10-K 1 tm205387-1_10k.htm FORM 10-K

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

¨ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended: December 31, 2019

 

¨ 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.)

 

55 Broadway, 19th Floor, New York, NY 10006

(Address of principal executive offices)

 

(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 ¨       No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ¨       No x

 

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.

Yes x       No ¨

 

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).

Yes x       No ¨

 

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. ¨

 

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 x
Non-Accelerated Filer ¨ Smaller Reporting Company x
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 ¨  No x

 

As of June 28, 2019 (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 $207,000,565. 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 162,026,045 shares of the registrant’s common stock outstanding as of March 14.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None.

 

 

 

 

 

IDEANOMICS, INC.

Annual Report on FORM 10-K

For the Fiscal Year Ended December 31, 2019

 

TABLE OF CONTENTS

 

  Page
     
PART I   1
     
ITEM 1. BUSINESS 1
     
ITEM 1A. RISK FACTORS 17
     
ITEM 1B. UNRESOLVED STAFF COMMENTS 39
     
ITEM 2. PROPERTIES 39
     
ITEM 3. LEGAL PROCEEDINGS 39
     
ITEM 4. MINE SAFETY DISCLOSURES 39
     
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 40
     
ITEM 6. SELECTED FINANCIAL DATA 40
     
PART II   41
     
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 41
     
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 54
     
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 55
     
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 56
     
ITEM 9A. CONTROLS AND PROCEDURES 57
     
ITEM 9B. OTHER INFORMATION 58
     
PART III   58
     
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 58
     
ITEM 11. EXECUTIVE COMPENSATION 67
     
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS 71
     
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 75
     
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 77
     
PART IV   78
     
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 78
     
ITEM 16. FORM 10-K SUMMARY 78

 

i

 

 

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 joint venture which was rebranded as Intelligenta. As part of the rebranding, Intelligenta’s strategy will now include AI solutions to enhance corporation services, index services and products, and capital market services and products.
· “Legacy YOD” business refers to the premium content and integrated value-added service solutions for the delivery of VOD (defined below) and paid video programing to digital cable providers, Internet Protocol Television (“IPTV”) providers, Over-the-Top (“OTT”) streaming providers, mobile manufacturers and operators, as well as direct customers.
· “MEG” refers to Mobile Energy Global the subsidiary that holds all of the Company’s Electronic Vehicles investments
· “PRC,” “China,” and “Chinese,” refer to the People’s Republic of China;

 

ii

 

 

· “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;
· “SSF” refers to Tianjin Sevenstarflix Network Technology Limited, a PRC company controlled by YOD Hong Kong through contractual arrangements;
· “Shandong Broadcast” refers to Shandong Broadcast & TV Weekly Press, a PRC company;
· “Shandong Media” refers to Shandong Lushi Media Co., Ltd., a PRC company and a joint venture with respect to which we previously directly owned 50%; effective July 1, 2012, our interest in Shandong Media was reduced to a 30% stake held by Sinotop Beijing, which we indirectly control;
· “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;
· “VIEs” refers to our current variable interest entities Sinotop Beijing, and SSF;
· “VOD” refers to video on demand, which includes near video on demand (“NVOD”), subscription video on demand (“SVOD”), and transactional video on demand (“TVOD”);
· “Mobile Energy Group Services” business unit refers to all other operations other than Legacy YOD business;
· “WSG” refers to our wholly-owned subsidiary Wecast Services Group Limited (formerly known as Sun Video Group Hong Kong Limited), a Hong Kong company;
· “Wecast SH” refers to Shanghai Wecast Supply Chain Management Limited, a PRC company that is 51% owned by the Company;
· “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;
· “Wide Angle” refers to Wide Angle Group Limited, a Hong Kong company that is 55% owned by the Company;
· “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
· “Zhong Hai Media” refers to Zhong Hai Shi Xun Media Co., Ltd., a PRC company that was 80% owned by Sinotop Beijing until June 30, 2017.
· “SSSIG” refers to Sun Seven Stars Investment Group Limited, a British Virgin Islands corporation, an affiliate of Dr. Wu.

 

iii

 

 

PART I

 

ITEM 1. BUSINESS

 

Overview

 

Ideanomics, Inc. (Nasdaq: IDEX) was incorporated in the State of Nevada 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 variable interest entities under the brand name You-on-Demand (“YOD”). We closed the YOD business during 2019.

 

Starting in early 2017, the Company transitioned its business model to become a next-generation financial technology (“fintech”) company. The Company built a network of businesses, operating principally in the trading of petroleum products and electronic component that the Company believed had significant potential to recognize benefits from blockchain and 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. Fintech continues to be a priority for 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. As we looked to deploy fintech solutions in late 2018 and into 2019, we found 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.

 

Principal Products or services and their markets

 

The Company operates in one segment which has two business units, the Mobile Energy Global and Ideanomics Capital.

