As compensation for providing the services, YOD Hong Kong is entitled to receive a fee from the VIE, upon demand, equal to 100% of the annual net profits as calculated on accounting policies generally accepted in the PRC of the VIE during the term of the Management Services Agreement. YOD Hong Kong may also request ad hoc quarterly payments of the aggregate fee, which payments will be credited against the VIE’s future payment obligations.
In addition, at the sole discretion of YOD Hong Kong, the VIE is obligated to transfer to YOD Hong Kong, or its designee, any part or all of the business, personnel, assets and operations of the VIE which may be lawfully conducted, employed, owned or operated by YOD Hong Kong, including:
(a) business opportunities presented to, or available to the VIE may be pursued and contracted for in the name of YOD Hong Kong rather than the VIE, and at its discretion, YOD Hong Kong may employ the resources of the VIE to secure such opportunities;
(b) any tangible or intangible property of the VIE, any contractual rights, any personnel, and any other items or things of value held by the VIE may be transferred to YOD Hong Kong at book value;
(c) real property, personal or intangible property, personnel, services, equipment, supplies and any other items useful for the conduct of the business may be obtained by YOD Hong Kong by acquisition, lease, license or otherwise, and made available to the VIE on terms to be determined by agreement between YOD Hong Kong and the VIE;
(d) contracts entered into in the name of the VIE may be transferred to YOD Hong Kong, or the work under such contracts may be subcontracted, in whole or in part, to YOD Hong Kong, on terms to be determined by agreement between YOD Hong Kong and the VIE; and
(e) any changes to, or any expansion or contraction of, the business may be carried out in the exercise of the sole discretion of YOD Hong Kong, and in the name of and at the expense of, YOD Hong Kong;
(f) provided, however, that none of the foregoing may cause or have the effect of terminating (without being substantially replaced under the name of YOD Hong Kong) or adversely affecting any license, permit or regulatory status of the VIE.
The term of each Management Services Agreement is 20 years, and maycould not be terminated by the VIE,VIEs, except with the consent of, or a material breach, by YOD Hong Kong.
Loan Agreement
Pursuant to the Loan Agreement among YOD WFOE and the nominee shareholders, YOD WFOE agrees to lend RMB19.8 million and RMB0.2 million, respectively, to the nominee shareholders of SSF for the purpose of establishing SSF and for development of its business. As of December 31, 2018, RMB27.6 million ($4.2 million) and RMB nil have been lent to Lan Yang and Yun Zhu, respectively. Lan Yang has contributed allCompany. A shareholder in one of the RMB27.6 million ($4.2 million) inVIEs is the formspouse of capital contribution and accordinglyDr. Wu, the loan is eliminated with the capital of SSF upon consolidation. The loan can only be repaid by a transfer by the nominee shareholders of their equity interests in SSF to YOD WFOE or YOD WFOE’s designated persons, through (i) YOD WFOE having the right, but not the obligation to at any time purchase, or authorize a designated person to purchase, all or partformer Chairman of the Nominee Shareholders’ equity interests in SSF at such price as YOD WFOE shall determine (the “Transfer Price”), (ii) all monies received by the nominee shareholders through the payment of the Transfer Price being used solely to repay YOD WFOE for the loans, and (iii) if the Transfer Price exceeds the principal amount of the loans, the amount in excess of the principal amount of the loans being deemed as interest payable on the loans, and to be payable to YOD WFOE in cash. Otherwise, the loans shall be deemed to be interest-free. Company.
The term of the Loan Agreement is perpetual, and may only be terminated upon the nominee shareholders receiving repayment notice, or upon the occurrence of an event of default under thekey terms of the agreement.VIE Agreements are summarized as follows:
● | Equity Pledge Agreement - The VIEs’ shareholders pledged all of their equity interests in the VIEs to a wholly-owned subsidiary of the Company in the PRC; |
● | Call Option Agreement - The VIEs’ shareholders granted an exclusive option to a wholly-owned subsidiary of the Company in the PRC, or its designee, to purchase all or any portion of the VIEs’ Shareholders’ equity in the VIEs; |
● | Power of Attorney - The VIEs’ shareholders granted to a wholly-owned subsidiary of the Company in the PRC the irrevocable right, for the maximum period permitted by law, all of its voting rights as shareholders of VIEs; |
● | Technical Service Agreement – A wholly-owned subsidiary of the Company in the PRC had the exclusive right to provide technical service, marketing and management consulting service, financial support service and human resource support services to the VIEs, and the VIEs were required to take all commercially reasonable efforts to permit and facilitate the provision of the services; |
● | Spousal Consent - The spouses of the VIEs’ shareholders unconditionally and irrevocably agreed to the execution of the Equity Pledge Agreement, Call Option Agreement and Power of Attorney agreement; |
● | Letter of Indemnification – A wholly-owned subsidiary of the Company in the PRC agreed to indemnify such nominee shareholder against any personal, tax or other liabilities incurred in connection with their role in equity transfer to the greatest extent permitted under PRC law; |
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● | Management Services Agreement - In addition to agreements described above, another of the Company’s wholly-owned subsidiaries entered into a Management Services Agreement with each VIE. Pursuant to such Management Services Agreement, the wholly-owned subsidiary had the exclusive right to provide to the VIE management, financial and other services related to the operation of the VIE’s business, and the VIE was required to take all commercially reasonable efforts to permit and facilitate the provision of the services by the subsidiary. In addition, at the sole discretion of the subsidiary, the VIE was obligated to transfer to the subsidiary, or its designee, any part or all of the business, personnel, assets and operations of the VIE which could be lawfully conducted, employed, owned or operated by the subsidiary; and |
● | Loan Agreement - Pursuant to the Loan Agreement dated April 5, 2016, a wholly-owned subsidiary of the Company in the PRC agreed to lend RMB 19.8 million and RMB 0.2 million, respectively, to the VIEs’ Shareholders, one of whom is the spouse of Dr. Wu, the Company’s former Chairman. The termination of the Loan Agreement resulted in a loss of $5.1 million in the year ended December 31, 2019. |
Our Unconsolidated Equity Investments
We hold a 30%34.0% ownership interest in Shandong Media,Glory, which is our print based media business,through its subsidiary Tree Manufacturing, holds a domestic EV manufacturing license in Malaysia. Tree Manufacturing had entered into a product supply and accounta product distribution arrangement for our investment in Shandong Media underEVs with Tree Technologies, a consolidated subsidiary of the equity method. The business of Shandong Media includes a television programming guide publication, the distribution of periodicals, the publication of advertising, the organization of public relations events, the provision of information related services, copyright transactions, the production of audio and video products, and the provision of audio value added communication services.
We hold a 39% ownership interest in Hua Cheng, and account for our investment in Hua Cheng under the equity method. The business of Hua Cheng mainly includes distribution of content and VOD business on television terminal.
We hold a 50% ownership interest in Wecast Internet Limited, a Hong Kong company (“Wecast Internet”), and account for our investment in Wecast Internet under the equity method. The business of Wecast Internet mainly includes computer network technology development, integrated circuit of software and hardware technology development, technical consultation.
From August 2017 through December 31, 2018, we acquired 36.92% ownership interest in DBOT, and are accounting for our investment in DBOT under the equity method starting from October 2018. DBOT is a FINRA member firm, and filed an initial operations report on Form ATS to give notice of DBOT ATS’s operations. DBOT is powered through blockchain technology licensed from one of our strategic licensing partners.
Company.
In 2018, we signed a joint venturean investment agreement to establish BDCG located in the United StatesIntelligenta for providing blockchain services for financial or energy industries by utilizing AI and big data technology in the United States. We hold a 60%60.0% ownership interest and Seasail ventures limited (“Seasail”) holds 40% of BDCG. The new entity is currently inIntelligenta.
On October 22, 2020, the processCompany acquired 1.4 million common shares, representing 15.0% of ramping up itsthe total common shares outstanding, of Solectrac for a purchase price of $0.91 per share, for total consideration of $1.3 million. On November 19, 2020, Ideanomics acquired an additional 1.3 million shares of common stock for $1.00 per share, for a subsequent investment of $1.3 million. With this subsequent investment, Ideanomics owned 2.7 million common shares out of a total number of issued and outstanding common shares of 10.2 million after the transaction, or 27.0%.
Solectrac develops, assembles and distributes 100% battery-powered electric tractors-an alternative to diesel tractors-for agriculture and utility operations.
Solectrac tractors provide an opportunity for farmers around the world to power their tractors by using the sun, wind, and other clean renewable sources of energy.
Our investments in Shandong Media, Hua Cheng, Wecast Internet, DBOTGlory, BDCG and BDCGSolectrac, where we may exercise significant influence, but not control, isare classified as a long-term equity investmentinvestments and accounted for using the equity method. Under the equity method, the investment is initially recorded at cost and adjusted for our share of undistributed earnings or losses of the investee. Investment losses are recognized until the investment is written down to nil, provided that we do not guarantee the investee’s obligations or we are committed to provide additional funding.
In the years ended December 31, 2020 and 2019, the Company recorded impairment losses with respect to its equity method investments of $16.6 million and $13.1 million, respectively.
Refer to Note 10 of the Notes to Consolidated Financial Statements included in Part IV, Item 8 of this Annual Report on Form 10-K for further information.
Our Competition
Ideanomics Mobility Business Unit
Wecast Services SegmentThe Company’s EV business operates in the market for fleet commercial vehicles, this market is still in its development stage. The Company could face competition from other companies that develop and operate a similar integrated platform for the procurement, purchase, financing, charging and energy management needs of fleet EV operators. The Company could also face competition from companies that only operate in one part of the vehicle purchase and operation cycle, for example, an EV vehicle or battery manufacturer may sell directly to EV fleet operators while also participating in the platform operated by the Company’s MEG business.
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Other
Grapevine competes in the consumer marketing sector and specializes in designing and managing “influencer” led social media campaigns for brands and advertising agencies that do not have a capability to manage influencer marketing campaigns directly. This is a very competitive sector with multiple competitors.
We will face significant competitionRevenue Recognition
The Company records and reports revenues in accordance with respectgenerally accepted accounting principles in the U.S., particularly ASC 606, Revenue from Contracts with Customers which provides guidance on how revenues should be reported and the timing of when revenues should be reported. ASC 606 includes guidance on when revenue should be recognized on a Gross (Principal) or Net (Agent) basis, the Company’s contracts are typically with large enterprises and consequently are heavily negotiated as to the products and services we plan to offer inbe provided; consequently the blockchain and AI enabled fintech business we are building, and we currently face significant competition with respect to the businesses we operate that currently generate revenue for our Company. Our long-term strategic goal is to leverage blockchain and AI based fintech solutions to offer products and services that will bring transparency, efficiency and cost savings to various markets, including finance, commodities, energy, consumer products and transportation logistics. We therefore face significant competitive pressure not only with other developers of blockchain and AI technologies in the fintech space, but also in the marketsaccounting treatment for the products and services we offerreporting of revenues may vary materially between contracts including whether the revenue is reported on a Principal (Gross) or plan to offer, which are very competitive and subject to rapid technological advances, new market entrants, non-traditional competitors, changes in industry standards and changes in customer needs and consumption models.
We believe that our parallel development strategy of building out our Fintech Ecosystem while developing a network of Industry Ventures will enable us to compete in our planned businesses on the basis of our ability to offer a wider range of value-added services than our competitors. We also believe that our unique position as a cross-border company will give us the ability to create partnerships with companies developing new technologies in both the U.S. and Asia.
While we generate revenues from our crude oil and consumer electronics business, we engage in this business largely for research purposes to support our development of fintech solutions for this space, and not primarily with a view to competitive returns.
YOD Segment
The market for video entertainment is subject to continuous change and aggressive competition. Our primary competitors in this space include Internet based content providers and the DVD market, such as iQiyi.com, Youku, Tencent and Sohu. We also face competitors who may attempt to undercut the market by providing pirated (illegal) content. Although we can provide no assurances that other companies will not enter the market of providing such services, we believe that we will have a competitive advantage over any new market entrant because of our exclusive joint venture partnership with CCTV-6’s pay channel, CHC, and first to market advantage.
Seasonality Variations in Business
We expect a disproportionate amount of our revenues generated from Wecast Services quarter over quarter to be subject to seasoned fluctuations at holiday periods and due to introduction of new consumer electronics products. There may also be fluctuations related to weather changes for the crude oil trading business. This pattern may change, however, as a result of new market opportunities or new product introductions.
Agent (Net) basis.
Regulation
General Regulation of Businesses in the PRC
We are required to obtain government approval from or filing with the Ministry of Commerce of the PRC (“MOFCOM”), and and/or other government agencies in the PRC for transactions, such as our acquisition or disposition of business entities in the PRC. Additionally, foreign ownership of certain business and assets in the PRC is not permitted without specific government approval. For this reason, Sinotop Beijing was acquired through our acquisition of YOD Hong Kong, which controls Sinotop Beijing through a series of contractual agreements with YOD Hong Kong and YOD WFOE. We use voting control agreements among the parties so as to obtain equitable and legal ownership or control of our subsidiaries and VIEs to conduct our legacy YOD business.
Investment activities in the PRC by foreign investors are principally governed by the GuidanceSpecial Administrative Measures for Access of Foreign Investment (Negative List) ("Negative List") and the Catalogue of Industries for Encouraged Foreign Investment or("Encouraged Foreign Investment Catalogue," together with the Catalogue,Negative List, the "Catalogue,") which was promulgated and is amended from time to time by the MOFCOM and the National Development and Reform Commission. The Catalogue sets forth the industries in which foreign investments are “encouraged”, “restricted”,encouraged, restricted, or “prohibited”.prohibited. Industries that are not listed in any of the above three categories are permitted areas for foreign investments and are generally open to foreign investment unless specifically restricted by other PRC regulations. Establishment of wholly foreign owned enterprises is generally allowed in encouraged and permitted industries. Foreign investors are not allowed to invest in industries in the prohibited category.
According to the latest version of the Catalogue, which came into effect on July 28, 2017, foreign investments in value-added telecommunications services (except for e-commerce) are “restricted”. Therefore, we provide value-added telecommunications services through our VIE in the PRC.
Other than value-added telecommunications, most of our PRC subsidiaries mainly engage in technical services, consultations and trading activities, which are “encouraged” under the latest version of the Catalogue.
Under PRC law, the establishment of a wholly foreign owned enterprise is subject to the approval of or filing with the MOFCOM or its local counterparts and the wholly foreign owned enterprise must register with the competent industry and commerce bureau.administration for market regulation. Our significant PRC subsidiaries have duly obtained all material approvals required for their business operations.
Foreign direct investment in telecommunications companies in the PRC is governed by the Regulations for the Administration of Foreign-Invested Telecommunications Enterprises, which was promulgated by the State Council on December 11, 2001 and recently amended on February 6, 2016. The regulations provide that a foreign investor’s beneficial equity ownership in an entity providing value-added telecommunications services in the PRC is not permitted to exceed 50%. In addition, the main foreign investor who invests in a foreign-invested value-added telecommunications enterprise operating the value-added telecommunications business in the PRC must demonstrate a good track record and experience in operating a value-added telecommunications business, provided such investortransportation sector is a major one among the foreign investors investing in a value-added telecommunications enterprise in the PRC. Moreover, foreign investors that meet these requirements must obtain approvals from the Ministry of Industry and Information Technology, or the MIIT, and the MOFCOM, or their authorized local counterparts, which retain considerable discretion in granting approvals, for its commencement of value-added telecommunications business in the PRC.
The MIIT’s Notice Regarding Strengthening Administration of Foreign Investment in Operating Value-Added Telecommunication Businesses, or the MIIT Notice, issued on July 13, 2006 prohibits holders of these services licenses from leasing, transferring or selling their licenses in any form, or providing any resources, sites or facilities,subject to any foreign investors intending to conduct such businesses in the PRC.
The PRC market, in which we operate our legacy YOD business, poses certain macro-economic and regulatory risks and uncertainties. These uncertainties extend to the ability of us to conduct wireless telecommunication services through contractual arrangements in the PRC since the industry remains highly regulated. We conduct those operations in the PRC through a series of contractual arrangements entered among YOD WFOE, Sinotop Beijing as the parent company of Zhong Hai Media, SSF and the respective legal shareholders of Sinotop Beijing and SSF. We believe that these contractual arrangements are in compliance with PRC law and are legally enforceable. If Sinotop Beijing, SSF or their respective legal shareholders fail to perform the obligations under the contractual arrangements or any dispute relating to these contracts remains unresolved, YOD WFOE or YOD HK can enforce its rights under the VIE contracts through PRC law and courts. However, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. In particular, the interpretation and enforcement of these laws, rules and regulations involve uncertainties. If YOD WFOE had direct ownership of Sinotop Beijing and SSF, it would be able to exercise its rights as a shareholder to effect changes in the board of directors of Sinotop Beijing or SSF, which in turn could effect changesregulation at the management level, subject to any applicable fiduciary obligations. However, under the current contractual arrangements, we rely on Sinotop Beijing, SSFcentral and their respective legal shareholders to perform their contractual obligations to exercise effective control. We also give no assurance that PRC government authorities will not take a view in the future that is contrary to our opinion. If our current ownership structure and our contractual arrangements with the VIEs and their equity holders were found to be in violation of any existing or future PRC laws or regulations, our ability to conduct its business could be impacted and we may be required to restructure our ownership structure and operations in the PRC to comply with the changes in the PRC laws which may result in deconsolidation of the VIEs.
In addition, the telecommunications, information and media industries remain highly regulated. Restrictions are currently in place and are unclear with respect to which segments of these industries foreign owned entities, like YOD WFOE, may operate.provincial level. The PRC government may issue from time to time new laws or new interpretations on existing laws, to regulate areas, such as telecommunications, information and media, some of which are not published on a timely basis or may have retroactive effect. For example, there is substantial uncertainty regarding the Draft Foreign Investment Law, including, among others, what the actual content of the law will be as well as the adoption and effective date of the final form of the law. Administrative and court proceedings in the PRC may also be protracted, resulting in substantial costs and diversion of resources and management attention. While such uncertainty exists, we cannot assure that the new laws, when it is adopted and becomes effective, and potential related administrative proceedings will not have a material and adverse effect on our ability to control the affiliated entities through the contractual arrangements.attention.. Regulatory risk also encompasses the interpretation by the tax authorities of current tax laws, and our legal structure and scope of operations in the PRC, which could be subject to further restrictions resulting in limitations on our ability to conduct business in the PRC.
Chinese regulations will also significantly impact our Wecast Services segment.MEG business unit. For example, in September 2017, reports were published that the PRC may begin prohibiting the practice of using digital assets for capital fundraising. In 2018, reports surfaced that the PRC had banned local digital asset exchanges from operating within the country. On January 10, 2019, the Cyberspace Administration of China passed the Administrative Provisions on Blockchain Information Services (“Provisions on Blockchain,”) which took effect on February 19, 2019. The Provisions on Blockchain clarify terms of the scope of blockchain information services, the filing process for blockchain information services, the responsibilities for blockchain information service providers, and the consequences of violations. Until there is greater regulatory clarity and acceptance of digital token and blockchain-based financial products in the PRC, we may not be able to provide services under our Wecast Services segmentMEG business unit in the PRC.
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Taxation
On March 16, 2007, the National People’s Congress of the PRC passed the Enterprise Income Tax law (“EIT Law,”) and on November 28, 2007, the State Council of China passed its implementing rules which took effect on January 1, 2008. The EIT Law and its implementing rules impose a unified earned income tax (“EIT”) rate of 25.0% on all domestic-invested enterprises and foreign invested enterprises (“FIEs”) unless they qualify under certain limited exceptions. In addition, under the EIT Law, an enterprise established outside of the PRC with “de facto management bodies” within the PRC is considered a resident enterprise and will normally be subject to an EIT of 25% on its global income. The implementing rules define the term “de facto management bodies” as “an establishment that exercises, in substance, overall management and control over the production, business, personnel, accounting, etc., of a Chinese enterprise.” If the PRC tax authorities subsequently determine that we should be classified as a resident enterprise, then our organization’s global income will be subject to PRC income tax of 25%. For detailed discussion of PRC tax issues related to resident enterprise status, see Part I—Item 1A—“Risk Factors—Risks Related to Doing Business in the PRC and to Our Legacy YOD Business —UnderPRC- Under the New Enterprise Income TaxEIT Law, we may be classified as a “resident enterprise” of the PRC.”China. Such classification will likely result in unfavorable tax consequencesdividends payable to usour foreign investor and gains on sale of our non-PRC shareholders.common stock by our foreign investors may become subject to PRC taxation.”
Foreign Currency Exchange
Approximately 50% of our gross profit and most expenses are denominated in RMB. Under the PRC foreign currency exchange regulations applicable to us, RMB is convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions. Currently, our PRC operating entities may purchase foreign currencies for settlement of current account transactions, including payments of dividends to us, without the approval of the PRC State Administration of Foreign Exchange (“SAFE”SAFE,”), by complying with certain procedural requirements. Conversion of RMB for capital account items, such as direct investment, loan, security investment and repatriation of investment, however, is still subject to the approval of SAFE. In particular, if our PRC operating entities borrow foreign currency through loans from us or other foreign lenders, these loans must be registered with SAFE, and if we finance the subsidiaries by means of additional capital contributions, these capital contributions must be approvedregistered or filed with by certain government authorities, including the MOFCOM, or their respective local branches.authorities. These limitations could affect our PRC operating entities’ ability to obtain foreign exchange through debt or equity financing.
Dividend Distributions
Approximately 50% of our gross profits are earned by our PRC entities. However, PRC regulations restrict the ability of our PRC entities to make dividends and other payments to their offshore parent company. PRC legal restrictions permit payments of dividends by our PRC entities only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Each of our PRC subsidiaries is also required under PRC laws and regulations to allocate at least 10% of our annual after-tax profits determined in accordance with generally accepted accounting principles in the PRC GAAP to a statutory general reserve fund until the amounts in such fund reaches 50% of its registered capital. These reserves are not distributable as cash dividends. Our PRC subsidiaries have the discretion to allocate a portion of their after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation.
In addition, under the new EIT law, the Notice of the State Administration of Taxation on Negotiated Reduction of Dividends and Interest Rates (Notice 112),(“Notice 112,”) which was issued on January 29, 2008, and the Notice of the State Administration of Taxation Regarding Interpretation and Recognition of Beneficial Owners under Tax Treaties (Notice 601), which became effective on October 27, 2009, dividends from our PRC operating subsidiaries paid to us through our entities will be subject to a withholding tax at a rate of 10%. Furthermore, the ultimate tax rate will be determined by treaty between the PRC and the tax residence of the holder of the PRC subsidiary. Dividends declared and paid from before January 1, 2008 on distributable profits are grandfathered under the EIT Law and are not subject to withholding tax.
We intend to reinvest profits, if any, and do not intend on making cash distributions of dividends in the near future.
Regulation Regarding our Fintech Businesses
Blockchain and distributed ledger platforms are recent technological innovations, and the regulatory schemes to which digital assets may be subject have not been fully explored or developed. Regulation of digital assets varies from country to country as well as within countries. In some cases, existing laws have been interpreted to apply to blockchain based technologies and digital assets, and in other cases, jurisdictions have adopted laws, regulations or directives that specifically affect digital assets, and some jurisdictions have not taken any regulatory stance on digital assets and or have explicitly declined to apply regulation. Accordingly, there is no clear regulatory framework applicable to blockchain platforms or digital asset products, and laws that do apply at times may overlap.
As both the regulatory landscape develops and journalistic familiarity with digital assets increase, mainstream media’s understanding of such digital assets and the regulation thereof may improve. An increase in the regulation of digital assets may affect our proposed business by increasing compliance costs or prohibiting certain or all of our proposed activities.
Securities and Commodities Laws
Actions taken by securities regulators in the United States and internationally have confirmed that certain digital assets may be securities under the laws of applicable jurisdictions, as a result of which we will face government regulation and oversight. For example, under U.S. federal law, an instrument is generally considered to be an “investment contract,” and therefore a security, where there is (i) an investment of money; (ii) money is made in a common enterprise; (iii) with an expectation of profits; (iv) to be derived from the efforts of others. We anticipate that all of the securitized digital assets we develop will be securities under U.S. federal law, as well as the securities laws of some overseas jurisdictions, such as Canada, Australia and Japan, which accordingly will trigger registration or qualification requirements with the SEC, or potentially, certain foreign jurisdiction where we may market such securitized digital assets, or require us to rely on any available exemptions.
Platforms for the exchange and trading of digital assets that qualify as securities under applicable laws, such as the four platforms we expect to offer, may also be subject to regulatory requirements and approvals. In order for a securities exchange to allow U.S. investors to participate on its platform,operate, it must register as a broker-dealer with the SEC, and become a member of FINRA, file a Form ATS with the SEC and comply with Regulation ATS.FINRA. Depending on a securities exchange’s activities, it may be required to also register as a broker dealer on the state level. DBOT one of our joint venture investments, has filedis a Form ATSregistered broker dealer with an ATS. Depending upon the SEC. We, or our joint ventures,jurisdiction, we may also be required to comply with laws applicable to securities exchanges to the extent our exchange platforms are made available in jurisdictions where the securitized digital assets that trade on those platforms are treated as securities.exchanges.
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In addition, the U.S. Commodity Futures Trading Commission (“CFTC”) has defined “virtual currencies” as a digital representationTable of value that functions as a medium of exchange, a unit of account, and/or a store of value, but does not have legal tender status in any jurisdiction. The CFTC has considered digital assets as commodities or derivatives, depending on the facts of the offering. We do not plan to facilitate borrowing transactions that permit the trading of the securitized digital assets we develop on a “leveraged, margined or financed basis.”Contents
Money Services and Transmitter Laws
FinCEN, a bureau of the U.S. Department of the Treasury responsible for the federal regulation of currency market participants, has issued interpretive guidance relating to the application of the Bank Secrecy Act to distributing, exchanging and transmitting “virtual currencies.” As a result of this guidance, some companies that act as an administrator or exchanger of digital assets may be considered a money service businesses (“MSB”). MSBs are required to register as an MSB under FinCEN’s money transmitter regulations, be subject to reporting requirements and perform recordkeeping functions. As a result, digital asset exchanges that offer services to U.S. residents or otherwise fall under U.S. jurisdiction are required to obtain licenses and comply with FinCEN regulations. FinCEN released additional guidance clarifying that most miners, software developers, hardware manufacturers, escrow service providers and investors in certain digital assets would not be required to register with FinCEN on the basis of such activity alone, but that digital asset exchanges, payment processors and convertible digital asset administrators would likely be required to register with FinCEN. We are currently evaluating whether our planned operations may be require our registration as an MSB.
In addition, various U.S. state regulators, including the California Department of Financial Institutions, the New York State Department of Financial Services, the Virginia Corporation Commission, the Idaho Department of Financial Services, and the Washington State Department of Financial Institutions, have released interpretations or mandates that digital asset exchanges and similar service providers register on a state-level as money transmitters (“MTs”) or MSBs. Many of the states have their own application and process to apply for an MT license.
Financial Crimes and Sanctions Compliance
The jurisdictions in which we operate and intend to operate generally have adopted laws to prevent money laundering, terrorist financing, fraud and other financial crime, as well as to ensure compliance with applicable sanctions regimes. Various aspects of our business require us to develop and implement policies and procedures that confirm the identity of customers, detect suspicious activities and ensure we do not do business with blocked persons. Accordingly, we have already implemented specific anti-money laundering (“AML”) and “know your customer” policies for the SSE oil trading operations and Amer consumer electronics operations through each entity’s bank.
Laws or Regulations Directed at Digital Assets
Certain jurisdictions may require specific licensees for companies operating blockchain and digital asset based businesses. Some jurisdictions, such as the PRC, Ecuador, Russia, South Korea and India, have prohibited or severely restricted the trading of digital assets and/or operation of exchanges that trade in such digital assets, which may prevent us from marketing the securitized digital assets we plan to develop in those countries, or from making the exchanges we are designing available in those countries.
European regulators generally have generally not yet implemented specific laws or regulations directed at digital assets, but reports suggest they may do so in the future. For example, in October 2012, the European Central Bank issued a report on “virtual currency” schemes indicating that digital assets may become the subject of regulatory interest in the European Union, in July 2016, the European Commission released a draft directive that proposed applying counter-terrorism and AML regulations to digital currencies, and in September 2016, the European Banking authority advised the European Commission to institute new regulation specific to digital currencies, with amendments to existing regulation as a stopgap measure. Australian lawmakers have also introduced legislation to regulate digital asset exchanges and increase AML policies. We intend to monitor the extent to which any such regulations are adopted and will apply to our business.
Environmental Disclosures
As part of the acquisition of the Fintech Village property (see Part I—Item 2—“Properties”Properties,”), we agreed to assume responsibility for completing environmental remediation, previously initiated by the prior owner, relating to the cleanup of asbestos and polychlorinated biphenyls (“PCBs”) from building materials on the property and any contamination of soil and groundwater on the land, an existing condition cited by the Department of Energy and Environmental Protection for the State of Connecticut (“DEEP”DEEP.”). We were required, as part of the purchase of the land, to post an $8$8.0 million surety bond, ($3.6 million of which was cash collateral), the approximate cost of previous remediation costs. The surety bond will serve either serve as collateral to the state if we do not complete the environmental remediation to state and federal requirements or be returned to us in full if remediation efforts are successful and completed.
Our remediation efforts are ongoingOn January 28, 2021, the Company’s Board of Directors accepted an offer of $2.75 million for Fintech Village, and are currently in the initial testing stage. We plansubsequently signed a non-binding sale contract on March 15, 2021. The Company is required to remove or renovate the contaminated buildings on the property and, through a third party, are currently testing levels of contaminants in the groundwater in some of the wetlands and ponds on the property. DEEP and the Environmental Protection Agency continue to monitor our remediation efforts. Although there can be no assurance, based upon the information available, we do not expect expenses associated with these activities to be material. If we elect to sell, transfer or change the use of the facility, additional environmental testing may be required. We cannot assure that we will not discover further environmental contamination, that any planned timeline for remediation will not be delayed, that we would not be required by DEEP or the EPA to incur significant expenditures for environmental remediation in the future.
Human Capital Management
Our Employees
Human Capital Resources
As of December 31, 2018,2020, we had amore than 110 employees in four countries. Within this total, 100% of 50the employee base is comprised of full-time employees including three locatedand 32.4% are in the United States.
We are an organization built on strong values, employee engagement and ownership. At our core, we are committed to our employees by providing them with an opportunity to participate in our success. By cultivating a dynamic mix of people and ideas, we enrich our businesses’ performance, the experience of an increasingly diverse employee base, and our communities’ engagement.
Human Capital Measures and Objectives
In operating our businesses, human capital measures and objectives are critical drivers of revenues and margins. We continually work to expand service offerings and geographies and seek to manage human capital resources to maximize profitability in the face of shifting client demands.
Our human capital measures and objectives include revenue per employee and profit per employee. The following table sets forthCompany is transforming itself and in a phase of rapid growth, consequently these measures may not be comparable between time periods or may be distorted by a change in the number nature of our business.
We continue to invest in the business by adding talented professionals across all of our businesses and functional areas. In 2020, we hired approximately 50 new employees.
Human Capital and Social Policies and Practices
We are committed to our people and the communities we serve, investing in our employees' long-term development and engagement by delivering training, programs and a culture where our people can thrive. We are committed to equal opportunity, diversity and other policies and practices, and an abiding pledge to community service and charity. We take seriously the health, safety and welfare
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of our employees, by functionclients, vendors and the broader communities in which we operate and are taking extraordinary measures in light of the current COVID-19 pandemic.
Environmental, Social and Governance (“ESG”) / Sustainability Information
To learn more about policies and practices and our continuing efforts related to human capital and ESG matters, please refer to our website at www.ideanomics.com for further information. You may also find our Corporate Governance Guidelines, the charters of the committees of our Board of Directors. The information contained on, December 31, 2018.
or that may be accessed through, our website, is not part of, and not incorporated into, this Annual Report on Form 10-K.
Our employees are not represented by a labor organization or covered by a collective bargaining agreement. We have not experienced any work stoppages.
We are required under PRC law to make contributions to employee benefit plans at specified percentages of employee salary. In addition, we are required by the PRC law to cover employees in the PRC with various types of social insurance. We believe that we are in compliance with the relevant PRC laws.
ITEM 1A.RISK FACTORS |
The business, financial condition and operating results of the Company may be affected by a number of factors, whether currently known or unknown, including but not limited to those described below. Any one or more of such factors could directly or indirectly cause the Company’s actual results of operations and financial condition to vary materially from past or anticipated future results of operations and financial condition. Any of these factors, in whole or in part, could materially and adversely affect the Company’s business, financial condition, results of operations and stock price. The following information should be read in conjunction with Part II—Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes in Part II—Item 8—“Financial Statements and Supplementary Data” of this Annual Report.
RISKS RELATED TO OUR BUSINESS AND STRATEGY
Substantial doubt about our ability to continue as a going concern.
This Annual Report on Form 10-K for the year ended December 31, 2018 includes disclosures and an opinion from our independent registered public accounting firm stating that our recurring losses and negative cash flows from operations raise substantial doubt about our ability to continue as a going concern. Our consolidated financial statements as of December 31, 2018 were prepared under the assumption that we will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty. As of December 31, 2018, we had accumulated deficit of $150.0 million, with liabilities of $49.8 million and cash on hand of $3.1 million.
We will need to rely on proceeds from debt and equity issuances to pay for ongoing operating expenses in order to execute its business plan. Management has taken several actions to ensure that the Company will continue as a going concern, including debit financings and reductions in YOD legacy segment related expenses and discretionary expenditures.
While we believe that our existing resources will be sufficient to fund our planned operations until March 31, 2020, we cannot provide assurances that our estimates are accurate, that we will be successful in transforming our business model or that we will be able to generate sufficient cash from operations or raise additional capital through equity and/or debt financings, collaborative or other funding arrangements with partners, or through other sources of financing on favorable terms or at all. If we are in fact unable to continue as a going concern, our shareholders may lose their entire investment in our Company.
We expect to require additional financing in the future to meet our business requirements. Such capital raising may be costly, difficult or not possible to obtain and, if obtained, could significantly dilute current stockholders’ equity interests
interests.
We must continue to rely on proceeds from debt and equity issuances to pay for ongoing operating expenses and repay existing debt in order to execute our business plan. Although we may attempt to raise funds by issuing debt or equity instruments, additional financing may not be available to us on terms acceptable us or at all or such resources may not be received in a timely manner. If we are unable to raise additional capital when required or on acceptable terms, we may be required to scale back or to discontinue certain operations, scale back or discontinue the development of new business lines, reduce headcount, sell assets, file for bankruptcy, reorganize, merge with another entity, or cease operations.
We are in the process of transforming our business model, such that there is only a limited basis to evaluate our business and prospects. This transformation may continue to evolve, and ultimately may not be successful.
We are in the process of transforming our business model to becomedevelop a next generation AI-platform for the procurement, purchase, and blockchain-enabled fintech company.financing of vehicles, charging and energy solutions for commercial fleets of Electric Vehicles. In connection with this transformation, we are in the process of considerable changes, including initiatives to assemble a new management team, reconfigure the business structure, and expand our mission and business lines. It is uncertain whether these efforts will prove beneficial or whether we will be able to develop the necessary business models, infrastructure and systems to support the business. This includes having or hiring the right talent to execute our business strategy, and building a team with the technological capability and know-how to build the products and provide the services we envision. Market acceptance of new product and service offerings will be dependent in part on our ability to include functionality and usability that address customer requirements, and optimally price our products and services to meet customer demand and cover our costs.
Although we have been operating our legacy YOD business for several years, because our new Wecast Services segment has only been developed since 2017, there is only a limited basis upon which to evaluate our business and prospects. Our future success depends, in part, on our ability to implement our business plans and complete the transformation we envision. An investor in our stock should consider the challenges, expenses, and difficulties we will face as a company seeking to provide new types of fintech solutions in a competitive market. For example, we have not generated and may never generate revenue from any AI- or blockchain-enabled products or services. Any failure to implement our business plans in accordance with our expectations may have a material adverse effect on our financial results.
Further, as digital assets and blockchain technologies become more widely available, we expect the services and products associated with them to evolve. Government regulation may cause us to potentially change our future business in order to comply fully with the federal securities and other laws as well as applicable state securities laws. As a result, to stay current with the industry, our business model may need to continue to evolve as well. From time to time, we may modify aspects four business model relating to our products and services. We cannot offer any assurance that these or any other modifications will be successful or will not have an adverse effect to our business.
Even if we implement our plan in accordance with our expectations, our assumptions regarding costs and growth of revenue may differ substantially from reality. Furthermore, even if the anticipated benefits and savings are realized in part, there may be consequences,
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internal control issues, or business impacts that were not expected. Additionally, as a result of our restructuring efforts in connection with our business transformation plan, we may experience a loss of continuity, loss of accumulated knowledge or loss of efficiency during transitional periods. Reorganization and restructuring can require a significant amount of management and other employees’ time and focus, which may divert attention from operating activities and growing our business. If we fail to achieve some or all of the expected benefits of these activities, it could have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows.
Our Such transformations may lead to a significant fluctuation in operating results are likely to fluctuate significantly and they may differvary materially from market expectations.
The success of the Company’s efforts to develop its Ideanomics Mobility business unit is highly dependent upon suitable financing structures being developed.
Our annual and quarterly operating results have varied significantlyThe market for commercial fleets of EVs is in the past,early stage of development and provides unique challenges to fleet owners trying to finance the purchase of fleets of EV and the related charging, storage and battery infrastructure. Unlike vehicles powered by Internal Combustion Engines, the power source in an EV, the battery, can be separated from the vehicle which creates unique challenges for lenders in valuing the collateral for any loan. Additionally, the market for commercial EVs is very new and consequently there is no reliable history of resale values to support lending decisions. Large scale adoption of EVs will require a range of borrowing options and loan types to be available to fund purchases and leasing of EV similar to those that currently exist to finance the purchasing and leasing of traditional internal combustion engine vehicles. Additionally, in some of the Company’s target markets there is no well developed market for lending to private enterprises and this may vary significantly infurther slow down the future, dueadoption of EVs. The Company is working with banks and insurance companies to create lending structures and pools of capital that can be used to finance fleet purchases of commercial EVs. Even if the Company can create the necessary pools of capital and lending structures there is no guarantee that any regulatory approvals required for these new structures will be obtained. If the Company is not able to develop a numbersolution for the funding of factors which could have an adverse impact on our business. Our revenue may fluctuate as we expect a disproportionate amountfleet purchases of our revenues generated from our Wecast Services segment quarter over quarter due toEVs and related charging and battery infrastructure then the customers’ seasonal demand, as normally holiday demand for consumer electronics would increase our revenue. Furthermore, as the launch dates of our new productsCompany’s Ideanomics Mobility business may not be the same as what we have planned, we expect the financial performance might fluctuate significantly depending on timing, quantitysuccessful and outcome of such product launches.generate minimal revenues and incur substantial losses.
The transformation of our business will put added pressure on our management and operational infrastructure, impeding our ability to meet any potential increased demand for our services and possibly hurting our future operating results.
Our business plan is to significantly grow our operations to meet anticipated growth in demand for the services that we offer, and by the introduction of new goods or services. Growth in our businesses will place a significant strain on our personnel, management, financial systems and other resources. The evolution of our business also presents numerous risks and challenges, including:
our ability to successfully and rapidly expand sales to potential new distributors in response to potentially increasing demand; |
the costs associated with such growth, which are difficult to quantify, but could be significant; and |
rapid technological change. |
To accommodate any such growth and compete effectively, we will need to obtain additional funding for working capital and to improve develop supply chain and logistics capabilities, information systems, procedures and controls and expand, train, motivate and manage our employees, and such funding may not be available in sufficient quantities, if at all. If we are not able to manage these activities and implement these strategies successfully to expand to meet any increased demand, our operating results could suffer.
The success of our business is dependent on our ability to hire and retain our existing key employees and to add and retain senior officers towith the specialists skills that we need for our management.
business.
We depend on the services of our key employees. Our success will largely depend on our ability to hire and retain these key employees and to attract and retain qualified senior and middle level managers to our management team. In addition, in connection with our transition to a new AI- & blockchain-enabled fintech business model, we have recruited certain members
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We have recruited executives and management both in the United States and the PRCin our operations outside of the United States to assist in our ability to manage the business and to recruit and oversee employees. While we believe we offer compensation packages that are consistent with market practice, we cannot be certain that we will be able to hire and retain sufficient personnel to support our business. In addition, severe capital constraints have limited our ability to attract specialized personnel. Moreover, our budget limitations will restrict our ability to hire qualified personnel. The loss of any of our key employees, or failure to find a suitable successor, would significantly harm our business. Our future success will also depend on our ability to identify, hire, develop and retain skilled key employees. We do not maintain key person life insurance on any of our employees. Future sales or acquisitions by us may also cause uncertainty among our current employees and employees of an acquired entity, which could lead to the departure of key employees. Such departures could have an adverse impact on our business and the anticipated benefits of a sale or acquisition.
Changes in our management team may adversely affect our operations.
Over the last several months, we have experienced turnover or changes in our senior management. On April 6, 2018, our CFO, Mr. Simon Wu announced his resignation as our CFO. On April 11, 2018, our Board of Directors (the “Board”) appointed Mr. Jason Wu to serve as interim CFO. Effective June 1, 2018, the Board appointed Mr. Federico Tovar as our new CFO. On September 10, 2018, the Board appointed Mr. Brett McGonegal as Co-CEO, and on November 14, 2018 appointed him as CEO and Director. On February 20 2019, Mr. Brett McGonegal announced his resignation as our CEO, and the Board of Directors appointed its Chief Operations Officer, Mr. Alfred Poor, as the CEO.
While we expect to engage in an orderly transition process as we integrate newly appointed officers and managers, we face a variety of risks and uncertainties relating to management transition, including diversion of management attention from business concerns, failure to retain other key personnel or loss of institutional knowledge. These risks and uncertainties could result in operational and administrative inefficiencies and added costs, which could adversely impact our results of operations, stock price and research and development of our products.
Our international operations expose us to a number of risks.
Our international activities are significant to our revenues and profits, and we plan to further expand internationally. In certain international market segments, we have relatively little operating experience and may not benefit from any first-to-market advantages or otherwise succeed. It is costly to establish, develop, and maintain international operations and platforms, and promote our brand internationally.
Our international sales and operations are subject to a number of risks, including:
local economic and political |
● | government regulation and restrictive governmental actions (such as trade protection measures, including export duties and quotas and custom duties and tariffs), nationalization, and restrictions on foreign ownership; |
restrictions on sales or distribution of certain products or services and uncertainty regarding liability for products, services, and content, including uncertainty as a result of less Internet-friendly legal systems, local laws, lack of legal precedent, and varying rules, regulations, and practices regarding the physical and digital distribution of media products and enforcement of IP rights; |
limitations on the repatriation and investment of funds and foreign currency exchange restrictions; |
limited technology infrastructure; |
environmental and health and safety liabilities and expenditures relating to the disposal and remediation of hazardous substances into the air, water and ground; |
shorter payable and longer receivable cycles and the resultant negative impact on cash flow; |
increased risk over the ability to collect accounts receivable and other amounts owed to the Company due the limited credit checking information available in some of the countries we operate in and possible difficulties to pursue legal action to collect amounts owed to us; |
● | laws and regulations regarding consumer and data protection, privacy, network security, encryption, payments, and restrictions on pricing or discounts; |
geopolitical events, including war and terrorism. |
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We may face challenges in expanding our international and cross-border businesses and operations.
As we expand our international and cross-border businesses into an increasing number of international markets, we will face risks associated with expanding into markets in which we have limited or no experience and in which we may be less well-known. We may be unable to attract a sufficient number of customers and other participants, fail to anticipate competitive conditions or face difficulties in operating effectively in these new markets. The expansion of our international and cross-border businesses will also expose us to risks inherent in operating businesses globally, including:
inability to recruit international and local talent and challenges in replicating or adapting our Company policies and procedures to different local and regional operating |
lack of acceptance of our product and service offerings; |
challenges and increased expenses associated with staffing and managing international and cross-border operations and managing an organization spread over multiple jurisdictions; |
trade barriers, such as import and export restrictions, customs duties and other taxes, competition law regimes and other trade restrictions, as well as other protectionist policies; |
differing and potentially adverse tax consequences; |
increased and conflicting regulatory compliance requirements; |
challenges caused by distance, language and cultural differences; |
increased costs to protect the security and stability of our information technology systems, IP and personal data, including compliance costs related to data localization laws; |
availability and reliability of international and cross-border payment systems and logistics infrastructure; |
exchange rate fluctuations; and |
political instability and general economic or political conditions in particular countries or regions. |
As we expand further into new regions and markets, these risks could intensify, and efforts we make to expand our international and cross-border businesses and operations may not be successful. Failure to expand our international and cross-border businesses and operations could materially and adversely affect our business, financial condition and results of operations.
Transactions conducted through our international and cross-border platforms may be subject to different customs, taxes and rules and regulations, and we may be adversely affected by the complexity of and developments in customs and import/export laws, rules and regulations in the PRC and other jurisdictions. For example, effective as of April 8, 2016, the Notice on Tax Policies of Cross-Border E-Commerce Retail Importation, or the New Cross-Border E-commerce Tax Notice, replaced the previous system for taxing consumer goods imported into the PRC and introduced a 16% value-added tax, or VAT, on most products sold through e-commerce platforms and consumption tax on high-end cosmetics.
We may also have operations in various markets with volatile economic or political environments and may pursue growth opportunities in a number of newly developed and emerging markets. These investments may expose us to heightened risks of economic, geopolitical, or other events, including governmental takeover (i.e., nationalization) of our manufacturing facilities or IP, restrictive exchange or import controls, disruption of operations as a result of systemic political or economic instability, outbreak of war or expansion of hostilities, and acts of terrorism, each of which could have a substantial adverse effect on our financial condition and results of operations. Further, the U.S. government, other governments, and international organizations could impose additional sanctions that could restrict us from doing business directly or indirectly in or with certain countries or parties, which could include affiliates.
As we acquire, dispose of or restructure our businesses, product lines, and technologies, we may encounter unforeseen costs and difficulties that could impair our financial performance
performance.
An important element of our management strategy is to review acquisition prospects that would complement our existing products, augment our market coverage and distribution ability, or enhance our capabilities. As a result, we may seek to make acquisitions of companies, products, or technologies, or we may reduce or dispose of certain product lines or technologies that no longer fit our business strategies. For regulatory or other reasons, we may not be successful in our attempts to acquire or dispose of businesses, products, or technologies, resulting in significant financial costs, reduced or lost opportunities, and diversion of management’s attention. Managing an acquired business, disposing of product technologies, or reducing personnel entails numerous operational and financial risks, including, among other things, (i) difficulties in assimilating acquired operations and new personnel or separating existing business or product groups, (ii) diversion of management’s attention away from other business concerns, (iii) amortization of acquired intangible assets, (iv) adverse customer reaction to our decision to cease support for a product, and (v) potential loss of key employees or customers of acquired or disposed operations. There can be no assurance that we will be able to achieve and manage successfully any such integration of potential acquisitions, disposition of product lines or technologies, or reduction in personnel or that our management, personnel, or systems will be adequate to support continued operations. Any such inabilities or inadequacies could have a material adverse effect on our business, operating results, financial condition, and/or cash flows.
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In addition, any acquisition could result in changes, such as potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities, the amortization of related intangible assets, and goodwill impairment charges, any of which could materially adversely affect our business, financial condition, results of operations, cash flows, and/or the price of our common stock.
We derived a substantial portion of our revenue from several major customers. If we lose any of these customers, or if the volume of business with these distribution partners decline, our revenues may be significantly affected.
We have agreements with only one distribution partner to operate all of our legacy YOD business, and in 2018, one customer individually accounted for more than 10% of third party revenue in our Wecast Services segment. Due to our reliance on those customers, any of the following events may cause a material decline in our revenue and have a material adverse effect on our results of operations:
We cannot be certain whether these relationships will continue to develop or if these significant customers will continue to generate significant revenue for us in the future.
Intellectual property litigation could cause us to spend substantial resources and could distract our personnel from their normal responsibilities.
Even if resolved in our favor, litigation or other legal proceedings relating to IP claims may cause us to incur significant expenses, and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development, sales, marketing or distribution activities. We may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources. Uncertainties resulting from the initiation and continuation of IP litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace.
Our ability to conduct our businesses may be materially adversely impacted by catastrophic events, including natural disasters, pandemics and other international health emergencies, weather-related events, terrorist attacks, and other disruptions.
We may encounter disruptions involving power, communications, transportation or other utilities or essential services depended on by us or by third parties with whom we conduct business. This could include disruptions as the result of natural disasters, pandemics, other international health emergencies, or weather-related or similar events (such as fires, hurricanes, earthquakes, floods, landslides and other natural conditions including the effects of climate change), political instability, labor strikes or turmoil, or terrorist attacks. The global coronavirus pandemic had a significant impact on global commerce. Similar potential disruptions may occur in any of the locations in which we, our counterparties or our customers do business. We continue to assess the potential impact on our counterparties and customers of such events, and what impact, if any, these events could have on our businesses, financial condition, results of operations and prospects.
If we fail to develop and maintain effective disclosure controls and an effective system of internal control over financial reporting, our ability to accurately and timely report our financial results or prevent fraud may be adversely affected, and investor confidence and market price of our shares may be adversely impacted.
Our reporting obligations as a public company place a significant strain on our management and our operational and financial resources and systems and will continue to do so for the foreseeable future. We are subject to Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”Act,”), which requires us to maintain internal control over financial reporting and to report any material weaknesses in such internal control. Material weaknesses and significant deficiencies may be identified during the audit process or at other times. In 2016, a material weakness was identified in the internal control over financial reporting related to the design, documentation and implementation of effective internal controls for the review of the cash flow forecasts used in the accounting for licensed content recoverability. Specifically, we did not design and maintain effective internal controls related to management’s review of the data inputs and assumptions used in our cash flow forecasts for licensed content recoverability. As of December 31, 2017, management concluded that our internal control over financial reporting was ineffective because this material weakness related to the design, documentation and implementation of effective internal controls over the review of the cash flow forecasts used in the accounting for licensed content recoverability still existed at the time effectiveness was re-tested. See Part II—Item 9A—“Controls and Procedures.”
If we fail to remediate this material weakness, or to develop and maintain effective internal control over financial reporting, in the future, our management may not be able to conclude that we have effective internal control over financial reporting at a reasonable assurance level. This could in turn result in the loss of investor confidence in the reliability of our financial statements. If we fail to timely achieve and maintain the adequacy of our internal control over financial reporting, we may not be able to produce reliable financial reports. Any failure to improve and maintain the effectiveness of our internal controls over financial reporting could lead to future errors in our financial statements that could require a restatement or untimely filings, which could cause investors to lose confidence in our reported financial information, and result in a decline in our stock price.
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The Sarbanes-Oxley Act also requires that we maintain effective disclosure controls and procedures. As a publicly traded company, we are required to file periodic reports containing our consolidated financial statements with the SEC within a specified time following the completion of quarterly and annual periods. Maintaining effective disclosure controls and procedures is necessary to identify information we must disclose in our periodic reports. Our disclosure controls and procedures have been ineffective in the past, and to the extent that our disclosure controls and procedures are found to be ineffective in the future, such finding could result in the loss of investor confidence in the reliability of our disclosures, harm our business, and negatively impact the trading price of our common stock.
We are currently, and may in the future be, subject to substantial litigation, investigations and proceedings that could cause us to incur significant legal expenses and result in harm to our business.
The Company and certain of its former officers and directors are defendants in a purported class action captioned Rudani v. Ideanomics, Inc., et al, pending in the United States District Court for the Southern District of New York against the Company. The Amended Complaint alleges violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934. Among other things, the Amended Complaint alleges purported misstatements made by the Company in 2017 and 2018. The Company and certain of its current and former officers and directors are also defendants in a consolidated purported securities class action captioned In Re Ideanomics, Inc. Securities Litigation, pending in the United States District Court for the Southern District of New York, which alleges violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 arising from certain purported misstatements by the Company beginning in March 2020 regarding its MEG division. The Company is also a nominal defendant, and certain of its former officers and directors are named as defendants, in a consolidated shareholder derivative action pending in the United States District Court for the Southern District of New York, captioned In re Ideanomics, Inc. Derivative Litigation which alleges violations of violations of Section 14(a) of the Securities Exchange Act of 1934, breach of fiduciary duties, unjust enrichment, abuse of control, gross mismanagement, and corporate waste and seeks monetary damages and other relief on behalf of the Company. The Company is also a nominal defendant, and certain of its former officers and directors are named as defendants, in a shareholder derivative action pending in the United States District Court for the District of Nevada, captioned Zare v. Wu, et al., 20-cv-608, which alleges breach of fiduciary duties, gross mismanagement, and contribution against certain defendants under Section 10(b) and 21D of the Securities Exchange Act of 1934. While the Company believes that these lawsuits are without merit and plans to vigorously defend itself against these claims, there can be no assurance that the Company will prevail in the lawsuits. The Company cannot currently estimate the possible loss or range of losses, if any, that it may experience in connection with these litigations. There is currently a mediation scheduled for April 2021 for all of the pending actions that have been filed and discussed above.
As reported previously, the Company is subject to an investigation by the SEC and has responded to various information requests and subpoenas from the SEC. The Company is fully cooperating with the SEC’s requests, and cannot predict the outcome of this investigation.
We are exposed to potential liabilities and reputational risk associated with litigation, regulatory proceedings and government investigations and enforcement actions. In addition, we are obligated to indemnify and advance expenses to certain individuals involved in certain of these proceedings. Further, volatility in our stock price may also make us vulnerable to future class action litigation. Any adverse judgment in or settlement of any pending or any future litigation or investigation could result in payments, fines and penalties that could adversely affect our business, results of operations and financial condition. Regardless of the merits of the claims and the outcome, legal proceedings have resulted in, and may continue to result in, significant legal fees and expenses, diversion of management’s time and other resources, and adverse publicity. Such proceedings could also adversely affect our business, results of operations and financial condition.
RISKS RELATED TO OUR WECAST SERVICES SEGMENTIDEANOMICS MOBILITY BUSINESS UNIT
We experience significant competitive pressure in the Wecast Services segment,Ideanomics Mobility business unit, which may negatively impact our business, financial condition, and results of operations.
We will face significant competition with respect to the products and services we plan to offerThe Company’s Ideanomics Mobility business unit is operating in the blockchain-fleet commercial EV market globally. The commercial EV market is still in its development stage and AI-enabled fintech business we are building,the rate at which the operators of fleets of commercial vehicles replace their internal combustion engine (ICE) vehicles with EV is very dependent upon (i) environmental and we currently face significant competition with respectclean air regulations that mandate conversion to EV, (ii) the businesses we operatesubsidies that generate revenue for our Company.
Our long term strategic goal isgovernment bodies make available to leverage blockchain-cover the cost of conversion and AI-based fintech solutions(iii) the availability of financing to offer productscover some or all of the cost of conversion, (iv) regulations governing the amount of locally manufactured content required in vehicles sold in a particular market, (v) the availability of charging and services that will bring transparency, efficiencybattery swap infrastructure, (vi) the rate at which EV technologies evolve.
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Environmental and cost savingsclean air regulations drive the timing and rate at which fleet operators convert to various markets, including logistics managementEV and finance, consumer products, media,by extension the size of the market and financial services. We therefore face significant competitive pressure not only with other developersthe type of blockchain and AI technologies in the fintech space, but also in the markets for the products and services we offer or plan to offer, which are very competitive and subject to rapid technological advances, new market entrants, non-traditional competitors, changes in industry standards and changes in customer needs and consumption models.
The blockchain industry is densely populated by companies touting blockchain capabilities, including Smart Valor, Polymath, tZero and Consensys, among others. Our competitors, both in the fintech space and in the markets we plan to service, may introduce new platforms and solutionsvehicles that are superior to ours, or may offer additional, vertically integrated productsin demand at any time. The Company’s revenues and services that we do not yet plan to provide. Certain competitors may have entered these spaces much earlier than us, may be better capitalized, may have more industry connections, and may be able to adapt more quickly to new technologies or may be able to devote greater resources to the development, marketing and sale of their products than we can. In addition, we are competing not only with respect to potential business, but with respect to the acquisition of novel and effective technologies, receipt of required regulatory approvals and retention of human capital and talent.
In addition, the fintech market in general is seeing myriad new capabilities and solutions introduced by large established companies, such as IBM, Google and Amazon, as well as smaller emerging companies. These technologies may rely on blockchain technology or AI, as well as other innovative technologies such as machine learning or big data. As we apply our blockchain-and AI-based fintech solutions to the finance industry, we will compete with private and public financial institutions, investment banks, broker-dealers and financial consulting firms, among other institutions, that may have their own proprietary solutions (including trading platforms, web based and mobile algorithm trading platforms, social trading platforms, high-frequency trading platforms, back office solutions, risk management tools, and other software), and that may offer regulated services that we do not at this time plan to offer (including underwriting services, advisory services, and investment management services). Other potential competitors include national securities exchanges that may be developing blockchain-based solutions and other regulated securities exchange industry participants, including ATSs, market makers and other execution venues.
In addition, the logistics management and financing industries have been increasingly competitive. Through our joint ventures, we offer services covering a range of supply chain operations, including in the crude oil trading and consumer electronics industries. On the logistics management side, we also face competition from manufacturing services, third party logistics providers, and supply chain management companies. On the logistics financing side, we believe our primary competitors in this space will be supply chain finance solutions providers in the B2B Supply Chain marketplace, such as Longfin Corp. as well as those in the commodities financing and trading space, including companies such as the conglomerate ABCD (comprised of Archer Daniels Midland Company, Bunge Ltd., Cargill Inc., and Louis Dreyfus Company) and Xpansiv.
Our failure to maintain and enhance our competitive position could adversely affect our business and prospects. Furthermore, our efforts to compete in the marketplace could cause deterioration of gross profit margins and, thus, overall profitability.
There can be no assurance that we will ever develop, issue or support the trading of securitized digital assets, or that we or our partners will build blockchain-based trading and logistics management platforms, or that any such products will be well received.
We intend to securitize assets that may be owned by third parties or owned by our Company, to encode such securitized assets as digital tokens using blockchain technology, and to support the issuance and trading of such securitized digital assets. As part of our larger blockchain strategy, we also intend to enter into joint ventures, strategic investments and partnerships to explore the application of blockchain technologies to logistics management. There can be no assurance that we will ever develop, issue or support the trading of any securitized digital assets, whatsoever, or that we will ever develop a blockchain or AI enabled logistics management platform. Should we fail to do so, our financial positionprofits may be adversely affected.
Evenimpacted if we do succeed in developing digital securitized assets, there can be no assurance that investors will be interested in purchasing such digital securitized assets, or that a robust ecosystem for their trading on our platforms will develop. For example, established financial institutions may refuse to process the digital assets for these transactions, process wire transfers, or maintain accounts for entities transacting in our digital assets. Conversely, a significant portion of demand for any digital securitized assets we develop may be generated by speculators and investors seeking to profit from the short- or long-term holding of our digital assets. Price volatility undermines the exchange of these digital assets and the liquidity of the digital assets we original may always be low, further fueling price volatility. Increased volatility may leadEV is lower than expected due to a reductionchange in regulation or regulations favor conversion of vehicle types that have lower profit margins.
Converting fleets to EV is very capital intensive and most operators require substantial amounts of funding in the valueform of the digital securitized assets we develop, which could adversely impact the valuegovernment and municipal subsidies and bank financing. The amount and form of any digital securitized assets we originate based on our own assets, and which could reduce demands for our digital financial services by reducing interest in using digital assets as a mean of creating liquidity from others’ owned assets.
In addition, the blockchain-enabled platforms and software upon which our products and services will be based, are in their early stages. Despite the efforts of our strategic partners and joint ventures to develop and complete the launch of, and subsequently to maintain, blockchain platforms for digital token trading and logistics management, it is possible that they will experience malfunctions or otherwise fail to be adequately secured and maintained. We may not have or may not be able to obtain the technical skills, expertise, or regulatory approvals needed to successfully develop blockchain platforms and products, including digital assets, and progress them to a successful launch. In addition, there are significant legal and regulatory considerations that will need to be addressed in order to develop and maintain a blockchain, and addressing such considerations will require significant time and resources. There can be no assurance that we will be able to develop the blockchain platform in such a way that achieves all of the features we anticipate that it will provide, or that the features provided will be sufficient to attract a significant number of users such that the blockchain platform will be widely adopted.
Blockchain technology and tokenized assetssubsidies are subject to a numberchange from time to time as government bodies adjust subsidies to influence consumer behavior. The mechanisms for financing of inherent risks that may impact our abilityEV are still being developed and large scale conversion from internal combustion engines to provideEV is highly dependent upon the services we are developingamount and adversely affect an investment in us.terms of financing available for the conversion to EV.
Blockchain technology and tokenized assets are subject to a number of inherent risks, including reliability risks, security risks, and risks associated with human error, that may impact our ability to provide the services we are developing. For example, a blockchain platform’s functionality depends on the Internet, and a significant disruption in Internet connectivity could disrupt a platform’s operations until the disruption is resolved; such disruption may have an adverse effect on the value of the digital assets traded on a platform. In addition, a hacking or service attack on a platform may cause temporary delays in block creation on the blockchain and in the transfer of digital assets recorded on the chain. Any disruptions, attacks or other security breaches, or the perception that our blockchain technology is unreliable for any reason, may have a material adverse effect on the value of the digital assets, investment in the digital assets and the operations and success of our business operations and financial results.
In addition, tokenized digital assets based on blockchain technology can only be transferred with the private key associated with a platform’s address in which the digital assets are held. We intend to safeguard and securely store the private keys associated with a platform’s addresses by engaging a custodian. To the extent a private key is lost, destroyed, or otherwise compromised and no backup of the private key is accessible, the custodian will be unable to transfer the digital assets held in a platform’s addresses associated with that private key. Consequently, the digital assets associated with such address will effectively be lost, which would adversely affect an investment in digital assets.
We and our digital asset customers may be subject to the risks encountered by the digital asset exchanges we partner with, including a malicious hacking, sale of a digital asset exchange, loss of the digital assets by the exchange, and other risks. Many digital asset exchanges do not provide insurance and may lack the resources to protect against hacking and theft. If a material amount of our digital assets or the digital assets of our customers are held by exchanges, we and our customers may be materially and adversely affected if an exchange suffers a cyberattack or incurs financial problems
Further, the recording of digital asset transactions are not, from an administrative perspective, reversible without the consent and active participation of the recipient of the transaction or, in theory, control or consent of a majority of the processing power on a certain blockchain platform. Once a transaction has been verified and recorded in a block that is added to the blockchain, an incorrect transfer of digital assets or a theft of such digital assets generally will not be reversible. We, our customers and our partners may not be capable of seeking compensation for any such transfer or theft. It is possible that, through computer or human error, or through theft or criminal action, digital assets could be transferred in incorrect amounts or to unauthorized third parties. To the extent that we, our customers or our partners are unable to seek a corrective transaction with such third party or are incapable of identifying the third party that has received the digital assets through error or theft, we, our customers or our partners will be unable to revert or otherwise recover incorrectly transferred digital assets. To the extent that we, our customers and our partners are unable to seek redress for such error or theft, such loss could adversely affect our reputation and our business.
The growth of the blockchain industry in general, as well as the blockchain networks, is subject to a high degree of uncertainty.
The factors affecting the further development of the digital asset industries, as well as blockchain networks, include uncertainty regarding:
The digital assets industries as a whole have been characterized by rapid changes and innovations and are continually evolving. Although blockchain networks and blockchain assets have experienced significant growth in recent years, the slowing or stopping of the development, general acceptance and adoption and usage of these networks and assets may materially adversely affect our business plans and results of operations.
We currently have limited intellectual property rights related to our new Wecast Services segment,Ideanomics Mobility business unit, and primarily rely on third parties through joint venturesagreements with them to conduct research and development activities and protect proprietary information.
Although we believe our success will depend in part on our ability to acquire, invest in or develop proprietary technology to effectively compete with our competitors, we currently have, and for the foreseeable future will have, limited direct IP rights related to our new Wecast Services segment.Ideanomics Mobility business unit. The IP relevant to the products and services we plan to provide is held primarily by joint ventures andthird-parties, including our strategic partners. Accordingly, we will rely on these third parties for research and development activities, which will present certain risks. For example, we will have limited control over the research and development activities of the business of our joint ventures,partners, and may require licenses from these third parties if we wish to develop products directly. If our joint venturethese businesses are unable to effectively maintain a competitive edge relative to the market with their technologies and IP, it may adversely affect our business and financial position.
Our reliance on third parties also presents risks related to ownership, use and protection of proprietary information. We are required to rely on the terms of the joint venture andrelated agreements, including the partnership agreements to protect our interests, as well as our joint ventures’investments and partners’ trade secret protections, non-disclosure agreements, and invention assignment agreements to protect confidential and proprietary information. If the IP and other confidential information of our joint venturesinvestments and strategic partners are not adequately protected, competitors may be able to use their proprietary technologies and information, thereby eroding any competitive advantages that IP provides to us.
Domestic and international regulatory regimes governing blockchain technologies, digital assets, distribution and utilization of digital assets is uncertain, and new regulations or policies may materially adversely affect the development and the value of certain digital assets.
Blockchain and distributed ledger platforms are recent technological innovations, and the regulatory schemes to which digital assets may be subject have not been fully explored or developed. Regulation of digital assets varies from country to country as well as within countries. In some cases, existing laws have been interpreted to apply to blockchain-based technologies and digital assets, and in other cases, jurisdictions have adopted laws, regulations or directives that specifically affect digital assets, and some jurisdictions have not taken any regulatory stance on digital assets and or have explicitly declined to apply regulation. Accordingly, there is no clear regulatory framework applicable to blockchain platforms or digital asset products, and laws that do apply at times may overlap or change. Regulation in these areas is likely to rapidly evolve as government agencies take regulatory action to monitor companies and their activities with respect to these areas.
Various legislative and executive bodies in the United States and in other countries may in the future adopt laws, regulations, or guidance, or take other actions, which may severely impact the operability of blockchain platforms and the permissibility of digital assets generally, the technology behind the assets, or the means of transacting or in transferring such assets. Failure by us to comply with any laws, rules and regulations, some of which may not yet exist or are subject to interpretation and may be subject to change, could result in a variety of adverse consequences, including civil penalties and fines.
Digital assets are novel and the application of U.S. federal and state securities laws is unclear in many respects. Digital assets are not traditional investment securities and issues that might be resolved with traditional securities may not be resolved with digital assets if the offer or sale of such digital assets is not made in full compliance with applicable registration exemptions or the federal securities laws, the token issuer may be in violation of such laws. It is possible that regulators may interpret laws in a manner that adversely affects a digital asset’s value.
Blockchain-enabled networks and distributed ledger technologies also face an uncertain regulatory landscape in many foreign jurisdictions, including the PRC. Various foreign jurisdictions may, in the near future, adopt laws, regulations or directives that may conflict with those of the United States or may directly and negatively impact our business. The effect of any future regulatory change is impossible to predict, but such change could be substantial and materially adverse to our business.
The further development and acceptance of blockchain platforms, which represent a new and rapidly changing industry, are subject to a variety of factors that are difficult to evaluate. The slowing or stopping of the development or acceptance of blockchain platforms and blockchain assets would have a material adverse effect on our business plans and could have a material adverse effect on us.
Regulatory authorities may never permit a trading system or ATS on which digital assets could trade to become operational.
In order for a securities exchange to allow U.S. investors to participate on its platform, it must register as a broker-dealer with the SEC, become a member of FINRA, file a Form ATS with the SEC and comply with Regulation ATS. DBOT, one of our joint venture investments, has filed an initial operations report on Form ATS to give notice of operations of DBOT ATS. Our investment in DBOT’s ATS is not approved by the SEC or FINRA. If FINRA, the SEC or any other regulatory authority objected to such system, such regulatory authorities could prevent the system from ever becoming operational.
If the digital assets we develop are considered to be derivatives or commodities, we may be subject to the provisions of the Commodities Exchange Act and the CFTC regulations.
The CFTC has defined “virtual currencies” as a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value, but does not have legal tender status in any jurisdiction. The CFTC has considered digital assets as commodities or derivatives, depending on the facts of the offering. If we facilitate borrowing transactions that permit the trading of the securitized digital assets we develop on a “leveraged, margined or financed basis,” we must comply with the provisions of the Commodities Exchange Act and CFTC regulations. Any regulatory issues encountered with respect to compliance with these regulations and laws would have a material adverse impact on our financial position.
In addition, the Federal Energy Regulatory Commission, the CFTC and the Federal Trade Commission hold statutory authority to monitor certain segments of the physical energy commodities markets. The trading of digital assets linked to such energy commodities may be subject to such regulations. To the extent that any digital asset is deemed to fall within the definition of a commodity future, such as those represented by oil or energy assets, pursuant to subsequent rulemaking by the CFTC, we and/or the issuer of such digital asset may be required to register and comply with additional regulation under the CEA. Moreover, we or the issuer may be required to register as a commodity pool operator and register the platform, or such other entity created to hold the digital assets, as a commodity pool with the CFTC through the National Futures Association. Such additional registrations may result in extraordinary expenses to us, and adversely impact the value of our common stock.
If regulatory changes or interpretations of our activities require the registration as a MSB under the regulations promulgated by FinCEN under the authority of the U.S. Bank Secrecy Act, or licensing as a MT (or equivalent designation) under state law in any state in which we operate, compliance with these requirements would result in extraordinary expenses to us or the termination of our Company.
To the extent that our activities cause our Company to be deemed a MSB under the regulations promulgated by FinCEN under the authority of the U.S. Bank Secrecy Act, we may be required to comply with FinCEN regulations, including those that would mandate us to implement AML programs, make certain reports to FinCEN and maintain certain records.
To the extent that our activities cause our Company to be deemed a MT (or equivalent designation) under state law in any state in which we operates, we may be required to seek a license or otherwise register with a state regulator and comply with state regulations that may including the implementation of AML programs, maintenance of certain records and other operational requirements.
Such additional federal or state regulatory obligations may cause us to incur extraordinary expenses, possibly affecting an investment in our common stock in a material and adverse manner. Furthermore, our Company and our service providers may not be capable of complying with certain federal or state regulatory obligations applicable to MSBs and MTs. Such noncompliance or extraordinary expense to comply with regulations may have an adverse effect on the value of our common stock and affect the financial position of the business.
We will face additional risks associated with the businesses of the Industry Ventures we own or operate.
While we believe that our principal growth potential lies in our ability to apply blockchain- and AI-based technologies to bring transparency, efficiency and cost savings to various markets, including logistics management and finance, consumer products, and financial services, we also intend to own and operate various businesses, which we refer to as our Industry Ventures, to synergistically benefit from and enhance the performance of the technologies in our Fintech Ecosystem. Accordingly, we will be subject to various risks associated with the industries in which those Industry Ventures operate. For example, for as the commodities trading component of the logistics management and financing businesses we acquired in 2017 provided 95.6% and 100.0% of our revenue for the year ended December 31, 2017 and 2018, respectively, our ability to report revenues in the near term, as well as potential liabilities to our Company overall, will be tied to risks associated with buying, selling and shipping crude oil, many of which may be outside of our control, such as volatility in shipping rates, the market cost for crude oil, compliance with safety, environmental and other governmental requirements and related costs, and import and export control risks.
RISKS RELATED TO DOING BUSINESS IN THE PRC AND TO OUR LEGACY YOD BUSINESS
U.S. financial regulatory and law enforcement agencies, including without limitation the SEC, U.S. Department of Justice and U.S. national securities exchanges, have limited ability, and in fact may have no ability, to conduct investigations within the PRC concerning our Company, our PRC-based officers, directors, market research services or other professional services or experts.
A substantial part of our assets and our current operations are conducted in the PRC, and some of our officers, directors and other professional service providers are nationals and residents of the PRC. U.S. financial regulatory and law enforcement agencies, including without limitation the SEC, U.S. Department of Justice and U.S. national securities exchanges, have limited ability, and in fact may have no ability, to conduct investigations within the PRC concerning our Company, and the PRC may have limited or no agreements in place to facilitate cooperation with the SEC’s Division of Enforcement for investigations within its jurisdiction.
Adverse changes in political, economic and other policies of the Chinese government could have a material adverse effect on the overall economic growth of the PRC, which could materially and adversely affect the growth of our business and our competitive position.
Our business operations are conducted inhave a material dependency on the PRC.PRC for both revenues generated with the PRC and as a source of finished products and components for our global operations. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in the PRC. The Chinese economy differs from the economies of most developed countries in many respects, including:
the degree of government involvement; |
the level of development; |
the growth rate; |
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the control of foreign exchange; |
the allocation of resources; |
an evolving and rapidly changing regulatory system; and |
a lack of sufficient transparency in the regulatory process. |
While the Chinese economy has experienced significant growth in the past 30 years, growth has been uneven, both geographically and across various sectors of the economy. The Chinese economy has also experienced certain adverse effects due to the global financial crisis. In addition, the growth rate of the PRC’s gross domestic product has materially slowed in recent years, to 6.6% in 2018, according to the National Bureau of Statistics of China. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall Chinese economy, but may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments, foreign currency exchange restrictions or changes in tax regulations that are applicable to us.
The Chinese economy has been transitioning from a planned economy to a more market-oriented economy. Although in recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of the productive assets in the PRC is still owned by the Chinese government. The continued control of these assets and other aspects of the national economy by the Chinese government could materially and adversely affect our business. The Chinese government also exercises significant control over Chinese economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.
Any adverse change in the economic conditions or government policies in the PRC could have a material adverse effect on overall economic growth, which in turn could lead to a reduction in demand for our products and consequently have a material adverse effect on our businesses.
Uncertainties with respect to the PRC legal system could limit the legal protections available to you and to us, which could cause material adverse effects to our business operations.
We conduct part of our business through our subsidiaries and VIEs in the PRC. Our subsidiaries and VIEs are generally subject to laws and regulations applicable to foreign investments in the PRC and, in particular, laws applicable to FIEs. The PRC legal system is based on written statutes, and prior court decisions may be cited for reference but have limited precedential value. Since 1979, a series of new PRC laws and regulations have significantly enhanced the protections afforded to various forms of foreign investments in the PRC. For example, on January 19, 2015, MOFCOM publishedHowever, there could be a draftchange of the PRC law on Foreign Investment (Draft for Comment), of the Draft Foreign Investment Law, which was open for public comments until February 17, 2015. At the same time, MOFCOM published an accompanying explanatory note of the Draft Foreign Investment Law, or the Explanatory Note, which contains important information about the Draft Foreign Investment Law, including its drafting philosophy and principles, main content, plans to transition to the new legal regime and treatment of business in the PRC controlled by FIEs, primarily through contractual arrangements such as VIE arrangements. The Draft Foreign Investment Law is intended to replace the current foreign investment legal regime consisting of three laws: the Sino-Foreign Equity Joint Venture Enterprise Law, the Sino-Foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-Invested Enterprise Law, as well as detailed implementing rules. The Draft Foreign Investment Law proposes significant changes to the PRC foreign investment legal regime and may have a material impact on Chinese companies listed or to be listed overseas. The proposed Draft Foreign Investment Law is to regulate FIEs the same way as PRC domestic entities, except for those FIEs that operate in industries deemed to be either “restricted” or “prohibited” in a “Negative List.” As the Negative List has yet to be published, it is unclear whether it will differ from the current list of industries subject to restrictions or prohibitions on foreign investment. The Draft Foreign Investment Law also provides that only FIEs operating in industries on the Negative List will require entry clearance and other approvals that are not required of PRC domestic entities. As a result of the entry clearance and approvals, certain FIEs operating in industries on the Negative List may not be able to continue to conduct their operations through contractual arrangements. Moreover, it is uncertain whether business industries in which our VIEsChina subsidiaries operate will be subject to the foreign investment restrictions or prohibitions set forth in the Negative List to be issued.prohibitions.
The Draft Foreign Investment Law has not taken a position on what actions will be taken with respect to the existing VIE structures, while it is soliciting comments from the public on this point by illustrating several possible options. Under these varied options, a company that has a VIE structure and conducts the business on the Negative List at the time of enactment of the new Foreign Investment Law has either the option or obligation to disclose its corporate structure to the authorities, while the authorities may either permit the company to continue to maintain the VIE structure (if the company is deemed ultimately controlled by PRC nationals), or require the company to dispose of its businesses and/or VIE structure based on circumstantial considerations. The Draft Foreign Investment Law also provides that only FIEs operating in industries on the Negative List will require entry clearance and other approvals that are not required of PRC domestic entities. As a result of such entry clearance and approvals or certain restructuring of our corporate structure and operations, to be completed by companies with existing VIE structure like us, we face substantial uncertainties as to whether these actions can be timely completed, or at all, and our business and financial condition may be materially and adversely affected.
Although the overall effect of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign investment in the PRC, the PRC has not developed a fully integrated legal system. Recently enacted laws, rules and regulations may not sufficiently cover all aspects of economic activities in the PRC or may be subject to significant degree of interpretation by PRC regulatory agencies and courts. Since the PRC legal system continues to evolve rapidly, the interpretations of many laws, regulations, and rules are not always uniform, and enforcement of these laws, regulations, and rules involve uncertainties, which may limit legal protections available to you and to us. In addition, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all, and which may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until after the occurrence of the violation.
In addition, any litigation in the PRC may be protracted and result in substantial costs and diversion of resources and management’s attention. In addition, some of our executive officers and directors are residents of the PRC and not of the United States, and substantially all the assets of these persons are located outside the United States. As a result, it could be difficult for investors to affect service of process in the United States or to enforce a judgment obtained in the United States against our Chinese operations and entities.
In order to comply with PRC regulatory requirements, we operate our legacy YOD businesses through companies with which we have contractual relationships. By virtue of these contractual relationships, we control the economic interests and have the power to direct the activities of these entities, and are therefore determined to be the primary beneficiary of these entities, but we do not have any equity ownership interest in these entities. If the PRC government determines that our contractual agreements with these entities are not in compliance with applicable regulations, our business in the PRC could be materially adversely affected.
We do not have direct or indirect equity ownership of our VIEs, which collectively operate all of our legacy YOD businesses in the PRC, but instead have entered into contractual arrangements with our VIEs and each of its individual legal shareholder(s) pursuant to which we received an economic interest in, and have the power to direct the activities of the VIEs, in a manner substantially similar to a controlling equity interest. Although we believe that our business operations are in compliance with the current laws in the PRC, we cannot be sure that the PRC government would view our operating arrangements to be in compliance with PRC regulations that may be adopted in the future. If we are determined not to be in compliance, the PRC government could levy fines, revoke our business and operating licenses, require us to restrict or discontinue our operations, restrict our right to collect revenues, require us to restructure our business, corporate structure or operations, impose additional conditions or requirements with which we may not be able to comply, impose restrictions on our business operations or on our customers, or take other regulatory or enforcement actions against us that could be harmful to our business. As a result, our legacy YOD business in the PRC could be materially adversely affected.
We rely on contractual arrangements with our VIEs for our operations, which may not be as effective for providing control over these entities as direct ownership.
Our legacy YOD operations and financial results are dependent on our VIEs in which we have no equity ownership interest and must rely on contractual arrangements to control and operate the businesses of our VIEs. These contractual arrangements may not be as effective for providing control over the VIEs as direct ownership. For example, the VIEs may be unwilling or unable to perform its contractual obligations under our commercial agreements. Consequently, we may not be able to conduct our operations in the manner currently planned. In addition, the VIEs may seek to renew their agreements on terms that are disadvantageous to us. Although we have entered into a series of agreements that provide us with the ability to control the VIEs, we may not succeed in enforcing our rights under them insofar as our contractual rights and legal remedies under PRC law are inadequate. In addition, if we are unable to renew these agreements on favorable terms when these agreements expire or to enter into similar agreements with other parties, our legacy YOD business may not be able to operate or expand, and our operating expenses may significantly increase.
Our arrangements with our VIEs and its respective shareholders may be subject to a transfer pricing adjustment by the PRC tax authorities which could have an adverse effect on our income and expenses.
We could face material and adverse tax consequences if the PRC tax authorities determine that our contracts with our VIEs and their respective shareholders were not entered into based on arm’s length negotiations. Although our contractual arrangements are similar to those of other companies conducting similar operations in the PRC, if the PRC tax authorities determine that these contracts were not entered into on an arm’s length basis, they may adjust our income and expenses for PRC tax purposes in the form of a transfer pricing adjustment. Such an adjustment may require that we pay additional PRC taxes plus applicable penalties and interest, if any.
We depend upon contractual arrangements with our VIEs for the success of our legacy YOD business and these arrangements may not be as effective in providing operational control as direct ownership of these businesses and may be difficult to enforce.
Our operations are partially conducted in the PRC, where the PRC government restricts or prohibits foreign-owned enterprises from owning certain other operations in the PRC. Accordingly, we depend on our VIEs, in which we have no direct ownership interest, to provide those services through contractual agreements among the parties and to hold some of our assets. These arrangements may not be as effective in providing control over our operations through direct ownership of these businesses. Due to our VIE structure, we have to rely on contractual rights to effect control and management of our VIEs, which exposes us to the risk of potential breach of contract by the VIEs or their shareholders. A failure by our VIEs or their shareholders to perform their obligations under our contractual arrangements with them could have an adverse effect on our business and financial condition. Furthermore, if the shareholders of our VIEs were involved in proceedings that had an adverse impact on their shareholder interests in such VIEs or on our ability to enforce relevant contracts related to the VIE structure, our legacy YOD business would be adversely affected.
As all of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through either arbitration or litigation in the PRC, they would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. We would have to rely for enforcement on legal remedies under PRC law, including specific performance, injunctive relief or damages, which might not be effective. As these PRC governmental authorities have wide discretion in granting such approvals, we could fail to obtain such approval. In addition, our VIE contracts might not be enforceable in the PRC if PRC governmental authorities, courts or arbitral tribunals took the view that such contracts contravened PRC law or were otherwise not enforceable for public policy reasons. In the event we were unable to enforce these contractual arrangements, we would not be able to exert effective control over our VIEs, and our ability to conduct our legacy YOD business, and our financial condition and results of operations, would be severely adversely affected.
You may have difficulty enforcing judgments against us.
Most of our assetsoperations are located outside of the United States and a substantial part of our current operations are conducted in the PRC. In addition, some of our directors and officers are nationals and residents of countries other than the United States. A substantial portion of the assets of these persons is located outside the United States. As a result, it may be difficult for you to effect service of process within the United States upon these persons. It may also be difficult for you to enforce in U.S. courts judgments on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, that are not residents in the United States and the substantial majority of whose assets are located outside of the United States. In addition, there is uncertainty as to whether the courts of the PRC would recognize or enforce judgments of U.S. courts. Recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. Courts in the PRC may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based on treaties between the PRC and the country where the judgment is made or on reciprocity between jurisdictions. The PRC does not have any treaties or other arrangements that provide for the reciprocal recognition and enforcement of foreign judgments with the United States. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our
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directors and officers if they decide that the judgment violates basic principles of PRC law or national sovereignty, security, or the public interest. So it is uncertain whether a PRC court would enforce a judgment rendered against us by a court in the United States.
The PRC government exerts substantial influence over the manner in which we must conduct our business activities.
The PRC government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in the PRC may be harmed by changes in its laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property, and other matters. We believe that our operations in the PRC are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of the jurisdictions in which we operate may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.
Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in the PRC or particular regions thereof and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.
Our results could be adversely affected by the trade tensions between the United States and the PRC.
● | With the increasing interconnectedness of global economic and financial systems and our business related to the PRC, trade tensions between the United States and the PRC can have an immediate and material adverse impact on our business. Changes to trade policies, treaties and tariffs in the jurisdictions in which we operate, or the perception that these changes could occur, could adversely affect our international and cross-border operations, our financial condition and results of operations. For example, the U.S. administration under has advocated greater restrictions on trade generally and significant increases on tariffs on goods imported into the United States, particularly from the PRC. Such trade restrictions or tariffs could cause U.S. companies to respond by minimizing their use of Chinese suppliers, thereby moving the supply chain away from China and limiting our competitive advantage in developing our logistics management and financing business. Further, the U.S. or the PRC could impose additional sanctions that could restrict us from doing business directly or indirectly in either country. Such actions could have material adverse impact on our profitability and operations. Government regulations, both federal and municipal, that may restrict the available market for our products and services through the requirement for a minimum value of local produced content, or restrict the availability of subsidies for products that do not meet designated value for local produced content, e.g. the Buy America program. |
With the increasing interconnectedness of global economic and financial systems and our business related to the PRC, trade tensions between the United States and the PRC can have an immediate and material adverse impact on our business. Changes to trade policies, treaties and tariffs in the jurisdictions in which we operate, or the perception that these changes could occur, could adversely affect our international and cross-border operations, our financial condition and results of operations. For example, the U.S. administration under President Donald Trump has advocated greater restrictions on trade generally and significant increases on tariffs on goods imported into the United States, particularly from the PRC. Such trade restrictions or tariffs could cause U.S. companies to respond by minimizing their use of Chinese suppliers, thereby moving the supply chain away from China and limiting our competitive advantage in developing our logistics management and financing business. Further, the U.S. or the PRC could impose additional sanctions that could restrict us from doing business directly or indirectly in either country. Such actions could have material adverse impact on our profitability and operations.
The enforcement of the PRC labor contract law may materially increase our costs and decrease our net income.
The PRC adopted a new Labor Contract Law, effective on January 1, 2008, issued its implementation rules and regulations, effective on September 18, 2008, and amended the Labor Contract Law, effective on July 1, 2013. The Labor Contract Law and related rules and regulations impose more stringent requirements on employers with regard to, among other things, minimum wages, severance payment and non-fixed-term employment contracts, time limits for probation periods, as well as the duration and the times that an employee can be placed on a fixed-term employment contract. Due to the limited period of effectiveness of the Labor Contract Law, its implementation rules and regulations and its amendment, and the lack of clarity with respect to its implementation and the potential penalties and fines, it is uncertain how it will impact our current employment policies and practices. In particular, compliance with the Labor Contract Law and its implementation rules and regulations may increase our operating expenses. In the event that we decide to terminate some of our employees or otherwise change our employment or labor practices, the Labor Contract Law and its implementation rules and regulations may also limit our ability to effect those changes in a manner that we believe to be cost-effective or desirable, and could result in a material decrease in our profitability.
Future inflation in the PRC may inhibit our ability to conduct business in the PRC.
In recent years, the Chinese economy has experienced periods of rapid expansion, significant stock market volatility and highly fluctuating rates of inflation. These factors have led to the adoption by the Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. In 2010 and 2011, for example, the Chinese economy experienced high inflation and to curb the accelerating inflation, the People’s Bank of China (“PBOC”), the PRC central bank, raised benchmark interest rates three times in 2011. High inflation may in the future cause the Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in the PRC, and thereby harm the market for our products and services and our company.
Restrictions on currency exchange may limit our ability to receive and use cash generated from sales in the PRC to fund our sales effectively.
business activities outside of the PRC.
At present, a substantial part of our sales will be settled in RMB, and any future restrictions on currency exchanges may limit our ability to use revenue generated in RMB to fund any future business activities outside the PRC or to make dividend or other payments in U.S. dollars. Although the Chinese government introduced regulations in 1996 to allow greater convertibility of the RMB for current account transactions, significant restrictions still remain, including primarily the restriction that FIEs may only buy, sell or remit foreign currencies after providing valid commercial documents, at those banks in the PRC authorized to conduct foreign exchange business. In addition, foreign exchange transactions under the capital account remain subject to limitations and require approvals from, or registration with, SAFE and other relevant PRC governmental authorities and companies are required to open and maintain separate foreign exchange accounts for capital account items. This could affect our ability to obtain foreign currency through debt or equity financing for our subsidiaries and the VIEs. Recent volatility in the RMB foreign exchange rate as well as capital flight out of the PRC may lead to further foreign exchange restrictions and policies or practices which adversely affect our operations and ability to convert RMB. We cannot be certain that the Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the RMB.
Restrictions under PRC law on our PRC subsidiaries’ ability to make dividends and other distributions could materially and adversely affect our ability to grow, make investments or acquisitions that could benefit our business, pay dividends to you, and otherwise fund and conduct our business.