 

Mobile Energy Group (MEG)

 

MEG’s mission is to use EV and EV battery sales and financing to attract commercial fleet operators that will generate large scale demand for energy, Energy Storage Systems (ESS) and Energy Management Contracts (EMC). Additionally, MEG will become a key player in the supply chain of crucial metals required for EV batteries, which are the center piece of mobile energy. The MEG business operates as an end-to-end solutions provider for the procurement, financing, charging and energy management needs for fleet operators of commercial Electronic Vehicles (EV). MEG operates through a series of joint ventures with the leading companies in the commercial EV space, principally in China, and earns fees for every transaction completed based on the spread for group buying of vehicles and fees derived from the arrangement of financing and energy management such as commercial purchasing of pre-paid electricity credits. MEG 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 vehicles types with supporting income streams: 1) Closed-area heavy commercial, in areas such as Mining, Airports, and Sea Ports; 2) Last-mile delivery light commercial; 3) Buses and Coaches; 4) Taxis. The purchase and financing of vehicles provides for one-time fees and the charging and energy management provides for recurring revenue streams.

 

In May 2019, the Company signed an agreement with iUnicorn (also known as Shenma Zhuanche) to form a strategic joint venture (“JV”) 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 JV and will have control of the board. iUnicorn, which will own 49.99% of the JV, agreed to contribute its vehicles sales orders in Sichuan province. The JV 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.

 

In July 2019 the Company made an equity investment in Glory Connection Snd. Bhd, (“Glory”) a vehicle manufacturer located in Malaysia. Glory’s principal operating entity is Tree Manufacturing which holds the only license granted so far to a domestic entity for the manufacture of electric vehicles in Malaysia and is in the process of setting up its manufacturing and assembly capabilities.

 

In September 2019, the Company entered into a revenue sharing agreement with First Auto Loan, one of the leading taxi finance companies in the PRC under which the Company’s MEG business unit would assist First Auto secure a funding pool for taxi finance and in return MEG will receive a commission on each loan written by First Auto Loan. The funding pool is led by Dasheng Licheng Lease Financing with additional funding provided by a consortium of large Chinese insurance companies.

 

The Company has preferred purchasing agreements with a number of EV manufacturers including Jianghuai Automobile Group Co. (frequently known as JAC), Geely Auto Group and Beijing Foton Motor Company and EV battery manufacturers including Contemporary Amperex Technology (frequently known as CATL) and Yinlong Energy Co Ltd. Under the terms of these preferred purchasing agreements the Company receives preferred pricing and volume discounts for EV and EV batteries purchased through these partners

 

In November 2019, the Company announced an agreement with China’s Yunnan province under the terms of which Yunnan, in its capacity as the PRC’s province responsible for China’s Belt and Road initiative in the ASEAN countries, will make an investment into the Company’s Malaysian headquartered Tree Technologies subsidiary. The terms of this investment are under negotiation.

 

The Company has entered into a sales referral agreement with Zhitong 3000 (Zhitong) an operator of a SaaS platform for the management of commercial truck fleets. This agreement will enable to Zhitong to broaden the services offered to its customers by providing access to MEG’s vehicle purchasing and financing platform. MEG will earn is normal fees for any business transacted by customers of Zhitong on the MEG platform

 

In September 2019, the company entered into a framework agreement with the China National Petroleum Corporation Nanjing (PetroChina), one of the world largest oil companies. The Company and PetroChina will negotiate an agreement under which the Company will earn a commission for each charge at a EV fast charging station financed by investment from the Company’s EV financing consortium which includes Three Georges, Tianda Energy, Ding Fang and Palcan Energy.

 

In August 2018, the Company and agreement with National Transport Capacity (also known as National Transport of Shenzhen) under which the Company receives an origination fee for any ABS transactions for any assets that the Company originates through its platform.

 

In August 2019 the Company entered into a joint venture agreement with Golden Concord Holdings Limited (GCL) thru which GCL took a 49.9% equity interest in logistical vehicle unit of the Company’s MEG subsidiary. As consideration for the 49.9% interest, GCL made an exclusive commitment to introduce sales of 500,000 EVs to MEG over three years. The transaction includes performance criteria with share-based claw back formula in the event that GCL does not meet its committed targets

 

1 

 

 

In December 2019 the Company purchased a controlling interest in Tree Technologies Sdn Bhd (“Tree Technologies”) a company that holds the distribution license for the EV’s manufactured by Glory’s Tree Manufacturing subsidiary. In addition to the distribution license, Tree Technologies has a 99 year lease on 250 acres of vacant land zoned for industrial development in the Gebeng 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.

 

Ideanomics Capital

 

The Company’s Ideanomics Capital business unit consists of the Delaware Board of Trade (DBOT), Intelligenta and EKAR.

 

The Delaware Board of Trade is a broker dealer that also operates an Alternative Trading System (ATS) focused on the trading of traditional OTC securities. The Company purchased DBOT in July 2019 and has been implementing a new trading platform to improve its competitive position in the trading of traditional OTC securities and provide enhanced functionality to allow for the trading of digital securities when all necessary regulatory approvals have been obtained.

 

Intelligenta (formerly BDCG)

 

Intelligenta is a pre-revenue company focused on delivering AI driven solutions for the financial services industry. Intelligenta has a license from BBD to adapt BBD’s solutions for use in the US market.