At present, part of our sales are earned by our PRC operating entities. However, PRC regulations restrict the ability of our PRC subsidiaries to make dividends and other payments to their offshore parent companies. PRC legal restrictions permit payments of dividends by our PRC subsidiaries only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Our PRC subsidiaries are also required under PRC laws and regulations to allocate at least 10% of their annual after-tax profits determined in accordance with PRC GAAP to a statutory general reserve fund until the amounts in said fund reaches 50% of their registered capital. Allocations to these statutory reserve funds can only be used for specific purposes and are not transferable to us in the form of loans, advances, or cash dividends. Any limitations on the ability of our PRC subsidiaries to transfer funds to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.
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Failure to comply with PRC regulations relating to the establishmentTable of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to personal liability, limit our ability to acquire PRC companies or to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute profits to us or otherwise materially adversely affect us.Contents
SAFE has promulgated several regulations, including the Notice Concerning Foreign Exchange Controls on Domestic Residents’ Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles (“Circular 75”), effective on November 1, 2005, and the Circular on Issues Concerning Foreign Exchange Administration Over the Overseas Investment and Financing and Roundtrip Investment by Domestic Residents Via Special Purpose Vehicles (“Circular 37”), effective on July 4, 2015, which replaced Circular 75. Under Circular 37, PRC residents must register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity for the purpose of holding domestic or offshore assets or interests, referred to as a “special purpose vehicle” in Circular 37. In addition, amendments to the registration must be made in the event of any material change, such as an increase or decrease in share capital contributed by the individual PRC resident shareholder, share transfer or exchange, merger, division or other material event. Failure to comply with the specified registration procedures may result in restrictions being imposed on the foreign exchange activities of the relevant PRC entity, including the payment of dividends and other distributions to its offshore parent, as well as restrictions on capital inflows from the offshore entity to the PRC entity. Further, failure to comply with the SAFE registration requirements may result in penalties under PRC law for evasion of foreign exchange regulations.
We have asked our shareholders who are PRC residents as defined in Circular 37 and related rules to register with the relevant branch of SAFE, as currently required, in connection with their equity interests in us and our acquisitions of equity interests in our PRC subsidiaries. However, we cannot provide any assurances that they can obtain the above SAFE registrations required by Circular 37 and related rules. Moreover, because Circular 37 is newly issued, there is uncertainty over how Circular 37 and related rules will be interpreted and implemented and how or whether SAFE will apply it to us, and we cannot predict how it will affect our business operations or future strategies. For example, our present and prospective PRC subsidiaries’ ability to conduct foreign exchange activities, such as the remittance of dividends and foreign currency-denominated borrowings, may be subject to compliance with Circular 37 and related rules by our PRC resident beneficial holders. In addition, such PRC residents may not always be able to complete the necessary registration procedures required by Circular 37 and related rules. We have little control over either our present or prospective direct or indirect shareholders or the outcome of such registration procedures.
We may be unable to complete a business combination transaction efficiently or on favorable terms due to complicated merger and acquisition regulations which became effective on September 8, 2006.
On August 8, 2006, six PRC regulatory agencies, including the China Securities Regulatory Commission (the “CSRC”), promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors, which became effective on September 8, 2006 and was amended in June 2009. This regulation, among other things, governs the approval process by which a PRC company may participate in an acquisition of assets or equity interests. Depending on the structure of the transaction, the regulation will require the PRC parties to make a series of applications and supplemental applications to the government agencies. In some instances, the application process may require the presentation of economic data concerning a transaction, including appraisals of the target business and evaluations of the acquirer, which are designed to allow the government to assess the transaction. Government approvals will have expiration dates by which a transaction must be completed and reported to the government agencies. Compliance with the regulation is likely to be more time consuming and expensive than in the past and the government can now exert more control over the combination of two businesses. Accordingly, due to the regulation, our ability to engage in business combination transactions has become significantly more complicated, time consuming and expensive, and we may not be able to negotiate a transaction that is acceptable to our shareholders or sufficiently protect their interests in a transaction.
The regulation allows PRC government agencies to assess the economic terms of a business combination transaction. Parties to a business combination transaction may have to submit to MOFCOM and other relevant government agencies an appraisal report, an evaluation report and the acquisition agreement, all of which form part of the application for approval, depending on the structure of the transaction. The regulation also prohibits a transaction at an acquisition price obviously lower than the appraised value of the PRC business or assets, and in certain transaction structures, may require that consideration be paid within defined periods, generally not in excess of a year. The regulation also limits our ability to negotiate various terms of the acquisition, including aspects of the initial consideration, contingent consideration, holdback provisions, indemnification provisions and provisions relating to the assumption and allocation of assets and liabilities. Transaction structures involving trusts, nominees and similar entities are prohibited. Therefore, such regulation may impede our ability to negotiate and complete a business combination transaction on financial terms that satisfy our investors and protect our shareholders’ economic interests.
Our existing contractual arrangements with Sinotop Beijing, SSF and their respective shareholders may be subject to national security review by MOFCOM, and the failure to receive the national security review could have a material adverse effect on our legacy YOD business and operating results.
In August 2011, MOFCOM promulgated the Rules of Ministry of Commerce on Implementation of Security Review System of Merger and Acquisition of Domestic Enterprises by Foreign Investors (the “Security Review Rules”) to implement the Notice of the General Office of the State Council on Establishing the Security Review System for Merger and Acquisition of Domestic Enterprises by Foreign Investors promulgated on February 3, 2011 (“Circular 6”). The Security Review Rules became effective on September 1, 2011. Under the Security Review Rules, a national security review is required for certain mergers and acquisitions by foreign investors raising concerns regarding national defense and security. Foreign investors are prohibited from circumventing the national security review requirements by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions. The application and interpretation of the Security Review Rules remain unclear. Based on our understanding of the Security Review Rules, we do not need to submit our existing contractual arrangements with Sinotop Beijing, SSF and their respective shareholders to the MOFCOM for national security review because, among other reasons, (i) we gained de facto control over Sinotop Beijing in 2010 prior to the effectiveness of Circular 6 and the Security Review Rules; and (ii) there are currently no explicit provisions or official interpretations indicating that our current businesses fall within the scope of national security review. Although we have no plan to submit our existing contractual arrangements with Sinotop Beijing and its shareholders to MOFCOM for national security review, the relevant PRC government agencies, such as MOFCOM, may reach a different conclusion. If MOFCOM or another PRC regulatory agency subsequently determines that we need to submit our existing contractual arrangements with Sinotop Beijing, SSF and their respective shareholders for national security review by interpretation, clarification or amendment of the Security Review Rules or by any new rules, regulations or directives promulgated, we may face sanctions by MOFCOM or another PRC regulatory agency. These sanctions may include revoking the business or operating licenses of our PRC entities, discontinuing or restricting our operations in the PRC, confiscating our income or the income of Sinotop Beijing and SSF, and taking other regulatory or enforcement actions, such as levying fines, that could be harmful to our business. Any of these sanctions could cause significant disruption to our legacy YOD business operations.
The Security Review Rules may make it more difficult for us to make future acquisitions or dispositions of our business operations or assets in the PRC.
The Security Review Rules, effective as of September 1, 2011, provide that when deciding whether a specific merger or acquisition of a domestic enterprise by foreign investors is subject to the national security review by MOFCOM, the principle of substance-over-form should be applied. Foreign investors are prohibited from circumventing the national security review requirement by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions. If the business of any target company that we plan to acquire falls within the scope of national security review, we may not be able to successfully acquire such company by equity or asset acquisition, capital increase or even through any contractual arrangement.
Under the Enterprise Income Tax Law, we may be classified as a “resident enterprise” of China. Such classification will likely result in dividends payable to our foreign investor and gains on sale of our common stock by our foreign investors may become subject to PRC taxation.
On March 16, 2007, the National People’s Congress of China passed a new Enterprise Income Tax law (the “EIT Law”), and on November 28, 2007, the State Council of China passed its implementing rules, which took effect on January 1, 2008. Under the EIT Law, an enterprise established outside of the PRC with “de facto management bodies” within the PRC is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define de facto management as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise.
On April 22, 2009, the State Administration of Taxation issued the Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies (the “Notice”), further interpreting the application of the EIT Law and its implementation non-Chinese enterprise or group controlled offshore entities. Pursuant to the Notice, an enterprise incorporated in an offshore jurisdiction and controlled by a Chinese enterprise or group will be classified as a “non-domestically incorporated resident enterprise” if (i) its senior management in charge of daily operations reside or perform their duties mainly in the PRC; (ii) its financial or personnel decisions are made or approved by bodies or persons in the PRC; (iii) its substantial assets and properties, accounting books, corporate chops, board and shareholder minutes are kept in the PRC; and (iv) at least half of its directors with voting rights or senior management often reside in the PRC. A resident enterprise would be subject to an enterprise income tax rate of 25% on its worldwide income and must pay a withholding tax at a rate of 10% when paying dividends to its non-PRC shareholders that do not have an establishment or place of business in the PRC or which have such establishment or place of business but the dividends are not effectively connected with such establishment or place of business, to the extent such dividends are derived from sources within the PRC. Similarly, any gains realized on the transfer of our shares by such investors is also subject to PRC tax at a current rate of 10%, subject to any reduction or exemption set forth in relevant tax treaties, if such gain is regarded as income derived from sources within the PRC. However, it remains unclear as to whether the Notice is applicable to an offshore enterprise incorporated by a Chinese natural person. Detailed measures on the imposition of tax from non-domestically incorporated resident enterprises are not readily available. Therefore, it is unclear how tax authorities will determine tax residency based on the facts of each case.
We may be deemed to be a resident enterprise by Chinese tax authorities. If the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as interest on financing proceeds and non-PRC source income would be subject to PRC enterprise income tax at a rate of 25%. Second, although under the EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification could result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC shareholders and with respect to gains derived by our non-PRC shareholders from transferring our shares.
If we were treated as a “resident enterprise” by PRC tax authorities, we would be subject to taxation in both the United States and the PRC, and our PRC tax may not be creditable against our U.S. tax.
Heightened scrutiny of acquisition transactions by PRC tax authorities may have a negative impact on our business operations or the value of your investment in us.
Pursuant to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises (“SAT Circular 698”), effective on January 1, 2008, and the Announcement on Several Issues Related to Enterprise Income Tax for Indirect Asset Transfer by Non-PRC Resident Enterprises (“SAT Announcement 7”), effective on February 3, 2015, issued by the SAT, if a non-resident enterprise transfers the equity interests of or similar rights or interests in overseas companies which directly or indirectly own PRC taxable assets through an arrangement without a reasonable commercial purpose resulting in the avoidance of PRC corporate income taxes, such a transaction may be re-characterized and treated as a direct transfer of PRC taxable assets subject to PRC corporate income tax. SAT Announcement 7 specifies certain factors that should be considered in determining whether an indirect transfer has a reasonable commercial purpose. However, as SAT Announcement 7 is newly issued, there is uncertainty as to its application and the interpretation of the term “reasonable commercial purpose.” In addition, under SAT Announcement 7, the entity which has the obligation to pay the consideration for the transfer to the transferring shareholders has the obligation to withhold any PRC corporate income tax that is due. If the transferring shareholders do not pay corporate income tax that is due for a transfer and the entity which has the obligation to pay the consideration does not withhold the tax due, the PRC tax authorities may impose a penalty on the entity that so fails to withhold, which may be relieved or exempted from the withholding obligation and any resulting penalty under certain circumstances if it reports such transfer to the PRC tax authorities.
As SAT Circular 698 and SAT Announcement 7 are relatively new and there is uncertainty over their application, we and our non-PRC resident investors may be subject to being taxed under Circular 698 and SAT Announcement 7 and may be required to expend valuable resources to comply with Circular 698 and SAT Announcement 7 or to establish that we or our non-PRC resident investors should not be taxed under Circular 698 and SAT Announcement 7, which could have a material adverse effect on our financial condition and results of operations.
We may be subject to fines and legal sanctions if we or our employees who are PRC citizens fail to comply with PRC regulations relating to employee share options.
Under the Administration Measures on Individual Foreign Exchange Control issued by the PBOC and the related Implementation Rules issued by the SAFE, all foreign exchange transactions involving an employee share incentive plan, share option plan or similar plan participated in by PRC citizens may be conducted only with the approval of the SAFE. Under the Notice of Issues Related to the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Listed Company (“Offshore Share Incentives Rule”), issued by the SAFE on February 15, 2012, PRC citizens who are granted share options, restricted share units or restricted shares by an overseas publicly listed company are required to register with the SAFE or its authorized branch and comply with a series of other requirements. The Offshore Share Incentives Rule also provides procedures for registration of incentive plans, the opening and use of special accounts for the purpose of participation in incentive plans, and the remittance of funds for exercising options and gains realized from such exercises and sales of such options or the underlying shares, both outside and inside the PRC. We, and any of our PRC employees or members of our Board who have been granted share options, restricted share units or restricted shares, are subject to the Administration Measures on Individual Foreign Exchange Control, the related Implementation Rules, and the Offshore Share Incentives Rule. If we, or any of our PRC employees or members of our Board who receive or hold options, restricted share units or restricted shares in us or any of our subsidiaries, fail to comply with these registration and other procedural requirements, we may be subject to fines and other legal or administrative sanctions.
We may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption laws, and any determination that we violated these laws could have a material adverse effect on our business.
We are subject to the Foreign Corrupt Practice Act (“FCPA”) and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute, for the purpose of obtaining or retaining business. We have operations and agreements with third parties, and make most of our sales in the PRC. The PRC also strictly prohibits bribery of government officials. Our activities in the PRC create the risk of unauthorized payments or offers of payments by the employees, consultants, sales agents, or distributors of our Company, which may not always be subject to our control. It is our policy to implement safeguards to discourage these practices by our employees. However, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants, sales agents, or distributors of our company may engage in conduct for which we might be held responsible. Violations of the FCPA or Chinese anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the U.S. government may seek to hold our Company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.
Our operations in foreign countries are subject to risks that could adversely impact our financial results, such as economic or political volatility, foreign legal and regulatory requirements, international trade factors (export controls, trade sanctions, duties, tariff barriers and other restrictions), protection of our proprietary technology in certain countries, potentially burdensome taxes, crime, employee turnover, staffing, managing personnel in diverse culture, labor instability, transportation delays, and foreign currency fluctuations.
If we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve the matter which could harm our business operations, stock price and reputation and could result in a loss of your investment in our stock, especially if such matter cannot be addressed and resolved favorably.
Over the past several years, U.S. public companies that have substantially all of their operations in the PRC, particularly companies like ours which have completed so-called reverse merger transactions, have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity is in connection with financial and accounting irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what affect this sector-wide scrutiny, criticism and negative publicity will have on our Company, our business and our stock price. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or not, we will have to expend significant resources to investigate such allegations and/or defend our Company. This situation will be costly and time consuming and distract our management from growing our Company.
The disclosures in our reports and other filings with the SEC and our other public announcements are not subject to the scrutiny of any regulatory bodies in the PRC. Accordingly, our public disclosure should be reviewed in light of the fact that no governmental agency that is located in the PRC, where part of our operations and business are located, has conducted any due diligence on our operations or reviewed or cleared any of our disclosure.
We are regulated by the SEC and our reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the SEC under the Securities Act and the Exchange Act. Unlike public reporting companies whose operations are located primarily in the United States, however, substantially all of our operations are located in the PRC, Hong Kong and Singapore. Since substantially all of our operations and business takes place outside of United States, it may be more difficult for the staff of the SEC to overcome the geographic and cultural obstacles that are present when reviewing our disclosure. These same obstacles are not present for similar companies whose operations or business take place entirely or primarily in the United States. Furthermore, our SEC reports and other disclosure and public announcements are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings are not subject to the review of the CSRC. Accordingly, you should review our SEC reports, filings and our other public announcements with the understanding that no local regulator has done any due diligence on our Company and with the understanding that none of our SEC reports, other filings or any of our other public announcements has been reviewed or otherwise been scrutinized by any local regulator.
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RISKS RELATED TO OUR STOCK
The market price of our common stock is volatile, leading to the possibility of its value being depressed at a time when you may want to sell your holdings.
The market price of our common stock is volatile, and this volatility may continue. Numerous factors, many of which are beyond our control or are not discernible or determinable by our Company, may cause the market price of our common stock to fluctuate significantly. In addition to market and industry factors, the price and trading volume for our common stock may be highly volatile for specific business reasons. Factors such as variations in our revenues, earnings and cash flow, announcements of new investments, cooperation arrangements or acquisitions, and fluctuations in market prices for our products could cause the market price for our shares to change substantially.
Securities Following periods of such volatility in the market price of a company’s securities, securities class action as well as derivative litigation ishas often institutedbeen brought against companies following periodsthat company and its officers and directors. Because of the potential volatility of the Company’s common stock price, it may become the target of securities litigation in their stock price. This type ofthe future. Securities litigation could result in substantial costs to us and divert our management’s attention and resources.
resources from its business.
Moreover, the trading market for our common stock will be influenced by research or reports that industry or securities analysts publish about us or our business. If one or more analysts who cover us downgrade our common stock, the market price for our common stock would likely decline. If one or more of these analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which, in turn, could cause the market price for our common stock or trading volume to decline.
The market price of our common stock could be also subject to volatility if the value of our business and common stock is viewed as being linked to the price and value of digital assets. A decrease in the price of a single digital asset may cause volatility in the entire digital asset and security token industry. For example, a security breach that affects purchaser or user confidence in Bitcoin or Ether may affect the industry as a whole. If investors view our business and the value of our common stock as dependent upon or linked to the value or growth of digital assets, whether or not tokenized on our blockchain platforms, the price of such digital assets may influence significantly the market price of shares of our common stock.
Furthermore, securities markets may from time to time experience significant price and volume fluctuations for reasons unrelated to operating performance of particular companies. These market fluctuations may adversely affect the price of our common stock and other interests in our Company at a time when you want to sell your interest in us.
Although publicly traded, the trading market in our common stock has been substantially less liquid than the average trading market for a stock quoted on the Nasdaq Stock Market and this low trading volume may adversely affect the price of our common stock.
Our common stock trades on the Nasdaq Capital Market. The trading volume of our common stock has been comparatively low compared to other companies listed on Nasdaq. Limited trading volume will subject our shares of common stock to greater price volatility and may make it difficult for you to sell your shares of common stock at a price that is attractive to you.
Provisions in our articles of incorporation and bylaws or Nevada law might discourage, delay or prevent a change of control of us or changes in our management and, therefore, depress the trading price of our common stock.
Our articles of incorporation authorize our Board to issue up to 50,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by the Board without further action by the shareholders. These terms may include preferences as to dividends and liquidation, conversion rights, redemption rights and sinking fund provisions. The issuance of any preferred stock could diminish the rights of holders of our common stock, and therefore could reduce the value of such common stock. In addition, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of our Board to issue preferred stock could make it more difficult, delay, discourage, prevent or make it costlier to acquire or effect a change-in-control, which in turn could prevent our shareholders from recognizing a gain in the event that a favorable offer is extended and could materially and negatively affect the market price of our common stock.
In addition, Section 78.438 of the Nevada Revised Statutes prohibits a publicly-held Nevada corporation from engaging in a business combination with an interested stockholder (generally defined as a person which together with its affiliates owns, or within the last three years has owned, 10% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder) unless the business combination is approved in a prescribed manner. The existence of the foregoing provisions and other potential anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our Company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.
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Certain of our shareholders hold a significant percentage of our outstanding voting securities.
As of March 25, 2019, Our Chairman,29, 2021, Dr. Wu, is the beneficial owners of approximately 27.7%11.1% of our outstanding voting securities (through their ownership of the Common Stock and 100% our Series A Preferred Stock, which entitle the holder to cast ten votes for every share of common stock that is issuable upon conversion of a share of Series A Preferred Stock (each share of Series A Preferred Stock is convertible into 0.1333333 shares of common stock), or a total of 9,333,330 votes). Star Thrive Group Limited is the beneficial owner of approximately 19.4% of our outstanding voting securities. Mr. Shane McMahon, our Vice Chairman, is the beneficial owner of approximately 5.2%2.2% of our outstanding voting securities. As a result, each possesses significant influence over the election of our directors and the authorization of any proposed significant corporate transactions. Their respective ownership and control may also have the effect of delaying or preventing a future change in control, impeding a merger, consolidation, takeover or other business combination or discourage a potential acquirer from making a tender offer.
We do not intend to pay dividends for the foreseeable future.
For the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and we do not anticipate paying any cash dividends on our common stock or Series A preferred stock. Accordingly, investors must be prepared to rely on sales of their common stock after price appreciation to earn an investment return, which may never occur. Investors seeking cash dividends should not purchase our common stock. Any determination to pay dividends in the future will be made at the discretion of our Board and will depend on our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our Board deems relevant. In addition, our ability to declare and pay dividends is dependent on our ability to declare dividends and profits in our PRC subsidiaries. PRC rulessubsidiaries domiciled outside of the United States. Rules in other jurisdictions may greatly restrict and limit the ability of our subsidiaries to declare dividends to us which, in addition to restricting our cash flow, limits our ability to pay dividends to our shareholders. See “—Risks Related to Doing Business in the PRC and to Our Legacy YOD Segment—Restrictions under PRC law on our PRC subsidiaries’ ability to make dividends and other distributions could materially and adversely affect our ability to grow, make investments or acquisitions that could benefit our business, pay dividends to you, and otherwise fund and conduct our business.”
Even if we are able to pay dividends on our common stock or Series A preferred stock, our Board may choose not to declare dividends on our capital stock. In addition, financing agreements that we may enter into in the future may limit our ability to pay cash dividends. Fluctuations in exchange rates could adversely affect our business and the value of our securities.
The value of our common stock will be indirectly affected by the foreign exchange rate between the U.S. dollar and RMB and between those currencies and other currencies in which our sales may be denominated. Appreciation or depreciation in the value of the RMBcurrencies in which are sales are denominated relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividend we issue that will be exchanged into U.S. dollars, as well as earnings from, and the value of, any U.S. dollar-denominated investments we make in the future.
Since July 2005, the RMB has no longer been pegged to the U.S. dollar. Although the PBOC regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.
Very limited hedging transactions are available in the PRC to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions.transactions to reduce our exposure to exchange rate fluctuations. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.
ITEM 1B.UNRESOLVED STAFF COMMENTS |
This Item 1B is not required for non-accelerated filers.The Company has no unresolved Staff Comments.
ITEM 2.PROPERTIES |
In 2018, we relocated our principal executive office from Beijing, China to New York, New York. We lease our principal executive office, which is located at 551441 Broadway, 19th Floor,Suite 5116, New York, NY 10006.10018. We lease an approximately 6,085 square foot office space in Beijing, China, which is used by both our WecastMobile Energy Group Services segmentbusiness unit and legacy YOD segmentbusiness for our PRC-based operations. In October 2018, we completed the $5.2 million acquisition of a 58-acre property located at 1700 &and 1800 Asylum Avenue in West Hartford, Connecticut, which was formerly part of the University of Connecticut campus and will be the site of our new “Fintech Village.”
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In response to the COVID-19 pandemic the company closed its New York City office at 55 Broadway in the first quarter of 2020. The current costsCompany concluded that it did not require the 55 Broadway office and terminated the lease in the third quarter of maintaining2020. The Company has entered into a short term lease for a very limited amount of office space at 1441 Broadway, New York, NY 10018. The Company has a 15 year lease on showroom and office space in the Fintech Village property are $30,000 per monthcity of Qingdao in the PRC. The Company's Tree Technologies subsidiary has office space in Kuala Lumpur in Malaysia and are expected to increase significantly dependinga long term lease on 250 acres of vacant land zoned for industrial development on the valuationGebeng Industrial Estate, Kuantan, Pahang Darul Makmur,Malaysia which is near the port of Kuantan.
Except for FinTech Village, the property for purposes of real estate taxes, expected to commence in July 2019. The value of the real estate taxes may have a material impact on the cost of our operations.
We believeCompany believes that all ourits properties have been adequately maintained, are generally in good condition, and are suitable and adequate for our business.
ITEM 3.LEGAL PROCEEDINGS |
From timeRefer to time, we may become involvedNote 19 of the Notes to Consolidated Financial Statements included in various lawsuits and legal proceedingsPart 4, Item 8 of this Annual Report on Form 10-K, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.incorporated herein by reference.
ITEM 4.MINE SAFETY DISCLOSURES |
Not applicable.
ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Price Information
OurThe Company’s common stock is quoted on the Nasdaq Capital Market under the symbol “IDEX.” Trading of our common stock is sometimes limited and sporadic. The following table sets forth, for the periods indicated, the high and low closing bid prices of ourthe Company’s common stock.
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| | Closing Bid Prices | ||||
| | High | | Low | ||
Year Ended December 31, 2020 |
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1st Quarter | | $ | 1.34 | | $ | 0.30 |
2nd Quarter | | $ | 3.29 | | $ | 0.38 |
3rd Quarter | | $ | 1.78 | | $ | 0.81 |
4th Quarter | | $ | 3.15 | | $ | 0.82 |
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Year Ended December 31, 2019 | |
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1st Quarter | | $ | 2.07 | | $ | 1.13 |
2nd Quarter | | $ | 2.46 | | $ | 1.28 |
3rd Quarter | | $ | 2.80 | | $ | 1.46 |
4th Quarter | | $ | 1.59 | | $ | 0.66 |
Closing Bid Prices | ||||||||
High | Low | |||||||
Year Ended December 31, 2018 | ||||||||
1st Quarter | $ | 4.97 | $ | 1.46 | ||||
2nd Quarter | $ | 3.15 | $ | 1.79 | ||||
3rd Quarter | $ | 5.42 | $ | 1.78 | ||||
4th Quarter | $ | 3.93 | $ | 1.14 | ||||
Year Ended December 31, 2017 | ||||||||
1st Quarter | $ | 2.21 | $ | 1.14 | ||||
2nd Quarter | $ | 3.22 | $ | 1.72 | ||||
3rd Quarter | $ | 2.65 | $ | 1.38 | ||||
4th Quarter | $ | 5.90 | $ | 1.79 |
Approximate Number of Holders of Our Common Stock
As of March 26, 2019,29, 2021, there were approximately 345365 holders of record of ourthe Company’s common stock. This number excludes the shares of ourthe Company’s common stock beneficially owned by shareholders holding stock in securities trading accounts through DTC, or under nominee security position listings.
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Dividend Policy
We haveThe Company has never declared or paid a cash dividend. Any future decisions regarding dividends will be made by ourthe Company’s Board. WeThe Company currently intendintends to retain and use any future earnings for the development and expansion of ourthe business and dodoes not anticipate paying any cash dividends in the foreseeable future. OurThe Company’s Board has complete discretion on whether to pay dividends, subject to the approval of ourthe Company’s shareholders. Even if ourthe Company’s Board decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the Board may deem relevant. In addition, ourthe Company’s ability to declare and pay dividends is dependent on ourthe Company’s ability to declare dividends and profits in ourthe PRC subsidiaries. PRC rules greatly restrict and limit the ability of ourthe Company’s subsidiaries to declare dividends to us which, in addition to restricting ourthe Company’s cash flow, limits ourits ability to pay dividends to ourits shareholders.
Securities Authorized for Issuance Under Equity Compensation Plans
See Part III—Item 12—Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters—“Securities Authorized for Issuance Under Equity Compensation Plans”.
Plans.”
Recent Sales of Unregistered Securities
WeThe Company did not sell any equity securities during the fiscal year ended December 31, 20182020 that were not previously disclosed in a quarterly report on Form 10-Q or a current report on Form 8-K that was filed during the 20182020 fiscal year.
Purchases of Equity Securities
No repurchases of ourthe Company’s common stock were made in 2018.the year ended December 31, 2020.
ITEM 6.SELECTED FINANCIAL DATA |
Not Applicable.
27
PART II
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following management’s discussion and analysis is presented in five sections as below and should be read in conjunction with our consolidated financial statements and the notes thereto and the other financial information appearing elsewhere in this report on Form 10-K. In addition to historical information, the following discussion contains certain forward-looking information. See “Special Note Regarding Forward Looking Statements” above for certain information concerning those forward-looking statements.
Overview |
Results of Operations |
Liquidity and Capital Resources |
Outlook |
Critical Accounting Policies and Estimates |
OVERVIEW
Ideanomics, is a holding company comprisedInc. (Nasdaq: IDEX) was incorporated in the State of Legacy YODNevada on October 19, 2004. From 2010 through 2017, our primary business activities were providing premium content video on demand (“VOD”) services, with primary operations in the PRC, through our subsidiaries and Wecast Servicevariable interest entities under the brand name You-on-Demand (“YOD.”) We closed the YOD business asduring 2019.
Starting in early 2017, the Company transitioned its business model to become a globalnext-generation financial technology (“Fintech”fintech”) advisory and Platform-as-a-Service company with the intent of offering customized services based on best-in-class blockchain, AI and other technologies to mature and emerging businesses across various industries. To do so, we are building a technology ecosystem through license agreements, joint ventures and strategic acquisitions, which we refer to as our Fintech Ecosystem. In parallel, through strategic acquisitions, equity investments and joint ventures, we are buildingcompany. The Company built a network of businesses, which operate across industry verticalsoperating principally in the trading of petroleum products and which we refer to as our Industry Ventures,electronic components that we believe havethe Company believed had significant potential to recognize benefits from blockchain and AI technologies that may,including, for example, enhanceenhancing operations, addressaddressing cost inefficiencies, improveimproving documentation and standardization, unlockunlocking asset value and improveimproving customer engagement. Our core business strategy is to promoteDuring 2018 the use, development and advancement of blockchain- and AI-based technologies, and our positioningCompany ceased operations in the fintech industry overall, through the creationpetroleum products and promotionelectronic components trading businesses and disposed of synergies between the businesses during 2019. As we looked to deploy fintech solutions in late 2018 and into 2019, we found a unique opportunity in the Chinese EV industry to facilitate large scale conversion of fleet vehicles from internal combustion engines to EV. This led us to establish our expanding Fintech Ecosystem and Industry Ventures network.
The year 2018 is a transformational year for the Company from the Legacy YODMEG business unit to take advantage of this opportunity, subsequently we have extended our EV business to our new fintech services business, as well as Fintech Villagethe ASEAN countries and the human capital and infrastructure needed to build outhave made an acquisition in the U.S. operations. As partin the first quarter of our transition strategy,2021.
Fintech continues to be an important area for us as we are identifying promising technologieslook to invest in and use cases for operations as a next-generation fintech company. Currently, aside from our legacy YOD segment, only the commodities trading component of the logistics management and financingdevelop businesses that we acquired in 2017 is operational and revenue generating. While we have begun phasing out ofcan improve the crude oil trading business and the electronics trading business,financial services industry, particularly as further described below, we intendit relates to continue to capitalize on our efforts and learnings from these businesses so that we can leverage the applications of our technologies and FinTech Ecosystem across this business and as part of our Industry Ventures strategy.
digital securities.
Principal Factors Affecting Our Financial Performance
Our business is expected to be impacted by both macroeconomic and Ideanomics-specific factors. The following factors have been part of the transformation of the Company which affected the results of our operations in 2018:the years ended December 31, 2020 and 2019:
Our business strategy and the primary goal for entering certain industries, such as logistics management for crude oil trading and electronics, was to learn about the needs of buyers and sellers in industries and to promote the use, development and advancement of blockchain- and AI-based technologies.
In parallel, and for strategic reasons, during the course of the fourth quarter of 2018 we also chose to focus our resources and efforts on other non-crude oil trading and non-logistics management revenue generating opportunities that we identified in the market. These new market opportunities also involve the use of our technologies in our FinTech Ecosystem and their application across Industry Ventures. We intend to continue to capitalize on our efforts and learnings from the crude oil trading business and overall logistics management business, but it is not intended to be our core business. Therefore, for comparability purposes, the financial results may not be comparable as we phase out of the logistics management business going forward.
Our ability to transform our business and to meet internal or external expectations of future performance. In connection with this transformation, we are in the process of considerable changes, which include assembling a new management team in the United States and overseas, reconfiguring our business structure, |
28
Our ability to remain competitive. |
The fluctuation in earnings resulting from |
Liquidity Improvements
In the year ended December 31, 2020, the Company improved its liquidity position by raising a total of $225.5 million: $191.4 million through the issuance of common stock and exercise of warrants, $7.1 million from noncontrolling interest shareholders, and $27.0 million through the issuance of senior secured convertible notes. The Company converted senior secured convertible notes of $34.4 million plus accrued interest of $0.3 million to common stock. Additionally, the Company converted $4.6 million of convertible notes payable and accrued interest to related parties and an additional $1.5 million due to related parties to common stock. As a result of these actions, the Company reduced its the principal amount of its indebtedness by $50.9 million, and as of December 31, 2020, had cash and cash equivalents of $165.8 million, $163.8 million of which is held in U.S. financial institutions.
Based upon its business projections and its cash and cash equivalents balance as of December 31, 2020, the Company believes it has the ability to continue as a going concern.
Effects of COVID-19
Novel Coronavirus 2019 (“COVID-19”) is an infectious disease cause by severe acute respiratory syndrome coronavirus. The disease was first identified in December 2019 in Wuhan, the capital of China’s Hubei province, and has since spread globally, resulting in the ongoing COVID-19 pandemic. As of March 21, 2021, over 122.9 million cases had been reported across the globe, resulting in 2.7 million deaths.
The spread of COVID-19 has caused significant disruption to society as a whole, including the workplace. The resulting impact to the global supply chain has disrupted most aspects of national and international commerce, with government-mandated social distancing measures imposing stay-at-home and work-from-home orders in almost every country. The effects of social distancing have shut down significant parts of the local, regional, national, and international economies, for limited or extended periods of time, with the exception of government designated essential services.
In many parts of the world, stay-at-home and work-from-home orders were relaxed during the summer of 2020 as the effects of the Coronavirus appeared to lessen, and economic activity began to recover. However, commencing in the autumn and fall of 2020, the U.S. as well as countries in Europe, South America and Asia began to experience an increase in new COVID-19 cases, and in some cases local, state, and national governments began to reinstate restrictive measures to stem the spread of the virus. The U.S. and other countries also experienced an increase in new COVID-19 cases after the fall and winter holiday season, with new, more infectious variants of COVID-19 identified. Various vaccines have been developed, with vaccinations programs in effect worldwide, though reaching acceptable levels for worldwide immunization against COVID-19 remains challenging.
The future effects of the virus are difficult to predict, due to uncertainty about the course of the virus, different variants that may evolve, and the supply of the vaccine on a local, regional, and global basis, as well as the ability to implement vaccination programs in a short time frame.
Many of the Company’s operations are in the development or early stage, have not had significant revenues to date, and the Company does not anticipate significant adverse effects on its operations’ revenue as compared to its business plan in the near- or mid-term, although the future effects of COVID-19 may result in regional restrictive measures which may constrain the Company’s operations.
29
The Company continues to monitor the overall situation with COVID-19 and its effects on both local, regional and global economies.
Information about segments
Wecast Services Segment WithinThe Company’s chief operating decision maker has been identified as the Wecast Services segment, we are engaged in the trading of (1) consumer electronics starting from January 2017, which is operated out of Hong Kong through our subsidiary, Amer;chief executive officer, who reviews consolidated results when making decisions about allocating resources and (2) crude oil trading business commenced in October 2017 when we formed our Singapore joint venture, SSE. Our end customers in our crude oil and consumer electronics trading businesses include about 15 to 20 corporations across the world. We have engaged in the crude oil trading (i.e. the sale of crude oil) and consumer electronics businesses with the primary goal of learning about the needs of buyers and sellers in industries that rely heavily on the shipment of goods in order to (i) inform our understandingassessing performance of the features a blockchain platform would need to serveCompany. Therefore, the logistics management and finance market, (ii) identify inefficienciesCompany operates in this market and (iii) generate data to support the potential future application of AI solutions.
Legacy YOD Segment
The core revenues from our legacy YOD segment have been generated both from minimum guarantee payments and revenue sharing arrangements with distribution partners as well as subscription or transactional fees from subscribers. We have run our legacy YODone segment with limited resources. Since October 2016, our legacy YOD segment has operated through a five-year partnership with Yanhua, where Yanhua acts as the exclusive distribution operator (within the PRC) of our licensed library of major studio films (the “Yanhua Partnership”). We entered into the Yanhua Partnership in order to offset losses from high upfront minimum guarantee licensing fees to studios. The Yanhua Partnership modifiedtwo business units: Ideanomics Mobility and improved our legacy major studio paid content business model by moving from a framework that included high and fixed costs and upfront minimum guaranteed payments, rising content costs from major Hollywood studios and low margins to a structure that will now include relatively nominal costs to our Company and the opportunity to reach an even wider audience. With the Yanhua Partnership, Yanhua assumed all sales and marketing costs and will pay us a minimum guarantee in exchange for a percentage of the total revenue share.
Pursuant to the Yanhua agreement, the existing legacy Hollywood studio paid content as well as other IP content specified in the agreement, along with the corresponding authorized rights letter that we are entitled to, will be transferred to Yanhua for RMB13,000,000 (approximately $2 million), to be paid in two equal installments in the amount of RMB6,500,000 (approximately $1 million). The first installment was received on December 30, 2016 and was recognized as revenue in 2017 based on the relative fair value of licensed content delivered to Yanhua. The second installment will be paid if the license content fees due to studios for the existing legacy Hollywood paid contents are settled. To date, the legacy Hollywood studio paid content and other IP has not been transferred, as the second installment was not yet made.
Ideanomics Capital.
Our Unconsolidated Equity Investments
For theThe investments where we may exercisethe Company exercises significant influence, but not control, are classified as long-term equity investments and accounted for using the equity method. Under the equity method, the investment is initially recorded at cost and adjusted for our share of undistributed earnings or losses of the investee. Investment losses are recognized until the investment is written down to nil, provided that we do not guarantee the investee’s obligations or we are committed to provide additional funding. Please referRefer to Note 10 of the Notes to Consolidated Financial Statements included in Part IV, Item 8 of this Annual Report on Form 10-K for further information.
Taxation
United States
Ideanomics, Inc., M.Y. Products, LLC, Grapevine Logic, Inc. and Red Rock Global Capital Ltd., Delaware Board of Trade Holdings, Inc., Fintech Village, LLC are United States companies subject to the provisions of the Internal Revenue Code. No provision for income taxes has been provided as neithernone of the companies had taxable profit since inception.
At the acquisition of Grapevine Logic, Inc. in 2018, deferred tax liabilities were recorded relating to intangible assets recorded for financial reporting purposes but not recognized for income tax purposes. The intangible assets consequently could not provide deductible amortization expense for income tax purposes. The deferred tax liabilities were recorded on the acquisition date to the extent that they could not be offset by usable net operating loss carryforwards acquired in the acquisition. These deferred tax liabilities were reduced, providing an income tax benefit, to the extent that the intangible assets were reduced by amortization expense and additional net operating loss carry forwards were created to offset the liabilities. These benefits include $152,875 in 2019. The 2019 amount related to activities in the first two quarters of 2019. Ideanomics, Inc. increased its ownership in Grapevine Logic, Inc. such that beginning with the third quarter of 2019, the result of which was that Grapevine Logic, Inc. activities would be included in the consolidated tax return of Ideanomics, Inc. As a result, the valuation allowance provided against Ideanomics’ deferred tax assets were reduced by $361,059, the amount of Grapevine Logic, Inc.’s remaining deferred tax liabilities as that portion of Ideanomics Inc.’s net operating loss carryovers could now be utilized to offset these liabilities.
The Tax Cut and Jobs Act (TCJA)(“TCJA”) of 2017 includes provision for Global Intangible Low-Taxed Income (GILTI)(“GILTI”) under which taxes on foreign income are imposed on the excess of a deemed return on tangible assets of certain foreign subsidiaries. TCJA also enacted the Base Erosion and Anti-Abuse Tax (BEAT)(“BEAT”) under which taxes are imposed on certain base eroding payments to related foreign companies, subject to certain requirements.
There are substantial uncertainties in the interpretation of BEAT and GILTI and while certain formal guidance has been issued by the U.S. tax authorities, there are still aspects of the TCJA that remain unclear and additional clarification is expected in 2019. Future guidance may result in changes to the interpretations and assumptions the company made and actions it may have to take, which may impact amounts recorded with respect to international provisions of the TCJA.
Based on current year financial results, the company has determined that there is no GILTI nor BEAT tax liability.
In addition, the TCJA now entitles USU.S. companies that owns 10%10.0% or more of a foreign corporation a 100% dividends-received deduction for the foreign-source portion of dividends paid by such foreign corporation. Also, net operating losses (NOLs)(“NOLs”) arising after December 31, 2017 are deductible only to the extent of 80%80.0% of the taxpayer’s taxable income, and may be carried forward indefinitely but generally not allowed to be carried back.
Cayman Islands and the British Virgin Islands
Under current laws of the Cayman Islands and the British Virgin Islands, the companyCompany is not subject to tax on its income or capital gains. In addition, dividend payments are not subject to withholding tax in the Cayman Islands or British Virgin Islands.
30
Hong Kong
The company’sCompany’s subsidiaries incorporated in Hong Kong are subject to Profits Tax of 16.5%. No provision forTax expense of $0.1 million was recorded in the year ended December 31, 2019 relating to the income on one Hong Kong Profits Tax has been made as NOLsubsidiary relating to a gain recorded on the sale of VIE related assets. All other Hong Kong subsidiaries had losses for 2019 and the resulting deferred tax assets relating to the loss carryovers were fully offset current taxable income.
by a valuation allowance.
The People’s Republic of China
Under the PRC’s Enterprise Income Tax Law, the company’s Chinese subsidiaries and VIEs are subject to an EIT of 25.0%.
The company’sCompany’s future effective income tax rate depends on various factors, such as tax legislation, geographic composition of its pre-tax income and non-tax deductible expenses incurred. The company’sCompany’s management regularly monitors these legislative developments to determine if there are changes in the statutory income tax rate.
During the year ended December 31, 2019, one of the Company’s PRC subsidiaries incurred a tax obligation of $0.6 million relating to its EV sales. The entity did not have operating loss carryovers and is not able to utilize the loss carryovers of other subsidiaries. The transactions under which the VIE agreements were terminated resulted in gains to one VIE entity, prior to deconsolidation, that triggered a tax expense of $0.2 million. Other PRC entities either had losses that created additional operating loss carryovers, where the related deferred tax assets were offset by a valuation allowance, or had income that would have resulted in a current tax liability, except that they were able to offset those liabilities with operating loss carryovers from prior years. The use of prior year carryovers, in all cases for which the related deferred tax assets all had previously been offset by a valuation allowance, avoided $0.2 million of income tax expense.
31
RESULTS OF OPERATIONS
Comparison of Years Ended December 31, 20182020 and 20172019 (USD in thousands, except per share amounts)
| | | | | | | | | | | | |
For the years ended December 31, |
| 2020 |
| 2019 |
| Amount Change |
| % Change |
| |||
Revenue | | $ | 26,759 | | $ | 44,566 | | $ | (17,807) |
| (40) | % |
Cost of revenue | |
| 24,702 | |
| 1,458 | |
| 23,244 |
| n/m | |
Gross profit | |
| 2,057 | |
| 43,108 | |
| (41,051) |
| (95) | % |
| | | | | | | | | | | | |
Operating expenses: | |
|
| |
|
| |
|
|
| | |
Selling, general and administrative expenses | | �� | 32,399 | |
| 24,862 | |
| 7,537 |
| 30 | % |
Research and development expense | |
| 1,635 | |
| — | |
| 1,635 |
| n/m | |
Professional fees | |
| 12,541 | |
| 5,828 | |
| 6,713 |
| n/m | |
Depreciation and amortization | |
| 5,310 | |
| 2,229 | |
| 3,081 |
| n/m | |
Impairment losses | |
| 42,554 | |
| 73,669 | |
| (31,115) |
| (42) | % |
Change in fair value of contingent consideration, net | |
| (5,503) | |
| 5,094 | |
| (10,597) |
| n/m | |
Total operating expenses | |
| 88,936 | |
| 111,682 | |
| (22,746) |
| (20) | % |
| | | | | | | | | | | | |
Loss from operations | |
| (86,879) | |
| (68,574) | |
| (18,305) |
| 27 | % |
| | | | | | | | | | | | |
Interest and other income (expense): | | | | | | | | | | | | |
Interest expense, net | |
| (15,970) | |
| (5,616) | |
| (10,354) |
| n/m | |
Expense due to conversion of notes | | | (2,266) | | | — | | | (2,266) | | n/m | |
Gain (loss) on extinguishment of debt | | | 8,891 | | | (3,940) | | | 12,831 | | n/m | |
Impairment of and equity in loss of equity method investees | | | (16,698) | |
| (13,718) | |
| (2,980) |
| 22 | % |
Gain (loss) on disposal of subsidiaries, net | |
| 276 | |
| (952) | |
| 1,228 |
| n/m | |
Loss on remeasurement of DBOT investment | |
| — | |
| (3,179) | |
| 3,179 |
| n/m | |
Other income (expense), net | |
| 6,603 | |
| (433) | |
| 7,036 |
| n/m | |
Loss before income taxes and non-controlling interest | |
| (106,043) | |
| (96,412) | |
| (9,631) |
| 10 | % |
| | | | | | | | | | | | |
Income tax (expense) benefit | |
| — | |
| (417) | |
| 417 |
| n/m | |
| | | | | | | | | | | | |
Net loss | |
| (106,043) | |
| (96,829) | |
| (9,214) |
| 10 | % |
| | | | | | | | | | | | |
Deemed dividend related to warrant repricing | |
| (184) | |
| (827) | |
| 643 |
| (78) | % |
| | | | | | | | | | | | |
Net loss attributable to common shareholders | |
| (106,227) | |
| (97,656) | |
| (8,571) |
| 9 | % |
| | | | | | | | | | | | |
Net (income) loss attributable to non-controlling interest | |
| 7,827 | |
| (852) | |
| 8,679 |
| n/m | |
| | | | | | | | | | | | |
Net loss attributable to IDEX common shareholders | | $ | (98,400) | | $ | (98,508) | | $ | 108 |
| 0 | % |
| | | | | | | | | | | | |
Basic and diluted loss per share | | $ | (0.46) | | $ | (0.82) | |
|
|
|
| |
Revenues (USD in thousands)
| | | | | | | | | | | | |
For the years ended December 31, |
| 2020 |
| 2019 |
| Amount Change |
| % Change |
| |||
Digital asset management services | | $ | — | | $ | 40,700 | | $ | (40,700) |
| n/m | |
Electric vehicles | | | 19,462 | | | 2,693 | | | 16,769 |
| n/m | |
Combustion engine vehicles | |
| 5,160 | |
| — | |
| 5,160 |
| n/m | |
Charging and batteries | |
| 506 | |
| — | |
| 506 |
| n/m | |
Digital advertising services | |
| 1,631 | |
| 1,173 | |
| 458 |
| 39 | % |
Total | | $ | 26,759 | | $ | 44,566 | | $ | (17,807) |
| (40) | % |
For the years ended December 31, | 2018 | 2017 | Amount Change | % Change | ||||||||||||
Revenue | $ | 377,742,872 | $ | 144,352,840 | $ | 233,390,032 | 162 | |||||||||
Cost of revenue | 374,575,038 | 137,188,393 | 237,386,645 | 173 | ||||||||||||
Gross profit | 3,167,834 | 7,164,447 | (3,996,613 | ) | (56 | ) | ||||||||||
Operating expenses: | ||||||||||||||||
Selling, general and administrative expenses | 22,471,976 | 13,129,313 | 9,342,663 | 71 | ||||||||||||
Research and development expense | 1,654,491 | 406,845 | 1,247,646 | 307 | ||||||||||||
Professional fees | 4,749,799 | 3,200,885 | 1,548,914 | 48 | ||||||||||||
Depreciation and amortization | 352,332 | 308,102 | 44,230 | 14 | ||||||||||||
Impairment of other intangible assets | 134,290 | 216,468 | (82,178 | ) | (38 | ) | ||||||||||
Total operating expenses | 29,362,888 | 17,261,613 | 12,101,275 | 70 | ||||||||||||
Loss from operations | (26,195,054 | ) | (10,097,166 | ) | (16,097,888 | ) | 159 | |||||||||
Interest and other income (expense): | ||||||||||||||||
Interest expense, net | (804,595 | ) | (94,618 | ) | (709,977 | ) | 750 | |||||||||
Change in fair value of warrant liabilities | - | (112,642 | ) | 112,642 | (100 | ) | ||||||||||
Equity in loss of equity method investees | (180,625 | ) | (129,193 | ) | (51,432 | ) | 40 | |||||||||
Loss on disposal of subsidiaries | (1,183,289 | ) | - | (1,183,289 | ) | - | ||||||||||
Others | (99,765 | ) | (426,698 | ) | 326,933 | (77 | ) | |||||||||
Loss before income taxes and non-controlling interest | (28,463,328 | ) | (10,860,317 | ) | (17,603,011 | ) | 162 | |||||||||
Income tax benefit | 40,244 | - | 40,244 | - | ||||||||||||
Net loss | (28,423,084 | ) | (10,860,317 | ) | (17,562,767 | ) | 162 | |||||||||
Net loss attributable to non-controlling interest | 996,728 | 357,268 | 639,460 | 179 | ||||||||||||
Net loss attributable to IDEX common shareholders | $ | (27,426,356 | ) | $ | (10,503,049 | ) | (16,923,307 | ) | 161 | |||||||
Basic and diluted loss per share | $ | (0.35 | ) | $ | (0.17 | ) |
32
Revenues
For the years ended December 31, | 2018 | 2017 | Amount Change | % Change | ||||||||||||
- Wecast Service | ||||||||||||||||
Crude oil | $ | 260,034,401 | $ | 19,028,003 | $ | 241,006,398 | 1,267 | |||||||||
Consumer electronics | 116,723,251 | 119,278,514 | (2,555,263 | ) | (2 | ) | ||||||||||
Other | 985,220 | 5,252,050 | (4,266,830 | ) | (81 | ) | ||||||||||
377,742,872 | 143,558,567 | 234,184,305 | 163 | |||||||||||||
-Legacy YOD | - | 794,273 | (794,273 | ) | (100 | ) | ||||||||||
Total | $ | 377,742,872 | $ | 144,352,840 | $ | 233,390,032 | 162 |
n/m = Not Meaningful
Revenue for the year ended December 31, 20182020 was $377.7$26.8 million as compared to $144.4$44.6 million for the same period in 2017,2019, a decrease of $17.8 million, or 40%. The decrease was due to a change to our business focus from digital asset management services to the EV business. The Company generated $19.5 million from the sale of EVs as compared to $2.7 million in the prior year, an increase of approximately $233.3$16.8 million. In the current year, the Company earned revenues of $5.2 million from the sale of combustion engine vehicles; the sale of combustion engine vehicles is not the Company’s primary focus, however, from time to time, the Company will sell combustion engine vehicles if a client places an order. During 2020, the Company made its first sales of charging and battery equipment. The Company believes this is very encouraging development as the provision of charging, battery and battery swap services is an important strategic focus for the Company. Revenues from Grapevine, the Company’s business focused on digital advertising services were $1.6 million as compared to $1.2 million in the prior year, an increase of $0.5 million or 162%39%. Grapevine is considered a non-core asset for Ideanomics.
The increaserevenues for the years ended December 31, 2020 and 2019 were recorded on either a Principal or Agent basis, depending on the terms of the underlying transaction, including the ability to control the product and the level of inventory risk taken. The majority of the revenue from the sale of EVs, as well as revenue from the sale of the combustion engine vehicles and charging and batteries for the year ended December 31, 2020 were recorded on a Principal basis because the Company has inventory risk in the transactions. The revenue from the sale of EVs for the year ended December 31, 2019 was mainlyrecorded on an Agent basis due to our Wecast business of crude oil trading initiated in October 2017 and partially offset in the amount of $0.8 million by a decrease of our legacy YOD business.
Our business strategy and the primary goal for entering crude oil and consumer electronic is to learn about the needs of buyers and sellers in industries that rely heavily on the shipment of goods. Our activities in the crude oil trading and consumer electronic business have been successful in various aspects. We generated revenue of $359.8 million for the first 3 quarters and have gained experience in the traditional logistics management and financing business, such that we have identified initial use cases for the applicationsterms of the technologies in our Fintech ecosystem. While we have gained this experience, the Company does not intend to be a logistics management company. Therefore, we decided to gradually start contracting our crude oil trading business and consumer electronics business starting in the third quarter of 2018 so that we can work towards enabling the application of our Fintech Ecosystem for other useful cases that we have identified. Therefore, revenue decreased by $88.3 million, from $132 million for the second quarter of year 2018 to $43.7 million for the third quarter of year 2018. During the fourth quarter of 2018, revenue further decreased to $17.0 million.transaction.
In parallel, for strategic reasons, during the course of the fourth quarter, we also chose to focus our resources and efforts on other non-crude oil trading and non-logistics management revenue generating opportunities that we have identified in the market. These other market opportunities also involve the use of our technologies across our Fintech Ecosystem and their applications across Industry Ventures.
We did not generate any revenue from YOD Legacy business in 2018 since our new fintech services business strategy limits the support of the Legacy YOD business. Currently, we have a partnership with a third party (since 2016) that acts as the exclusive distribution operator (within the territory of PRC) of our licensed library of major studio films.
Cost of revenue (USD in thousands)
| | | | | | | | | | | | |
For the years ended December 31, |
| 2020 |
| 2019 |
| Amount Change |
| % Change |
| |||
Digital asset management services | | $ | — | | $ | 467 | | $ | (467) |
| n/m | |
Electric vehicles | | | 18,035 | | | — | | | 18,035 |
| n/m | |
Combustion engine vehicles | |
| 5,121 | |
| — | |
| 5,121 |
| n/m | |
Charging and batteries | |
| 488 | |
| — | |
| 488 |
| n/m | |
Digital advertising services | |
| 1,058 | |
| 991 | |
| 67 |
| 6.7 | % |
Total | | $ | 24,702 | | $ | 1,458 | | $ | 23,244 |
| n/m | |
For the years ended December 31, | 2018 | 2017 | Amount Change | % Change | ||||||||||||
-Wecast Service | ||||||||||||||||
Crude oil | $ | 260,006,382 | $ | 18,972,000 | $ | 241,034,382 | 1,270 | |||||||||
Consumer electronics | 114,477,226 | 116,010,031 | (1,532,805 | ) | (1 | ) | ||||||||||
Other | 91,430 | 1,443,748 | (1,352,318 | ) | (94 | ) | ||||||||||
374,575,038 | 136,425,779 | 238,149,259 | 175 | |||||||||||||
-Legacy YOD | - | 762,614 | (762,614 | ) | (100 | ) | ||||||||||
Total | $ | 374,575,038 | $ | 137,188,393 | $ | 237,386,645 | 173 |
n/m = Not Meaningful
Cost of revenues was $ 374.6$24.7 million for the year ended December 31, 2018,2020, as compared to $137.2$1.5 million for the year ended December 31, 2017. Our2019. The cost of revenues increased by $237.4 million which$23.2 million. From a comparability perspective, the cost of revenue during 2019 is not indicative of the new business in line2020. The cost of revenue during 2019 was primarily associated with our increasethe digital asset management services and creator payments from the Grapevine business. The cost of revenue from the sale of EVs was $18.0 million; there was no cost of revenue recorded for the sale of EVs during 2019 as the company acted as agent in the sale of EVs in 2019 and consequently revenues were recorded on “net” basis without any corresponding cost of revenues. OurCost of revenues from the sale of combustion engine vehicles was $5.1 million; there were no sales of combustion engine vehicles in the prior year. Cost of revenues for charging and batteries was $0.5 million; there were no sales of charging and batteries in the prior year. The cost of revenues is primarily comprisedfor the digital advertising services provided by Grapevine were $1.1 million as compared to $1.0 million in the prior year, an increase of cost to purchase electronics products and crude oil from suppliersalmost $0.1 million or 6.7%.
Gross profit (USD in our logistics management business and the costthousands)
| | | | | | | | | | | |
For the years ended December 31, |
| 2020 |
| 2019 |
| Amount Change |
| % Change | |||
Digital asset management services | | $ | — | | $ | 40,233 | | $ | (40,233) | | n/m |
Electric vehicles | | | 1,427 | | | 2,693 | | | (1,266) |
| n/m |
Combustion engine vehicles | |
| 39 | |
| — | |
| 39 |
| n/m |
Charging and batteries | |
| 18 | |
| — | |
| 18 |
| n/m |
Digital advertising services | |
| 573 | |
| 182 | |
| 391 |
| n/m |
Total | | $ | 2,057 | | $ | 43,108 | | $ | (41,051) |
| n/m |
n/m = Not Meaningful
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Gross profit
For the years ended December 31, | 2018 | 2017 | Amount Change | % Change | ||||||||||||
-Wecast Service | ||||||||||||||||
Crude oil | $ | 28,019 | $ | 56,003 | $ | (27,984 | ) | (50 | ) | |||||||
Consumer electronics | 2,246,025 | 3,268,483 | (1,022,458 | ) | (31 | ) | ||||||||||
Other | 893,790 | 3,808,302 | (2,914,512 | ) | (77 | ) | ||||||||||
3,167,834 | 7,132,788 | (3,964,954 | ) | (56 | ) | |||||||||||
-Legacy YOD | - | 31,659 | (31,659 | ) | (100 | ) | ||||||||||
Total | $ | 3,167,834 | $ | 7,164,447 | $ | (3,996,613 | ) | (56 | ) |
Gross profit ratio
| | | | | |
For the years ended December 31, |
| 2020 |
| 2019 |
|
Digital asset management services |
| — | % | 99 | % |
Electric vehicles |
| 7 | | 100 | |
Combustion engine vehicles |
| 1 | | — | |
Charging and batteries |
| 4 | | — | |
Digital advertising services |
| 35 | | 16 | |
Total |
| 8 | % | 97 | % |
For the years ended December 31, | 2018 | 2017 | ||||||
-Wecast Service | ||||||||
Crude oil | 0 | % | 0 | % | ||||
Consumer electronics | 2 | % | 3 | % | ||||
Other | 91 | % | 73 | % | ||||
1 | % | 5 | % | |||||
-Legacy YOD | 0 | % | 4 | % | ||||
Total | 1 | % | 5 | % |
OurThe gross profit for the year ended December 31, 20182020 was approximately $3.2$2.1 million, as compared to $7.2$43.1 million during the same period in 2017.
Our current crude oil2019, a decrease of $41.1 million. The decrease was due to the Company recorded service revenue from digital asset management services in 2019 which was not repeated in 2020 and consumer electronics trading business operateshad a low cost of revenue. The gross profit earned from the sale of EVs was $1.4 million a decrease of $1.3 million from the prior year. The Company acted in highly competitive global markets characterized by aggressive price competition, resulting in downward pressure on already low gross margins. Further, factors such as frequent introduction of new products, short product life cycles, evolving industry standards, price sensitivity on the part of consumers place continued competitive pressure in our consumer electronics trading business, and our crude oil trading margins are impacted by many factors outside of our control, including geopolitical developments and fluctuationsan agent capacity in the world’s markets.sale of EVs in 2019 and consequentially the revenue was recorded on a “net” basis without any cost of revenue which resulted in a higher gross profit and gross margin.
As such, the logistics management business typically has low margins and the Company has primarily focused its activities in this area with the intent of learning the logistics management business so that we could develop use cases for the applications of our technologies and the overall benefit of our long-term strategy, not necessarily with a focus on deriving margin improvement.
Selling, general and administrative expenses
Our selling, general and administrative expense for the year ended December 31, 20182020 was $ 22.5$32.4 million as compared to $13.1$24.9 million for the same period in 2017,2019, an increase of approximately $9.3$7.5 million or 71%30%. The majority of the increase was due to
increased stock based compensation expense, bonuses and sales commissions and salaries resulting from the increase in employee numbers and sales activity, and bad debt expense which was partially offset by lower spending on travel and entertainment due to the restrictions on travel and entertaining arising from COVID-19 and lower severance expense.
Research and development expense
Research and development expensesexpense for the year ended December 31, 2018 was $1.72020 represents the fees paid for EV technical development and design.
Professional fees
Professional fees for the year ended December 31, 2020 were $12.5 million as compared to $0.4$5.8 million for the same period in 2017,2019, an increase of approximately $1.3 million or 307%.$6.7 million. The majority of thethis increase was due to increased expense for investor relations programs, legal fee expense related to regulatory enquires, fund raising and merger and acquisition activities, and class action lawsuits. Expenses for consultants and contractors increased as a result of the early stage technology development.Company’s continued expansion.
Depreciation and amortization
Professional fees
Professional fees are generally related to public company reportingDepreciation and governance expenses as well as legal fees related to business transition and expansion. Our professional fees increased approximately by $1.5 million, or 48%,amortization for the year ended December 31, 2018,2020 was $ 5.3 million as compared withto $2.2 million for the same period in 2017.2019, an increase of $3.1 million. The increase was mainly due to the increase in amortization expense of $2.1 million arising from the shortening of the useful life on an intellectual property intangible asset.
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Impairment losses
The following table summarizes the impairment losses recorded in the years ended December 31, 2020 and 2019 (in thousands):
| | | | | | | | | | |
Asset Impaired |
| Note |
| Caption |
| Amount | ||||
| | | | | | 2020 | | 2019 | ||
GTB – digital currency |
| Note 9 – Goodwill and Intangible Assets |
| Impairment losses | | $ | — | | $ | 61,124 |
| | | | | | | | | | |
Equity method investments |
| Note 10 - Long-term Investments |
| Impairment of and equity in loss of equity method investments | | | 16,650 | |
| 13,062 |
| | | | | | | | | | |
Intangible assets |
| Note 9 – Goodwill and Intangible Assets |
| Impairment losses | | | 20,446 | |
| 5,715 |
| | | | | | | | | | |
Goodwill |
| Note 9 – Goodwill and Intangible Assets |
| Impairment losses | | | 9,323 | |
| — |
| | | | | | | | | | |
Right of use assets | | Note 11 - Leases | | Impairment losses | | | 6,424 | | | — |
| | | | | | | | | | |
Fintech buildings, land and capitalized fees | | Note 8 - Property and Equipment, net | | Impairment losses | | | 3,315 | | | 2,299 |
| | | | | | | | | | |
Fintech buildings asset retirement cost | | Note 8 - Property and Equipment, net | | Impairment losses | | | 1,996 | | | 1,504 |
| | | | | | | | | | |
Fixed assets and other |
| |
| | | | 923 | |
| — |
| | | | | | | | | | |
Cost method investments |
| Note 10 - Long-term Investments |
| Impairment losses | | | 241 | |
| 3,026 |
Total | | |
|
| | $ | 59,318 | | $ | 86,730 |
Additional information related to an increasethe impairment losses recorded in legal, valuation, auditthe years ended December 31, 2020 and tax2019 is as well as fees associated with continuing to build out our technology ecosystem and establishing strategic partnerships and M&A activity as part of this technology ecosystem.follows:
Year Ended December 31, 2020
The Company recorded impairment losses of $16.7 million related to its equity method investments, Glory and BDCG. In the fourth quarter of 2020, Tree Technologies obtained its own domestic manufacturing license, and determined that it would not purchase vehicles from Tree Manufacturing, Glory’s subsidiary, and that the investment in Glory was therefore impaired. The Company evaluated the business prospects of BDCG in light of the continued political tensions between China and the U.S., and determined that its business prospects had diminished. |
● | The Company recorded impairment losses of $20.4 million related to intangible assets: |
o | An impairment loss of $12.5 million related to Tree Technologies marketing and distribution agreement with Tree Manufacturing after Tree manufacturing obtained its own domestic manufacturing license, and determining that it would not purchase vehicles from Tree Manufacturing. |
o | Impairment losses of $7.1 million related to DBOT’s intangible assets, its continuing membership agreement and customer list. |
o | An impairment loss of $0.8 million related to Grapevine’s influencer network, after determining that the attrition rate of the influencer network was higher than expected. |
● | The Company recorded an impairment loss of $9.3 million related to the goodwill of its consolidated subsidiary, DBOT, after evaluating its business prospects. |
35
● | The Company recorded impairment losses of $6.4 million related to right of use assets after ceasing to use the related real estate premises. |
● | The Company recorded impairment losses of $3.3 million related to its investment in Fintech Village, and recorded an impairment loss of $2.0 million for the related asset retirement cost. |
● | The Company recorded an impairment loss of $0.2 million related to a cost method investment after its price per share declined in the fourth quarter of 2020. |
Year Ended December 31, 2019
● | The Company recorded an impairment loss of $61.1 million in the fourth quarter of 2019 related to GTB which the Company had received in connections with a services agreement and an asset purchase agreement with GT Dollar Pte, a minority shareholder at the time of the transaction. On October 29, 2019, GTB had an unexpected significant decline in quoted price, from $17.00 to $1.84. This decline continued through the fourth quarter of 2019, and on December 31, 2019 the quoted price was $0.23. As a result of this decline in quoted price, and its inability to convert GTB into other digital currencies which were more liquid, or fiat currency, the Company performed an impairment analysis and recorded an impairment loss. |
● | The Company recorded a $13.1 million impairment loss in Glory, an equity method investment, in the fourth quarter of 2019, when it became apparent that Glory’s subsidiary, Tree Manufacturing, would not receive the land use rights to 250 acres of vacant land and other assets. |
● | The Company recorded a $5.7 million impairment loss related to a secure mobile financial information, social, and messaging platform that has been designed for streamlining financial-based communication for professional and retail users. Management determined these assets had no future use and recorded an impairment loss. |
● | The Company recorded impairment losses of $3.0 million in two non-marketable equity investments after management evaluated their performance. |
● | The Company recorded an impairment loss of $2.3 million in the third quarter of 2019 in connection with four buildings in Fintech Village, which were later demolished, and recorded an impairment loss of $1.5 million for the related asset retirement cost. |
Change in fair value of contingent consideration, net
DepreciationFor the year ended December 31, 2020, Change in fair value of contingent consideration, net of $5.5 million represents the remeasurement loss of $1.5 million of the contingent consideration payable to the former DBOT shareholder and amortizationremeasurement gain of $7.0 million of the contingent consideration payable to the Tree Technology shareholders.
For the year ended December 31, 2019, Change in fair value of contingent consideration, net of $5.1 million represents the remeasurement of the contingent consideration payable to the former DBOT shareholders due to the decline in Ideanomics’ stock price.
No material changes in depreciation and amortization.
Impairment of other intangible assets
We did not have any material impairment charges during 2018 and 2017.
Loss from operations
Our lossLoss from operations for the year ended December 31, 2020 was increased by $16.1$86.9 million as compared to $26.2loss of $68.6 million for the year ended December 31, 2018,2019 an increase of $18.3 million. The increased Loss from $10.1 million during 2017. This was mostlyOperations is due to number of factors, the decrease in gross profit for 2019 included revenues from our Wecast Services segment and the increasedigital asset services which had a gross profit margin of operatingalmost 100% which was not repeated in 2020, increased expenses for selling, general and administrative, research and development, professional fees, and depreciation and amortization expense partially offset by lower impairment charges and a gain resulting from a change in the developmentfair value of Wecast Service business.contingent consideration.
36
Interest expense, net
Our interest expense increased $0.7$10.4 million to $0.8$16.0 million for the year ended December 31, 2018,2020, from $0.1$5.6 million during 2017.2019. The interest expense increase during 20182020 was primarily due to the amortization of beneficiarybeneficial conversion features and the interest associated with convertible notes issued in 2018.2020. The following table summarizes the breakdown of the interest expense (in thousands):
| | | | | | | |
|
|
| Year ended December 31, |
| Year ended December 31, | ||
| | | 2020 | | 2019 | ||
Interest, net | | | $ | 1,485 | | $ | 1,381 |
Amortization of discount | | |
| 14,485 | |
| 4,235 |
Total | | | $ | 15,970 | | $ | 5,616 |
Change in fair valueExpense due to conversion of warrant liabilitiesnotes
CertainExpense due to conversion of our warrants arenotes for the year ended December 31, 2020 represents the expense recognized as derivative liabilitiesa result of the reduction of conversion price to induce the conversion of the convertible notes from the related parties.
Gain (loss) on extinguishment of debt
In the year ended December 31, 2020, the Company recorded a gain on the extinguishment of debt of $8.9 million, as it paid a promissory note prior to its scheduled maturity. The Company also settled several outstanding balances with vendors and re-measured atrecorded a gain of $0.5 million.
In the endyear ended December 31, 2019, the Company recorded a loss on extinguishment of every reporting perioddebt of $3.9 million which resulted from modifications made to various convertible notes.
Impairment of and upon settlement, with the changeequity in value reportedloss of equity method investees
Impairment of and equity in loss of equity method investments increased by $3.0 million to $16.7 million in the statementyear ended December 31, 2020 from $13.7 million in the year ended December 31, 2019. The increase was due to impairments losses of operations. We reported$16.7 million recorded in the year ended December 31, 2020, as compared to an impairment loss of $0.1$13.1 million forrecorded in the year ended December 31, 2019. Refer to “Impairment losses” above.
Gain (loss) on disposal of subsidiaries, net
The following table summarizes gains and (losses) recorded in “Gain (loss) on disposal of subsidiaries, net” in the years ended December 31, 20172020 and no warrant liability in 2018.2019 (in thousands):
| | | | | | |
|
| Year ended December 31, |
| Year ended December 31, | ||
Subsidiary | | 2020 | | 2019 | ||
Guang Min | | $ | 276 | | $ | — |
Red Rock Global Capital LTD | |
| — | |
| 552 |
Amer Global Technology Limited | |
| — | |
| 505 |
Deconsolidation of VIEs | |
| — | |
| (2,009) |
Total | | $ | 276 | | $ | (952) |
Equity in loss of equity method investees
No material change.
LossGain (loss) on disposal of subsidiaries was a gain of $0.3 million for year ended December 31, 2020 as compared to a loss of $1.0 million in the same period in 2019.
Loss on remeasurement of DBOT investment
The increaseIn the year ended December 31, 2019, the Company increased its ownership in loss ($1.2 million) is dueDBOT and consolidated DBOT in July 2019. Immediately prior to the salesconsummation of ourthe acquisition, the Company’s investment (55% interest) in Wide AngleDBOT had a fair value of $3.1 million, and Shanghai Huicang Supplychain Management Ltdthe Company recorded a loss of $3.2 million to record the investment in 2018. Please see Note 6DBOT to its fair value.
37
Other income (expense), net
Other income (expense), net increased $7.0 million for the year ended December 31, 2020 in comparison to the consolidated financial statements included in this report.same period of 2019 mainly because of a gain of $4.9 million from the lease settlement of its New York City headquarters at 55 Broadway with the landlord, a gain of $0.8 million from the DBOT lease settlement with the landlord and sublease income $0.1 million.
Net (income)/loss attributable to non-controlling interest
Net (income)/loss attributable to non-controlling interests was $1.0a $7.8 million loss in 20182020 as compared to a net lossincome of $0.4$0.9 million in 2017.2019. The increaseloss in 2020 is primarily due to net loss from Amer (we have 55% ownershipour investments in entities formed and its primary business is consumer electronic) and Grapevine (we have 65.65% ownership and it was acquired in 2018).
2019. The gain in 2019 is primarily due to the taxis commission revenue recognized in an entity we have 51% ownership during the third quarter of 2019.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2018,2020, we had cash of approximately $3.1$165.8 million. Approximately $1.5$164.5 million was held in our Hong Kong, USU.S., Malaysia and Singapore entities and $1.6$1.2 million was held in our PRC entities.
Due to the strict regulations governing the transfer of funds held in the PRC to other jurisdictions, the Company does not consider funds held in its PRC entities to be available to fund operations and investment outside of the PRC and consequently does not include them when evaluating the liquidity needs of its businesses operating outside of the PRC.
As discussed in Note 3 to the consolidated financial statements included in this report for going concern and management’s plan, the Companya broker-dealer, DBOT has incurred significant continuing losses in 2018 and 2017, and total accumulated deficits were $150.0 million and $126.7minimum capital requirements. DBOT had cash of $0.2 million as of December 31, 2018 and 2017, respectively.2020, which was necessary for DBOT to meet its minimum capital requirements. The Company also usedconsolidates a 51.0% owned investment in an entity which is based in Singapore. This entity venture had cash for operations of approximately $20.2$0.6 million and $10.3 million for the year endedas of December 31, 2018 and 2017, respectively. We believe our existing cash resources will be sufficient to fund our planned operations into April 2020. However, we cannot provide assurances that our plans will not change or that changed circumstances will not result in the depletionThe agreement of our capital resources more rapidly than we currently anticipate. We must continue to rely on proceeds from debt and equity issuances to fund ongoing operating expenses to date, which could raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements includedpartner in this report have been prepared assuming that the Company will continue as a going concern and, accordingly, do not include any adjustments that may result from the outcomeentity is required prior to disbursement of this uncertainty.
entity’s funds for certain defined expenditures.
The following table provides a summary of our net cash flows from operating, investing, and financing activities.activities (in thousands).
| | | | | | |
| | Year Ended | ||||
| | December 31, | | December 31, | ||
| | 2020 | | 2019 | ||
Net cash used in operating activities |
| $ | (41,468) |
| $ | (13,784) |
Net cash used in investing activities | |
| (3,500) | |
| (1,794) |
Net cash provided by financing activities | |
| 208,049 | |
| 15,114 |
Effect of exchange rate changes on cash | |
| 50 | |
| (9) |
Net increase/(decrease) in cash, cash equivalents and restricted cash | |
| 163,131 | |
| (473) |
Total cash, cash equivalents and restricted cash at beginning of period | |
| 2,633 | |
| 3,106 |
Cash and cash equivalents at end of period | | $ | 165,764 | | $ | 2,633 |
Year Ended | ||||||||
December 31, | December 31, | |||||||
2018 | 2017 | |||||||
Net cash used in operating activities | $ | (20,160,210 | ) | $ | (10,318,774 | ) | ||
Net cash used in investing activities | (19,140,641 | ) | (525,456 | ) | ||||
Net cash provided by financing activities | 34,898,919 | 14,258,290 | ||||||
Effect of exchange rate changes on cash | (69,141 | ) | 83,488 | |||||
Net increase/(decrease) in cash, cash equivalents and restricted cash | (4,471,073 | ) | 3,497,548 | |||||
Total cash, cash equivalents and restricted cash at beginning of period | 7,577,317 | 4,079,769 | ||||||
Cash, cash equivalents and restricted cash at end of period | $ | 3,106,244 | $ | 7,577,317 |
Operating Activities
Cash used in operating activities increaseddecreased by $9.8$27.7 million for the year ended December 31, 20182020 compared to 2017,2019, primarily due to (1) an increase in net loss from $10.9$96.8 million in 20172019 to $28.4$106.0 million in 2018,2020, (2) total non-cash adjustments to net loss was $6.0$75.9 million and $2.9$67.9 million for the yearyears ended December 31, 20182020 and 2017,2019, respectively; and (3) total changes in operating assets and liabilities resulted in an increase of $2.5$11.3 million and a reduction of $2.4$15.1 million in cash used in operationsoperating activities for the years ended December 31, 2020 and 2019, respectively.
Investing Activities
Cash used in investing activities was $3.5 million for the year ended 2020 mainly due to the investment to Solectrac. Cash used in investing activities was $1.8 million for the year ended December 31, 20182019 primarily due to the payment of $1.8 million for Fintech Village.
38
Financing Activities
For the year ended December 31, 2020. The Company received $182.5 million from the issuance of common stock, $8.9 million from warrant and 2017, respectively.
Investing Activities
Cash used in investing activities increased by $19.1option exercise, $27.0 million from the issuance of convertible notes, $7.1 million from noncontrolling shareholders contribution and made repayments of $17.5 million, primarily used forof a $12.0 million convertible note and other borrowings. For the acquisition of Fintech Village,year ended December 31, 2019, the related costs and surety bond (approximately $10.7 million) and an increase of approximately $5.0 million during 2018 related to acquisitions of subsidiaries and long term investments.
Financing Activities
WeCompany received $13$9.1 million from the issuance of convertible notes, and $21.5$2.8 million in proceeds in a private placement from the issuance of common shares, warrant and options for the year ended December 31, 2018, to certain investors, including officers, directors and other affiliates. While in the same period in 2017, we received $13.6 million.2019.
Effects of Inflation
Inflation and changing prices have had an effect on our business and we expect that inflation or changing prices could materially affect our business in the foreseeable future. Our management will closely monitor the price change and make efforts to maintain effective cost control in operations.
Off-Balance Sheet Arrangements
Off-balance sheet arrangements are obligations the Company has with nonconsolidated entities related to transactions, agreements or other contractual arrangements. The Company holds variable interests in joint venturesinvestments accounted for under the equity method of accounting. The Company isdoes not the primary beneficiary ofcontrol these joint venturesinvestments and therefore isdoes not required to consolidate these entities (see Note 8 to the Consolidated Financial Statements).
them.
We do not have other off balanceoff-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 or capital expenditures or capital resources that is material to an investor in our securities.
Contractual Obligations
The tabular presentation of contractual obligations is not required for Smaller Reporting Companies.
AsSeasonality
The Company expects that orders and sales will be influenced by the amount and timing of December 31, 2018, webudgeted expenditure by its customers. Typically, the Company would expect to see higher sales at the start of the year when companies start executing on their capital programs and at the end of the year when companies are spending any surplus or uncommitted budget before the new budget cycle commences. The Company’s operating businesses are in the early stage of their development and consequently do not have the following contractual obligations:
Payments due by Period | ||||||||||||||||||||
Less than | More than | |||||||||||||||||||
Total | 1 year | 1-3 years | 3-5 years | 5 years | ||||||||||||||||
Contractual Obligations | ||||||||||||||||||||
Operating lease | $ | 6,910,639 | $ | 1,728,670 | $ | 2,543,520 | $ | 2,638,449 | $ | 2,587,280 | ||||||||||
Asset retirement obligations | 8,000,000 | - | 8,000,000 | - | - | |||||||||||||||
Long-term debt obligations | 12,000,000 | - | 12,000,000 | - | - | |||||||||||||||
Total | $ | 26,910,639 | $ | 1,728,670 | $ | 22,543,520 | $ | 2,638,449 | $ | 2,587,280 |
Seasonality
Our operating results and operating cash flows historically for our legacy YOD business have not been subjectsufficient trading histories to project seasonal variations. However, we expect a disproportionate amountbuying patterns with any degree of our revenues generated from Wecast Services quarter over quarter to be subject to seasoned fluctuations at holiday periods and due to introduction of new products. This pattern may change, however, as a result of new market opportunities or new product introductions.
confidence.
OUTLOOK
In orderThe Company believes that the investment made to meet market demands,build out its sales capacity in China and a related capability in sourcing and supply chain and related logistics in China will help drive growth in China using the Company's S2F2C business model and enable the Company has identified various areas that we intendto source high quality components and completed vehicles at competitive prices for its Medici, Treeletrik, WAVE and Solectrac businesses outside of China. The global focus on climate change and the related regulatory changes to encourage the adoption of EVs is very favorable for the Company's business, particularly the charging and battery businesses, which are critical to the widespread adoption of EVs. Providing customers with easy access to financing options for their purchases of vehicles, batteries and charging infrastructure is an important enabler for the deployment of EV and related technologies and the Company will continue to work to develop asfunding sources in conjunction with manufactures and established lenders.
Fintech continues to provide opportunities which could generate high rates of return through the deployment of technology to disrupt existing business models. The Company's acquisition of Timios in the first quarter of 2021 marks the first entrance into the real estate title agency and closing market. Management believes that through deployment of advanced technology and complimentary acquisitions it can increase Timios' value. The regulatory environment for the adoption of digital securities is improving with regulators and central bankers in the world's most developed economies acknowledging that digital securities should be part of our overall fintech services strategy, whichthe financial ecosystem. This change favors companies like Ideanomics that have assets such as DBOT that are complementary to both our FinTech Ecosystem and Industry Ventures. These areas will focus primarily around (i) an Ideanomics AI Engine Group, (ii) a Digital Banking Advisory Group, and (iii) a Digital Asset Management Group.
Through these groups, we intend to further leverage our core business strategy, which is to promote the use, development and advancementfundamental building blocks of blockchain- and AI-based technologies, by bringing technology leaders together with industry leaders and creating synergies in our Fintech Ecosystem and the business in our networkany move towards digital securities.
39
Table of Industry Ventures.Contents
Environmental Matters
We are subject to various federal, state and local laws and regulations governing, among other things, hazardous materials, environmental contamination and the protection of the environment. We have made, and expect to make in the future, expenditures to comply with such laws and regulations, but cannot predict the full amount of such future expenditures. We may also incur fines and penalties from time to time associated with noncompliance with such laws and regulations. Starting from year 2018, we had $8 million accrued for Asset Retirement Obligations. The increase is related to our legal contractual obligation in connection with the acquisition of Fintech Village.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires ourthe Company’s management to make assumptions, estimates, and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We haveCompany management has identified certain accounting policies that are significant to the preparation of ourits financial statements. These accounting policies are important for an understanding of ourthe Company’s financial condition and results of operations. Critical accounting policies are those that are most important to the portrayal of ourits financial condition and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. We believeCompany management believes the following critical accounting policies involve the most significant estimates and judgments used in the preparation of ourits financial statements. We haveCompany management has reviewed ourthe critical accounting policies and estimates with the audit committeeAudit Committee of our boardBoard of directors.Directors.
Variable Interest Entities
We accountThe Company accounts for variable interest entities qualifying as VIEs in accordance with Financial Accounting Standards Boards (“FASB”) Accounting Standards Codification (“ASC”) Topic 810,Consolidation. For our consolidated VIEs, management has made evaluations ofManagement evaluates the relationships between ourthe Company and the various VIEs and the economic benefit flow of the contractual arrangement with the VIEs. In connection with such evaluation, management also took into account the fact that,considers whether or not, as a result of such contractual arrangements, we controlthe Company controls the legal shareholders’ voting interests and havehas power of attorney in the VIEs, and therefore we arewhich counterparty is able to direct all business activities of the VIEs. As a result of such evaluation, management concluded that we arethe Company is the primary beneficiary of ourcertain VIEs, which are consolidated, VIEs.and that the Company is not the primary beneficiary of one investment in which the Company holds a 60.0% interest, and of one investment in which the Company holds a 34.0% investment and which had a supply agreement with a consolidated entity. Both of these investments are accounted for as an equity method investments.
We have consulted our PRC legal counsel in assessing our ability to control our PRC VIEs. Any changes in PRC laws and regulations that affect our ability to control ourAs of December 31, 2019, the Company has terminated the agreements with the PRC VIEs may preclude usand will not consolidate them beyond that date.
Revenue Recognition
The Company recognizes revenue when its customer obtains control of the promised goods or services in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. To determine the amount and timing of revenue recognition for the arrangements that the Company determines are within the scope of ASC 606, Revenue from consolidating these companiesContracts with Customers (“ASC 606,”) the Company performs the following five steps: (1) identify the contract(s) with the customer, (2) identify the performance obligations in the future.contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the Company satisfies the respective performance obligations.
A performance obligation may be satisfied over time or at a point in time. Revenue Recognition
Forfrom a performance obligation satisfied over time is generally evaluated by measuring our progress in satisfying the saleperformance obligation as evidenced by the transfer of the goods andor services to the customer. Revenue from a performance obligation satisfied at a point in time is recognized at the point in time when the customer obtains control over the promised good.
40
The amount of revenue recognized reflects the consideration we expect to be entitled to in exchange for the promised goods or services, or the transaction price. In determining the transaction price, we evaluate consideration promised in a contract that includes a variable amount, or variable consideration, and estimate the amount of consideration that is due to us. Variable consideration is included in the transaction price only to the extent that we believe it is probable that a significant reversal in the amount of revenue recognized will not occur.
Additionally, an analysis is performed in order to evaluate whether we are the Company is acting as a principal, and report revenuesin which case revenue is reported on a gross basis, or as an agent, and report revenuesin which case revenue is reported on a net basis. In this assessment,This analysis considers whether or not the Company recognizes revenue on a gross basis based on the consideration if we obtainobtains control of the specified goods or services before they are transferred to the customer, as well as other indicators such as the party primarily responsible for fulfillment, inventory risk, and discretion in establishing price.
Licensed Content
We obtain content through content licensing agreementsThe Company’s contracts are typically with studioslarge enterprises and distributors. We recognize licensed content whenconsequently are heavily negotiated as to the license fee andservices to be provided; consequently the specified content titles are known or reasonably determinable. Prepaid license fees are classified as an asset onaccounting treatment for the consolidated balance sheets as licensed content and accrued license fees payable are classified as a liability on the consolidated balance sheets.
We amortize licensed content in costreporting of revenues overmay vary materially between contracts including whether the content contractual window of availability based on the expected revenue derived from the licensed content, beginning with the month of first availability, such that our revenues bear a representative amount of the cost of the licensed content. We review factors that impact the amortization of licensed contentis reported on a regular basis, including factors that may bear direct impact on expected revenue from specific content titles. We estimate expected revenue by reviewing relevant factors, including marketing considerations, programming efforts, relationship with our channel partners, expected customer renewals and content offered by other distributors on the same platform. Changes in our expected revenue from licensed content could have a significant impact on our amortization pattern.gross or net basis.
Long-lived Assets
Long-lived assets, including property and equipment and intangible assets, excluding goodwill, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The evaluation is performed at the lowest level of identifiable cash flows independent of other assets. An impairment loss would be recognized when estimated undiscounted future cash flows generated from the assets are less than their carrying amount. Measurement
Factors which could result in the Company performing an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the assets or the strategy for our business, and significant negative industry or economic trends.
The Company received a specific type of digital currency, GTB, as a result of two transactions in the three months ended March 31, 2019, and recorded the GTB currency as indefinite-lived intangible assets. On October 29, 2019, GTB had an unexpected significant decline in quoted price, from $17.00 to $1.84. This decline continued through the fourth quarter of 2019, and on December 31, 2020 the quoted price was $0.23. As a result of this decline in quoted price, and its inability to convert GTB into other digital currencies which were more liquid, or fiat currency, the Company performed an impairment analysis in the fourth quarter of 2019 and recorded an impairment loss would be based on the excess of the carrying amount of the asset group over its fair value.
$61.1 million.
The assumptions and estimates used to determine future values and remaining useful lives of our intangible and other long-lived assets are complex and subjective. They can be affected by various factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our forecasts for future expansion development. Based on our
As a result of the impairment assessment,analyses performed in the year ended December 31, 2020, the Company recorded impairment losses related to land, asset retirement costs, influencer networks, a membership agreement, and a marketing and distribution agreement of $22.5 million.
As part of the impairment analyses discussed above in the year ended December 31, 2020, the Company also evaluated the remaining useful life of intangible assets, and determined that one intangible asset, intellectual property, no longer had a useful life and recorded amortization expense of $2.1 million.
As a result of the impairment has been recognized.analyses performed in the year ended December 31, 2019, the Company recorded an impairment loss related to a secure mobile financial information, social and messaging platform of $5.7 million.
Acquisition accounting
Asset Retirement Obligations
Asset retirement obligations generally applyOur consolidated financial statements include the operations of acquired businesses subsequent to legal obligations associated with the retirementclosing of a tangible long-lived asset that result fromthe transaction. We account for acquired businesses using the acquisition constructionmethod of accounting, which requires, among other things, that assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date. Transaction costs are expensed as incurred.
41
Accounting for business combinations requires our management to make significant estimates and assumptions, especially at the acquisition date including the identification of and our estimates for intangible assets, contractual obligations assumed, restructuring liabilities, pre-acquisition contingencies and contingent consideration, where applicable. Although we believe the assumptions and estimates we have made have been reasonable and appropriate, they are based in part on historical experience and information obtained from our management of the acquired companies and are inherently uncertain.