 

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”). In April 2019 the Company rebranded the name BDCG to Intelligenta. We hold approximately 60% of the equity interest of Inteligenta and have the power to appoint three of the five directors of the board of Intelligenta. Intelligenta focuses on developing AI-driven financial data services as well as building transactional platforms for index, futures and derivative trading, 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, with the primary objective being enhancing trading and risk management strategies. 

 

We believe we can leverage Intelligenta’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 among stakeholders. We also intend to design the digital securitized assets we develop to have data attributes that can be integrated into INTELLIGENTA’s approach for processing financial data.

 

EKAR – Exchange Traded Fund (ETF)

 

EKAR is an ETF listed on the NY Stock Exchange under the symbol EKAR. EKAR tracks the Innovation Labs Next Generation Vehicles Index, which is comprised of a basket of global stocks that have exposure to the theme of electric and self driving/autonomous vehicles. As at December 31, 2019 the total assets under management for EKAR stood at $1.7 million.

 

FinTalk

 

In September 2018, we entered into an agreement for the acquisition of FinTalk, a secure mobile messaging, collaboration and information services platform that delivers encrypted text and media messaging, with high performance large file transfer capabilities. The Company has determined through analysis that the technology is rapidly changing and the cost of maintaining this does not meet further investment. The Company recorded an impairment loss of $5.7 million related to Fintalk in the year ended December 31, 2019.

 

Blockchain And AI Technologies

 

The Company considers deploying blockchain & AI technologies, where appropriate, to be an important part of its strategy of building new businesses and disrupting established businesses and processes. The Company does not develop proprietary blockchain or AI technologies, the company will license the necessary technology.

 

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.

 

Sources and availability of raw materials

 

The Company does not directly manufacture any products, consequently it is not dependent on a reliable source of materials to operate its business. However, the Company’s partners that manufacture EVs and batteries do depend on a ready supply of raw materials and consequently a shortage of raw materials would adversely impact their manufacturing process and, potentially, indirectly impact the Company’s revenues as it may not be able to complete orders that it had received.

 

2 

 

 

Seasonality

 

The Company’s MEG division operates in the market for fleet sales of commercial EVs and 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 MEG division is building out its network and has not generated sufficient orders to allow it to establish with any degree of certainty an expected pattern of seasonality.  

 

Working Capital requirements

 

The Company’s MEG division is still in the development stage and its business model continues to evolve, however, management does not believe that the MEG divisions anticipated business model will require substantial amounts of working capital as it does not anticipate holding material amounts of inventory or offering customers extended payment terms. The Company’s Tree Technologies subsidiary will require substantial amounts of investment to build out its distribution business. It is the Company’s intention to fund this with borrowings secured against Tree Technologies assets, however the Company may need to fund all, or a material portion of the investment if the Tree Technologies is not able to raise the required capital to set-up and operate the business. The Company will continue to raise funds to support its US based Head Office functions and its US based operating subsidiaries until such time as the operations become cash flow positive.

 

Trade marks, patents and licenses

 

The Company’s Intelligenta business operates under a license granted by Seasail Ventures. The license does not have a stated term.

 

Customer Concentration

 

The Company is in the process of building out its Mobile Energy Group subsidiary 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

 

 3 

 

 

Reliance on government contracts

 

The Company does not contract directly with the government of the PRC, however it does have joint ventures, partnerships and agreements with the State Own Entities (SOE) described above. Additionally, the rate at which commercial fleets convert to EV is heavily 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 adversely impacted by changes in regulations in the PRC.

 

Competitive business conditions, competitive position in the industry and methods of competition

 

Mobile Energy Group

 

The Company’s MEG business unit is focused on the PRC and the ASEAN Region. The most important drivers for the development of the commercial fleet EV market in the PRC 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 government of the PRC has a stated policy of converting all taxis and buses to EV by the end of 2022. The speed at which fleet operators convert to EV is highly correlated with government regulations, targets and related subsidies and incentives. If the government of the PRC, or a municipality, changes 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 the Company. Additionally, the rate, and form in which, the commercial fleet EV market develops is dependent upon the development of new financing and lending structures that address the different collateral and resale values of the battery and vehicle. For vehicles with Internal Combustion Engines the power source, i.e. the engine, and the car body are one integrated unit, however EVs are designed with the intention of the battery being easily removed from the vehicle to enable fast recharging through “swapping’ of batteries. Additionally, the EV market is still developing and there is a very limited history of resale values for lenders to use when calculating resale values when evaluating a financing application.

 

The Company operates through a network of joint ventures, partnerships and formal and informal alliances; consequently, its competitive position could be adversely impacted if one of the members of the alliance was not able to meet the demand for its products or goes out of business.

 

Ideanomics Capital

 

The Company’s Ideanomics Capital business unit operates in sectors that are undergoing rapid change.