When estimating fair value, depending on the nature and complexity of the asset or development andliability, we may use one or all of the normal operationfollowing techniques:
● | Income approach, which is based on the present value of a future stream of net cash flows; |
● | Market approach, which is based on market prices and other information from market transactions involving identical or comparable assets or liabilities; and |
● | Cost approach, which is based on the cost to acquire or construct comparable assets, less an allowance for functional and/or economic obsolescence. |
Fair value methodologies depend on the following types of a long-lived asset. If a reasonable estimateinputs:
● | Quoted prices for identical assets or liabilities in active markets (Level 1 inputs); |
● | Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are directly or indirectly observable, or inputs that are derived principally from, or corroborated by, observable market data by correlation or other means (Level 2 inputs); and |
● | Unobservable inputs that reflect estimates and assumptions (Level 3 inputs). |
The determination of fair value can be made,is extremely subjective and complex, and requires judgements concerning future events, including future cash flows, the appropriate discount factors and weighted average cost of capital, and market comparables, among other factors. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
Goodwill
Goodwill represents the excess of cost over fair value of identifiable net assets acquired and liabilities assumed in a liability for an asset retirement obligation is recognized inbusiness combination. Application of goodwill impairment tests requires significant management judgment, including the period in which it is incurred or a change in estimate occurs. Asset retirement costs associated with asset retirement obligations are capitalized with the carrying amountidentification of the related long-livedreporting units, assigning assets, liabilities and depreciated over the asset’s estimated life. The Company’s asset retirement obligations asgoodwill to reporting units and determination of December 31, 2018 are mainly associated with the acquisitionfair value of Fintech Village that we are contractually obligated to remediate the existing environmental conditions. We included it in the construction in progress and asset retirement obligation (long term) in the consolidated balance sheets. We will start to amortize asset retirement costs upon completion of the assets and put into use.
Goodwill
each reporting unit. The Company performs goodwill impairment testing at the reporting unit level which is defined as the operating segment or one level below the operating segment. One level below the operating segment, or component, is a business infor which discrete financial information is available and regularly reviewed by segment management. The Company tests goodwill for impairment annually (during the fourth quarter), or more frequently when events or changes in circumstances indicate it is more likely than notmore-likely-than-not that the fair value of a reporting unit has declined below its carrying value.amount. Goodwill is evaluated for impairment using qualitative and/or quantitative testing procedures.
The Company has the option to first perform qualitative testing to determine whether it is more likely than notmore-likely-than-not that the fair value of a reporting unit is less than its carrying value.amount. Judgment applied when performing the qualitative analysis includes consideration of macroeconomic, industry and market conditions, overall financial performance of the reporting unit, composition, personnel or strategy changes affecting the reporting unit and recoverability of asset groups within a reporting unit. If, after assessing the totality of events and circumstances, the Company determines it is not more-likely-than-not that the fair value of a reporting unit is greater than its carrying amount, then performing the quantitative impairment test is unnecessary. However, if the Company concludes otherwise, then it is required to perform the quantitative impairment test by calculating the fair value of the reporting unit and comparing the fair value of the reporting unit to its carrying amount.
42
The fair value of a reporting unit may be determined using externally quoted prices (if available), a discounted cash flow model, or a market approach. Judgments applied when performing the quantitative analysis includes estimating future cash flows, determining appropriate discount rates and making other assumptions. Changes in these judgments, estimates and assumptions could materially affect the determination of fair value for each reporting unit.
If we determine that itAn impairment loss, if any, is more-likely-than-not thatrecorded when the fair value of a reporting unit is less thanhas declined below its carrying amount,amount.
As a result of its goodwill impairment analyses performed in the year ended December 31, 2020, the Company recorded goodwill impairment losses of $9.3 million. The Company recorded no goodwill impairment losses in the year ended December 31, 2019.
Long-term Investments
The Company accounts for equity investments through which management exercises significant influence but does not have control over the investee under the equity method. Under the equity method, the investment is further testedinitially recorded at cost and adjusted for the Company’s share of undistributed earnings or losses of the investee. The Company’s share of losses is not recognized when the investment is reduced to zero since the Company does not guarantee the investees’ obligations nor is the Company committed to providing additional funding.
The equity investments which are not consolidated or accounted for under the equity method are either carried at fair value or under the measurement alternative upon the adoption of the Accounting Standards Update (“ASU”) No. 2016-01, Financial Instruments – Overall (Subtopic 825-10) (“ASU No 2016-01.”)
The Company utilizes the measurement alternative for equity investments that do not have readily determinable fair values and measures these investments at cost less impairment plus or minus observable price changes in orderly transactions for an identical or similar investment of the same issuer.
Management periodically reviews long-term investments for impairment by comparingwhenever events or changes in business circumstances indicate that the carrying valueamount of the investment may not be fully recoverable. Management considers impairment indicators such as negative changes in industry and market conditions, financial performance, business prospects, and other relevant events and factors. If indicators exist, further analysis must be performed in order to determine if the estimatedimpairment, if any, is other-than-temporary. If the impairment is deemed to be other-than-temporary, the fair value of its reporting units, determined using externallythe investment must be determined. In the absence of quoted market prices, (if available) or a discountedmanagement must use judgement to determine the fair value of the investment, considering such factors as current economic and market conditions, the operating performance of the entities, including current earnings trends and forecasted cash flow modelflows, and when deemed necessary, a market approach. other company and industry specific information. If the fair value of the investment is below the carrying amount, an impairment loss is recorded to record the investment at fair value.
The Company recorded impairment losses of $0.2 million and $3.0 million in the years ended December 31, 2020 and 2019, respectively, for equity investments accounted for under the measurement alternative, and recorded impairment losses of $16.6 million and $13.1 in the years ended December 31, 2020 and 2019, respectively, for investments accounted for as equity method investments.
New Accounting Pronouncements
Information regarding new accounting pronouncements is included in Note 2 of the Notes to the Consolidated Financial Statements.Statements included in Part IV, Item 8 of this Annual Report on Form 10-K.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This Item 7A is not required for non-accelerated filers.Smaller Reporting Companies.
43
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
IDEANOMICS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
Report of Independent Registered Public Accounting Firm
To the shareholders and the board of directors of Ideanomics, Inc.
OpinionOpinions on the Financial Statements
We have audited the accompanying consolidated balance sheets of Ideanomics Inc. and its subsidiaries and variable interest entities (the "Company") as of December 31, 20182020 and 2017,2019, and the related consolidated statements of operations, comprehensive loss, equity, and cash flows for each of the two years thenin the period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20182020 and 2017,2019 and the results of its operations and its cash flows for each of the two years thenin the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States.States of America.
Going concern uncertainty
The accompanyingWe also have audited the Company's internal control over financial statements have been prepared assuming thatreporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company will continuemaintained, in all material respects, effective internal control over financial reporting as a going concern. As discussedof December 31, 2019, based on criteria established in Note 3 to the financial statements, the Company incurred recurring losses from operations, has net current liabilities and an accumulated deficit that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.Internal Control – Integrated Framework (2013) issued by COSO.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. fraud, and whether effective internal control over financial reporting was maintained in all material respects.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.reporting as of December 31, 2020. As part of our auditsaudit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.opinion as of December 31, 2020.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit of internal control over financial reporting also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.opinions.
F-2
Critical Audit Matters
Emphasis
The critical audit matters communicated below are matters arising from the current period audit of Mattersthe financial statements that were communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of Accounts Receivable
As described in Note 62 to the financial statements, the Company’sCompany reviews its allowance for doubtful accounts receivable on an ongoing basis. In establishing the required allowance, management considers any historical losses, the customer’s financial condition, the accounts receivable aging, and the customer’s payment patterns. The Company has $7.4 million of accounts receivable carrying value as of December 31, 2020.
The principal considerations for our determination that auditing management’s assessment of allowance for doubtful accounts is a critical audit matter are there was significant judgment made by management when considering factors in management’s assessment on collectability of the accounts receivables as described above, as well as the likelihood of the occurrence of these factors impacting the collectability. In turn, such management’s assessment led to challenging and subjective auditor judgment in performing our audit procedures.
Our audit procedures included, among others, understanding of controls relating to management assessment of accounts receivable allowance, interviewing client account managers, examining transaction-related documents, testing historical collections for estimation accuracy, and reviewing collections subsequent to the balance sheet date. Our procedures also included confirming balances with clients, searching public information for the operating and financial conditions of the clients, and interviewing the business contacts of the Company. Our audit procedures also included testing their adequacy of footnote disclosures.
Impairment assessment of intangible assets and goodwill
As described in Note 2 to the financial statements, the Company performs an annual impairment assessment of its indefinite-lived intangible assets and goodwill, or more frequently if events or circumstances indicate that the carrying values exceeds its fair value. The Company reviews other intangible assets with estimable lives for impairment whenever indicators are present that the carrying value may not recoverable. These intangible assets and goodwill have carrying value of $29.7 million and $1.2 million as of December 31, 2020, respectively.
Auditing the valuation of intangible assets and goodwill involved complex judgment due to subjective evaluation of indicators and significant estimation required in determining the recoverability or fair value of the intangible assets and goodwill. Specifically, the cash flow forecasts were sensitive to significant assumptions about future market and economic conditions. Significant assumptions used in the Company’s estimates included sales volume, growth rates, gross profits, operating expenditures, tax rates, and discount rate, as applicable.
We obtained an understanding of the controls over the Company’s annual impairment assessments of intangible assets and goodwill. We compared, by searching online information, management’s assessment in qualitative factors, to public information including economic growth forecast, industry outlook, and business environment, relating to the intangible assets and goodwill. We also tested the estimated future cash flows, including but not limited to, comparing significant inputs to observable third party and industrial sources, comparing to the historical performance of the Company, and evaluating the reasonableness of management’s projected financial information by comparing to observable average industry historical trends and projections, and other internal and external data. For certain intangible asset with comparable current market value such of land use rights, we looked for nearby areas for their market value and price trending of similar lands. We performed sensitivity analyses of significant assumptions to evaluate the reasonableness of the Company’s cash flow forecasts. We assessed the Company’s disclosure of its impairment assessments included in Note 2 as well as the sufficiency of footnote disclosure of impairment assessment of intangible assets and goodwill in Note 9.
F-3
Fair value measurement of acquisition contingent consideration
As described in the Note 2 to the financial statements, accounting for business combinations requires management to make significant estimates and assumptions, especially at the acquisition date including the identification of and estimates for intangible assets, contractual obligations assumed, restructuring liabilities, pre-acquisition contingencies and contingent consideration, where applicable. The Company recognized $5.5 million of remeasurement gain for the year ended December 31, 2017 have been retrospectively adjusted in accordance with FASB Accounting Standards Codification (“ASC”) Subtopic 805-502020.
Auditing the fair value of contingent liabilities, or earn-out liabilities, relating to business combination involved complex judgment due to subjective evaluation of indicators and significant estimation required in determining the fair value of the liabilities. Specifically, the discounted cash flow forecasts commonly used in the valuation were sensitive to significant assumptions about future market and economic conditions. Significant assumptions used in the Company’s estimates included sales volume, growth rates, gross profits, operating expenditures, tax rates, and discount rate, as applicable.
We obtained an understanding of the controls over the Company’s financial reporting process for business acquisitions. We tested the estimated future cash flows, including but not limited to, comparing significant inputs to observable third party and industrial sources, and evaluating the reasonableness of management’s projected financial information by comparing to observable average industry historical trends and projections, and other internal and external data. We performed sensitivity analyses of significant assumptions to evaluate the reasonableness of management’s cash flow analyses of the fair value of the liabilities. We then agreed the Company’s conclusion to the relevant terms of contingent consideration in the business acquisition of entities controlled byagreements. We assessed the Company’s Chairman in April 2018.
The Company has significant transactionsdisclosure of its business combination accounting policies and relationships with related parties, including entities controlled by the Company’s Chairman, which are describedfair value measurement included in Note 142 as well as the sufficiency of footnote disclosures to the financial statements. Transactions involving related parties cannot be presumed to be carried out on an arm's length basis, as the requisite conditions of competitive, free market dealings may not exist.changes in contingent consideration in Note 23.
/s/ B F Borgers CPA PC
We have served as the Company’s auditor since 2018.
Lakewood, Colorado
April 1, 2019 March 31, 2021
F-4
IDEANOMICS, INC.
CONSOLIDATED BALANCE SHEETS (USD in thousands)
| | | | | | |
As of December 31, | | 2020 |
| 2019 | ||
ASSETS | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 165,764 | | $ | 2,633 |
Accounts receivable, net (including due from related parties of $0 and $2,284 as of December 31, 2020 and 2019, respectively) | |
| 7,400 | |
| 2,405 |
Amount due from related parties | |
| 240 | |
| 1,256 |
Prepaid expenses | |
| 2,629 | |
| 572 |
Other current assets | |
| 3,726 | |
| 587 |
Total current assets | |
| 179,759 | |
| 7,453 |
Property and equipment, net | |
| 330 | |
| 378 |
Fintech Village | | | 7,250 | | | 12,561 |
Intangible assets, net | |
| 29,705 | |
| 52,771 |
Goodwill | |
| 1,165 | |
| 23,344 |
Long-term investments | |
| 8,570 | |
| 22,621 |
Operating lease right of use assets | | | 7,117 | | | 6,934 |
Other non-current assets | |
| 516 | |
| 883 |
Total assets | | $ | 234,412 | | $ | 126,945 |
| | | | | | |
LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK , REDEMABLE NON-CONTROLLING INTEREST AND EQUITY | |
|
| |
|
|
Current liabilities | |
|
| |
|
|
Accounts payable | | $ | 5,057 | | $ | 3,380 |
Deferred revenue | |
| 1,129 | |
| 477 |
Accrued salaries | |
| 1,750 | |
| 923 |
Amount due to related parties | |
| 882 | |
| 3,962 |
Other current liabilities | |
| 1,920 | |
| 6,466 |
Current portion of operating lease liabilities | |
| 430 | |
| 1,113 |
Current contingent consideration | | | 1,325 | | | 12,421 |
Promissory note-short term | | | 568 | | | 3,000 |
Convertible promissory note due to third-parties-short term | | | 0 | | | 1,753 |
Convertible promissory note due to related parties-short term | | | 0 | | | 3,260 |
Total current liabilities | |
| 13,061 | |
| 36,755 |
| | | | | | |
Asset retirement obligations | |
| 4,653 | |
| 5,094 |
Convertible promissory note due to third-parties-long term | |
| 0 | |
| 5,089 |
Convertible promissory note due to related parties-long term | | | 0 | | | 1,551 |
Operating lease liability-long term | | | 6,759 | | | 6,222 |
Non-current contingent liabilities | | | 7,635 | | | 12,235 |
Other long-term liabilities | |
| 535 | |
| 0 |
Total liabilities | |
| 32,643 | |
| 66,946 |
Commitments and contingencies (Note 19) | |
|
| |
|
|
Convertible redeemable preferred stock and Redeemable non-controlling interest: | |
|
| |
|
|
Series A - 7,000,000 shares issued and outstanding, liquidation and deemed liquidation preference of $3,500,000 as of December 31, 2020 and 2019, respectively | |
| 1,262 | |
| 1,262 |
Redeemable non-controlling interest | | | 7,485 | | | 0 |
Equity: | |
|
| |
|
|
Common stock - $0.001 par value; 1,500,000,000 shares authorized, 344,906,295 and 149,692,953 shares issued and outstanding as of December 31, 2020 and 2019, respectively | | | 345 | | | 150 |
Additional paid-in capital | |
| 531,866 | |
| 282,556 |
Accumulated deficit | |
| (346,883) | |
| (248,483) |
Accumulated other comprehensive loss | |
| 1,256 | |
| (664) |
Total IDEX shareholder's equity | |
| 186,584 | |
| 33,559 |
Non-controlling interest | |
| 6,438 | |
| 25,178 |
Total equity | |
| 193,022 | |
| 58,737 |
Total liabilities, convertible redeemable preferred stock, redeemable non-controlling interest and equity | | $ | 234,412 | | $ | 126,945 |
As of December 31, | 2018 | 2017 | ||||||
(As adjusted*) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 3,106,244 | $ | 7,208,037 | ||||
Restricted cash | - | 369,280 | ||||||
Accounts receivable, net | 19,370,665 | 26,962,085 | ||||||
Licensed content | 16,958,149 | 16,958,149 | ||||||
Inventory | - | 216,453 | ||||||
Prepaid expenses | 2,042,041 | 2,202,728 | ||||||
Other current assets | 3,594,942 | 2,276,096 | ||||||
Total current assets | 45,072,041 | 56,192,828 | ||||||
Property and equipment, net | 15,029,427 | 127,275 | ||||||
Intangible assets, net | 3,036,352 | 148,874 | ||||||
Goodwill | 704,884 | - | ||||||
Long-term investments | 26,408,609 | 6,975,511 | ||||||
Other non-current assets | 3,983,799 | - | ||||||
Total assets | $ | 94,235,112 | $ | 63,444,488 | ||||
LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK AND EQUITY | ||||||||
Current liabilities: (including amounts of the consolidated VIEs without recourse to Ideanomics, Inc. See note 5) | ||||||||
Accounts payable | $ | 19,265,094 | $ | 26,829,593 | ||||
Deferred revenue | 405,929 | 222,350 | ||||||
Accrued interest due to a related party | 140,055 | 20,055 | ||||||
Accrued salaries | 706,351 | 737,072 | ||||||
Amount due to related parties | 800,822 | 434,030 | ||||||
Other current liabilities | 4,615,346 | 801,560 | ||||||
Convertible promissory note due to related parties | 4,000,000 | 3,000,000 | ||||||
Total current liabilities | 29,933,597 | 32,044,660 | ||||||
Deferred tax liabilities | 513,935 | - | ||||||
Asset retirement obligations | 8,000,000 | - | ||||||
Convertible note-long term | 11,313,770 | - | ||||||
Other non-current liabilities | - | 384,243 | ||||||
Total liabilities | 49,761,302 | 32,428,903 | ||||||
Commitments and contingencies (Note 18) | ||||||||
Convertible redeemable preferred stock: | ||||||||
Series A - 7,000,000 shares issued and outstanding, liquidation and deemed liquidation preference of $3,500,000 as of December 31, 2018 and 2017, respectively | 1,261,995 | 1,261,995 | ||||||
Equity: | ||||||||
Common stock - $0.001 par value; 1,500,000,000 shares authorized, 102,766,006 and 68,509,090 shares issued and outstanding as of December 31, 2018 and 2017, respectively | 102,765 | 68,509 | ||||||
Additional paid-in capital | 195,779,576 | 158,449,544 | ||||||
Accumulated deficit | (149,975,302 | ) | (126,693,022 | ) | ||||
Accumulated other comprehensive loss | (1,664,598 | ) | (782,074 | ) | ||||
Total IDEX shareholder’s equity | 44,242,441 | 31,042,957 | ||||||
Non-controlling interest | (1,030,626 | ) | (1,289,367 | ) | ||||
Total equity | 43,211,815 | 29,753,590 | ||||||
Total liabilities, convertible redeemable preferred stock and equity | $ | 94,235,112 | $ | 63,444,488 |
* The above consolidated balance sheets include Shanghai Guang Ming Investment Management Limited (“Guang Ming”). The acquisition of Guang Ming was completed on April 4, 2018 and accounted for as a reorganization of entities under common control and as if it had been owned by the Company since November 10, 2016 in accordance with ASC Subtopic 805-50 (See Note 6 “Acquisition”)
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Table of ContentsIDEANOMICS,
IDEANOMICS, INC.
CONSOLIDATEDCONSOLIDATED STATEMENTS OF OPERATIONS (USD in thousands, except per share data)
| | | | | | |
For the years ended December 31, |
| 2020 |
| 2019 | ||
Revenue from third-parties | | $ | 26,749 | | $ | 1,295 |
Revenue from related parties | |
| 10 | |
| 43,271 |
Total revenue | |
| 26,759 | |
| 44,566 |
Cost of revenue from third-parties | |
| 24,701 | |
| 991 |
Cost of revenue from related parties | |
| 1 | |
| 467 |
Gross profit | |
| 2,057 | |
| 43,108 |
| | | | | | |
Operating expenses: | |
|
| |
|
|
Selling, general and administrative expenses | |
| 32,399 | |
| 24,862 |
Research and development expense | |
| 1,635 | |
| 0 |
Professional fees | | | 12,541 | | | 5,828 |
Depreciation and amortization | | | 5,310 | | | 2,229 |
Change in fair value of contingent consideration, net | |
| (5,503) | |
| 5,094 |
Impairment losses | | | 42,554 | | | 73,669 |
Total operating expenses | |
| 88,936 | |
| 111,682 |
| | | | | | |
Loss from operations | |
| (86,879) | |
| (68,574) |
| | | | | | |
Interest and other income (expense): | |
|
| |
|
|
Interest expense, net | |
| (15,970) | |
| (5,616) |
Expense due to conversion of notes | | | (2,266) | | | 0 |
Gain (loss) on extinguishment of debt | | | 8,891 | | | (3,940) |
Impairment of and equity in loss of equity method investees | |
| (16,698) | |
| (13,718) |
Gain (loss) on disposal of subsidiaries, net | | | 276 | | | (952) |
Loss on remeasurement of DBOT investment | | | 0 | | | (3,179) |
Other income (expense), net | |
| 6,603 | |
| (433) |
Loss before income taxes and non-controlling interest | |
| (106,043) | |
| (96,412) |
| | | | | | |
Income tax (expense) benefit | |
| 0 | |
| (417) |
| | | | | | |
Net loss | |
| (106,043) | |
| (96,829) |
| | | | | | |
Deemed dividend related to warrant repricing | | | (184) | | | (827) |
| | | | | | |
Net loss attributable to common stockholders | | | (106,227) | | | (97,656) |
| | | | | | |
Net (income) loss attributable to non-controlling interest | |
| 7,827 | |
| (852) |
| | | | | | |
Net loss attributable to IDEX common shareholders | | $ | (98,400) | | $ | (98,508) |
| | | | | | |
Basic and diluted loss per share | | $ | (0.46) | | $ | (0.82) |
| | | | | | |
Weighted average shares outstanding: | |
|
| |
|
|
| | | | | | |
Basic and diluted | |
| 213,490,535 | |
| 119,766,859 |
For the years ended December 31, | 2018 | 2017 | ||||||
(As adjusted*) | ||||||||
Revenue from third parties | $ | 278,024,867 | $ | 125,379,786 | ||||
Revenue from related party | 99,718,005 | 18,973,054 | ||||||
Total revenue | 377,742,872 | 144,352,840 | ||||||
Cost of revenue from third parties | 130,464,906 | 137,188,393 | ||||||
Cost of revenue from related parties | 244,110,132 | - | ||||||
Gross profit | 3,167,834 | 7,164,447 | ||||||
Operating expenses: | ||||||||
Selling, general and administrative expenses | 22,471,976 | 13,129,313 | ||||||
Research and development expense | 1,654,491 | 406,845 | ||||||
Professional fees | 4,749,799 | 3,200,885 | ||||||
Depreciation and amortization | 352,332 | 308,102 | ||||||
Impairment of other intangible assets | 134,290 | 216,468 | ||||||
Total operating expenses | 29,362,888 | 17,261,613 | ||||||
Loss from operations | (26,195,054 | ) | (10,097,166 | ) | ||||
Interest and other income (expense): | ||||||||
Interest expense, net | (804,595 | ) | (94,618 | ) | ||||
Change in fair value of warrant liabilities | - | (112,642 | ) | |||||
Equity in loss of equity method investees | (180,625 | ) | (129,193 | ) | ||||
Loss on disposal of subsidiaries | (1,183,289 | ) | - | |||||
Others | (99,765 | ) | (426,698 | ) | ||||
Loss before income taxes and non-controlling interest | (28,463,328 | ) | (10,860,317 | ) | ||||
Income tax benefit | 40,244 | - | ||||||
Net loss | (28,423,084 | ) | (10,860,317 | ) | ||||
Net loss attributable to non-controlling interest | 996,728 | 357,268 | ||||||
Net loss attributable to IDEX common shareholders | $ | (27,426,356 | ) | $ | (10,503,049 | ) | ||
Basic and diluted loss per share | $ | (0.35 | ) | $ | (0.17 | ) | ||
Weighted average shares outstanding: | ||||||||
Basic and diluted | 78,386,116 | 61,182,209 |
*The above consolidated statements of operations include Guang Ming. The acquisition of Guang Ming was completed on April 4, 2018 and accounted for as a reorganization of entities under common control and as if it had been owned by the Company since November 10, 2016 in accordance with ASC Subtopic 805-50 (See Note 6 “Acquisition”)
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of ContentsIDEANOMICS,
IDEANOMICS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (USD in thousands)
| | | | | | |
For the years ended December 31, |
| 2020 |
| 2019 | ||
| | | | | | |
| | | | | | |
Net loss | | $ | (106,043) | | $ | (96,829) |
Other comprehensive loss, net of NaN tax | |
| | |
| |
Foreign currency translation adjustments | |
| 3,208 | |
| 407 |
Comprehensive loss | |
| (102,835) | |
| (96,422) |
Deemed dividend related to warrant repricing | | | (184) | | | (827) |
Comprehensive loss attributable to non-controlling interest | |
| 6,539 | |
| (844) |
Comprehensive loss attributable to IDEX common shareholders | | $ | (96,480) | | $ | (98,093) |
For the years ended December 31, | 2018 | 2017 | ||||||
(As adjusted*) | ||||||||
Net loss | $ | (28,423,084 | ) | $ | (10,860,317 | ) | ||
Other comprehensive loss, net of nil tax | ||||||||
Foreign currency translation adjustments | (882,516 | ) | 766,070 | |||||
Comprehensive loss | (29,305,600 | ) | (10,094,247 | ) | ||||
Comprehensive loss attributable to non-controlling interest | 978,282 | 401,359 | ||||||
Comprehensive loss attributable to IDEX common shareholders | $ | (28,327,318 | ) | $ | (9,692,888 | ) |
* The above consolidated statements of cash flows include Guang Ming. The acquisition of Guang Ming was completed on April 4, 2018 and accounted for as a reorganization of entities under common control and as if it had been owned by the Company since November 10, 2016 in accordance with ASC Subtopic 805-50 (See Note 6 “Acquisition”)
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Table of ContentsIDEANOMICS,
IDEANOMICS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
For the years ended December 31, 20182020 and 20172019 (USD in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | ||
| | Series E | | Series E | | | | | | | Additional | | | | | Other | | Ideanomics | | Non- | | | | |||||
| | Preferred | | Par | | Common | | Par | | Paid-in | | Accumulated | | Comprehensive | | Shareholders' | | controlling | | Total | ||||||||
|
| Stock |
| Value |
| Stock |
| Value |
| Capital |
| Deficit |
| Loss |
| equity |
| Interest* |
| Equity | ||||||||
Balance, December 31, 2018 |
| 0 | | $ | 0 |
| 102,766,006 | | $ | 103 | | $ | 195,780 | | $ | (149,975) | | $ | (1,665) | | $ | 44,243 | | $ | (1,031) | | $ | 43,212 |
Share-based compensation |
| 0 | |
| 0 |
| 0 | |
| 0 | |
| 9,113 | |
| 0 | |
| 0 | |
| 9,113 | |
| 0 | |
| 9,113 |
Common stock issued under employee stock incentive plan |
| 0 | |
| 0 |
| 129,840 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 0 |
Common stock issuance for acquisitions, investments, and assets |
| 0 | |
| 0 |
| 37,966,908 | |
| 38 | |
| 53,183 | |
| 0 | |
| 0 | |
| 53,221 | |
| 24,598 | |
| 77,819 |
Common stock issuance for convertible notes |
| 0 | |
| 0 |
| 8,186,890 | |
| 8 | |
| 22,997 | |
| 0 | |
| 0 | |
| 23,005 | |
| 0 | |
| 23,005 |
Disposal of subsidiary |
| 0 | |
| 0 |
| 0 | |
| 0 | |
| 1,374 | |
| 0 | |
| 586 | |
| 1,960 | |
| 446 | |
| 2,406 |
Non-controlling shareholder contribution |
| 0 | |
| 0 |
| 575,431 | |
| 1 | |
| (1) | |
| 0 | |
| 0 | |
| 0 | |
| 321 | |
| 321 |
Common stock issued to settle debt |
| 0 | |
| 0 |
| 67,878 | |
| 0 | |
| 110 | |
| 0 | |
| 0 | |
| 110 | |
| 0 | |
| 110 |
Net loss** | | 0 | |
| 0 |
| 0 | |
| 0 | |
| 0 | |
| (98,508) | |
| 0 | |
| (98,508) | |
| 852 | |
| (97,656) |
Foreign currency translation adjustments, net of nil tax | | 0 | |
| 0 |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 415 | |
| 415 | |
| (8) | |
| 407 |
Balance, December 31, 2019 |
| 0 | | | 0 |
| 149,692,953 | | | 150 | | | 282,556 | | | (248,483) | | | (664) | | | 33,559 | | | 25,178 | | | 58,737 |
Share-based compensation |
| 0 | |
| 0 |
| 0 | |
| 0 | |
| 11,971 | |
| 0 | |
| 0 | |
| 11,971 | |
| 0 | |
| 11,971 |
Common stock issuance for professional fees |
| 0 | |
| 0 |
| 1,804,033 | |
| 2 | |
| 1,640 | |
| 0 | |
| 0 | |
| 1,642 | |
| 0 | |
| 1,642 |
Common stock issuance for convertible notes |
| 0 | |
| 0 |
| 40,662,420 | |
| 40 | |
| 45,627 | |
| 0 | |
| 0 | |
| 45,667 | |
| 0 | |
| 45,667 |
Common stock issuance for acquisitions, investments, and assets |
| 0 | |
| 0 |
| 13,056,055 | |
| 13 | |
| 8,179 | |
| 0 | |
| 0 | |
| 8,192 | |
| 0 | |
| 8,192 |
Common stock issuance for warrant exercise |
| 0 | |
| 0 |
| 8,995,906 | |
| 9 | |
| 7,206 | |
| 0 | |
| 0 | |
| 7,215 | |
| 0 | ��� |
| 7,215 |
Measurement period adjustment |
| 0 | |
| 0 |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| (11,584) | |
| (11,584) |
Non-controlling shareholder contribution |
| 0 | |
| 0 |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 100 | |
| 100 |
Common stock issued to settle debt |
| 0 | |
| 0 |
| 4,577,876 | |
| 5 | |
| 2,309 | |
| 0 | |
| 0 | |
| 2,314 | |
| 0 | |
| 2,314 |
Common stock issued under employee stock incentive plan |
| 0 | |
| 0 |
| 2,634,666 | |
| 3 | |
| 1,723 | |
| 0 | |
| 0 | |
| 1,726 | |
| 0 | |
| 1,726 |
Extinguishment of convertible note | | 0 | |
| 0 |
| 0 | |
| 0 | |
| (12,000) | |
| 0 | |
| 0 | |
| (12,000) | |
| 0 | |
| (12,000) |
Common stock issuance | | 0 | |
| 0 |
| 123,437,386 | |
| 123 | |
| 182,655 | |
| 0 | |
| 0 | |
| 182,778 | |
| (280) | |
| 182,498 |
Net loss** |
| 0 | |
| 0 |
| 0 | |
| 0 | |
| 0 | |
| (98,400) | |
| 0 | |
| (98,400) | |
| (8,264) | |
| (106,664) |
Foreign currency translation adjustments, net of nil tax |
| 0 | |
| 0 |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 1,920 | |
| 1,920 | |
| 1,288 | |
| 3,208 |
Balance, December 31, 2020 |
| 0 | | $ | 0 |
| 344,861,295 | | $ | 345 | | $ | 531,866 | | $ | (346,883) | | $ | 1,256 | | $ | 186,584 | | $ | 6,438 | | $ | 193,022 |
Series E Preferred Stock | Series E Par Value | Common Stock | Par Value | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Ideanomics Shareholders' equity | Non-controlling Interest | Total Equity | |||||||||||||||||||||||||||||||
Balance, January 1, 2017 (As adjusted*) | 7,154,997 | $ | 7,155 | 53,918,523 | $ | 53,918 | $ | 152,792,855 | $ | (115,829,451 | ) | $ | (1,371,498 | ) | $ | 35,652,979 | $ | (5,325,481 | ) | $ | 30,327,498 | |||||||||||||||||||
Share-based compensation | - | - | - | - | 1,305,829 | - | - | 1,305,829 | - | 1,305,829 | ||||||||||||||||||||||||||||||
Common stock issuance | - | - | 6,221,778 | 6,222 | 11,969,368 | - | - | 11,975,590 | - | 11,975,590 | ||||||||||||||||||||||||||||||
Common stock issuance for RSU vested | - | - | 117,715 | 118 | (118 | ) | - | - | - | - | - | |||||||||||||||||||||||||||||
Common stock issuance for option exercised | - | - | 188,687 | 189 | 100,129 | - | - | 100,318 | - | 100,318 | ||||||||||||||||||||||||||||||
Common stock issued for warrant exercised | - | - | 907,390 | 907 | 1,724,819 | - | - | 1,725,726 | - | 1,725,726 | ||||||||||||||||||||||||||||||
Common stock issued from conversion of series E preferred stock | (7,154,997 | ) | (7,155 | ) | 7,154,997 | 7,155 | - | - | - | - | - | - | ||||||||||||||||||||||||||||
Disposal of Xhong Hai Shi Xun | - | - | - | - | (9,887,398 | ) | (360,522 | ) | (220,737 | ) | (10,468,657 | ) | 3,947,473 | (6,521,184 | ) | |||||||||||||||||||||||||
Capital contribution from noncontrolling interest shareholder | - | - | - | - | - | - | - | - | 490,000 | 490,000 | ||||||||||||||||||||||||||||||
Acquisition of Guang Ming* | - | - | - | - | 444,060 | - | - | 444,060 | - | 444,060 | ||||||||||||||||||||||||||||||
Net loss | �� | - | - | - | - | - | (10,503,049 | ) | - | (10,503,049 | ) | (357,268 | ) | (10,860,317 | ) | |||||||||||||||||||||||||
Foreign currency translation adjustments, net of nil tax | - | - | - | - | - | - | 810,161 | 810,161 | (44,091 | ) | 766,070 | |||||||||||||||||||||||||||||
Balance, December 31, 2017 (As adjusted*) | - | $ | - | 68,509,090 | $ | 68,509 | $ | 158,449,544 | $ | (126,693,022 | ) | $ | (782,074 | ) | $ | 31,042,957 | $ | (1,289,367 | ) | $ | 29,753,590 | |||||||||||||||||||
Share-based compensation | - | - | - | - | 3,412,977 | - | - | 3,412,977 | - | 3,412,977 | ||||||||||||||||||||||||||||||
Common stock issuance (GTD) | - | - | 5,494,505 | 5,494 | 9,994,506 | - | - | 10,000,000 | - | 10,000,000 | ||||||||||||||||||||||||||||||
Common stock to be issued (SSSIG) | - | - | 1,177,585 | - | - | 1,177,585 | - | 1,177,585 | ||||||||||||||||||||||||||||||||
Common stock issuance (STAR) | - | - | 5,027,324 | 5,027 | 9,194,973 | - | - | 9,200,000 | - | 9,200,000 | ||||||||||||||||||||||||||||||
Common stock issuance for option exercised | - | - | 82,797 | 82 | 27,960 | - | - | 28,042 | - | 28,042 | ||||||||||||||||||||||||||||||
Common stock issued for warrant exercised | - | - | 643,714 | 644 | 1,125,856 | - | - | 1,126,500 | - | 1,126,500 | ||||||||||||||||||||||||||||||
Common stock issuance for RSU vested | - | - | 1,240,707 | 1,241 | (1,241 | ) | - | - | - | - | - | |||||||||||||||||||||||||||||
Common stock issuance for acquisition (BDCG) | - | - | 3,000,000 | 3,000 | 7,797,000 | - | - | 7,800,000 | - | 7,800,000 | ||||||||||||||||||||||||||||||
Common stock issuance for acquisition (DBOT) | - | - | 2,267,869 | 2,268 | 6,724,078 | - | - | 6,726,346 | - | 6,726,346 | ||||||||||||||||||||||||||||||
Beneficial conversion feature of convertible note-long term | - | - | - | - | 1,384,615 | - | - | 1,384,615 | - | 1,384,615 | ||||||||||||||||||||||||||||||
Earnout shares to SSSIG | - | - | 16,500,000 | 16,500 | (16,500 | ) | - | - | - | - | - | |||||||||||||||||||||||||||||
Acquisition resulting in non-controlling interest (Grapevine) | - | - | - | - | - | - | - | - | 678,651 | 678,651 | ||||||||||||||||||||||||||||||
Disposal of subsidiaries | - | - | (3,491,777 | ) | 4,144,076 | 18,438 | 670,737 | 558,372 | 1,229,109 | |||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | (27,426,356 | ) | (27,426,356 | ) | (996,728 | ) | (28,423,084 | ) | |||||||||||||||||||||||||||
Foreign currency translation adjustments, net of nil tax | - | - | - | - | - | - | (900,962 | ) | (900,962 | ) | 18,446 | (882,516 | ) | |||||||||||||||||||||||||||
Balance, December 31, 2018 | - | $ | - | 102,766,006 | $ | 102,765 | $ | 195,779,576 | $ | (149,975,302 | ) | $ | (1,664,598 | ) | $ | 44,242,441 | $ | (1,030,626 | ) | $ | 43,211,815 |
* Excludes accretion of dividend for redeemable non-controlling interest
** Excludes deemed dividend related to warrant repricing
* The above consolidated statements of equity include Guang Ming. The acquisition of Guang Ming was completed on April 4, 2018 and accounted for as a reorganization of entities under common control and as if it had been owned by the Company since November 10, 2016 in accordance with ASC Subtopic 805-50 (See Note 6 “Acquisition”)
The accompanying notes are an integral part of these consolidated financial statements.
F-8
Table of ContentsIDEANOMICS,
IDEANOMICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD in thousands)
| | | | | | |
For the years ended December 31, |
| 2020 |
| 2019 | ||
Cash flows from operating activities: | | | | | | |
Net loss | | $ | (106,043) | | $ | (96,829) |
Adjustments to reconcile net loss to net cash used in operating activities | |
| | |
| |
Share-based compensation expense | |
| 11,971 | |
| 9,113 |
Depreciation and amortization | |
| 5,310 | |
| 2,229 |
Non-cash interest expense | | | 14,785 | | | 5,511 |
Allowance for doubtful accounts | |
| 1,219 | |
| 0 |
Bad debt expense | | | 1,643 | | | 0 |
Expense due to conversion of notes | | | 2,266 | | | 0 |
Change in fair value of contingent consideration, net | | | (5,503) | | | 5,094 |
Loss (gain) on extinguishment of debt | | | (8,891) | | | 3,940 |
Impairment of and equity in losses of equity method investees | | | 16,698 | | | 13,718 |
Settlement of ROU operating lease liabilities | | | (5,926) | | | 0 |
Loss on impairment of assets | |
| 42,554 | |
| 73,669 |
Loss (gain) on disposal of subsidiaries, net | |
| (276) | |
| 952 |
Loss on remeasurement of DBOT investment | | | 0 | | | 3,179 |
Digital tokens received as payment for services | | | 0 | | | (40,700) |
Disposal of equity method investments | | | 0 | | | 245 |
| | | | | | |
Change in assets and liabilities: | |
| | |
| |
Accounts receivable | |
| (6,214) | |
| (2,278) |
Prepaid expenses and other assets | |
| (6,745) | |
| 2,881 |
Accounts payable | |
| 2,206 | |
| 2,862 |
Deferred revenue | |
| 652 | |
| 168 |
Amount due to related parties (interest) | |
| 1,269 | |
| (1,256) |
Accrued expenses, salary and other current liabilities | |
| (2,443) | |
| 3,718 |
Net cash used in operating activities | |
| (41,468) | |
| (13,784) |
| | | | | | |
Cash flows from investing activities: | |
| | |
| |
Acquisition of property and equipment | | | (191) | | | (1,816) |
Disposal of subsidiaries, VIEs, net of cash disposed | |
| 0 | |
| 645 |
Acquisition of subsidiaries, net of cash acquired | |
| 0 | |
| (623) |
Investments in long term investment | |
| (2,850) | |
| 0 |
Loans to third parties | |
| (1,988) | |
| 0 |
Proceeds from loan repayment | |
| 1,529 | |
| 0 |
Net cash used in investing activities | |
| (3,500) | |
| (1,794) |
| | | | | | |
Cash flows from financing activities | |
| | |
| |
Proceeds from issuance of convertible notes | | | 27,000 | | | 9,132 |
Repayment of convertible notes | | | (12,000) | | | 0 |
Proceeds from issuance of shares, stock options and warrant | | | 191,440 | | | 2,821 |
Proceeds from noncontrolling interest shareholder | | | 7,148 | | | 0 |
Proceeds (repayments) due from/to related parties | |
| (2,999) | |
| 3,161 |
Borrowings(repayments) from/to third parties | |
| (2,540) | |
| 0 |
Net cash provided by financing activities | |
| 208,049 | |
| 15,114 |
Effect of exchange rate changes on cash | |
| 50 | |
| (9) |
Net increase (decrease) in cash, cash equivalents and restricted cash | |
| 163,131 | |
| (473) |
| | | | | | |
Cash, cash equivalents and restricted cash at the beginning of the year | |
| 2,633 | |
| 3,106 |
| | | | | | |
Cash, cash equivalents and restricted cash at the end of the year | | $ | 165,764 | | $ | 2,633 |
| | | | | | |
Supplemental disclosure of cash flow information: | |
| | |
| |
Cash paid for income tax | | $ | 0 | | $ | 0 |
Cash paid for interest | | | 3,004 | | | 73 |
| | | | | | |
Issuance of shares for contingent consideration | | | 8,192 | | | 0 |
Issuance of shares for convertible notes conversion | | | 45,114 | | | 0 |
Tree Technologies measurement period adjustment on goodwill, non-controlling interest and intangible assets | | | 12,848 | | | 0 |
Disposal of assets in exchange of GTB | | | 0 | | | 20,219 |
Issuance of shares for acquisition of intangible assets | | | 0 | | | 10,005 |
Issuance of shares for acquisition of long-term investments | | | 0 | | | 40,715 |
For the years ended December 31, | 2018 | 2017 | ||||||
As adjusted* | ||||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (28,423,084 | ) | $ | (10,860,317 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
Share-based compensation expense | 3,412,977 | 1,305,829 | ||||||
Provision for doubtful accounts | - | 145,512 | ||||||
Depreciation and amortization | 352,332 | 308,102 | ||||||
Non-cash interest expense | 698,385 | - | ||||||
Equity in losses of equity method investees | 180,625 | 129,193 | ||||||
Loss on disposal of assets | - | 688,098 | ||||||
Loss on disposal of subsidiaries | 1,183,289 | - | ||||||
Change in fair value of warrant liabilities | - | 112,642 | ||||||
Impairment of other intangible assets | 134,290 | 216,468 | ||||||
Change in assets and liabilities: | ||||||||
Accounts receivable | 7,591,420 | (18,802,766 | ) | |||||
Licensed content | - | 759,698 | ||||||
Inventory | 216,453 | - | ||||||
Prepaid expenses and other assets | (1,296,872 | ) | 4,130,372 | |||||
Accounts payable | (7,564,499 | ) | 13,493,865 | |||||
Deferred revenue | 183,579 | (1,124,119 | ) | |||||
Amount due to related parties (interest) | 120,000 | - | ||||||
Accrued expenses, salary and other current liabilities | 3,050,895 | (821,351 | ) | |||||
Net cash used in operating activities | (20,160,210 | ) | (10,318,774 | ) | ||||
Cash flows from investing activities: | ||||||||
Acquisition of property and equipment | (6,762,248 | ) | (63,877 | ) | ||||
Proceeds from disposal of property and equipment | - | 2,515,923 | ||||||
Disposal of subsidiaries, net of cash disposed | (41,976 | ) | (8,753 | ) | ||||
Acquisition of subsidiaries, net of cash acquired | (2,784,243 | ) | (754,361 | ) | ||||
Investments in intangible assets | (301,495 | ) | - | |||||
Payments for long term investments | (5,266,880 | ) | (2,250,000 | ) | ||||
Capital decrease in long term investment | - | 35,612 | ||||||
Deposit for surety bond and other | (3,983,799 | ) | - | |||||
Net cash used in investing activities | (19,140,641 | ) | (525,456 | ) | ||||
Cash flows from financing activities | ||||||||
Proceeds from issuance of convertible notes | 13,000,000 | - | ||||||
Proceeds from issuance of shares, stock options and warrant | 21,532,127 | 13,618,207 | ||||||
Proceeds from/(Repayment of) amounts due to related parties | 366,792 | (293,977 | ) | |||||
Capital contribution from noncontrolling interest shareholder | - | 490,000 | ||||||
Exemption of amounts due to related parties | - | 444,060 | ||||||
Net cash provided by financing activities | 34,898,919 | 14,258,290 | ||||||
Effect of exchange rate changes on cash | (69,141 | ) | 83,488 | |||||
Net increase (decrease) in cash, cash equivalents and restricted cash | (4,471,073 | ) | 3,497,548 | |||||
Cash, cash equivalents and restricted cash at the beginning of the year | 7,577,317 | 4,079,769 | ||||||
Cash, cash equivalents and restricted cash at the end of the year | $ | 3,106,244 | $ | 7,577,317 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid for income tax | $ | - | $ | - | ||||
Cash paid for interest | $ | - | $ | 407,863 | ||||
Exchange of Series E Preferred Stock for Common stock | $ | - | $ | 7,155 | ||||
Issuance of shares for acquisition of long-term investments | $ | 14,526,346 | $ | - | ||||
Issuance of earn-out shares | $ | 16,500 | $ | - | ||||
Asset retirement obligations acquired | $ | 8,000,000 | $ | - |
* The above consolidated statements of cash flows include Guang Ming. The acquisition of Guang Ming was completed on April 4, 2018 and accounted for as a reorganization of entities under common control and as if it had been owned by the Company since November 10, 2016 in accordance with ASC Subtopic 805-50 (See Note 6 “Acquisition”)
The accompanying notes are an integral part of these consolidated financial statements.