 

The Delaware Board of Trade is a broker dealer that also operates an Alternative Trading System for the trading of OTC equities, this is market which is undergoing rapid change as retail focused stock brokers introduce zero commission trading for their clients and the industry continues to consolidate as large financial firms acquire national stock brokers. These changes make for a very difficult competitive environment. The Company has applied for regulatory approval to broker digital securities and tokens, this is a nascent market which the Company believes has good long term potential.

 

Intelligenta is developing a platform for AI driven decision making and risk management for financial data. The company is developing proof of concepts.

 

The Company manages the EKAR ETF listed on the New York Stock Exchange under the symbol EKAR.

 

4 

 

 

Corporate Structure

 

The following chart depicts our corporate structure as of December 31, 2019: 

 

 

5 

 

 

(1). On December 26, 2019, the Company completed the acquisition of a 51% interest in Tree Technologies, a Malaysian company engaged in the EV market. (Refer to Note 6 for the detail information)
   
(2). In 2019, the Company entered into two purchase agreements to increase the ownership in Delaware Board of Trade Holdings, Inc. to 97.5%. (Refer to Note 6 for the detail information).  
   
(3). In 2019, the Company formed the joint venture (“JV”) with iUnicorn that will focus on green finance and integrated marketing services for new energy taxi vehicles as part of Ideanomics’ Mobile Energy Group (“MEG”).
   
(4) In 2019, the Company renamed the China Broadband, Ltd. to Mobile Energy Global Limited.
   

(5)

In 2019, the Company cancelled the VIE agreements and deconsolidated Sinotop BJ and SSF.

 

6 

 

 

VIE Structure and Arrangements

 

Prior to December 31, 2019, 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 years ended December 31, 2019 and 2018, and as of December 31, 2018. A shareholder in one of the VIEs is the spouse of Bruno Wu (“Dr. Wu”), the Chairman of the Company.

 

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 “Loss on disposal of subsidiaries, net” in the consolidated statements of operations, and a statutory income tax of $0.2 million.

 

For these consolidated VIEs, their assets were not available to the Company and their creditors did not have recourse to the Company. As of December 31, 2018, assets (mainly long-term investments) that could only be used to settle obligations of these VIEs were $3.5 million, and the Company was the major creditor for the VIEs.

 

In order to operate certain legacy YOD 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”). These contractual agreements were initially set to expire in March 2030 and April 2036, respectively, and could not be terminated by the VIEs, except with the consent of, or a material breach by the Company. The contractual VIE agreements were terminated by the parties on December 31, 2019. A shareholder in SSF is the spouse of Dr. Wu, the Chairman of the Company.

 

The key terms of the VIE Agreements are summarized as follows:

 

Equity Pledge Agreement

 

The VIEs’ Shareholders pledged all of their equity interests in the VIEs (the “Collateral”) to YOD On Demand (Beijing) Technology Co., Ltd (“YOD WFOE”), the Company’s wholly-owned subsidiary in the 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 were set to expire upon satisfaction of all obligations under the Technical Services Agreement and Call Option Agreement.

 

The Equity Pledge Agreement was terminated by all parties on December 31, 2019.

 

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 was to be determined by YOD WFOE at its sole discretion, subject to any restrictions imposed by PRC law. The term of the agreement was until all of the equity interest in the VIEs held by the VIEs’ Shareholders were transferred to YOD WFOE, or its designee and could not be terminated by any part to the agreement without consent of the other parties.

 

The Call Option Agreement was terminated by all parties on December 31, 2019.

 

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 could not transfer any of its equity interest in VIEs to any party other than YOD WFOE. The Power of Attorney agreements could not be terminated except until all of the equity in VIEs had been transferred to YOD WFOE or its designee.

 

The Power of Attorney agreements were terminated by all parties on December 31, 2019.

 

Technical Service Agreement

 

YOD WFOE 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 by YOD WFOE. As compensation for providing the services, YOD WFOE was entitled to receive service fees from the VIEs equivalent to YOD WFOE’s cost plus 20.0 to 30.0% of such costs as calculated on accounting policies generally accepted in the PRC. YOD WFOE and the VIEs agreed to periodically review the service fee and make adjustments as deemed appropriate. The term of the Technical Services Agreement was perpetual, and could only be terminated upon written consent of both parties.

 

The Technical Services Agreement was terminated by all parties on December 31, 2019.

 

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Spousal Consent

 

Pursuant to the Spousal Consent, undersigned by the respective spouse of the VIEs’ Shareholders, the spouses unconditionally and irrevocably agreed to the execution of the Equity Pledge Agreement, Call Option Agreement and Power of Attorney agreement. The spouses agreed to not make any assertions in connection with the equity interest of the VIEs 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 pledged 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 obtained any equity interests of the VIEs which were held by the VIEs’ Shareholders, the spouses agreed to be bound by the VIE agreements, including the Technical Services Agreement, and comply with the obligations thereunder, including signing a series of written documents in substantially the same format and content as the VIE agreements.

 

The Spousal Consents were terminated by all parties on December 31, 2019.