F-9
IDEANOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Principal Activities
Ideanomics, Inc. (Nasdaq: IDEX) (formerly known as Seven Stars Cloud Group, Inc. which changed its name effective as of October 17, 2018), is a Nevada corporation that primarily operates in Asia and the United States through its subsidiaries and variable interest entities (“VIEs”VIEs.”). Unless the context otherwise requires, the use of the terms "we," "us","us," "our" and the “Company” in these notes to consolidated financial statements refers to Ideanomics, Inc, ("Ideanomics") its consolidated subsidiaries and VIEs.variable interest entities.
Our Company consists of two operating segments which our Chief Executive Officer (ourThe Company’s chief operating decision maker)maker has been identified as the chief executive officer, who reviews separately to makeconsolidated results when making decisions about resource allocationallocating resources and assessing performance of the Company. Therefore, the Company operates in one segment with two business units, Ideanomics Mobility, formally referred to assess performance: Legacy YOD segmentas the Mobile Energy Group (“MEG,”) and Wecast Service segment.Ideanomics Capital. MEG is a subsidiary which holds the Company’s China based vehicle operations.
Legacy YOD segment provides premium contentIdeanomics Mobility’s mission is to use electronic vehicles (“EVs”) and integrated value-added serviceEV battery sales and financing to attract commercial fleet operators that will generate large scale demand for energy, energy storage systems, and energy management contracts. Ideanomics Mobility operates as an end-to-end solutions provider for the deliveryprocurement, financing, charging and energy management needs for fleet operators of videocommercial EVs.
Ideanomics Capital is the Company's fintech business unit, which focuses on demand (“VOD”)leveraging technology and paid video programminginnovation to digital cable providers, Internet Protocol Television (“IPTV”) providers, over-the-top (“OTT”) streaming providers, mobile manufacturersimprove efficiency, transparency, and operators, as well as direct customers. profitability for the financial services industry.
The Company historically has offered these products under thealso seeks to identify industries and business name “YOU On Demand” and refers to these operations as the legacy YOD business. The revenues from Legacy YOD segment were from both minimum guarantee payments and revenue sharing arrangements with distribution partners as well as subscription or transactional fees from subscribers.
Wecast Services is currently primarily engaged in the logistics management and financing business primarily operated in Singapore.
Starting from early year 2017, the Company began transitioning our business model to become a next generation financial technology (“Fintech”) company through several acquisitions and the establishment of joint ventures, with the intention of offering financing solutions and logistics solutions, each based on the emergence of systems that utilizeprocesses where blockchain and artificial intelligence (“AI”) technologies. Ontechnologies can be profitably deployed to disrupt established industries and business processes.
Liquidity Improvements
In the financing solutions side,year ended December 31, 2020, the Company improved its liquidity position by raising a total of $225.5 million: $191.4 million through the issuance of common stock and exercise of warrants, $7.1 million from noncontrolling interest shareholders, and $27.0 million through the issuance of senior secured convertible notes. The Company converted senior secured convertible notes of $34.4 million plus accrued interest of $0.3 million to common stock. Additionally, the Company converted $4.6 million of convertible notes payable and accrued interest to related parties and an additional $1.5 million due to related parties to common stock. As a result of these actions, the Company reduced the principal amount of its indebtedness by $50.9 million, and as of December 31, 2020, had cash and cash equivalents of $165.8 million, $163.8 million of which is held in U.S. financial institutions.
Based upon its business projections and its cash and cash equivalents balance as of December 31, 2020, the Company believes it has the ability to continue as a going concern.
Effects of COVID-19
Novel Coronavirus 2019 (“COVID-19”) is an infectious disease cause by severe acute respiratory syndrome coronavirus. The disease was first identified in December 2019 in Wuhan, the capital of China’s Hubei province, and has since spread globally, resulting in the ongoing COVID-19 pandemic. As of March 21, 2021, over 122.9 million cases had been building capabilities bothreported across the globe, resulting in providing business consulting services related2.7 million deaths.
The spread of COVID-19 has caused significant disruption to traditional financings,society as a whole, including the workplace. The resulting impact to the global supply chain has disrupted most aspects of national and international commerce, with government-mandated social distancing measures imposing stay-at-home and work-from-home orders in almost every country. The effects of social distancing have shut down significant parts of the local, regional, national, and international economies, for limited or extended periods of time, with the exception of government designated essential services.
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In many parts of the world, stay-at-home and work-from-home orders were relaxed during the summer of 2020 as the effects of the Coronavirus appeared to lessen, and economic activity began to recover. However, commencing in the autumn and fall of 2020 and continuing, the U.S. as well as countries in developing digital asset securitization services via AIEurope, South America and blockchain enabled platforms. OnAsia began to experience an increase in new COVID-19 cases, and in some cases local, state, and national governments began to reinstate restrictive measures to stem the logistics side,spread of the virus. The U.S. and other countries also experienced an increase in new COVID-19 cases after the fall and winter holiday season, with new, more infectious variants of COVID-19 identified. Various vaccines have been developed, with vaccinations programs in effect worldwide, though reaching acceptable levels for worldwide immunization against COVID-19 remains challenging.
The future effects of the virus are difficult to predict, due to uncertainty about the course of the virus, different variants that may evolve, and the supply of the vaccine on a local, regional, and global basis, as well as the ability to implement vaccination programs in a short time frame.
Many of the Company’s operations are in the development or early stage, have not had significant revenues to date, and the Company has been building expertisedoes not anticipate significant adverse effects on its operations’ revenue as compared to its business plan in the traditional commodities trading business,near- or mid-term, although the future effects of COVID-19 may result in regional restrictive measures which may constrain the Company’s operations.
The Company continues to monitor the overall situation with an initial focusCOVID-19 and its effects on crude oil tradingboth local, regional and consumer electronics trading, with the goal of leveraging such expertise to inform the development of an AI and blockchain enabled logistics platform.global economies.
Note 2. Summary of Significant Accounting Policies
(a) Basis of Presentation
The consolidated financial statements of Ideanomics, Inc., its subsidiaries and VIEs were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the assets, liabilities, revenues and expenses of the subsidiaries over which the Company exercises control and, when applicable, entities for which the Company has a controlling financial interest or is the primary beneficiary. Intercompany transactions and balances are eliminated in consolidation.
(b) Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the related disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
On an ongoing basis, we evaluate ourthe Company evaluates its estimates, including those related to the bad debt allowance, sales returns, fair values of financial instruments, equity investments, stock-based compensation, intangible assets and goodwill, licensed content, useful lives of intangible assets and property and equipment, asset retirement obligations, income taxes, and contingent liabilities, among others. We base ourThe Company bases its estimates on assumptions, both historical and forward looking, that are believed to be reasonable, the results of which form the basis for making judgments about the carrying valuesamounts of assets and liabilities.
|
(c) Cash and Cash Equivalents
Cash consists of cash on hand, demand deposits, time deposits, and demand depositother highly liquid instruments with an original maturity of three months or less when purchased. Refer to Note 19Notes 20 (d) and (e) for furtheradditional information on our credit and foreign currency risks.
(d) Accounts Receivable, net
Accounts receivable are recognized at invoiced amounts and do not bear interest. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company reviews its allowance for doubtful accounts receivable on an ongoing basis. In establishing the required allowance, management considers any historical losses, the customer’s financial condition, the accounts receivable aging, and the customer’s payment patterns. After all attempts to collect a receivable have failed and the potential for recovery is remote, the receivable is written off against the allowance.
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(e) Licensed Content
The Company obtainspreviously obtained content through content license agreements with studios and distributors. We recognizeThe Company recognized licensed content when the license fee and the specified content titles arewere known or reasonably determinable. Prepaid license fees arewere classified as an asset (licensed content) and accrued license fees payable arewere classified as a liability on the consolidated balance sheets.
We amortizeThe Company amortized licensed content in cost of revenues over the contentscontents’ contractual availability based on the expected revenue derived from the licensed content, beginning with the month of first availability, such that our revenues bearbore a representative amount of the cost of the licensed content. We reviewManagement reviewed factors that impactimpacted the amortization of licensed content at each reporting date, including factors that may bearhave had a direct impact on expected revenue from specific content titles. Changes in ourthe expected revenue from licensed content could have had a significant impact on ourthe amortization pattern.
Management evaluatesevaluated the recoverability of the licensed content whenever events or changes in circumstances indicateindicated that its carrying amount may not behave been recoverable. NoNaN impairment losslosses were recorded forin the yearsyear ended December 31, 2018 and 2017.2019. The Company sold the entire licensed content in March 2019. Please refer to Note 22 for additional information.
(f) Property and Equipment, net
Property and equipment are stated at cost less accumulated depreciation. Expenditures for major renewals and improvements, which extend the original estimated economic useful lives of applicable assets, are capitalized. Expenditures for normal repairs and maintenance are charged to expense as incurred. The costs and related accumulated depreciation of assets sold or retired are removed from the accounts and any gain or loss thereon is recognized in the consolidated statement of operations. Depreciation is provided for on a straight-line basis over the estimated useful lives of the respective assets. The estimated useful life is 5 years for the furniture, 3 years for thefurniture and electronic equipment 5 to 10 years for and vehicles, and the vehicles and lesser of lease terms or the estimated useful lives of the assets for the leasehold improvements.
Construction in progress is stated at the lower of cost or fair value, which includes the cost of construction and other direct costs attributable to the construction. NoNaN provision for depreciation is made on construction in progress until such time as the relevant assets are completed and put into use. Construction in progress at December 31, 20182020 and 2019 represents Fintech Village under construction. The Company recorded impairment losses of $3.3 million and $2.3 million in the years ended December 31, 2020 and 2019, respectively, related to construction (Seein progress. Refer to Note 8).8 for additional information.
Asset retirement obligations
Retirement Obligations
Asset retirement obligations generally apply to legal obligations associated with the retirement of a tangible long-lived asset that result from the acquisition, construction or development and the normal operation of a long-lived asset. If a reasonable estimate of fair value can be made, the fair value of a liability for an asset retirement obligation is recognized in the period in which it is incurred or a change in estimate occurs. Asset retirement costs associated with asset retirement obligations are capitalized with the carrying amount of the related long-lived assets and depreciated over the related asset’s estimated useful life. The Company’s asset retirement obligations as of December 31, 20182020 and 2019 are mainly associated with the acquisition of Fintech Village, that we arein which the Company is contractually obligated to remediate thecertain existing environmental conditions. We included it in the construction in progress and asset retirement obligation (long term) in the consolidated balance sheets. WeThe Company will start to amortize the asset retirement costs upon completion ofif and when the related assets andare completed, put into use. Please seeuse and depreciation commences. Refer to Note 24 for additional information regarding Fintech Village.
The Company recorded impairment losses of $2.0 million and $1.5 million in the years ended December 31, 2020 and 2019, respectively, subsequent to recording impairment losses related to asset retirement costs for construction in progress. Refer to Note 8 for more information.
(g) Business Combinations
We includeThe Company includes the results of operations of the businesses that we acquireare acquired as of the acquisition date. We allocateThe Company allocates the purchase price of the acquisitions to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase price over the fair values of identifiable assets and liabilities is recorded as goodwill. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.
F-12
(h) Intangible Assets and Goodwill
The Company accounts for intangible assets and goodwill in accordance with ASCAccounting Standards Codification (“ASC”) 350, Intangibles – Goodwill and Other.Other (“ASC 350.”) ASC 350 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be evaluated for impairment at least annually. ASC 350 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives and reviewed for impairment whenever events indicate the carrying amount may not be recoverable. In accordance with ASC 350, goodwill is allocated to reporting units, which are either the operating segment or one reporting level below the operating segment. On an annual basis, we reviewin the fourth quarter of the fiscal year, management reviews goodwill for impairment by first assessing qualitative factors to determine whether the existence of events or circumstances makes it more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. If we determineit is determined that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, goodwill is further tested for impairment by comparing the carrying valueamount to the estimated fair value of its reporting units, determined using externally quoted prices (if available) or a discounted cash flow model and, when deemed necessary, a market approach.
Goodwill impairment, if any, is measured as the amount by which a reporting unit’s carrying amount exceeds its fair value.
Application of goodwill impairment tests requires significant management judgment, including the identification of reporting units, assigning assets, liabilities and goodwill to reporting units and determination of fair value of each reporting unit. Judgment applied when performing the qualitative analysis includes consideration of macroeconomic, industry and market conditions, overall financial performance of the reporting unit, composition, personnel or strategy changes affecting the reporting unit and recoverability of asset groups within a reporting unit. Judgments applied when performing the quantitative analysis includes estimating future cash flows, determining appropriate discount rates, and making other assumptions. Changes in these judgments, estimates and assumptions could materially affect the determination of fair value for each reporting unit.
The Company recorded an impairment loss of $9.3 million related to goodwill in the year ended December 31, 2020. Refer to Note 9 for additional information.
WeThe Company has other intangible assets, excluding goodwill, which consist primarily of customer relationships and contracts, trademarks and tradenames and other intellectual property, which are generally recorded in connection with acquisitions at their fair value. Intangible assets with estimable lives are amortized, generally on a straight-line basis, over their respective estimated useful lives to their estimated residual values and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
The Company recorded impairment losses related to intangible assets acquired in various acquisitions of $20.4 million in the year ended December 31, 2020. The Company recorded an impairment loss related to a secure mobile financial information, social and messaging platform of $5.7 million in the year ended December 31, 2019. Refer to Notes 9(b) , 9(c), 9(d), and 9(e) for additional information.
(i) Digital Currency
The Company may, from time to time, enter into transactions denominated in digital currency, which may consist of GTDollar Coins (“GTB,”) Bitcoin, Ethereum and/or other types of digital currency.
Digital currency is a type of digital asset that is not a fiat currency and is not backed by hard assets or other financial instruments. As a result, the value of digital currency is determined by the value that various market participants place on the respective digital currencies through their transactions. Holders of digital currency make or lose money from buying and selling digital currency.
Given that there is limited precedent regarding the classification and measurement of cryptocurrencies and other digital currencies under U. S. GAAP at the time of the transactions, the Company determined to account for these currencies as indefinite-lived intangible assets in accordance with ASC 350.
In the year ended December 31, 2019, the Company entered into transactions in which it received 8.3 million GTB, valued at the time at $61.1 million. On October 29, 2019, GTB had an unexpected significant decline in quoted price, from $17.00 to $1.84. This decline continued through the fourth quarter of 2019, and on December 31, 2019 the quoted price was $0.23. As a result of this decline in quoted price, and its inability to convert GTB into other digital currencies which were more liquid, or fiat currency, the Company performed an impairment analysis in the fourth quarter of 2019 and recorded an impairment loss of $61.1 million. Refer to Note 9(f) for additional information.
F-13
(j) Long-term Investments
The Company accounts for equity investments through which we exercisemanagement exercises significant influence but dodoes not have control over the investee under the equity method (“Equity Method Investments”).method. Under the equity method, the investment is initially recorded at cost and adjusted for the Company’s share of undistributed earnings or losses of the investee. The Company’s share of losses is not recognized when the investment is reduced to zero since the Company does not guarantee the investees’ obligations nor is the Company committed to providing additional funding.
Beginning on January 1, 2018, ourThe equity investmentinvestments which are not result in consolidation and notconsolidated or accounted for under the equity method are either carried at fair value or under the measurement alternative upon the adoption of the FASB issued Accounting Standards Update (“ASU”) No. 2016-01, (“Non-marketable Equity Investments”Financial Instruments – Overall (Subtopic 825-10) (“ASU No 2016-01.”).
We utilizeThe Company utilizes the measurement alternative for equity investments that do not have readily determinable fair values and measuremeasures these investments at cost less impairment plus or minus observable price changes in orderly transactions for an identical or similar investment of the same issuer.
We classify ourThe Company classifies its long-term investments as non-current assets on the consolidated balance sheets as those investments do not have stated contractual maturity dates.sheets.
Impairment of Investments
WeManagement periodically review our equityreviews long-term investments for impairment. We considerimpairment whenever events or changes in business circumstances indicate that the carrying amount of the investment may not be fully recoverable. Management considers impairment indicators such as negative changes in industry and market conditions, financial performance, business prospects, and other relevant events and factors. If indicators exist and the fair value of the securityinvestment is below the carrying amount, we write downan impairment loss is recorded to record the securityinvestment at fair value. The Company recorded impairment losses of $0.2 million and $3.0 million in the years ended December 31, 2020 and 2019, respectively, for equity investments accounted for under the measurement alternative, and recorded impairment losses of $16.7 million and $13.1 million in the years ended December 31, 2020 and 2019, respectively, for investments accounted for as equity method investments . Refer to fair value.Note 10 for additional information on impairment losses related to investments.
(k) Leases
The Company adopted ASU No. 2016-02 (“ASU 2016-02”) as of January 1, 2019 using a modified retrospective method. The Company leases certain office space and equipment from third-parties. Leases with an initial term of 12 months or less are not recorded on the balance sheet and lease expense is recognized on a straight-line basis over the lease term. For leases beginning in 2019 and later, at the inception of a contract management assesses whether the contract is, or contains, a lease. The assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether the right to substantially all the economic benefit from the use of the asset throughout the period is obtained, and (3) whether the Company has the right to direct the use of the asset. At the inception of a lease, management allocates the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments. The Company accounts for lease components (e.g., fixed payments including rent, real estate taxes and insurance costs) separately from the nonlease components (e.g., common-area maintenance costs).
Leases may include one or more options to renew, with renewal terms that can extend the lease term from one year or more. Renewal periods are included in the lease term only when renewal is reasonably certain, which is a high threshold and requires management to apply judgment to determine the appropriate lease term. The Company’s leases do not include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term. Certain lease agreements include rental payments adjusted periodically for inflation. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. All of the Company’s leases are classified as operating leases. The Company has elected not to recognize right-of-use assets and lease liabilities for short-term leases that have a term of 12 months or less. The effect of short-term leases and initial direct costs on our right-of-use asset and lease liability was not material.
ASC 842, Leases, (“ASC 842”) requires the Company to make certain assumptions and judgments in applying the guidance, including determining whether an arrangement includes a lease, determining the term of a lease when the contract has renewal or cancellation provisions, and determining the discount rate.
F-14
As the rate implicit in the lease is not usually available, the Company used an incremental borrowing rate based on the information available at the adoption date of ASC 842 in determining the present value of lease payments for existing leases. The Company uses information available at the lease commencement date to determine the discount rate for any new leases.
Accounting standardsIn the year ended December 31, 2020, the Company recorded impairment losses of $6.3 million related to right of use assets subsequent to vacating the real estate.
Refer to Note 11 for additional information.
(l) Convertible Promissory Notes
The Company accounts for its convertible notes at issuance by allocating the proceeds received among freestanding instruments according to ASC 470, Debt ("ASC 470,") based upon their relative fair values. The fair value of debt and common stock is determined based on the closing price of the common stock on the date of the transaction, and the fair value of warrants, if any, is determined using the Black-Scholes option-pricing model. Convertible notes are subsequently carried at amortized cost. The fair value of the warrants is recorded as additional paid-in capital, with a corresponding debt discount from the face amount of the convertible note.
Each convertible note is analyzed for the existence of a beneficial conversion feature, defined as the fair value of the common stock at the commitment date for the convertible note less the effective conversion price. Beneficial conversion features are recognized at their intrinsic value, and recorded as an increase to additional paid-in capital, with a corresponding reduction in the carrying amount of the convertible note (as a debt discount from the face amount of the convertible note.) The discounts on the convertible notes, consisting of amounts ascribed to warrants and beneficial conversion features, are amortized to interest expense, using the effective interest method, over the terms of the related convertible notes. Beneficial conversion features that are contingent upon the occurrence of a future event are recorded when the contingency is resolved.
Each convertible note is also analyzed for the existence of embedded derivatives, which may require bifurcation from the convertible note and separate accounting treatment.
The Company also analyzes the features of its convertible notes which, when triggered, mandate a downward adjustment to the instrument’s strike price (or conversion price) if equity shares are issued at a lower price (or equity-linked financial instruments are issued at a lower strike price) than the instrument’s then-current strike price. The purpose of the feature is typically to protect the instrument’s counterparty from future issuances of equity shares at a more favorable price.
(m) Fair Value Measurements
U.S. GAAP requires the categorization of financial assets and liabilities, based on the inputs to the valuation technique, into a three-level fair value hierarchy. The various levels of the fair value hierarchy are described as follows:
● | Level 1 - Unadjusted quoted market prices for identical assets and liabilities in an active market that the Company has the ability to access. |
● | Level 2 - Quoted prices in markets that are not active or model inputs that are observable for substantially the full term of the asset or liability. |
● | Level 3 - Prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. |
The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The Company reviews the valuation techniques used to determine if the fair value measurements are still appropriate on an annual basis, and evaluateevaluates and adjustadjusts the unobservable inputs used in the fair value measurements based on current market conditions and third partythird-party information.
F-15
Our financial assets and liabilities that are measured at fair value on a recurring basis include cash and cash equivalents, accounts receivable, accounts payable, accrued other expenses, and other current liabilities and convertible notes.liabilities. The fair values of these assets and liabilities approximate carrying valuesamounts because of the short-term nature of these instruments. If these instruments were measured at fair value in the financial statements, they would be classified as Level 1 in the fair value hierarchy.
Our financial and non-financial assets and liabilities that are measured at fair value on a nonrecurring basis include goodwill and other intangible assets, asset retirement obligations, and adjustment in carrying valueamount of equity securities for which the measurement alternative of cost less impairment plus or minus observable price changes is used. There were no material impairmentsRefer to Notes 2(f), 2(h), 2(i), 2(j), and 2(k) for 2018additional information on impairment losses.
(n) Assets and 2017Liabilities Held for Sale
The Company classifies assets and no material adjustmentsliabilities (disposal group) to equity securities usingbe sold as held for sale in the period in which all of the following criteria are met: (1) management, having the authority to approve the action, commits to a plan to sell the disposal groups; (2) the disposal group is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such disposal group; (3) an active program to locate a buyer and other actions required to complete the plan to sell the disposal group have been initiated; (4) the sale of the disposal group is probable, and (5) transfer of the disposal group is expected to qualify as a completed sale within one year, except if events or circumstances beyond the Company’s control extend the period of time required to sell the disposal group beyond one year; (6) the disposal group is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and (7) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
The Company initially measures a disposal group that is classified as held for sale at the lower of its carrying amount or fair value less any costs to sell. Any loss resulting from this measurement alternativeis recognized in the period in which the held for 2018.sale criteria are met. Gains are not recognized on the sale of a disposal group until the date of sale. The Company assesses the fair value of a disposal group, less any costs to sell, each reporting period it remains classified as held for sale and reports any subsequent losses as an adjustment to the carrying amount of the disposal group.
As part of this assessment, the Company also evaluates the criteria for reporting the disposal group as a discontinued operation. Factors which the Company considers includes, but is not limited to, the level of continuing involvement, if any, whether the disposal constitutes a strategic shift, and the relative magnitude of revenue, net income or loss, and total assets.
(o) Foreign Currency Translation
The Company uses the United States dollar (“$” or “USD”) as its reporting currency. The Company’s worldwide operations utilize the local currency or the U.S. dollar ("USD")USD as the functional currency, where applicable. For certain foreign subsidiaries, USD is used as the functional currency.currency, and the local records are maintained in USD. This occurs when the subsidiary is considered an extension of the parent. The functional currency of certain subsidiaries and VIEs located in the Peoples Republic of China (“PRC” or “China”) and Hong Kong is either the Renminbi (“RMB”) or Hong Kong dollars (“HKD”HKD.”). In the consolidated financial statements, the financial information of the entities which use RMB and HKD as their functional currency has been translated into USD: assets and liabilities are translated at the exchange rates on the balance sheet date, equity amounts are translated at the historical exchange rates, and revenues, expenses, gains and losses are translated using the average rate for the period. Translation adjustments arising from these are reported as foreign currency translation adjustments and are shown as a component as a component of “Accumulated other comprehensive loss” in the equity section of the consolidated balance sheets.
Transactions denominated in currencies other than functional currency are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated in the functional currency at the applicable rates of exchange in effect at the balance sheet date. The resulting exchange differences are recorded in “Other income (expense), net” in the consolidated statements of operations.
F-16
(p) Revenue Recognition
Year 2018
We adopted ASU No. 2014-09, Revenue from Contracts with Customers, and other related ASUs (collectively, ASC 606, Revenue from Contracts with Customers) on January 1, 2018 using the modified retrospective transition approach. The Company recognizes revenue when its customer obtains control of promised goods or services in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. To determine revenue recognition forFor most of the Company’s customer arrangements, control transfers to customers at a point in time, as that is generally when legal title, physical possession and risk and rewards of goods/services transfer to the customer. In certain arrangements, control transfers over time as the customer simultaneously receives and consumes the benefits as the Company determinescompletes the performance obligations.
Our contracts with customers may include multiple performance obligations. For such arrangements, revenue is allocated to each performance obligation based on its relative standalone selling price. Standalone selling prices are withinbased on the scope of ASC 606, theobservable prices charged to customers or adjusted market assessment or using expected cost-plus margin when one is available. Adjusted market assessment price is determined based on overall pricing objectives taking into consideration market conditions and entity specific factors.
The Company performs an analysis of the following five steps: (1) identifyrelevant terms of its sales contracts, including whether or not it controls the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. See Recently Adopted Accounting Pronouncements and Note 4 for further discussion on Revenues.
Year 2017
In periodsproduct prior to sale, whether or not it incurs inventory risk, and other factors in order to determine if revenue should be recorded as a principal or agent.
Certain customers may receive discounts or rebates, which are accounted for as variable consideration. Variable consideration is estimated based on the adoption of ASC 606, theexpected amount to be provided to customers, and initially reduces revenues recognized.
The Company recognizesrecords deferred revenues when persuasive evidencecash payments are received or due in advance of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and the collectabilityperformance, including amounts which are refundable. Substantially all of the resulting receivable is reasonably assured.
Legacy YOD
The revenue is recognized as services are performed. For certain contracts that involve sub-licensing content within the specified license period, revenue is recognized in accordance with ASC Subtopic 926-605, Entertainment-Films - Revenue Recognition, whereby revenue is recognized upon delivery of films when the arrangement includes a nonrefundable minimum guarantee, delivery is complete and the Company has no substantive future obligations to provide future additional services. Payments received from customers for the performance of future services are recognized as deferred revenue and subsequentlyas of December 31, 2019 was recognized as revenue in the period thatyear ended December 31, 2020.
The Company does not disclose the servicevalue of unsatisfied performance obligations for contracts with an original expected length of one year or less.
(q) Advertising and Marketing Costs
Advertising and marketing costs are completed. In 2018, we do not have any revenue generated from Legacy YOD business.
Wecast Services
Wecast Services is mainly engagedexpensed as incurred. Advertising and marketing costs were $0.2 million and $24,394 in the sales of crude oilyears ended December 31, 2020 and consumer electronics. For both sales of crude oil2019, respectively.
(r) Research and consumer electronics, sales orders are confirmed after negotiation on price between customers and the Company. Development Costs
The Company recognizes revenue on a gross basis based on the indicator points in ASC 605-45-45-2 and ASC 606-10-55-39. The Company enters into the contracts with the supplier and customer independently. Purchase orders are confirmed after careful selection of suppliers and negotiation on price. The Company purchases crude oil and consumer electronics from suppliers in accordance with sales orders from customers. The Company is responsible for fulfilling the promise to provide the specified good or service in the contract, including sourcing the right oil products desired by the customers, issuing the bill of lading to customers and nominating the vessels that comply with the applicable laws and standards; however customers may still submit claims against the Company in connection with the quality and quantity of any products delivered. Revenue recognition criteria are met when the products are delivered. For sale of crude oil, the Company considers delivery to have occurred once it is shipped; for sale of the consumer electronics, the Company considers delivery to have occurred once it arrives at the designated locations in Hong Kong. The crude oil and electronics sales arrangement do not include provisions for cancellation, variable consideration, returns, inventory swaps or refunds. In accordance with ASC 605-45, Revenue Recognition – Principal Agent Consideration, the Company accounts for revenue from sales of goods on a gross basis. The Company is the primary obligor in the arrangements, as company has the ability to establish prices, and has discretion in selecting the independent suppliers and other third-party that will perform the delivery service, the company is responsible for the defective products and company bears credit risk with customer payments. Accordingly, all such revenue billed to customers is classified as revenue and all corresponding payments to suppliers are classified as cost of revenues. In accordance with ASC 606-10-55-39, the Company accounts for revenue from sales of goods on a gross basis. The Company is primarily responsible for fulfilling the promise to provide the goods to the customer; bears certain inventory risk and also has the discretion in establishing prices. See Note 4 for further discussion on Revenues.
We expenseexpenses research and development costs, including costs to develop software products orwhich may be incurred for the software componentdesign, development, experimentation and testing of products to be sold, leased, or marketed to external users, before technological feasibility is reached. Technological feasibility is typically reached shortly before the release of such products and as a result, development costs that meet the criteria for capitalization were not material for the periods presented.
Research and development costs also include costs to develop software to be used solely to meet internal needs and cloud based applications used to deliver our services. We capitalize development costs related to these software applications once the preliminary project stage is complete and it is probable that the project will be completed and the software will be used to perform the function intended. All the software developed in 2018 and 2017 did not reach technological feasibility and therefore no costs capitalized.automotive industry.
(s) Share-Based Compensation
The Company awards share options and other equity-based instruments to its employees, directors and consultants (collectively “share-based payments”payments.”). Compensation cost related to such awards is measured based on the fair value of the instrument on the grant date. The Company recognizes the compensation cost over the period the employeeindividual is required to provide service in exchange for the award, which generally is the vesting period. The amount of cost recognized is adjusted to reflect the expectedeffect of forfeiture prior to vesting.as they occur. When no future services are required to be performed by the employeeindividual in exchange for an award of equity instruments, and if such award does not contain a performance or market condition, the cost of the award is expensed on the grant date. The Company recognizes compensation cost for an award with only service conditions that has a graded vesting schedule on a straight-line basis over the requisite service period for the entire award, provided that the cumulative amount of compensation cost recognized at any date at least equals the portion of the grant-date value of such award that is vested at that date.
F-17
The Company also awards stocks and warrants for service to consultants for service and accounts for these awards under ASC 505-50,Equity - Equity-Based Payments to Non-Employees. The fair valueTable of the awards is assessed at measurement date and is recognized as cost or expenses when the services are provided. If the related services are completed upon issuance date, measurement date is determined to be the date the awards are issued. Contents
(t) Income Taxes
The Company accounts for income taxes in accordance with the asset and liability method. Deferred taxes are recognized for the future tax consequences attributable to temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and income tax purposes using enacted rates expected to be in effect when such amounts are realized or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established, as needed, to reduce the amount of deferred tax assets if it is considered more likely than notmore-likely-than-not that some portion or all of the deferred tax assets will not be realized.
The Company recognizes the effect of uncertain income tax positions only if those positions are more likely than notmore-likely-than-not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50%50.0% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company’s policy is to record interest and penalties related to uncertain tax positions as a component of income tax expense. There were no such interest or penalty for the years ended December 31, 20182020 and 2017.
2019.
On December 22, 2017 the U.S. Tax Reform,Cut and Jobs Act of 2017 (“the Tax Act”) was signed into law, which among other effects, reduces the U.S. federal corporate income tax rate to 21%21.0% from 34%34.0% (or 35%35.0% in certain cases) beginning in 2018, and requires companies to pay a one-time transition tax on certain unrepatriated earnings from non-U.S. subsidiaries that is payable over eight years. No tax was due under this provision. U.S.The Tax reformAct also makes the receipt of future non-U.S. sourced income of non-U.S. subsidiaries tax-free to U.S. companies and creates a new minimum tax on the earnings of non-U.S. subsidiaries relating to the parent’s deductions for payments to the subsidiaries.
(u) Net Loss Per Share Attributable to IDEX Shareholders
Net loss per share attributable to our shareholders is computed in accordance with ASC 260, Earnings per Share.Per Share (Topic 260) (“ASC 260.”) The two-class method is used for computing earnings per share. Under the two-class method, net income is allocated between ordinarycommon shares and participating securities based on dividends declared (or accumulated) and participating rights in undistributed earnings as if all the earnings for the reporting period had been distributed. The Company’s convertible redeemable preferred shares are participating securities because the holders are entitled to receive dividends or distributions on an as converted basis. For the years presented herein, the computation of basic loss per share using the two-class method is not applicable as the Company is in a net loss position and net loss is not allocated to other participating securities, since these securities are not obligated to share the losses in accordance with the contractual terms.
Basic net loss per share is computed usingby dividing net loss attributable to IDEX common shareholders by the weighted average number of ordinarycommon shares outstanding during the period. Options and warrants are not considered outstanding in computation of basic earnings per share. Diluted net loss per share is computed usingby dividing net loss attributable to IDEX common shareholders by the weighted averageweighted-average number of ordinarycommon shares and potential ordinarycommon shares outstanding during the period under the treasury stock method. Potential ordinarycommon shares include options and warrants to purchase ordinarycommon shares, preferred shares and convertible promissory note,notes, unless they were anti-dilutive. The computation of diluted net loss per share does not assume conversion, exercise, or contingent issuance of securities that would have an anti-dilutive effect (i.e. an increase in earnings per share amounts or a decrease in loss per share amounts) on net loss per share.
(v) Reclassifications of a General Nature
The Company has renamed captions in its consolidated balance sheet, consolidated statement of operations, and its consolidated statement of cash flows. There were no changes to the composition of these accounts, and therefore no change to the consolidated financial accounts aside from the renaming of the captions.
F-18
Statement |
| |
| | Current caption | |
Consolidated balance sheet | | | Acquisition earn-out liability | | | Contingent consideration |
Consolidated statement of | | | Acquisition earn-out/true up expense, net | | | Change in fair value of contingent consideration, net |
Consolidated statement of cash flows | | | Acquisition earn-out expense | | | Change in fair value of contingent consideration, net |
Certain amounts in the prior periods presented have been reclassified to conform to the current period financial statement presentation. These reclassifications have no effect on previously reported net income.loss, total assets, or cash flows.
Standards Issued and Not Yet Implemented
In February 2016, the Financial Accounting Standards Board (FASB)(“FASB”) issued Accounting Standards UpdateASU No. 2016-02 (“ASC 842”) "Leases." ASC 842 supersedes the lease requirements in Accounting Standards Codification (ASC) Topic 840, "Leases." Under ASC 842,which requires lessees are required to recognize assetsa right-of-use asset and liabilitieslease liability for all leases with terms of more than 12 months. Recognition, measurement and presentation of expenses depends on the balance sheet for most leases and provide enhanced disclosures. Leases will continue to be classifiedclassification as eithera finance or operating. We will adopt ASC 842 effectiveoperating lease. The Company adopted ASU 2016-02 as of January 1, 2019, using a modified retrospective method and will not restate comparative periods.transition method.
The lease liability was based on the present value of the remaining minimum lease payments, determined under ASC 842, discounted using the Company’s incremental borrowing rate at the effective date of January 1, 2019, using the original lease term as the tenor. As permitted under the transition guidance, we will carry forward the assessment ofCompany elected several practical expedients that permitted the Company to not reassess (1) whether our contracts containa contract is or are leases,contains a lease, (2) the classification of ourexisting leases, and remaining(3) whether previously capitalized costs continue to qualify as initial indirect costs. The application of the practical expedients did not have a significant impact on the measurement of the operating lease terms. Based on our portfolioliability. The adoption of leasesASU 2016-02 resulted in the recording of operating right-of-use assets and the related lease liabilities of $3.6 million and $3.7 million, respectively, as of December 31, 2018, approximately $8.3 million of leaseJanuary 1, 2019. The difference between the additional right-of-use assets and lease liabilities willwas immaterial. The adoption of ASU 2016-02 did not materially impact the consolidated statement of operations and had no impact on the consolidated statement of cash flows. Refer to Note 11 for additional information.
In July 2017, the FASB issued ASU No. 2017-11 (“ASU 2017-11”) “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception,” which applies to issuers of financial instruments with down round features. A down round feature is a term in an equity-linked financial instrument (i.e. a freestanding warrant contract or an equity conversion feature embedded within a host debt or equity contract) that triggers a downward adjustment to the instrument’s strike price (or conversion price) if equity shares are issued at a lower price (or equity-linked financial instruments are issued at a lower strike price) than the instrument’s then-current strike price. The purpose of the feature is typically to protect the instrument’s counterparty from future issuances of equity shares at a more favorable price. ASU 2017-11 amends (1) the classification of such instruments as liabilities or equity by revising the certain guidance relative to evaluating if they must be recognizedaccounted for as derivative instruments, and (2) the guidance on our consolidated balance sheet upon adoption. We are substantially complete with our implementation efforts.
recognition and measurement of freestanding equity-classified instruments. The Company adopted ASU 2017-11 as of January 1, 2019 on a prospective basis. Refer to Note 13 for additional information.
In June 2016,2018, the FASB issued ASU No. 2018-07 (“ASU 2018-07”) “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting,” which largely aligns the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payments to employees. ASU 2018-07 also clarifies that any share-based payment issued to a customer should be evaluated under ASC 606, “Revenue from Contracts with Customers.” The Company adopted ASU 2018-07 as of January 1, 2019 on a modified retrospective basis. There was no impact to the consolidated financial statements because the Company did not have material payments in the year ended December 31, 2019.
F-19
Accounting Standards UpdatePronouncements Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13 (ASU 2016-13) "Financial Instruments-Credit(“ASU 2016-13”) "Financial Instruments - Credit Losses” (“ASC 326”): Measurement of Credit Losses on Financial Instruments"Instruments" which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes will result in earlier recognition of credit losses. WeIn November 2019, the FASB issued ASU 2019-10 “Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842)” (“ASC 2019-10,”) which defers the effective date of ASU 2016-13 to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, for public entities which meet the definition of a smaller reporting company. The Company will adopt ASU 2016-13 effective January 1, 2020. We are2023. Management is currently evaluating the effect of the adoption of ASU 2016-13 on ourthe consolidated financial statements. The effect will largely depend on the composition and credit quality of our investment portfolio and the economic conditions at the time of adoption.
In June 2018,December 2019, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment2019-12 (“ASU 2019-12”) “Income Taxes (Topic 740) Simplifying the Accounting which largely alignsfor Income Taxes.” ASU 2019-12 will simplify the measurementaccounting for income taxes by removing certain exceptions currently provided for in ASC 740, “Income Taxes” (“ASC 740,”) and classification guidance for share-based payments to nonemployees with the guidance for share-based payments to employees.by amending certain other requirements of ASC 740. The changes resulting from ASU also clarifies that any share-based payment issued to2019-12 will be made on a customer should be evaluated under ASC 606,Revenue from Contracts with Customers. The ASU requires aretrospective or modified retrospective transition approach. We will adopt ASU 2018-07 effective as of January 1, 2019. The adoption will not have a material impactbasis, depending on the Company’s consolidated financial statements.
Recently Adopted Accounting Pronouncements
Inspecific exception or amendment. For public business entities, the first quarter of 2018, the Company adopted ASC 606 using the modified retrospective method applied to those contracts/sales orders which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018amendments in ASU 2019-12 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605. The effect from the adoption of ASC 606 was not material to our financial statements. (See Note 2 (m) above and Note 4 for more information.) The new standard was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017.
In the first quarter of 2018, the2020. The Company adoptedwill adopt ASU 2016-01, "Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," which amends various aspects of the recognition, measurement, presentation, and disclosure of financial instruments. We use the prospective method for our non-marketable equity securities. We have elected to use the measurement alternative for our non-marketable equity securities, defined as cost adjusted for changes from observable transactions for identical or similar investments of the same issuer, less impairment.2019-12 effective January 1, 2021. The adoption of the new guidance didthis standard is not have a material impact on the consolidated financial statements. See Notes 10 for additional information.
expected to be material.
In August 2020, the first quarterFASB issued ASU No. 2020-06 (“ASU 2020-06”) “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” ASU 2020-06 will simplify the accounting for convertible instruments by reducing the number of 2018,accounting models for convertible debt instruments and convertible preferred stock. Limiting the Company adoptedaccounting models results in fewer embedded conversion features being separately recognized from the host contract as compared with current U.S. GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting, and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as additional paid-in capital. ASU 2016-18, "Statement2020-06 also amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. For public business entities, the amendments in ASU 2020-06 are effective for public entities which meet the definition of Cash Flows (Topic 230): Restricted Cash," which clarifies how entities should present restricted cash and restricted cash equivalents in the statements of cash flows, and as a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statements of cash flows. An entity with a material balance of restricted cash and restricted cash equivalents must disclose information about the nature of the restrictions. The new standard wassmaller reporting company are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017.2023. The new guidance changedCompany will adopt ASU 2020-06 effective January 1, 2021. Management is currently evaluating the presentationeffect of restricted cash in the consolidated statements of cash flows and was implemented on a retrospective basis.
In the first quarter of 2018, the Company adopted ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”. The update affects all companies and other reporting organizations that must determine whether they have acquired or sold a business. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The update is intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The update provides a more robust framework to use in determining when a set of assets and activities is a business, and also provides more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable. The new standard was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and should be applied prospectively. The adoption of the new guidance did not have a material impactASU 2020-06 on the consolidated financial statements. See Notes 6 for additional information.The effect will largely depend on the composition and terms of the financial instruments at the time of adoption.
Note 3. Going Concern and Management’s PlansNotes Receivable
(a) | Zhu Note Receivable |
AsIn May 2020, a subsidiary of December 31, 2018, the Company, had cashQingdao Chenyang Ainengju New Energy Sales and cash equivalentsService Company Limited ("Energy Sales") provided a note receivable to Mr. Jianya Zhu ("Mr. Zhu") in the amount of approximately $3.110.0 million RMB ($1.4 million). Mr. Zhu, through his wholly-owned entity Prime Capital Enterprise Pte. Ltd., provided collateral in the form of its 50.0% ownership of Seven Stars Founder Space Industrial Pte. Ltd ("Founder Space.") Founder Space is also 50.0% owned by a related party, Seven Stars Innovative Industries Group Limited, an affiliate of Dr. Bruno Wu (“Dr. Wu,”) the former Chairman of the Company. Mr. Zhu agreed to repay 10.5 million RMB ($1.5 million) one month from the disbursement date. In September 2020, a third-party satisfied the note receivable and an accumulated deficitaccrued interest in the amount of approximately $150.0 million. Additionally,10.5 million RMB ($1.5 million) on behalf of Mr. Zhu, and the Company has incurred losses since its inceptionterminated the note and must continuecollateral agreement.
F-20
(b) | Fuzhou Note Receivable |
In May 2020, Energy Sales provided a note receivable to rely on proceeds from debt and equity issuancesFuzhou Zhengtong Hongxin Investment Management Company Limited ("Zhengtong") in the amount of 3.0 million RMB ($0.4 million). The note receivable is not collateralized. Zhengtong agreed to pay for ongoing operating expenses in order to execute its business plan.
Management has taken several actions below to ensure that the Company will continue as a going concern through March 31, 2020, including reductions in YOD legacy segment related expenses and discretionary expenditures.