 

Letter of Indemnification

 

Pursuant to the Letter of Indemnification among YOD WFOE and each nominee shareholder, YOD WFOE 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. YOD WFOE further waived and released 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 were taken in good faith and were not opposed to YOD WFOE’s best interests. The VIEs’ Shareholders were not entitled to dividends or other benefits generated therefrom, or to receive any compensation in connection with this arrangement. The Letter of Indemnification was to remain valid until either the nominee shareholder or YOD WFOE terminates the agreement by giving the other party hereto 60 days’ prior written notice.

 

The Letter of Indemnification was terminated by all parties on December 31, 2019.

 

Management Services Agreement

 

In addition to VIE agreements described above, the Company’s 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”) entered into a Management Services Agreement with each VIE.

 

Pursuant to such Management Services Agreement, YOD Hong Kong 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 YOD Hong Kong. As compensation for providing the services, YOD Hong Kong was entitled to receive a fee from the VIE, upon demand, equal to 100.0% 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 could also request ad hoc quarterly payments of the aggregate fee, which payments would be credited against the VIE’s future payment obligations.

 

In addition, at the sole discretion of YOD Hong Kong, the VIE was 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 could be lawfully conducted, employed, owned or operated by YOD Hong Kong, including:

 

  (a) business opportunities presented to, or available to the VIE could be pursued and contracted for in the name of YOD Hong Kong rather than the VIE, and at its discretion, YOD Hong Kong could 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 could be transferred to YOD Hong Kong at book value;

 

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  (c) real property, personal or intangible property, personnel, services, equipment, supplies and any other items useful for the conduct of the business could 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 could 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 could 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 Management Services Agreement was terminated by all parties on December 31, 2019.

 

Loan Agreement

 

Pursuant to the Loan Agreement dated April 5, 2016, YOD WFOE 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 Chairman, for the purpose of establishing SSF and for development of its business. As of December 31, 2018, RMB27.6 million ($4.2 million) had been lent to VIEs’ Shareholders which had contributed all of the RMB27.6 million ($4.2 million) in the form of capital contribution to SSF. The loan could only be repaid by a transfer by the VIEs’ Shareholders of their equity interests in SSF to YOD WOFE or YOD WOFE’s designated persons, through (1) YOD WOFE having the right, but not the obligation to at any time purchase, or authorize a designated person to purchase, all or part of the VIEs’ Shareholders’ equity interests in SSF at such price as YOD WOFE shall determine (the “Transfer Price”), (2) all monies received by the VIEs’ Shareholders through the payment of the Transfer Price being used solely to repay YOD WOFE for the loans, and (3) 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 WOFE in cash. Otherwise, the loans were deemed to be interest free. The term of the Loan Agreement was perpetual, and could only be terminated upon the VIEs’ Shareholders receiving repayment notice, or upon the occurrence of an event of default under the terms of the agreement. The loan extended to the Nominee Shareholders and the capital of SSF are fully eliminated in the consolidated financial statements.

 

The Loan Agreement was terminated by all parties on December 31, 2019. The termination of the Loan Agreement resulted in a loss of $5.1 million.

 

Therefore, the Company considers that there was no asset of the VIEs that could be used only to settle obligation of the Company, except for the registered capital of VIEs amounting to RMB38.2 million ($5.8 million) as of December 31, 2018.

 

Our Unconsolidated Equity Investments

 

We hold a 34% ownership interest in Glory, which through its subsidiary Tree Manufacturing, holds a domestic EV manufacturing license in Malaysia. Tree Manufacturing has entered into a product supply and a product distribution arrangement for EVs with Tree Technologies, a consolidated subsidiary of the Company.

 

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In 2018, we signed a joint venture agreement to establish Intelligenta located in the United States for providing services for financial or energy industries by utilizing AI and big data technology in the United States.  We hold a 60.0% ownership and Seasail ventures limited (“Seasail”) holds 40% of Intelligenta.  BDCG is currently in the process of ramping up its operations.

 

Our investments in Glory and BDCG where we may exercise significant influence, but not control, are classified as a long-term equity investment 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. 

 

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

 

Mobile Energy Group Services Business Unit

 

The 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 for 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 MEG platform.

 

Delaware Board of Trade (DBOT) operates an ATS in the highly competitive market for trading Over-the-Counter (OTC) equities. The market that DBOT operates in is dominated by the OTC Markets group. 

 

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. 

 

Seasonality Variations in Business

 

The Company’s MEG division operates in the market for fleet sales of commercial EVs and 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 MEG division is building out its network and has not generated sufficient orders to allow it to establish with any degree of certainty an expected pattern of seasonality.

 

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Revenue Recognition

 

The Company records and reports revenues in accordance with US GAAP 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 services to be provided; consequently the accounting treatment for the reporting of revenues may vary materially between contracts including whether the revenue is reported on a Gross or Net basis.

 

Regulation

 

General Regulation of Businesses in the PRC

 

We are required to obtain government approval from the Ministry of Commerce of the PRC (“MOFCOM”), and other government agencies in the PRC for transactions, such as our acquisition or disposition of business entities in the PRC. Additionally, foreign ownership of business and assets in the PRC is not permitted without specific government approval.

 

Investment activities in the PRC by foreign investors are principally governed by the Guidance Catalogue of Industries for Foreign Investment, or 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”, or “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.

 

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. Our significant PRC subsidiaries have duly obtained all material approvals required for their business operations.

 

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In addition, the transportation sector is subject to regulation at the federal and provincial level. The PRC government may issue from time to time new laws or new interpretations on existing laws, 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. 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 Mobile Energy Group Services 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. 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 Mobile Energy Group Services business unit in the PRC.

 

Taxation

 

On March 16, 2007, the National People’s Congress of the PRC passed the 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 —Under the New Enterprise Income Tax Law, we may be classified as a “resident enterprise” of the PRC.” Such classification will likely result in unfavorable tax consequences to us and our non-PRC shareholders.”

 

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Foreign Currency Exchange

 

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”), 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 approved by certain government authorities, including the MOFCOM, or their respective local branches. These limitations could affect our PRC operating entities’ ability to obtain foreign exchange through debt or equity financing.

 

Dividend Distributions

 

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 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), 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 (1) an investment of money; (2) money is made in a common enterprise; (3) with an expectation of profits; (4) 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.

 

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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, 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. 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 filed a Form ATS with the SEC. We, or our joint ventures, 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.

 

In addition, the U.S. Commodity Futures Trading Commission (“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. 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.”

 

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.

 

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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”), 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”). We were required, as part of the purchase of the land, to post an $8 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 ongoing and are currently in the initial testing stage. We plan 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. 

 

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Our Employees

 

As of December 31, 2019, we had a total of 60 full-time employees, including 30 located in the United States. The following table sets forth the number of our employees by function on December 31, 2019.

 

Function   Number of Employees
Business Development   22
Project Management and Operations   7
Technology   1
Finance and Legal   16
Administrative   14
TOTAL   60

 

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.

 

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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, 2019 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, 2019 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, 2019, we had an accumulated deficit of $249.0 million, with liabilities of $67.0 million and cash on hand of $2.6 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 business related expenses and discretionary expenditures.  

 

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 development of new business lines, reduce headcount, sell assets, file for bankruptcy, reorganize, merge with another entity, or cease operations.

 

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

 

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 develop a platform for the procurement, purchase, financing battery charging and energy management 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.

 

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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, 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.

 

The success of the Company’s efforts to develop its MEG business unit is highly dependent upon suitable financing structures being developed.

 

The market for commercial fleets of Electric Vehicles (EV) is in the early stage of development and provides unique challenges to fleet owners trying to finance the purchase of fleets of EV. 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. 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 solution for the funding of fleet purchases then the companies MEG business may not be successful and generate minimal revenues and incur substantial losses.

 

Our operating results are likely to fluctuate significantly and may differ from market expectations.

 

Our annual and quarterly operating results have varied significantly in the past, and may vary significantly in the future, due to a number of factors which could have an adverse impact on our business. Our revenue may fluctuate as we expect a disproportionate amount of our revenues generated from our Mobile Energy Group Services business unit quarter over quarter due to the customers’ seasonal demand, as normally holiday demand for consumer electronics would increase our revenue. Furthermore, as the launch dates of our new products may not be the same as what we have planned, we expect the financial performance might fluctuate significantly depending on timing, quantity and outcome of such product launches.

 

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 to improve 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 retain our existing key employees and to add and retain senior officers to our management.

 

We depend on the services of our key employees. Our success will largely depend on our ability to retain these key employees and to attract and retain qualified senior and middle level managers to our management team.

 

We have recruited executives and management both in the United States and the PRC 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.

 

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Changes in our management team may adversely affect our operations.

 

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.

 

We are highly dependent on the services of Dr. Bruno Wu, our Chairman.

 

We are highly dependent on the services of Dr. Bruno Wu, our Chairman and largest stockholder, particularly as it relates to our operations in the PRC and Asia. Although Dr. Wu spends significant time with Ideanomics and is highly active in our management, he does not devote his full time and attention to Ideanomics. Dr. Wu also currently serves as CEO of Sun Seven Stars Investment Group.

 

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 conditions;

 

  · government regulation of e-commerce and other services, electronic devices, and competition, 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;

 

  · 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 operating environments different than that of the PRC;

 

  · 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.

 

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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

 

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.

 

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.

 

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. In 2020, China and other countries have experienced the spread of the coronavirus pandemic. At a minimum, we believe this pandemic has a significant chance of effecting the timing and amount of our revenue for 2020. 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”), 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, However, the condition of this material weakness does not exist as of the date of this report as the licensed content was sold in March 2019. As of December 31, 2019, management concluded that our internal control over financial reporting was effective.

 

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If we fail to develop and maintain effective internal control over financial reporting, 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.

 

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.

 

RISKS RELATED TO OUR MOBILE ENERGY GROUP SERVICES BUSINESS UNIT

 

We experience significant competitive pressure in the Mobile Energy Group Services business unit, which may negatively impact our business, financial condition, and results of operations.