As partrepay 3.3 million RMB ($0.5 million) within three months of the Company’s strategy, management raised these recent capital to cover short and medium term cash needs, while it plans to unlock revenue from its new fintech advisory services business in 2019. Therefore, thedisbursement date. The Company does not plan to take additional outside investments in the near term, unless there ishas recorded a delay product expectations and sales.
Although the Company may attempt to raise funds by issuing debt or equity instruments, in the future additional financing may not be available to the Company on terms acceptable to the Company or at all or such resources may not be received in a timely manner. If the Company is unable to raise additional capital when required or on acceptable terms, the Company may be required to scale back or to discontinue certain operations, scale back or discontinue the developmentreserve of new business lines, reduce headcount, sell assets, file for bankruptcy, reorganize, merge with another entity, or cease operations.
These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements have been prepared assuming that the Company will continue as a going concern and, accordingly, do not include any adjustments that might result from the outcome of$0.5 million against this uncertainty. If the Company is in fact unable to continue as a going concern, the shareholders may lose their entire investment in the Company.note receivable.
Note 4. Revenue
The majority of the Company’s revenue is derived from Wecast Service (100% in 2018 and 99.5% in 2017). The following table presents oursummarizes the Company's revenues disaggregated by revenue source, geography (based on ourthe Company's business locations), and timing of revenue recognition.recognition (in thousands):
| | | | | | |
| | Year Ended | ||||
| | December 31, | | December 31, | ||
|
| 2020 |
| 2019 | ||
Geographic Markets |
| |
|
| |
|
Malaysia | | $ | 83 | | $ | 0 |
USA | |
| 1,631 | |
| 41,873 |
PRC | | | 25,045 | |
| 2,693 |
Total | | $ | 26,759 | | $ | 44,566 |
| | | | | | |
Product or Service | |
|
| |
|
|
Digital asset management services | | $ | 0 | | $ | 40,700 |
Digital advertising services and other | | | 1,631 | | | 1,173 |
Electric vehicles* | | | 19,462 | | | 2,693 |
Combustion engine vehicles* | |
| 5,160 | |
| 0 |
Charging and batteries* | | | 506 | | | 0 |
Total | | $ | 26,759 | | $ | 44,566 |
| | | | | | |
Timing of Revenue Recognition | | | | | | |
Products and services transferred at a point in time | | $ | 26,729 | | $ | 3,866 |
Services provided over time | | | 30 | | | 40,700 |
Total | | $ | 26,759 | | $ | 44,566 |
2018 | 2017 | |||||||
Geographic Markets | ||||||||
Singapore | $ | 260,034,401 | $ | 19,028,003 | ||||
USA | 638,412 | 7,037 | ||||||
Hong Kong | 117,070,059 | 119,683,121 | ||||||
PRC | - | 5,634,679 | ||||||
$ | 377,742,872 | $ | 144,352,840 | |||||
Segments | ||||||||
-Wecast Service | ||||||||
Crude oil | $ | 260,034,401 | $ | 143,558,567 | ||||
Consumer electronics | 116,723,251 | - | ||||||
Other | 985,220 | - | ||||||
377,742,872 | 143,558,567 | |||||||
-Legacy YOD | - | 794,273 | ||||||
Total | $ | 377,742,872 | $ | 144,352,840 |
Wecast service revenue
Wecast Services is mainly engaged in*The revenues for the salesyears ended December 31, 2020 and 2019 were recorded on either a Principal or Agent basis, depending on the terms of crude oilthe underlying transaction, including the ability to control the product and consumer electronics. Revenuethe level of inventory risk taken. The majority of the revenue from the salessale of crude oil and consumer electronics is recognized when the customer obtains control of the Company’s crude oil and consumer electronics, which occurs at a point in time, usually upon shipment or upon acceptance. The contracts are generally short-term contracts where the time between order confirmation and satisfaction of all performance obligations is less than one year.
The most significant judgment is determining whether we are the principal or agent for the sales of crude oil and consumer electronics. We report revenues from these transactions on a gross basis where we are the principal considering the following principal versus agent indicators:
Legacy YOD revenue
In October 2016, the Company signed an agreement to form a partnership with Zhejiang Yanhua ("Yanhua Agreement"), where Yanhua acts as the exclusive distribution operator in PRC. According to the Yanhua Agreement, the existing legacy Hollywood studio paid contentselectric vehicles, as well as other IP contents specified in the agreement, along with the corresponding authorized rights letter that the Company is entitled to, will be turned over to Yanhua as a whole package, which was agreed to be priced at RMB13 million (approximately $2 million) as minimal guarantee fee. In addition to the minimal guarantee fee specified, there is a provision in the Yanhua Agreement which states that once the revenue recognized from the existing contents transferred from us to Yanhua reachessale of the amount of minimal guarantee fee, the revenue above minimal guarantee fee will be shared with us from the date when this revenue threshold is reached based on certain revenue-sharing mechanism stipulated in the Yanhua Agreement.
The payment is agreed to be paid in two installments, the first half of RMB 6.5 million was received on December 30, 2016combustion engine vehicles and revenue was recognized in 2017 based on ASC 926-605. The remaining RMB 6.5 million will be paid under the scenario that the license content fees due to Hollywood studios for the existing legacy Hollywood paid contents will be settled. We did not recognize revenue for the second installment (RMB 6.5 million) since the Company is not entitled to the second installment as of December 31, 2018.
Arrangements with multiple performance obligations
Our contracts with customers may include multiple performance obligations. For such arrangements, we allocate revenue to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on an observable prices charged to customers or adjusted market assessment or using expected cost plus margin when one is available. Adjusted market assessment price is determined based on overall pricing objectives taking into consideration market conditionscharging and entity specific factors.
Variable consideration
Certain customers may receive discounts, which are accounted for as variable consideration. We estimate these amounts based on the expected amount to be provided to customers and reduce revenues recognized. We believe that there will not be significant changes to our estimates of variable consideration.
Deferred revenues
We record deferred revenues when cash payments are received or due in advance of our performance, including amounts which are refundable. The increase in the deferred revenue balancebatteries for the year ended December 31, 2018 is primarily driven by cash payments received or2020 were recorded on a Principal basis because the Company has inventory risk in the transactions. The revenue from the sale of electric vehicles for the year ended December 31, 2019 was recorded on an Agent basis due in advance of satisfying our performance obligations.
Our payment terms vary by the type and location of our customer and the products or services offered. The term between invoicing and when payment is due is not significant. For certain products or services and customer types, we require payment before the products or services are delivered to the customer.terms of the transaction.
In the year ended December 31, 2020, the balance of deferred revenue increased primarily as the Company sold vehicles with on-site maintenance agreement and allocated a portion of the transaction price to this performance obligation and will recognize this revenue over the service period.
Practical expedientsIn the year ended December 31, 2020 the Company sold vehicles whose contractual terms contained provisions which gave rise to variable consideration or other obligations. The Company has estimated the variable consideration and exemptionsother obligations, and will continue to revise these estimates in the future. The liabilities associated with these estimates are recorded as “Deferred revenue” or “Other long-term liabilities,” as appropriate, in the consolidated balance sheet.
We do not disclose
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Note 5. VIE Structure and Arrangements
The Company consolidated certain VIEs located in the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
We consolidate VIEsPRC in which we hold ait held variable interestinterests and arewas the primary beneficiary through contractual agreements. We areThe Company was the primary beneficiary because we haveit had the power to direct activities that most significantly affectaffected their economic performance and havehad the obligation to absorb or right to receive the majority of their losses or benefits. The results of operations and financial position of these VIEs are included in ourthe consolidated financial statements.statements for the year ended December 31, 2019. A shareholder in one of the VIEs is the spouse of Bruno Wu (“Dr. Wu,”) the former Chairman of the Company.
Refer to Note 10 for information on an additional VIE.
The contractual agreements listed below, which collectively granted the Company the power to direct the VIEs activities that most significantly affected their economic performance, as well to cause the Company to have the obligation to absorb or right to receive the majority of their losses or benefits, were terminated by all parties on December 31, 2019. As a result, the Company deconsolidated the VIEs as of December 31, 2019. The deconsolidation resulted in a net loss of $2.0 million recorded in “Gain (loss) on disposal of subsidiaries, net” in the consolidated statements of operations, and a statutory income tax of $0.2 million in the year ended December 31, 2019.
For these consolidated VIEs, their assets arewere not available to usthe Company and their creditors dodid not have recourse to us. As ofthe Company.
Prior to December 31, 2018 and 2017, assets (mainly long-term investments) that can only be used to settle obligations of these VIEs were approximately $3.5 million and $3.7 million, respectively, and the Company is the major creditor for the VIEs.
In2019, in order to operate our Legacy YODcertain legacy business in the PRC and to comply with PRC laws and regulations that prohibit or restrict foreign ownership of companies that provides value-added telecommunication services, the Company entered into a series of contractual agreements with two VIEs: Beijing Sinotop Scope Technology Co., Ltd (“Sinotop Beijing”) and Tianjin Sevenstarflix Network Technology Limited (“SSF”).2 VIEs. These contractual agreements will be expiredwere initially set to expire in March 2030 and April 2036, respectively, and maycould not be terminated by the VIEs, except with the consent of, or a material breach, by us. Currently, the Company is still evaluating the overall operating strategy for YOD legacy business and does not have plan to provide any funding to these two VIEs. Please refer to Note 19(a) for associated regulatory risks.
Company.
The key terms of the VIE Agreementsagreements are summarized as follows:
Equity Pledge Agreement
The VIEs’ Shareholders pledged all of their equity interests in VIEs (the “Collateral”) to YOD On Demand (Beijing) Technology Co., Ltd (“YOD WFOE”), our wholly owned subsidiary in PRC, as security for the performance of the obligations to make all the required technical service fee payments pursuant to the Technical Services Agreement and for performance of the VIEs’ Shareholders’ obligation under the Call Option Agreement. The terms of the Equity Pledge Agreement expire upon satisfaction of all obligations under the Technical Services Agreement and Call Option Agreement.
Call Option Agreement
The VIEs’ Shareholders granted an exclusive option to YOD WFOE, or its designee, to purchase, at any time and from time to time, to the extent permitted under PRC law, all or any portion of the VIEs’ Shareholders’ equity in VIEs. The exercise price of the option shall be determined by YOD WFOE at its sole discretion, subject to any restrictions imposed by PRC law. The term of the agreement is until all of the equity interest in VIEs held by the VIEs’ Shareholders are transferred to YOD WFOE, or its designee and may not be terminated by any part to the agreement without consent of the other parties.
Power of Attorney
The VIEs’ Shareholders granted YOD WFOE the irrevocable right, for the maximum period permitted by law, all of its voting rights as shareholders of VIEs. The VIEs’ Shareholders may not transfer any of its equity interest in VIEs to any party other than YOD WFOE. The Power of Attorney agreements may not be terminated except until all of the equity in VIEs has been transferred to YOD WFOE or its designee.
Technical Service Agreement
YOD WFOE has the exclusive right to provide technical service, marketing and management consulting service, financial support service and human resource support services to the VIEs, and the VIEs is required to take all commercially reasonable efforts to permit and facilitate the provision of the services by YOD WFOE. As compensation for providing the services, YOD WFOE is entitled to receive service fees from the VIEs equivalent to YOD WFOE’s cost plus 20-30% of such costs as calculated on accounting policies generally accepted in the PRC. YOD WFOE and the VIEs agree to periodically review the service fee and make adjustments as deemed appropriate. The term of the Technical Services Agreement is perpetual, and may only be terminated upon written consent of both parties.
Equity Pledge Agreement - The VIEs’ shareholders pledged all of their equity interests in the VIEs to a wholly-owned subsidiary of the Company in the PRC; |
● | Call Option Agreement - The VIEs’ shareholders granted an exclusive option to a wholly-owned subsidiary of the Company in the PRC, or its designee, to purchase all or any portion of the VIEs’ shareholders’ equity in the VIEs; |
● | Power of Attorney - The VIEs’ shareholders granted to a wholly-owned subsidiary of the Company in the PRC the irrevocable right, for the maximum period permitted by law, all of its voting rights as shareholders of VIEs; |
● | Technical Service Agreement – A wholly-owned subsidiary of the Company in the PRC had the exclusive right to provide technical service, marketing and management consulting service, financial support service and human resource support services to the VIEs, and the VIEs were required to take all commercially reasonable efforts to permit and facilitate the provision of the services; |
● | Spousal Consent - The spouses of the VIEs’ shareholders unconditionally and irrevocably agreed to the execution of the Equity Pledge Agreement, Call Option Agreement and Power of Attorney agreement; |
● | Letter of Indemnification – A wholly-owned subsidiary of the Company in the PRC agreed to indemnify such nominee shareholder against any personal, tax or other liabilities incurred in connection with their role in equity transfer to the greatest extent permitted under PRC law; |
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Spousal Consent
Letter of Indemnification
Pursuant to the Letter of Indemnification among YOD WFOE and each nominee shareholder, YOD WFOE agrees to indemnify such nominee shareholder against any personal, tax or other liabilities incurred in connection with their role in equity transfer to the greatest extent permitted under PRC law. YOD WFOE further waives and releases the VIEs’ Shareholders from any claims arising from, or related to, their role as the legal shareholder of the VIE, provided that their actions as a nominee shareholder are taken in good faith and are not opposed to YOD WFOE’s best interests. The VIEs’ Shareholders will not be entitled to dividends or other benefits generated therefrom, or receive any compensation in connection with this arrangement. The Letter of Indemnification will remain valid until either the nominee shareholder or YOD WFOE terminates the agreement by giving the other party hereto sixty (60) days’ prior written notice.
Management Services Agreement
In addition to VIE agreements described above, our subsidiary and the parent company of YOD WFOE, YOU On Demand (Asia) Limited, a company incorporated under the laws of Hong Kong (“YOD Hong Kong”) has entered into a Management Services Agreement with each VIE.
Pursuant to such Management Services Agreement, YOD Hong Kong has
● | Management Services Agreement - In addition to agreements described above, another of the Company’s wholly-owned subsidiaries entered into a Management Services Agreement with each VIE. Pursuant to such Management Services Agreement, the wholly-owned subsidiary had the exclusive right to provide
Note 6. Acquisitions and Divestitures
The
The Company may divest certain businesses from time to time based upon review of the In the year ended December 31, 2020, the Company commenced the liquidation of a consolidated entity and therefore deconsolidated the entity. As a result of the deconsolidation, the Company recorded a gain of $0.3 million in "Gain (loss) on disposal of subsidiaries, net” and bad debt expense of $0.2 million in "Selling, general and administrative expense" in the consolidated statements of operations.
(a) Acquisition of Tree Technologies Sdn. Bhd. ("Tree Technologies") On December 26, 2019, the Company completed the acquisition of a 51.0% interest in Tree Technologies, a Malaysian company engaged in the EV market. The acquisition price was comprised of (1) $0.9 million in cash, (2) 9.5 million shares of Ideanomics common stock, and (3) contingent consideration of up to $32.0 million over three years, to be paid in cash or Ideanomics common shares at the election of the Company. The contingent consideration was initially based upon revenue targets over three 12 month periods beginning in the three months ended December 31, 2019; due to financing delays and resulting production delays, these three 12 month periods commenced on July 1, 2020. In the year ended December 31, 2020, the Company recorded remeasurement gains of $7.0 million in "Change in fair value of contingent consideration, net" in the consolidated statements of operations. As of December 31, 2020, the recorded balance of this liability was $8.3 million. The fair value of the Ideanomics stock was based upon the closing price of $0.82 on December 26, 2019, and the fair value of the contingent consideration was estimated to be $15.5 million, and revised to $15.3 million upon finalization of the purchase, and was recorded as a liability on the date of acquisition. The Company estimated the fair value of the contingent consideration using a scenario-based method which incorporates various estimates, including projected gross revenue for the periods, probability estimates, discount rates and other factors. This fair value measurement is based on significant Level 3 inputs. The resulting probability-weighted cash flows were discounted using the Company’s estimated weighted average cost of capital of 15.0%. Tree Technologies holds the land use rights for 250 acres of vacant land zoned for industrial development in the Begeng Industrial Area adjacent to Kuantan Port. Kuantan is the capital city of the state of Pahang on the east coast of Peninsular Malaysia. The Company intends to develop this land and lease it to Tree Manufacturing for the manufacture of EVs. As part of the acquisition, Tree Technologies acquired an exclusive right to market and distribute the EVs manufactured by Tree Manufacturing. The goodwill arising from the acquisition consists largely of the synergies expected from the fulfillment of these contracts. None of the goodwill recognized is expected to be deductible for tax purposes. F-23 The following table summarizes the acquisition-date fair value of assets acquired and liabilities assumed, as well as the fair value of the non-controlling interest in Tree Technologies recognized. The Company has completed the fair value analysis of the assets acquired, liabilities assumed, the noncontrolling interest, and the contingent consideration, and therefore the adjustments are incorporated in the table below (in thousands):
The completion of the fair value analysis resulted in measurement period adjustments of $12.8 million, primarily to the amount initially assigned to the noncontrolling interest, and reduced the amount of goodwill recorded. The accounts payable above of $0.7 million primarily represents the transfer tax payable for the land use rights for the 250 acres of vacant land, which the Company paid in the three months ended September 30, 2020. Tree Technologies had not commenced operations as of the acquisition date, therefore pro forma results as if the acquisition had occurred as of January 1, 2019, and related information, are not presented. Refer to Note 9(e) for information regarding the impairment of the marketing and distribution agreement. (b) Acquisition of Grapevine Logic, Inc. (“Grapevine”) On September 4, 2018, the Company completed the acquisition of 65.7% share of Grapevine for $2.4 million in cash. Fomalhaut Limited (“Fomalhaut,”) a British Virgin Islands company and an affiliate of Dr. Wu, was the non-controlling equity holder of 34.4% in Grapevine (the “Fomalhaut Interest.”) Fomalhaut entered into an option agreement, effective as of August 31, 2018 (the “Option Agreement,”) with the Company pursuant to which the Company provided Fomalhaut with the option to sell the Fomalhaut Interest to the Company. The aggregate sale price for the Fomalhaut Interest was the fair market value of the Fomalhaut Interest as of the close of business on the date preceding the date upon which the right to sell the Fomalhaut Interest to the Company is exercised by Fomalhaut. If the option was to be exercised, the sale price for the Fomalhaut Interest was payable in a combination of 1/3 in cash and 2/3 in the Company’s shares of common stock at the then market value on the exercise date. In May 2019, the Company entered into 2 amendments to the Option Agreement. The aggregate exercise price for the Option was amended to the greater of: (1) fair market value of the Fomalhaut Interest in Grapevine as of the close of business on the date preceding the date upon which the option is exercised; and (2) $1.84 per share of the Company’s common stock. It was also agreed that the full amount of the exercise price was to be paid in the form of common stock of the Company. In June 2019, the Company issued 0.6 million shares in exchange for a 34.3% ownership in Grapevine as a result of the exercise of the Option. At the completion of this transaction the Company owned 100.0% of Grapevine. At the date of the transaction, the carrying amount of the non-controlling interest in Grapevine was $0.5 million. The difference between the value of the consideration exchanged of $1.1 million and the carrying amount of the non-controlling interest in Grapevine is recorded as a debit to additional paid-in capital based on ASC 810, Consolidation (“ASC 810.”) Refer to Note 9(c) for information regarding the impairment of Grapevine’s influencer network. F-24 (c) Acquisition of Delaware Board of Trade Holdings, Inc. (“DBOT”) In April 2019, the Company entered into a securities purchase agreement to acquire 6.9 million shares in DBOT in exchange for 4.4 million shares of the Company’s common stock at $2.11 per share. In July 2019, the Company entered into another securities purchase agreement to acquire an additional 2.2 million shares in DBOT in exchange for 1.4 million shares of the Company’s common stock at $2.11 per share. The two transactions, which increased the Company’s ownership in DBOT to 99.0% as of that date, were completed in July 2019. The securities purchase agreements required the Company to issue contingent consideration in the form of additional shares of the Company’s common stock in the event the stock price of the common stock falls below $2.11 at the close of trading on the date immediately preceding the lock-up date, which was 9 months from the closing date. The Company accounted for the contingent consideration as a liability in accordance with ASC 480, Distinguishing Liabilities from Equity. The Company recorded this liability at fair value of $2.2 million on the date of acquisition. As of December 31, 2019, the Company remeasured this liability to $7.3 million and the remeasurement loss of $5.1 million was recorded in “Change in fair value of contingent consideration, net” in the consolidated statements of operations. In the year ended December 31, 2020, the Company recorded remeasurement losses of $1.5 million in “Change in fair value of contingent acquisition, net” in the consolidated statements of operations, and partially satisfied the liability with the issuance of 13.1 million shares of common stock. As of December 31, 2020, the recorded balance of this liability was $0.6 million. The contractual period which required periodic remeasurement has expired, and therefore the Company will not remeasure this liability in the future. Immediately prior to the consummation of the transaction, the Company’s investment in DBOT consisted of 37.0% of the common shares outstanding, which had a fair value of $3.1 million, and the Company recorded a loss of $3.2 million to record the investment in DBOT to its fair value. This loss was recorded in “Loss on remeasurement of DBOT investment” in the consolidated statements of operations in the year ended December 31, 2019. The fair value of the investment in DBOT immediately prior to the consummation of the transaction was determined in conjunction with the overall fair value determination of the DBOT assets acquired and liabilities assumed. DBOT operated 3 companies: (1) DBOT ATS LLC, an SEC recognized Alternative Trading System (“ATS;”) (2) DBOT Issuer Services LLC, focused on setting and maintaining issuer standards, as well as the provision of issuer services to DBOT designated issuers; and (3) DBOT Technology Services LLC, focused on the provision of market data and marketplace connectivity. The goodwill arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of the Company and DBOT, as the Company expected to execute its business plan of selling digital tokens and digital assets and other commodities on an approved ATS. The consolidated statements of operation for the year ended December 31, 2019 include the results of DBOT from July 2019 to December 31, 2019. For the time period from July 2019 through December 31, 2019, DBOT contributed $15,838 and $1.9 million to the Company’s revenue and net loss, respectively. The following table summarizes supplemental information on an unaudited pro forma basis, as if the acquisition had been consummated as of January 1, 2018
The unaudited pro forma results of operations do not purport to represent what the Company’s results of operations would actually have been had the acquisition occurred on January 1, 2019. Actual future results may vary considerably based on a variety of factors beyond the Company’s control. F-25 The following table summarizes the acquisition-date fair value of assets acquired and liabilities assumed, as well as the fair value of the non-controlling interest in DBOT recognized (in thousands):
The excess of the consideration over the fair value of the net assets acquired has been recorded as goodwill, of which none is expected to be deductible for tax purposes. For all intangible assets acquired, the continuing membership agreements were determined to have a useful life of 20 years and the customer list a useful life of 3 years. Refer to Note 9 for information regarding the impairment of DBOT's goodwill, continuing membership agreement, and customer list. 2019 Divestitures (d) Red Rock Global Capital LTD (“Red Rock”) In May 2019, the Company determined to sell the Red Rock business and entered into an agreement with (e) Amer Global Technology Limited On June 30, 2019, the Company entered into an agreement with BCC Technology Company Limited (“BCC”) and Tekang Holdings Technology Co., Ltd (“Tekang ”) pursuant to which Tekang will inject certain assets in the robotics and electronic internet industry and Internet of Things business consisting of manufacturing data, supply chain management and financing, and lease financing of industrial robotics into Amer in exchange for 71.8% of ownership interest in The Company recognized a disposal gain of $0.5 million as a result of the Pro forma results of operations for the year ended December 31, 2019 have not been presented because they are not material to the consolidated results of operations. Amer had no revenue and minimal operating expenses in the year ended December 31, 2019. In the three months ended September 30, 2020, the Company sold its remaining 10.0% interest in Amer to Fintalk Media Inc., F-26 Note 7. Accounts Receivable The following table summarizes the Company’s accounts receivable (in thousands):
$2.3 million, respectively. The following table summarizes the movement of the allowance for doubtful accounts
In the year ended December 31, 2020, the Company increased its allowance for doubtful accounts by $1.2 million for the accounts receivable from the related party Guizhou Qianxi Green Environmentally Friendly Taxi Service Co. Note 8. Property and Equipment, net The following
The Company recorded depreciation expense of F-27 Global Headquarters for Technology and Innovation in Connecticut (“Fintech Village”) On October 10, 2018, the Company purchased a 58-acre former University of Connecticut campus in West Hartford from the State of Connecticut for $5.2 million in cash and also assumed responsibility of the environmental remediation. The Company obtained a surety bond in favor of the University of Connecticut and the State of Connecticut (the “Seller”) in connection with the Company’s environmental remediation obligations. The following table summarizes the activity in the asset retirement obligation for the year ended December 31, 2020 (in thousands):
In the year ended December 31, 2020, the Company impaired the remaining building with a In the year ended December 31, 2019, the Company impaired buildings with a carrying amount of $2.3 million, which were subsequently demolished, and In connection with the acquisition, the Company also entered into an Assistance Agreement by and between the State of Connecticut, acting by the Department of Economic and Community Development (the “Assistance
Note 9. Goodwill and Intangible Assets Goodwill
F-28 *During the three months ended December 31, 2019, the Company completed the acquisition of a 51.0% interest in Tree Technologies, a Malaysian company engaged in the EV market. The Company adjusted goodwill balance in connection with the completion of acquisition accounting. Refer to Note 6(a) for additional information related to the acquisition. Impairment of DBOT Goodwill Throughout 2020, the Company pursued its initial business goals for DBOT involving the sale of digital securities and brokering commodity products, more specifically investigating applications to new and underserved markets, or targeting of specific transactions, such as
Intangible Assets
F-29
Amortization expense, The following table
F-30
Note 10. Long-term Investments The following table summarizes the composition of long-term investments (in thousands):
Non-marketable equity Our non-marketable equity investments are investments in privately held companies without readily determinable fair values and are carried at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The Company reviews its equity securities without readily determinable fair values on a regular basis to determine if the investment is impaired. For purposes of this assessment, the Company considers the investee’s cash position, earnings and revenue outlook, liquidity and management ownership, among other factors, in its review. If management’s assessment indicates that an impairment exists, the Company estimates the fair value of the equity investment and recognizes in current earnings an impairment loss that is equal to the difference between the fair value of the equity investment and its carrying amount. The Company sold one non-marketable equity investment with a carrying amount of $3.2 million for GTB and recognized no Equity method investments The following table summarizes the Company’s investment in companies accounted for using the equity method of accounting
All the investments above are privately held companies; therefore, quoted market prices are not available.
F-31
In 2018, Intelligenta’s target customer base is financial institutions and large energy companies in the U. S.; however, due to the political relations between the U.S. and China, Intelligenta has been unable to commercialize its product as such companies are hesitant to engage a company with China-based ownership to perform AI and block chain services. The Intelligenta has yet to record revenue or earnings or losses, and therefore its statement of operations and balance sheet data are not material. As of December 31, 2019, the excess of the Company’s investment over its proportionate share of Intelligenta’s net assets was $9.8 million. The difference represented goodwill and was not amortized.
On July 18, 2019, the Company entered into an acquisition agreement to purchase a 34.0% interest in Glory, a Malaysian company, from its shareholder Beijing Financial Holding Limited, a Hong Kong registered company, for the consideration of 12.2 million restricted common shares of the Company, initially representing $24.4 million at $2.00 per share, the contract price, and subsequently revised to $20.0 million at $1.64 per share, the closing price on the date of acquisition. As part of this transaction, the Company was also granted an option to purchase a 40.0% interest in Bigfair Holdings Limited (“Bigfair”) from its shareholder Beijing Financial Holding Limited for an exercise price of $13.2 million in the form of common shares of the Company. Bigfair holds a 51.0% ownership stake in Glory. The option is exercisable from July 18, 2020 to July 19, 2021. If the option is exercised, the Company would have 20.4% indirect ownership in Glory in addition to the 34.0% direct ownership it already has. Upon the initial investment, the Company performed a valuation analysis and allocated $23.0 million and $1.4 million of the consideration transferred to the equity method investment and the call option, respectively, which was subsequently revised to $20.0 million and $0, respectively. As initially contemplated, Glory, through its subsidiary Tree Manufacturing, would hold a domestic EV manufacturing license in Malaysia, a marketing and distribution agreement for EVs in the ASEAN region, as well as the land use rights for 250 acres of vacant land zoned for industrial development in the Begeng Industrial Area adjacent to Kuantan Port. Kuantan is the capital city of the state of Pahang on the east coast of Peninsular Malaysia, which was to be the site of the manufacturing operations. In December 2019, the Company acquired a 51.0% ownership interest in Tree Technologies. Tree Technologies had previously been granted the land use rights to the 250 acres of vacant land mentioned above, which was previously anticipated would be owned by Glory. As Glory would no longer receive the land use rights to the 250 acres of vacant land, the Company evaluated its investment in Glory for impairment, and recorded an impairment loss of $13.1 million in “Impairment of and equity in loss of equity method investees” in the consolidated statements of operations in the year ended December 31, 2019. Tree Technologies had also entered into a product supply arrangement and a product distribution arrangement with a subsidiary of Glory. The Company performed an assessment of these arrangements, and determined that Glory is a variable interest entity, but that the Company is F-32 In the three months ended December 31, 2020, Tree Technologies obtained a domestic EV manufacturing license in Malaysia; and therefore determined it would not purchase vehicles from Glory's subsidiary, Tree Manufacturing. As Glory's value was predicated on the underlying manufacturing agreement between Tree Technologies and Tree Manufacturing, the Company evaluated the business prospects of Glory, and determined that its investment was impaired, and the impairment was other-than-temporary. Accordingly, the Company recorded an impairment loss of $6.9 million in "Impairment of and equity in loss of equity method investees" in the consolidated statements of operations in the year ended December 31, 2020. Refer to Note 9(e) for information on the impairment loss recorded with respect to the manufacturing agreement with Tree Manufacturing. As of December 31, 2019, the excess of the Company’s investment over its proportionate share of Glory’s net assets was $6.6 million. The difference represented an amortizing intangible asset. The following table summarizes the income statement information of Glory for the year ended December 31, 2019 (in thousands):
On October 22, 2020, the Company acquired 1.4 million common shares, representing 15.0% of the total common shares outstanding, of Solectrac for a purchase price of $0.91 per share, for total consideration of $1.3 million. On November 19, 2020, Ideanomics acquired an additional 1.3 million shares of common stock for $1.00 per share, for a subsequent investment of $1.3 million. With this subsequent investment, Ideanomics owned 2.7 million common shares out of a total number of issued and outstanding common shares of 10.2 million after the transaction, or 27.0%. Solectrac develops, assembles and distributes 100% battery-powered electric tractors-an alternative to diesel tractors-for agriculture and utility operations. Solectrac tractors provide an opportunity for farmers around the world to power their tractors by using the sun, wind, and other clean renewable sources of energy.
As of January 1, 2019, the Company had a 50.0% interest in Wecast Internet. Wecast Internet was in the process of liquidation and the remaining carrying amount of $6,000 was impaired in the year ended December 31, 2019.
As of January 1, 2019, the Company held a 39.0% equity ownership in Hua Cheng, a company established to provide integrated value-added service solutions for the delivery of video on demand and enhanced content for cable providers. This investment was held by a PRC VIE and was deconsolidated on December 31, 2019. Refer to Note 5 for additional information on the PRC VIEs.
F-33 In July 2019, the Company issued 6.7 million shares of the Company’s common stock to acquire additional shares in DBOT, thereby increasing its holdings to 99.0%. As a result, the Company began to consolidate DBOT. Refer to Note 6(c) for additional information on the acquisition and consolidation of DBOT. Note 11. Leases On May 1, 2020, the Company took possession of premises in Qingdao, China in furtherance of a larger public/private initiative to promote EV business in the region and reduce the reliance on traditional combustion engines. The premises are indirectly and partially owned by local governmental entities, and were provided to the Company at no charge. The Company, pursuant to the underlying lease, has use of the premises until November 30, 2034. The Company has determined the fair value of the lease and recorded the lease in accordance with ASC 842, ASC 845 Nonmonetary Transactions(“ASC 845,”) and ASC 958, Not-for-Profit Entities (“ASC 958.”) In connection with this lease agreement, the Company recorded operating right of use assets of $7.2 million, and an operating lease liability of $7.2 million. The fair value of the annual lease payments is $0.7 million. As of December 31, 2020, the Company’s operating lease right of use assets and operating lease liability are $7.1 million and $7.2 million, respectively. The weighted-average remaining lease term is 13.7 years and the weighted-average discount rate is 4.4%. The following table summarizes the components of lease expense (in thousands):
The following table summarizes supplemental information related to leases (in thousands):
The following table summarizes the maturity of operating lease liabilities (in thousands):
F-34 In the three months ended March 31, 2020 the Company ceased to use the premises underlying one lease and vacated the real estate. As a result, the Company recorded an impairment loss related to the right of use asset of $0.9 million. In the three months ended June 30, 2020, the Company completed negotiations with the landlord to settle the remaining operating lease liability of $0.9 million by issuing a promissory note for $0.1 million, bearing an annual interest rate of 4.0%, and which is due and payable on December 31, 2021. The Company recorded a gain of $0.8 million in “Other income (expense), net” in the consolidated statements of operations for the settlement of the operating lease liability. In the three months ended June 30, 2020 the Company ceased to use its New York City headquarters at 55 Broadway, which are subject to two leases, and vacated the real estate. As a result, the Company recorded an impairment loss related to the right of use asset of $5.3 million. The Company had an operating use liability of $5.8 million with respect to these leases, excluding $0.6 million in accounts payable. In the three months ended September 30, 2020, the Company completed negotiations with the landlord to settle the remaining amounts due of $6.4 million for a cash payment of $1.5 million. The Company recorded a gain of $4.9 million in “Other income (expense), net” in the consolidated statements of operations for the settlement of the operating lease. Note 12. Supplementary Information Other Current Assets “Other current assets” were third-party supplier for EV purchases. Other Current Liabilities “Other current liabilities” were Note 13. Promissory Notes The following is the summary of outstanding promissory notes as of December 31, 2020 and 2019 (in thousands):
*Carrying amount includes the accrued interest. As of December 31, 2020 and 2019, the Company was in compliance with all ratios and covenants. F-35 (a) $12.0 Million Convertible Note - Advantech On June 28, 2018, the Company entered into a convertible note purchase agreement with Advantech Capital Investment II Limited (“Advantech”) in the aggregate principal amount of The Company received aggregate gross proceeds of The initial difference between the conversion price and the fair NaN additional BCF was recognized because the discount assigned to the BCF is already equal to the proceeds allocated to the convertible instrument. In December 2020, the Company entered the into a payoff letter agreement with Advantech, and repaid in full all remaining obligations under the Advantech Note in cash. The payoff amount, including the outstanding principal and interest, was $14.5 million. The Company recognized the gain of $8.4 million as of the payoff. Total interest expense recognized (b) $2.05 Million Senior Secured Convertible Debenture due in August 2020 - ID Venturas 7 On February 22, 2019, the Company executed a security purchase agreement with ID Venturas 7, LLC (“IDV”), whereby the Company issued $2.1 million of senior secured convertible note (“February IDV Note.”) The February IDV Note bore interest at a rate of 10.0% per year payable either in cash or in kind at the option of the Company on a quarterly basis and was scheduled to mature on August 22, 2020. In addition, IDV was entitled to the following: (1) the convertible note was senior secured; (2) convertible at an adjusted price per share of Company common stock at the option of IDV, subject to adjustments if subsequent equity shares had a lower conversion price (original conversion price of $1.84, $1.00 after October 30, 2019 and $0.5869 after April 22, 2020), (3) 1.2 million shares of common stock of the Company; and (4) a warrant exercisable for 1.6 million shares of common stock, which the February IDV Note was convertible into at an adjusted exercise price (original conversion price of $1.84, $1.00 after October 30, 2019 and $0.5869 after April 22, 2020) per share and initially expired in 7 years, which was extended from 5 years on December 19, 2019. The Company received aggregate gross proceeds of $2.0 million, net of $50,000 for the issuance expenses paid by IDV. Total funds received were allocated to the February IDV Note, common shares and warrants based on their relative fair values in accordance with ASC 470 , Debt (“ASC 470.”) The fair value of the February IDV Note and common shares was based on the closing price of the Company's common stock on February 22, 2019. The fair value of the warrants was determined using the Black-Scholes option-pricing model, with the following assumptions: expected life of 5 years, expected dividend rate of 0%, volatility of 111.83% and an interest rate of 2.48%. The fair value of the warrants was recorded as additional paid-in capital and a corresponding discount on the carrying amount of the February IDV Note. The Company recognized a BCF of $0.6 million as an increase in additional paid-in capital and corresponding discount on the carrying amount of the February IDV Note, which was the fair value of the common shares at the commitment date for the February IDV Note, less the effective conversion price. Interest on the February IDV Note was payable quarterly starting from April 1, 2019. The February IDV Note was redeemable at the option of the Company in whole at an initial redemption price of the principal amount of the February IDV Note plus additional warrants and accrued and unpaid interest to the date of redemption. The Company was also subject to penalty fee at 8.0% per annum for late payments of interests and compensation for the loss of IDV on failure to timely deliver conversion shares upon conversion. F-36 The security purchase agreement contained customary representations, warranties, and covenants. The February IDV Note was collateralized by the Company’s equity interest in Grapevine and the Company had the right to request the removal of the guarantee and collateral by the issuance of additional 250,000 shares of common stock. Modification/Extinguishment On September 27, 2019, the Company issued 250,000 shares of common stock to IDV in exchange for the release of Grapevine as collateral. The issuance of the common shares in exchange for the removal of collateral was treated as a modification of the February IDV Note pursuant to the guidance of ASC 470. The Company concluded that the February IDV Note qualified for debt extinguishment as the 10.0% cash flow test was met. As a result, the carrying amount of $0.8 million of the February IDV Note was written off and the amended note was recorded at its fair value of $1.7 million. The Company recognized a non-cash loss on extinguishment of debt in the amount of $1.2 million and the intrinsic value of reacquisition of BCF is zero as of September 27, 2019. Down Round Price Adjustment on October 30, 2019 As a result of the additional financing on October 30, 2019, the Company entered into a letter agreement with IDV pursuant to which the Company agreed to reduce the conversion price of the February IDV Note and the exercise price of the warrants from $1.84 to $1.00. The Company recognized $1.4 million of remeasured BCF as an increase in additional paid- in capital and a corresponding discount on the carrying amount of the February IDV Note and $0.2 million of deemed dividend on warrant repricing for the difference between the fair value of the unadjusted warrants and adjusted warrants. The fair value of the adjusted warrants was determined using the Black-Scholes option-pricing model based on the following assumptions: expected life of 5 years, expected dividend rate of 0%, volatility of 112.0%, and an interest rate of 2.48%. Down Round Price Adjustment on April 22, 2020 As a result of the additional financing on April 22, 2020, the conversion price of the February IDV Note and the exercise price of the warrants was reduced from $1.00 to $0.5869. The Company recognized $0.3 million of remeasured BCF as an increase in additional paid in capital and a corresponding discount on the carrying amount of the February IDV Note and $59,372 of deemed dividend on warrant repricing for the difference between the fair value of the unadjusted warrants and adjusted warrants. The fair value of the adjusted warrants was determined using the Black-Scholes option-pricing model based on the following assumptions: expected life of 7 years, expected dividend rate of 0%, volatility of 122.4%, and an interest rate of 1.84%. Conversion As of December 31, During year ended December 31, 2020, the remaining $0.85 million of the February IDV note, plus accrued and unpaid interest, were converted into 1.4 million shares of common stock of the Company. As a result of the conversions, the Company recognized associated unamortized discount at the date of conversion as interest expense. Total interest expense recognized was $0.9 million and $1.2 million for the years ended December 31, 2020 and 2019, respectively. F-37 (c) $3.58 Million Senior Secured Convertible Debenture due in On September 27, 2019, the Company executed a security purchase agreement with IDV (“IDV September Agreement,”) whereby the Company issued $2.5 million of senior secured convertible note in September (“September IDV Note”) and issued an additional $1.1 million of secured convertible notes subsequently based on additional investment rights in the IDV September Agreement. The September IDV Notes bore interest at a rate of 10.0% per year payable either in cash or in kind at the option of the Company on a quarterly basis and was scheduled to mature on March 27, 2021. In addition, IDV was entitled to the following: (1) the convertible note was senior secured; (2) convertible at an adjusted price per share of Company common stock at the option of IDV, subject to adjustments if subsequent equity shares had a lower conversion price (original $1.84, $1.00 after October 30, 2019 and $0.5869 after April 22, 2020), (3) 1.5 million shares of common stock of the Company, and (4) a warrant exercisable for 4.7 million shares of common stock at an adjusted exercise price (original $1.84 , $1.00 after October 30, 2019 and $0.5869 after April 22, 2020) per share and will expire in 7 years, which was extended from 5 years. The Company received net proceeds of $3.5 million (aggregate gross proceeds of $3.6 million, net of $65,000 for the issuance expenses paid to IDV). Total gross proceeds were allocated to the September IDV Note, common shares and warrants based on their relative fair values in accordance with ASC 470. The fair value of the September IDV Note and common shares was based on the closing price of the common stock on September 27, 2019. The fair value of the warrants was determined using the Black-Scholes option-pricing model, with the following assumptions: expected life of 5 years, expected dividend rate of 0%, volatility of 122.44% and an average interest rate of 1.66%. The fair value of the warrants was recorded as additional paid-in capital and corresponding discount on the carrying amount of the September IDV Note. The Company recognized a BCF as a discount on September IDV Note at its intrinsic value, which was the fair value of the common shares at the commitment date, less the effective conversion price. The Company recognized $1.3 million of BCF in total as an increase in additional paid-in capital and corresponding discount on the carrying amount of the September IDV Note. The September IDV Note was redeemable at the option of the Company in whole at an initial redemption price of the principal amount of the September IDV Note plus additional warrants and accrued and unpaid interest to the date of redemption. The security purchase agreement contains customary representations, warranties, and covenants. The September IDV Note was collateralized by the Company’s equity interest in DBOT. The Company was also subject to penalty fee at 8.0% per annum for late payments of interests and compensation for the loss of IDV on failure to timely deliver conversion shares upon conversion. Down Round Price Adjustment on October 30, 2019 On October 29, 2019 the Company entered into a letter agreement with IDV pursuant to which the Company agreed to reduce the conversion price of the debentures and the exercise price of the warrants from $1.84 to $1.00 due to the lower conversion price and exercise price agreed in the additional issuance in October, 2019. The Company recognized $0.2 million of remeasured BCF as an increase in additional paid-in capital and corresponding discount on the carrying amount of the September IDV note and $0.1 million of deemed dividend on warrant repricing for the difference between the fair value of the unadjusted warrants and adjusted warrants. Additional Issuance for No Additional Consideration - Consent of IDV for Subsequent Financing with YA II PN On December 19, 2019, the Company executed an additional issuance agreement with IDV, pursuant to which the Company obtained a consent from IDV for subsequent financing with YA II PN in exchange for: (1) 2.0 million shares of the Company's common stock; (2) the warrant to purchase 1.0 million shares of the Company's common stock at an exercise price of $1.00 with a 7 year term in the form of prior warrants issued to IDV; and (3) a 2 year extension of the exercise period for all F-38 The additional issuance above and the exercise period extension in exchange for the consent was treated as a modification of the September IDV Note pursuant to the guidance of ASC 470. The Company concluded that the September IDV Note qualified for debt extinguishment as the 10.0% cash flow test was met. As a result, the carrying amount of $0.4 million of the September IDV Note was written off and the amended note was recorded at its fair value of $2.2 million along with a BCF at intrinsic value of $0.5 million. The Company measured and recognized the intrinsic value of the BCF at its reacquisition price $0.5 million on December 19, 2019 and recognized a non-cash loss on extinguishment of debt in the amount of $2.7 million in accordance with ASC 470. In addition, the Company recognized a deemed dividend of $0.5 million for the extension of exercise period for all applicable warrants issued to IDV. Down Round Price Adjustment on April 22, 2020 As a result of the additional financing on April 22, 2020, the conversion price of the September IDV Note and the exercise price of the warrants was reduced from $1.00 to $0.5869. The Company recognized $0.3 million of remeasured BCF as an increase in additional paid- in capital and a corresponding discount on the carrying amount of the amended note and $0.1 million of deemed dividend on warrant repricing for the difference between the fair value of the unadjusted warrants and adjusted warrants. The fair value of the adjusted warrants was determined using the Black-Scholes option-pricing model based on the following assumptions: expected life of 7 years, expected dividend rate of 0%, volatility of 122.4%, and an interest rate of 1.84%. Down Round Price Adjustment on May 20, 2020 In order to facilitate the additional financing, the Company entered into an amendment and waiver agreement with IDV pursuant to which the Company agreed to reduce the conversion price of $1.0 million principal amount of debenture to the lowest price per share sold in the financing but not less than $0.36. NaN additional BCF is recognized because the discount assigned to the BCF is already equal to the proceeds allocated to the convertible instrument. Conversion During the nine months ended September 30, 2020, $3.6 million of the amended note, plus accrued and unpaid interest, were converted into 7.3 million shares of common stock of the Company. As a result of the conversions, the Company recognized associated unamortized discount at the date of conversion as interest expense. Total interest expense recognized was $2.1 million and $0.7 million for the years ended December 31, 2020 and 2019, respectively. (d) $5.0 Million Senior Secured Convertible Debenture due in December 2020 - YA II PN On December 19, 2019, the Company completed the initial closing with respect to a securities purchase agreement with YA II PN, Ltd, a company incorporated under the laws of the Cayman Islands ("YA II PN"), where YA II PN agreed to purchase from the Company up to $5.0 million (with 4.0% discount) in units consisting of secured convertible debentures (the “YA II PN Note,”) which was convertible into shares of the Company's common stock at lower of: (1) $1.50 per share, or (2) 90.0% of the lowest 10 day volume weighted average price ("VWAP") with a floor price at $1.00, subject to adjustments if subsequent equity shares had a lower conversion price, and shares of the Company's common stock. The purchase and sale of the units occurred in three closings:
The YA II PN Note was scheduled to mature in December 2020 and accrued interest at an 4.0% interest rate. YA II PN also received: (1) a warrant (the "Warrant I") exercisable for 1.7 million shares of common stock at $1.50 with an expiration date 60 months from the date of the agreement, and (2) a warrant (the "Warrant II") exercisable for 1.0 million shares of common stock at $1.00 with an expiration date of 12 months from the date of the agreement. F-39 The Company received aggregate gross proceeds of $2.9 million (net of $0.1 million discount) as of December 31, 2019 and received $2.0 million in February 2020. Total funds received were allocated to the YA II PN Note, common shares and warrants based on their relative fair values in accordance with ASC 470. The fair value of the YA II PN Note and common shares was based on the closing price of the common stock on December 19, 2019. The fair value of the warrants was determined using the Black-Scholes option-pricing model, with the following assumptions: expected life of 5 years (1 year for Warrant II), expected dividend rate of 0%, volatility of 122.44% and an interest rate of 1.66% (1.54% for Warrant II). The fair value of the warrants was recorded as additional paid-in capital and a corresponding discount on the carrying amount of the YA II PN Note. There was no BCF because its intrinsic value is zero since the stock price of the common shares at the commitment date for the YA II PN Note is greater than the effective conversion price. The YA II PN Note was redeemable at the option of the Company in whole or in part at an initial redemption price of the principal amount of the YA II PN Note plus a redemption premium equal to 15.0% of the amount being redeemed and accrued and unpaid interest to the date of redemption. The security purchase agreement contains customary representations, warranties, and covenants. Down Round Price Adjustment on April 22, 2020 As a result of the additional financing on April 22, 2020, the conversion price of the YA II PN Note was reduced from $1.00 to $0.5869. The Company recognized $2.7 million of remeasured BCF as an increase in additional paid- in capital and a corresponding discount on the carrying amount of the amended Note. Down Round Price Adjustment on May 20, 2020 In order to facilitate the additional financing, the Company entered into an amendment and waiver agreement with YA II PN pursuant to which the Company agreed to reduce the conversion price of $1.0 million principal amount of debenture to the lowest price per share sold in the financing but not less than $0.36. NaN additional BCF was recognized because the discount assigned to the BCF was already equal to the proceeds allocated to the convertible instrument. Conversion During year ended December 31, 2020, $5.0 million of the YA II PN Note, plus accrued and unpaid interest, were converted into 9.7 million shares of common stock of the Company. As a result of the conversions, the Company recognized associated unamortized discount at the date of conversion as interest expense. Total interest expense recognized was $5.0 million and $70,000 for the years ended December 31, 2020 and 2019, respectively. (e) $25.0 Million Convertible Debenture due in June 2021 – YA II PN On December 14, 2020, the Company executed a security purchase agreement with YA II PN, whereby the Company issued $25.0 million of convertible note (“December YA Note.”) The December YA Note was scheduled to mature on June 14, 2021 and bore interest at an annual rate of 4.0% , The Interest Rate shall be increased to 18% upon an Event of Default. The Note has a fixed conversion price of $1.93. The Conversion Price is not subject to adjustment except for subdivisions or combinations of common stock. The Company has the right, but not the obligation, to redeem (“Optional Redemption”) a portion or all amounts outstanding under this Note prior to the Maturity Date at a cash redemption price equal to the Principal to be redeemed, plus accrued and unpaid interest, if any; provided that the Company provides YA II PN with at least 15 business days’ prior written notice of its desire to exercise an Optional Redemption and the volume weighted average price of the Company’s common stock over the 10 Business Days’ immediately prior to such redemption notice is less than the Conversion Price. The YA II PN may convert all or any part of the Note after receiving a redemption notice, in which case the redemption amount shall be reduced by the amount so converted. The Note contains customary events of default, indemnification obligations of the Company and other obligations and rights of the parties. Conversion During the year ended December 31, 2020, $25.0 million of the YA II PN Note, plus accrued and unpaid interest, were converted into 13.0 million shares of common stock of the Company. F-40 The Company received aggregate gross proceeds of $25.0 million. Total interest expense recognized was $44,384 for the years ended December 31, 2020. (f) $3.0 Million Promissory Note due in November 2020 – New Castle County On November 25, 2015, DBOT, the subsidiary which the Company acquired in 2019, entered into a promissory note with New Castle County, a political subdivision of the State of Delaware in the aggregate principal amount of $3.0 million (the “New Castle County Notes.”) The New Castle County Notes bore interest at a rate of 6.0%, and was paid off when matured on November 25, 2020. Total interest expense recognized was $0.2 million and $0.2 million for the years ended December 31, 2020 and 2019, respectively. The agreement also requires the Company to comply with certain covenants, including restrictions on new indebtedness offering and liens. (g)Vendor Notes Payable On May 13, 2020, DBOT entered into a settlement agreement with a vendor whereby the existing agreement with the vendor was terminated, the vendor ceased to provide services, and all outstanding amounts were settled. In connection with this agreement, DBOT paid an initial $30,000 and executed an unsecured promissory note in the amount of $60,000, bearing interest at 0.25% per annum, and payable in 2 installments of $30,000. The first installment is due on December 31, 2020 and was repaid, the remaining payment is due on August 31, 2021. In the three months ended March 31, 2020 the Company ceased to use the premises underlying one lease and vacated the real estate. In the three months ended June 30, 2020, the Company completed negotiations with the landlord to settle the remaining operating lease liability of $0.9 million by issuing a promissory note for $0.1 million, bearing an annual interest rate of 4.0%, and which is due and payable on December 31, 2021. (h) Small Business Association Paycheck Protection Program On April 10, 2020, the Company borrowed $0.3 million at an annual rate of 1.0% from a commercial bank through the Small Business Association Paycheck Protection Program. The loan was originally payable in 18 installments of $18,993 commencing on November 10, 2020, with a final payment due on April 10, 2022. With several amendments, the loan is currently payable monthly commencing on September 10, 2021, with a final payment due on April 10, 2025. The Company may apply for forgiveness of this loan in the next twelve months in an amount equal to the sum of the following costs incurred in the eight weeks following the disbursement of the loan: (1) payroll costs, (2) interest on a covered mortgage obligation, (3) payment on a covered rent obligation, and (4) any covered utility payment. On May 1, 2020 Grapevine borrowed $0.1 million at an annual rate of 1.0% from a commercial bank through the Small Business Association Paycheck Protection Program. The loan was originally payable in 18 installments of approximately $7,000 commencing on December 1, 2020, with a final payment due on May 1, 2022. With several amendments, the loan is currently payable commencing on October 1, 2021, with a final payment due on April 10, 2025. The Company may apply for forgiveness of this loan in an amount equal to the sum of the following costs incurred in the eight weeks following the disbursement of the loan: (1) payroll costs, (2) interest on a covered mortgage obligation, (3) payment on a covered rent obligation, and (4) any covered utility payment. Total interest expense recognized was $3,211 in the year ended December 31, 2020. Note Convertible Preferred Stock and Redeemable Non-controlling Interest Convertible Preferred Stock Our F-41 Common Stock Our Redeemable Non-controlling Interest
The investment agreement stipulates that New Energy must pay Qingdao dividends at the rate of 6.0%. After one year, Qingdao may sell its investment to an institutional investor, and after three years may redeem its investment for the face amount plus 6.0% interest less dividends paid. The redemption feature is neither mandatory nor certain. Due to the redemption feature, the Company has classified the investment outside of permanent equity. The following table summarizes activity for the redeemable non-controlling interest for the year ended December 31, 2020 (in thousands):
Standby Equity
For each share of common stock purchased under the SEDA, YA II PN will pay 90% of the lowest VWAP of the Company’s shares during the five trading days following the Company’s advance notice to YA II PN. In YA II PN’s obligation under the SEDA is subject to The SEDA contains customary representations, warranties and agreements of the Company and YA II PN, indemnification rights and other obligations of the parties. YA II PN has covenanted not to cause or engage in any direct or indirect short selling or hedging of the Company’s shares of common stock. F-42 During the year ended December 31, 2020, the Company issued 122.9 million shares of common stock 2020 Equity Transactions Refer to
2019 Equity Transactions Refer to Note 13 for information related to issuance of Note
$3.0 Million Convertible Note with Mr. Shane McMahon (“Mr. McMahon”) On May 10, 2012, Mr. McMahon, our Vice Chairman, made a loan to the Company in the amount of
On June 5, 2020, the Audit Committee and converted into 5.1 million shares of common stock. The Company paid the accumulated interest $0.3 million in cash prior to the conversion. For the years ended December 31, $2.5 Million Convertible Promissory Note with SSSIG On February 8, 2019, the Company entered into a convertible promissory note agreement with SSSIG, an affiliate of Dr. Wu, in the aggregate principal amount of As of December 31, 2019, the Company received $1.3 million from SSSIG. The Company did not receive the remaining $1.2 million due under this note. For the years ended December 31, 2020 and 2019, the Company recorded interest expense of $21,546 and $48,357, respectively, related to the note. The Company did not pay such interest to SSSIG in the year ended December 31, 2019. On June 5, 2020, the Audit Committee and the Board of Directors approved the reduction of the conversion price to $0.59, contingent upon the immediate conversion of the convertible promissory note. On June 5, 2020, the convertible promissory note including accumulated interest was converted into 2.2 million shares of common stock. F-43 $1.0 Million Convertible Promissory Note with SSSIG On November 25, 2019, the Company entered into a convertible promissory note agreement with SSSIG, an affiliate of Dr. Wu, in the aggregate principal amount of $1.0 million. The convertible promissory note bore interest at a rate of 4.0%, was initially scheduled to mature on November 25, 2021, and was convertible into the shares of the Company’s common stock at a conversion price of As of December 31,
note. For the years ended December 31, On June 5, 2020, the Audit Committee and the Board of Directors approved the reduction of conversion price to $0.59, contingent upon the immediate conversion of the convertible promissory note. On June 5, 2020, the convertible promissory note, including accumulated interest, was converted into 0.4 million shares of common stock.