 

The Company’s Mobile Energy Group business unit is operating in the fleet commercial Electric Vehicle (EV) market primarily in the PRC and the ASEAN region. The commercial EV market is still in its development stage and 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 clean air regulations that mandate conversion to EV, (ii) the subsidies that government bodies make available to cover the cost of conversion and (iii) the availability of financing to cover some or all of the cost of conversion.

 

Environmental and clean air regulations drive the timing and rate at which fleet operators convert to EV and by extension the size of the market and the type of vehicles that are in demand at any time. The company’s revenues and profits may be adversely impacted if demand for EV is lower than expected due to a change 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 form of PRC and provincial subsidies and bank financing. The amount and form of PRC and provincial subsidies are subject to change from time to time as the government bodies adjust subsidies to influence consumer behavior. The mechanisms for financing of EV are still being developed and large scale conversion from internal combustion engines to EV is highly dependent upon the amount and terms of financing available for the conversion to EV.

 

We will face significant competition with respect to the products and services we may offer in the blockchain- and AI-enabled fintech business we are building, and we currently face significant competition with respect to the businesses we operate that generate revenue for our Company.

 

One of the Company’s long term strategic goals 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 logistics management and finance, consumer products, media, and financial services. We therefore face significant competitive pressure not only with other developers 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 solutions that are superior to ours, or may offer additional, vertically integrated products 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.

 

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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 position may be adversely affected.

 

Even 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 lead to a reduction in the value of the digital securitized assets we develop, which could adversely impact the value 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 assets are subject to a number of inherent risks that may impact our ability to provide the services we are developing and adversely affect an investment in us.

 

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.

 

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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:

 

  · worldwide growth in the adoption and use of digital assets, and other blockchain technologies;

 

  · government and quasi-government regulation of digital assets and other blockchain assets and their use, or restrictions on or regulation of access to and operation of blockchain networks or similar systems;

 

  · the maintenance and development of the open-source software protocol of the blockchain networks;

 

  · changes in consumer demographics and public tastes and preferences;

 

  · the availability and popularity of other forms or methods of buying and selling goods and services, or trading assets including new means of using traditional currencies or existing networks;

 

  · general economic conditions and the regulatory environment relating to digital assets; and

 

  · The popularity or acceptance of blockchain-enabled tokens.

 

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 Mobile Energy Group Services business unit, and primarily rely on third parties through joint ventures 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 Mobile Energy Group Services business unit. The IP relevant to the products and services we plan to provide is held primarily by joint ventures and 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, and may require licenses from these third parties if we wish to develop products directly. If our joint venture 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.

 

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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 and partnership agreements to protect our interests, as well as our joint ventures’ 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 ventures 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.

 

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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.

 

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RISKS RELATED TO DOING BUSINESS IN 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, 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 in the PRC. 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;
  · 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 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.

 

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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 in the PRC. Our subsidiaries 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 published a draft 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. 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 VIEs operate will be subject to the foreign investment restrictions or prohibitions set forth in the Negative List to be issued.

 

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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.

 

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You may have difficulty enforcing judgments against us.

 

Most of our assets 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 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.

 

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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 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 use cash generated from sales in the PRC to fund our 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.

 

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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.

 

Failure to comply with PRC regulations relating to the establishment 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.

 

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.

 

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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.

 

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.

 

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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.

 

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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.

 

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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 class action litigation is often instituted against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs to us and divert our management’s attention and resources.

 

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. 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.

 

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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.

 

Certain of our shareholders hold a significant percentage of our outstanding voting securities.

 

As of March 11, 2020, Our Chairman, Dr. Wu, is the beneficial owners of approximately 18.8% 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). Mr. Shane McMahon, our Vice Chairman, is the beneficial owner of approximately 3.4% 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 rules 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—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.”

 

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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 RMB 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. 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

 

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 55 Broadway, 19th Floor, New York, NY 10006. We lease an approximately 6,085 square foot office space in Beijing, China, which is used by both our Mobile Energy Group Services business unit and legacy YOD business for our PRC-based operations. In October 2018, we completed the $5.2 million acquisition of a 58-acre property located at 1700 & 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.”

 

Except for FinTech Village, the Company believes that all its properties have been adequately maintained, are generally in good condition, and are suitable and adequate for our business.

 

ITEM 3. LEGAL PROCEEDINGS

 

Information with respect to this item may be found in Note 19 of the Notes to Consolidated Financial Statements under Item 8, which is incorporated herein by reference.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Price Information

 

The Company’s common stock is quoted on the Nasdaq Capital Market under the symbol “IDEX.” Trading of the Company’s common stock is sometimes limited and sporadic. The following table sets forth, for the periods indicated, the high and low closing bid prices of the Company’s common stock.

 

   Closing Bid Prices 
   High   Low 
Year Ended December 31, 2019          
1st Quarter  $2.07   $1.13 
2nd Quarter  $2.46   $1.28 
3rd Quarter  $2.80   $1.46 
4th Quarter  $1.59   $0.66 
           
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 

 

Approximate Number of Holders of Our Common Stock

 

As of March 12, 2020, there were approximately 393 holders of record of the Company’s common stock. This number excludes the shares of the Company’s common stock beneficially owned by shareholders holding stock in securities trading accounts through DTC, or under nominee security position listings.