Disposal of Assets in exchange of GTB In March 2019, the Company completed the sale of the following assets (with total carrying amount of
Digital asset management services The Company recognized revenue for the master plan development services over the contract period based on the progress of the services provided towards completed satisfaction. Based on ASC 606, at contract inception, the Company considered the following factors to estimate the value of GTB (noncash consideration): 1) it only trades in one exchange, which operations have been less than one year; 2) its historical volatility is high; and 3) the Company’s intention at the time to hold the majority of GTB, as part of its digital asset management services; and 4) associated risks related to holding GTB. Therefore, the value of 7.1 million GTB using Level 2 measurement was $40.7 million with a 76.0% discount to the fixed contract price agreed upon by both parties when signing the contract. The Company considered similar assets exchanges in Singapore and considered the volatility of the quoted prices and determined a discount of 76.0%. The estimated value of GTB is calculated using the Black-Scholes valuation model using the following assumptions: expected terms 3.0 years; volatility 155%; dividend yield: 0 and risk-free interest rate 2.25%. As of December 31, 2019, all performance obligations associated with the development of the master plan for GTD’s assets had been satisfied. Accordingly, the Company recognized revenue of $40.7 million in the year ended December 31, 2019. Refer to Note 9(f) for information concerning the impairment loss of $61.1 million recorded related to GTB in the year ended December 31, 2019. F-44 (c) Severance payments On February 20, 2019, the Company accepted the resignation of its former Chief Executive Officer, former Chief Investment Officer and former Chief Strategy Officer and agreed to pay $0.8 million in total for salary, severance and expenses. The Company paid $0.6 million in the first quarter of 2019, paid $0.1 million in the second quarter of 2020, and recorded the remaining $0.1 million in “Other current liabilities” on its consolidated balance sheet as of December 31, 2019. The $0.8 million severance expenses were recorded in “Selling, general and administrative expenses” in the consolidated statements of operations for the year ended 2019. (d) Borrowing from Dr. Wu. and his affiliates In the year ended December 31, 2020, the Company’s net borrowings from Dr. Wu and his affiliates decreased by $3.5 million. In the year ended December 31, 2019, the Company’s net borrowings from Dr. Wu and his affiliates increased by $3.3 million. The Company recorded these borrowings in “Amount due to related parties” in its consolidated balance sheet as of December 31, 2020 and 2019. These borrowings bear no interest. On June 5, 2020, the Audit Committee and the Board of Directors approved the conversion of some borrowings at a conversion price of $0.59 per common share, contingent upon the immediate conversion of these amounts. On June 5, 2020, the borrowings of $1.5 million, including the $0.4 million transferred from Beijing Financial Holding Limited, were converted into 2.6 million shares of common stock. (e) Zhu Note Receivable Refer to Note 3 for this note collateralized by equity in a company partially-owned by a related party. (f) Disposal of the ownership in Amer Refer to Note 6(e) for the disposal of 10.0% ownership in Amer to a related party. (g) Service agreement with SSSIG The Company entered a service agreement with SSSIG for the period from July 1, 2020 through June 30, 2021 for $1.4 million in exchange for consulting services from SSSIG, the services include but are not limited to human resources, finance and legal advice. The Company recorded the service charges of $0.7 million in "professional fess" for the year ended December 31 2020, and $0.2 million in "Amount due to related parties" as of December 31 2020. The Company is currently in process of negotiating the agreement with SSSIG. (h) Amounts due from and due to Glory Glory has made partial payment of $0.5 million on behalf of the Company to acquire the land use rights and the Company has made payments of $0.2 million on behalf of Glory for some of its operational expenses. The net balance of $0.3 million due to Glory as result of these payments is recorded in "Amount due to related parties" as of December 31 2020. (i) Research and development contract with a related party The Company has entered a research and development contract with an entity with the total amount of $2.8 million for EV design and technology development. The Company has paid $1.6 million for the year ended 2020 and recorded this amount in "Research and development expense." One of the shareholders of this entity held a senior position in several of Dr. Wu’s affiliated entities. (j) Borrowing from DBOT During the three F-45 (k) Acquisition of Fintalk Assets Refer to Note 9(b) for additional information. (l) Sale of Red Rock Global Capital LTD (“Red Rock”) Refer to Note 6(d) for additional information. (m) Acquisition of Grapevine Logic. (“Grapevine”) Refer to Note 6(b) for additional information. (n) Sale of Amer Global Technology Limited (“Amer”) Refer to Note 6(e) for additional information. (o) Taxis commission revenue from Guizhou Qianxi Green Environmentally Friendly Taxi Service Co. (“Qianxi”) During the second quarter of 2019, the Company signed an agreement with iUnicorn (also known as Shenma Zhuanche) to form a strategic entity that will focus on green finance and integrated marketing services for new energy taxi vehicles as part of Ideanomics' Mobile Energy Group ("MEG.") The Company agreed to contribute advisory and sales resources which include arranging ABS-based auto financing with its bank partners, and will have 50.01% ownership interest in the investment and will have control of the board. iUnicorn, which will own 49.99% of the of the joint venture, agreed to contribute its vehicles sales orders in Sichuan province. The entity will generate revenues from commissions on vehicle sales order and ABS fees related to the financing, which will vary accordingly to manufacturer and vehicle model. During the third quarter of 2019, the joint venture took over an order of 4,172 EV taxis from a third-party and helped facilitate the completion of the order in that quarter. As part of the transaction, Qianxi agreed to pay a commission of $2.7 million to the joint venture for facilitating the completion of this order. There is no other remaining performance obligation relating to this commission. In addition, the commission revenue is considered revenue from a related party as the minority shareholder of the (p) Long Term Investment to Qianxi In November 2019, the Company entered into a share transfer agreement with Sichuan Shenma Zhixing Technology Co.("Shenma") to acquire its 1.72% ownership in Qianxi with the consideration of $4.9 million, which will be paid in 6 installments. Shenma need to complete the share transfer registration prior to May 31, 2020, otherwise it will return the investment payment to the Company. The Company has
Note Compensation As of December 31, The Company awards common stock and stock options to employees and directors as compensation for their services, and accounts for its stock option awards to employees and directors pursuant to the provisions of ASC 718,Stock Compensation. The fair value of each option award is estimated on the date of grant using the Black-Scholes Merton valuation model. The Company recognizes the fair value of each option as compensation expense ratably using the straight-line attribution method over the service period, which is generally the vesting period. Effective as of December 3, 2010 and amended on August 3, 2018, F-46 that may be issued under the 2010 Plan increased from For the years ended December 31, (a) Stock Options
As of December 31, $0, respectively. The following table summarizes the assumptions used to estimate the fair values of the share options granted
F-47 (b) Warrants In connection with certain of the Company’s financings
* YA II PN exercised 1.0 million and 1.7 million warrants on March 31, 2020 and June 22, 2020 and the Company received $1.0 million and $2.5 million proceeds, respectively. ** ID Venturas exercised 5.3 million and 1.0 million warrants in June 2020 and October 2020. The
$0.6 million proceeds, respectively. On September 24, 2018, the Company entered into an employment agreements with
In
$0.1 million. A summary of the unvested restricted shares is as follows:
As of December 31, F-48 Note The following table summarizes the Company's earnings (loss) per share (USD in thousands, except per share amounts):
Basic loss per common share attributable to our shareholders is calculated by dividing the net loss attributable to our shareholders by the weighted average number of outstanding common shares during the period. Diluted loss per share is calculated by taking net loss, divided by the diluted weighted average common shares outstanding. Diluted net loss per share equals basic net loss per share because the effect of securities convertible into common shares is anti-dilutive. The following table includes the number of shares that may be dilutive potential common shares in the future. The holders of these shares do not have a contractual obligation to share in our losses and thus these shares were not included in the computation of diluted loss per share because the effect was
Note (a) Corporate Income Tax (“CIT”) Ideanomics, Inc., M.Y. Products LLC, CB Cayman was incorporated in the Cayman Islands as an exempted company and is not subject to income tax under the current laws of the Cayman Islands.
YOD WFOE, Sinotop Beijing, and Sevenstarflix are PRC entities. The income tax provision of these entities is calculated at the applicable tax rates on the taxable income for the periods based on existing legislation, interpretations and practices in the PRC. In accordance with the Corporate Income Tax Law of the PRC (“CIT Law”), effective beginning on January 1, 2008, enterprises established under the laws of foreign countries or regions and whose “place of effective management” is located within the PRC territory are considered PRC resident enterprises and subject to the PRC income tax at the rate of F-49 The CIT Law imposes a Loss before tax and the provision for income tax benefit consists of the following
A reconciliation of the expected income tax derived by the application of the U.S. corporate income tax rate to the Company’s loss before income tax benefit is as follows:
F-50 Deferred income taxes are recognized for future tax consequences attributable to temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and income tax purposes using enacted rates expected to be in effect when such amounts are realized or settled. Significant components of the Company’s deferred tax assets and liabilities at December 31,
As of December 31, Realization of the Company’s net deferred tax assets is dependent upon the Company’s ability to generate future taxable income in (b) Uncertain Tax Positions Accounting guidance for recognizing and measuring uncertain tax positions prescribes a threshold condition that a tax position must meet for any of the benefit of uncertain tax position to be recognized in the financial statements. 2019. As of December 31, The Company’s United States income tax returns are subject to examination by the Internal Revenue Service for at least F-51
Note
Lawsuits and Legal Proceedings From time to time, Vendor Settlement In the three months ended September 30, 2020, Ideanomics preliminarily settled a payable of $1.7 million with one vendor for $1.3 million. The settlement were conditioned upon factors which did not expire until three months from the date of the settlement; therefore, the Company recognized the gain of $0.4 million in the three months ended December 31, Shareholder Class Actions and Derivative Litigations On July 19, 2019, a purported class action, now captioned Rudani v. Ideanomics, et al. Inc., was filed in the United States District Court for the Southern District of New York against the Company and certain of its current and former officers and directors. The Amended Complaint alleges violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934. Among other things, the Amended Complaint alleges purported misstatements made by the Company in 2017 and 2018. On June 28, 2020, a purported securities class action, captioned Lundy v. Ideanomics et al. Inc., was filed in the United State District Court for the Southern District of New York against the Company and certain current officers and directors of the Company. Additionally, on July 7, 2020, a purported securities class action captioned Kim v. Ideanomics, et al, was filed in the Southern District of New York against the Company and certain current officers and directors of the Company. Both cases alleged violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 arising from certain purported misstatements by the Company beginning in March 2020 regarding its MEG division. On November 4, 2020, the Lundy and Kim actions were consolidated and is now titled “In re Ideanomics, Inc. Securities Litigation.” In December 2020, the Court appointed Rene Aghajanian as lead plaintiff and an amended complaint was filed in February 2021, alleging violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 arising from certain purported misstatements by the Company beginning in March 2020 regarding its MEG division On March 20, 2020, the Company received a formal demand letter to the Board of Directors ascertain allegations similar to those alleged in the Rudani Complaint and demanding that the Board pursue causes of action on behalf of the Company against certain of the Company’s former and current directors and officers. In response to this stockholder demand letter, the Board established a demand review committee to review the demand and make a recommendation to the Board of Directors regarding a response to the demand. The demand review committee has not yet completed its review. On July 10, 2020, the Company was named as a nominal defendant, and certain of its former officers and directors were named as defendants, in a shareholder derivative action filed in the United States District Court for the Southern District of New York, captioned Toorani v. Ideanomics, et al., 1:20-cv-05333. The Complaint alleges violations of Section 14(a) of the Securities Exchange Act of 1934, breach of fiduciary duties, unjust enrichment, abuse of control, gross mismanagement, and corporate waste and seeks monetary damages and other relief on behalf of the Company. Additionally, on September 11, 2020, the Company was named as a nominal defendant, and certain of its former officers and directors were named as defendants, in a shareholder derivative action filed in the United States District Court for the Southern District of New York, captioned Elleisy, Jr. v. Ideanomics, et al, 20-cv-5333, alleging violations and allegations similar to the Toorani litigation. On October 10, 2020, the Court in the Elleisy and Toorani, consolidated these two actions. Additionally, on October 27, 2020, the Company was named as a nominal defendant, and certain of its former officers and directors were named as defendants, in a shareholder derivative action filed in the United States District Court for the District of Nevada, captioned Zare v. Ideanomics, et al, 20-cv-608, alleging violations and allegations similar to the Toorani and Elleisy litigations. While the Company believes that the above litigations are without merit and plans to vigorously defend itself against these claims, there F-52 SEC Investigation As previously reported, the Company is subject to an investigation by the SEC and has responded to various information requests from the SEC. The Company is fully cooperating with the SEC’s requests, and cannot predict the outcome of this investigation. Note a) PRC Regulations The PRC market in which the Company operates poses certain macro-economic and regulatory risks and uncertainties. These uncertainties
b) Major Customers For the year ended December 31, 2020 (98.2% of accounts receivable.) For the year ended December 31,
c) Major Suppliers For the year ended December 31, 2020 (61.1% of accounts payable.) For the year ended December 31, (d) Concentration of Credit Risks Financial instruments that potentially subject the Company to significant concentration of credit risk primarily consist of cash, cash equivalents, and accounts receivable. As of December 31, (e) Foreign Currency Risks A majority of the Company’s operating transactions are F-53
As of December 31, 2020, the Company had cash
PRC entities. As of December 31, Note For Full time employees in the PRC participate in a government-mandated defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. PRC labor regulations require the Company to make contributions based on certain percentages of the employees’ basic salaries. Other than such contributions, there is no further obligation under these plans. The total Note The following table summarizes geographic information for long-lived assets (in thousands):
Note 23. Fair Value Measurement The following table summarizes information about the Company’s
Note 1 This represents the liability incurred in connection with the acquisition of DBOT shares during the three months ended September 30, 2019 and as remeasured as of April 17, 2020 as disclosed in Note 6(c). The contractual period which required periodic remeasurement has 2 This represents the liability incurred in connection with the acquisition of Tree Technology shares during the three months ended December 31, 2019 and as The fair value of the F-54 The following table summarizes the significant inputs and assumptions used in the model:
The fair value of the Tree Technology contingent consideration as of December 31, 2020 and 2019 was valued using a scenario-based method which incorporates various estimates, including projected gross revenue for the periods, probability estimates, discount rates and other factors. The following table summarizes the significant inputs and assumptions used in the scenario-based method:
Significant increases or decreases in any of those inputs in isolation would result in a significantly different fair value measurement. The following table summarizes the reconciliation of Level 3 fair value measurements (in thousands):
Note 24. Subsequent Events Held for Sale Fintech Village On January 28, 2021, the Company’s Board of Directors accepted an offer of $2.75 million for Fintech Village, and subsequently signed a sale contract on Acquisitions and
WAVE Acquisition On F-55 gross revenue targets and certain Timios Acquisition On January 8, 2021 the Company completed the acquisition of Timios Holdings Corp. (“
On Silk EV Investment
On Energica Investment On March 3, 2021, the Company entered into an investment agreement with Debt Transactions YA Notes On various dates subsequent to the
F-56 For each issuance, at Equity Transactions
On terms of the sales agreement, the Company may offer and sell from time to time through Roth Capital the Company’s common stock having an aggregate offering price of up to $150.0 million (the “Placement Shares”). The
F-57 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.
ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information that would be required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including to our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. As required by Rule 13a-15 under the Exchange Act, our management, including our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, Management’s Annual Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Exchange Act defines internal control over financial reporting as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our Board, 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 accounting principles generally accepted in the United States of America and includes those policies and procedures that:
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. 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.
53 Changes in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting that occurred during our most recent fiscal year that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
None.
Directors and Executive Officers The following sets forth the name and position of each of our current executive officers and directors as of March 29, 2020.
Shane McMahon. Mr. McMahon was appointed Vice Chairman as of January 12, 2016 and was previously our Chairman from July 2010 to January 2016. Prior to joining us, from 2000 to December 31, 2009, Mr. McMahon served in various executive level positions with World Wrestling Entertainment, Inc. (NYSE: WWE). Mr. McMahon also sits on the Boards of Directors of International Sports Management (USA) Inc., a Delaware corporation, and Global Power of Literacy, a New York not-for-profit corporation. Mr. Alf Poor. Our Chief Executive Officer Mr. 54 James S. Cassano. Mr. Cassano was appointed as director of the Company effective as of January 11, 2008. Mr. Cassano is currently a Partner Jerry Fan. Mr. Fan was appointed as director of the Company on January 12, 2016. Mr. Fan has served as Managing Director and Country Manager for the Greater China region at Analog Devices, Inc. (NASDAQ: ADI), a global semiconductor company since November, 2012. Prior to ADI, Mr. Fan worked for Cisco Systems, Inc. (NASDAQ: CSCO) for 15 years between 1997 and 2012 in a number of senior management roles, including Sales Managing Director for Cisco China, Sale Director for Cisco Australia and Senior Manager for Operations and Strategy for the Cisco Service Provider business based in Hong Kong. Mr. Fan started his career in 1998 working at Fudan University as a faculty member in both teaching and research roles. He graduated from Fudan University with a Computer Science Bachelor degree and an Executive MBA degree from CEIBS (China European International Business School) in 1999.
participated in numerous Mergers and Acquisitions transactions. There are no agreements or understandings between any of our executive officers or directors and any other persons to resign at the request of another such other person and to act on behalf of or at the direction of any such other person. Directors are elected for one-year term and until their successors are duly elected and qualified. 55 Corporate Governance Our current corporate governance practices and policies are designed to promote shareholder value and we are committed to the highest standards of corporate ethics and diligent compliance with financial accounting and reporting rules. Our Board provides independent leadership in the exercise of its responsibilities. Our management oversees a system of internal controls and compliance with corporate policies and applicable laws and regulations, and our employees operate in a climate of responsibility, candor and integrity. Corporate Governance Guidelines We and our Board are committed to high standards of corporate governance as an important component in building and maintaining shareholder value. To this end, we regularly review our corporate governance policies and practices to ensure that they are consistent with the high standards of other companies. We also closely monitor guidance issued or proposed by the SEC and the provisions of the Sarbanes-Oxley Act, as well as the emerging best practices of other companies. The current corporate governance guidelines are available on the Company’s website The Board and Committees of the Board The Company is governed by the Board that currently consists of Governance Structure Our Board of Directors is responsible for corporate governance in compliance with reporting laws and for representing the interests of our shareholders. As of the date of this Annual report, the Board was composed of nine members, five of whom are considered independent, non-executive directors. Details on Board membership, oversight and activity are reported below. We encourage our shareholders to learn more about our Company’s governance practices at our website, The Board’s Role in Risk Oversight The Board oversees that the assets of the Company are properly safeguarded, that the appropriate financial and other controls are maintained, and that the Company’s business is conducted wisely and in compliance with applicable laws and regulations and proper governance. Included in these responsibilities is the Board of Directors’ oversight of the various risks facing the Company. In this regard, the Board seeks to understand and oversee critical business risks. The Board does not view risk in isolation. Risks are considered in virtually every business decision and as part of the Company’s business strategy. The Board recognizes that it is neither possible nor prudent to eliminate all risk. Indeed, purposeful and appropriate risk-taking is essential for the Company to be competitive on a global basis and to achieve its objectives. While the Board oversees risk management, Company management is charged with managing risk. The Company has robust internal processes and a strong internal control environment to identify and manage risks and to communicate with the Board. The Board and the Audit Committee monitor and evaluate the effectiveness of the internal controls and the risk management program at least annually. Management communicates routinely with the Board, Board committees and individual directors on the significant risks identified and how they are being managed. Directors are free to, and indeed often do, communicate directly with senior management. 56 The Board implements its risk oversight function both as a whole and through Committees. Much of the work is delegated to various Committees, which meet regularly and report back to the full Board. All Committees play significant roles in carrying out the risk oversight function. In particular:
Independent Directors In considering and making decisions as to the independence of each of the directors of the Company, the Board considered transactions and relationships between the Company (and its subsidiaries) and each director (and each member of such director’s immediate family and any entity with which the director or family member has an affiliation such that the director or family member may have a material direct or indirect interest in a transaction or relationship with such entity). The Board has determined that James Cassano, Shane McMahon, Jerry Fan, Audit Committee Our Audit Committee consists of James Cassano, Harry Edelson and Jerry Fan
The Audit Committee may engage independent counsel and such other advisors it deems necessary to carry out its responsibilities and powers, and, if such counsel or other advisors are engaged, shall determine the compensation or fees payable to such counsel or other advisors. The Audit Committee may form and delegate authority to subcommittees consisting of one or more of its members as the Audit Committee deems appropriate to carry out its responsibilities and exercise its powers. 57 Compensation Committee Our Compensation Committee consists of
The Compensation Committee has sole authority to retain and terminate any consulting firm or other outside advisor to assist the committee in the evaluation of director, chief executive officer or senior executive compensation and other compensation-related matters, including sole authority to approve the firms’ fees and other retention terms. The Compensation Committee may also form and delegate authority to subcommittees consisting of one or more members of the Compensation Committee. Governance and Nominating Committee Our Governance and Nominating Committee consists of Harry Edelson, Jim Cassano and Jerry Fan
The Governance and Nominating Committee has sole authority to retain and terminate any search firm that is to be used by the Company to assist in identifying director candidates, including sole authority to approve the firms’ fees and other retention terms. The Governance and Nominating Committee may also form and delegate authority to subcommittees consisting of one or more members of the Governance and Nominating Committee. Director Qualifications Directors are responsible for overseeing the Company’s business consistent with their fiduciary duty to shareholders. This significant responsibility requires highly-skilled individuals with various qualities, attributes and professional experience. The Board believes that there are general requirements for service on the Company’s Board of Directors that are applicable to all directors and that there are other skills and experience that should be represented on the Board as a whole but not necessarily by each director. The Board and the Governance and Nominating Committee of the Board consider the qualifications of directors and director candidates individually and in the broader context of the Board’s overall composition and the Company’s current and future needs. Qualifications for All Directors In its assessment of each potential director candidate, including those recommended by shareholders, the Governance and Nominating Committee considers the nominee’s judgment, integrity, experience, independence, understanding of the Company’s business or other related industries and such other factors the Governance and Nominating Committee determines are pertinent in light of the current needs of the Board. The Governance and Nominating Committee also takes into account the ability of a director to devote the time and effort necessary to fulfill his or her responsibilities to the Company. 58 The Board and the Governance and Nominating Committee require that each director be a recognized person of high integrity with a proven record of success in his or her field. Each director must demonstrate innovative thinking, familiarity with and respect for corporate governance requirements and practices, an appreciation of multiple cultures and a commitment to sustainability and to dealing responsibly with social issues. In addition to the qualifications required of all directors, the Board assesses intangible qualities including the individual’s ability to ask difficult questions and, simultaneously, to work collegially. The Board does not have a specific diversity policy, but considers diversity of race, ethnicity, gender, age, cultural background and professional experiences in evaluating candidates for Board membership. Diversity is important because a variety of points of view contribute to a more effective decision-making process. Qualifications, Attributes, Skills and Experience to be represented on the Board as a Whole The Board has identified particular qualifications, attributes, skills and experience that are important to be represented on the Board as a whole, in light of the Company’s current needs and business priorities. The Company’s services are performed in areas of future growth located outside of the United States. Accordingly, the Board believes that international experience or specific knowledge of key geographic growth areas and diversity of professional experiences should be represented on the Board. In addition, the Company’s business is multifaceted and involves complex financial transactions. Therefore, the Board believes that the Board should include some directors with a high level of financial literacy and some directors who possess relevant business experience as a Chief Executive Officer or President. Our business involves complex technologies in a highly specialized industry. Therefore, the Board believes that extensive knowledge of the Company’s business and industry should be represented on the Board. Summary of Qualifications of Current Directors Set forth below is a narrative disclosure that summarizes some of the specific qualifications, attributes, skills and experiences of our directors. For more detailed information, please refer to the biographical information for each director set forth above.
Shane McMahon. Mr. McMahon has significant marketing and promotion experience and has been instrumental in exploiting pay-per-view programming on a global basis. In light of our business and structure, Mr. McMahon’s extensive executive and industry experience led us to the conclusion that he should serve as a director of our Company. Alfred Poor. Mr. Poor is a client-focused and profitability-driven management executive with a track record of success at both rapidly-growing technology companies and large, multi-national, James S. Cassano. Mr. Cassano has Harry Edelson. Mr. Edelson is the Founder of Edelson Technology Partners, and President since 1980 of Edelson Technology, Inc., a company involved in consulting, fundraising, Mergers and Acquisitions, and investments. In light of our business and structure, Mr. Edelson’s extensive executive experience and his educational background led us to the conclusion that he should serve as a director of our Company. Jerry Fan. Mr. Fan has more than 20 years of experience in top management positions in China and the Asia Pacific region, working for several multinational technology companies. He also has served in senior management positions of several U.S. public companies. In light of our business and structure, Mr. Fan’s extensive industry and business experience and his educational background led us to the conclusion that he should serve as a director of our Company.
Family Relationships There are no family relationships among our directors and officers. 59 Involvement in Certain Legal Proceedings To the best of our knowledge, none of our directors or executive officers has, during the past ten years:
Except as set forth in our discussion below in Item 13- Certain Relationships and Related Transactions, and Director Independence - Transactions with Related Persons, none of our directors, director nominees or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC. Section 16(A) Beneficial Ownership Reporting Compliance Under U.S. securities laws, directors, certain executive officers and persons holding more than 10% of our common stock must report their initial ownership of the common stock, and any changes in that ownership, to the SEC. The SEC has designated specific due dates for these reports. Based solely on our review of copies of such reports filed with the SEC by and representations of our directors and executive officers, except for the Form 3 Initial Statement of Beneficial Ownership to be filed by our Fan, the Company is not aware of any failures to file reports or report transactions in a timely manner during the year ended December 31, 2020. Code of Ethics Our board of directors adopted a code of business conduct and ethics that applies to our directors, officers, employees and advisors, which became effective in January 2015. We have posted a copy of our code of business conduct and ethics on our website at 60 Summary Compensation Table 2019) The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to the named persons (our “named executive officers”) for services rendered in all capacities during the noted periods.
Employment Agreements Alfred Poor
Effective on
Conor McCarthy
2021. We have not provided retirement benefits (other than a state pension scheme in which all of our employees in China participate) or change of control benefits to our named executive officers. 61 Outstanding Equity Awards at Fiscal Year-End The following table sets forth the equity awards of our named executive officers outstanding at December 31,
Compensation of Directors The following table sets forth certain information concerning the compensation paid to our directors for services rendered to us during the fiscal year ended December 31,
(1)Reflects the aggregate grant date fair value of restricted stock determined in accordance with FASB ASC Topic 718. (2)Reflects the number of stock options granted in 2020. 62 Security Ownership of Certain Beneficial Owners and Management The following table sets forth information regarding beneficial ownership of our common stock as of March
63
Changes in Control There are no arrangements known to us, including any pledge by any person of our securities, the operation of which may at a subsequent date result in a change in control of the Company. Securities Authorized for Issuance under Equity Compensation Plans The following table includes the information as of December 31,
(1)On August 3, 2018, our Board of Directors approved and on August 28, 2018 our shareholders approved the Ideanomics Amended and Restated 2010 Equity Incentive Plan (the “Plan”) to increase the number of shares authorized for issuance under the Plan to 31,500,000 pursuant to which incentive stock options, non-statutory stock options, restricted stock, restricted stock units, stock appreciation rights, performance units and performance shares may be granted to employees, directors and consultants of the Company and its subsidiaries. On October 22, 2020 our shareholders at our Annual General Meeting approved an increase of 25,300,000 in the number of shares authorized for issuance under the Plan to 56,800,000. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Review and Approval of Related Party Transactions We have adopted a written policy with respect to the review, approval and ratification of related person transactions. The Audit Committee has primary responsibility for reviewing all related party transactions involving the Company’s directors, officers and directors’ and officers’ immediate family members. The Board may determine to permit or prohibit the Related Party Transaction. For any ongoing relationships, the Board shall annually review and assess the relationships with the Related Party and whether the Related Party Transaction should continue. 64 Under the policy, a “related party transaction” means any transaction directly or indirectly involving any Related Party that would need to be disclosed under Item 404 of Regulation S-K. Under Item 404, the Company is required to disclose any transaction occurring since the beginning of the Company’s last fiscal year, or any currently proposed transaction, in which the Company was or is a participant and the amount involved exceeds $120,000, and in which any related party had or will have a direct or indirect material interest. “Related Party Transaction” also includes any material amendment or modification to an existing Related Party Transaction. For the purposes of this policy, a “Related Party” means (A) a director, including any director nominee, (B) an executive officer; (C) a person known by the Company to be the beneficial owner of more than 5% of the Company’s common stock; or (D) a person known by the Company to be an immediate family member of any of the foregoing. “Immediate family member” means a child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law of such director, executive officer, nominee for director, or beneficial owner, and any person (other than a tenant or employee) sharing the household of such director, executive officer, nominee for director, or beneficial owner. The following is a summary of transactions since the beginning of the 2018 fiscal year, or any currently proposed transaction, in which we were or are to be a participant and the amount involved exceeded or exceeds the lesser of $120,000 or one percent of the average of our total assets at year-end for the last two completed years, and in which any related person had or will have a direct or indirect material interest (other than compensation described under Item 11—“Executive Compensation”). We believe the terms obtained or consideration that we paid or received, as applicable, in connection with the transactions described below were comparable to terms available or the amounts that would be paid or received, as applicable, in arm’s-length transactions. Related Party Transactions with Bruno Wu, Chairman On November 25, 2019, the Company entered into a convertible promissory note agreement with SSSIG, an affiliate of Dr. Wu, in the aggregate principal amount of $1.0 million. The convertible promissory note bore interest at a rate of 4.0%, was initially scheduled to mature on November 25, 2021, and was convertible into the shares of the Company’s common stock at a conversion price of $1.25 per share anytime at the option of SSSIG. As of December 31, 2019, the Company received $0.25 million from SSSIG. The Company did not receive the remaining $0.975 million due under this note. On June 5, 2020, the Audit Committee and the Board of Directors approved the reduction of conversion price to $0.59, contingent upon the immediate conversion of the convertible promissory note. On June 5, 2020, the convertible promissory note, including accumulated interest, was converted into 0.4 million shares of common stock. On February 8, 2019, the Company entered into a convertible promissory note agreement with
common stock. In connection with our acquisition with Grapevine on September 4, 2018, Fomalhaut Limited (“Fomalhaut”), a British Virgin Islands company and an affiliate of Bruno Wu (“Dr. Wu”), the Chairman of the Company, is the non-controlling equity holder of 34.35% in Grapevine (the “Fomalhaut Company. In June 2019, the Company issued 0.6 million shares in exchange for a 34.3% ownership in Grapevine as a result of the exercise of the Option. On September 7, 2018, the Company entered into an agreement to purchase FinTalk Assets with Sun Seven Star International Limited, a Hong Kong company and an affiliate of Dr. Wu. FinTalk Assets are the rights, titles and interest in a secure mobile financial information, social, and messaging platform that has been designed for streamlining financial-based communication for professional and retail users. The purchase price for Fintalk Assets is $7.0 million payable with $1.0 million in cash and shares of the Company’s common stock with a fair market value of $6.0 million. The Company paid $1.0 million in October 2018 and recorded in prepaid 65 shares of the Company’s common stock with a value of $5.4 million. The Company issued 2.9 million common shares in June 2019 and completed the transaction. In In June 2020, the Audit Committee and In June 2020, the Company Other Related Party Transactions On May 10, 2012, conversion. Except as set forth in our discussion above, none of our directors or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC. Promoters and Certain Control Persons We did not have any promoters at any time during the past five fiscal years.
Independent Auditor’s Fees The following is a summary of the fees billed to the Company by its principal accountants for professional services rendered for the years ended December 31,
* “Audit Fees” consisted of the aggregate fees billed for professional services rendered for the audit of our annual financial statements and the reviews of the financial statements included in our Forms 10-Q and for any other services that were normally provided in connection with our statutory and regulatory filings or engagements. 66
Pre-Approval Policies and Procedures Under the Sarbanes-Oxley Act, all audit and non-audit services performed by our auditors must be approved in advance by our Audit Committee to assure that such services do not impair the auditors’ independence from us. In accordance with its policies and procedures, our Audit Committee pre-approved the audit
Financial Statements and Schedules The financial statements are set forth under Item 8 of this Annual Report on Form 10-K. Financial statement schedules have been omitted since they are either not required, not applicable, or the information is otherwise included. Exhibit List See the Exhibit Index immediately preceding the signature page of this Annual Report on Form 10-K, which is incorporated by reference here.
None. Exhibit Index
67
68
69
70 71 72
73 74 75
76
77
*Filed herewith. 78 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized. Date: March 31, 2021
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