 

Dividend Policy

 

The Company has never declared or paid a cash dividend. Any future decisions regarding dividends will be made by the Company’s Board. The Company currently intends to retain and use any future earnings for the development and expansion of the business and does not anticipate paying any cash dividends in the foreseeable future. The Company’s Board has complete discretion on whether to pay dividends, subject to the approval of the Company’s shareholders. Even if the Company’s Board decides to pay dividends, the form, frequency and amount will depend upon future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the Board may deem relevant. In addition, the Company’s ability to declare and pay dividends is dependent on the Company’s ability to declare dividends and profits in the PRC subsidiaries. PRC rules greatly restrict and limit the ability of the Company’s subsidiaries to declare dividends which, in addition to restricting the Company’s cash flow, limits its ability to pay dividends to its 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.”

 

Recent Sales of Unregistered Securities

 

The Company did not sell any equity securities during the fiscal year ended December 31, 2019 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 2019 fiscal year.

 

Purchases of Equity Securities

 

No repurchases of the Company’s common stock were made in the year ended December 31, 2019.

 

ITEM 6. SELECTED FINANCIAL DATA

 

Not Applicable.

 

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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, Inc. (Nasdaq: IDEX) was incorporated in the State of Nevada 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 variable interest entities under the brand name You-on-Demand (“YOD”). We closed the YOD business during 2019.

 

Starting in early 2017, the Company transitioned its business model to become a next-generation financial technology (“fintech”) company. The Company built a network of businesses, operating principally in the trading of petroleum products and electronic component that the Company believed had significant potential to recognize benefits from blockchain and 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. Fintech continues to be a priority for 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. As we looked to deploy fintech solutions in late 2018 and into 2019, we found 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.

 

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 2019:

 

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  · 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, continuing to further enhance our controls, procedures, and oversight during this transformation, and expanding our mission and business lines for continued growth. 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 our businesses. To succeed, among other things, we will need to have or hire the right talent to execute our business strategy. 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.

 

  · Our ability to remain competitive. We will continue to face intense competition: these new technologies are constantly evolving, and our competitors may introduce new platforms and solutions that are superior to ours. In addition, our competitors 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. We may never establish and maintain a competitive position in the hybrid financing and logistics management businesses.

 

  · The fluctuation in earnings from the deployment of the Mobile Energy Group Services business unit through acquisitions, strategic equity investments, the formation of joint ventures, and in-licenses of technology. Our results of operations may fluctuate from period to period based on our entry into new transactions to expand our business. In addition, while we intend to contribute cash and other assets to our joint ventures, we do not intend for our holding company to conduct significant research and development activities. We intend research and development activities to be conducted by our technology partners and licensors. These fluctuations in growth or costs and in our joint ventures and partnerships may contribute to significant fluctuations in the results of our operations.

 

Information about segments

 

The Company’s chief operating decision maker has been identified as the chief executive officer, who reviews consolidated results when making decisions about allocating resources and assessing performance of the Company. Therefore, the Company operates in one segment with two business units: MEG and Ideanomics Capital. As the chief executive officer previously reviewed two operating segments separately for this purpose, the Company has changed its presentation accordingly, from two reportable segments to one reportable segment.

 

The segment reporting changes were retrospectively applied to all periods presented.

 

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Our Unconsolidated Equity Investments

 

The investments where the 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. 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.

 

Taxation

 

United States

 

Ideanomics, Inc., M.Y. Products, LLC, Grapevine Logic, Inc., Delaware Board of Trade Holdings, Inc., Fintech Village, LLC and Red Rock Global Capital Ltd. are United States companies subject to the provisions of the Internal Revenue Code. No provision for income taxes has been provided as none 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 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 amounted to $56,305 in 2018 and $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, Inc.’s 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) of 2017 includes provision for Global Intangible Low-Taxed Income (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) under which taxes are imposed on certain base eroding payments to related foreign companies, subject to certain requirements.

 

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 US companies that owns 10% 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) arising after December 31, 2017 are deductible only to the extent of 80% of the taxpayer’s taxable income, and may be carried forward indefinitely but generally not allowed to be carried back.

 

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Cayman Islands and the British Virgin Islands

 

Under current laws of the Cayman Islands and the British Virgin Islands, the company 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.

 

Hong Kong

 

The company’s subsidiaries incorporated in Hong Kong are subject to Profits Tax of 16.5%. $84,574 tax expense was recorded in 2019 relating to the income on one Hong Kong subsidiary 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 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’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’s management regularly monitors these legislative developments to determine if there are changes in the statutory income tax rate.

 

During 2019, one of the Company’s PRC subsidiaries incurred a tax obligation of $622,608 tax expense relating to its electric vehicle 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 pf $224,206. Other PRC entities either had losses that created additional operating loss carryovers, where the related deferred tax assets were offset 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 $176,107 of income tax expense.

 

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RESULTS OF OPERATIONS

 

Comparison of Years Ended December 31, 2019 and 2018

 

For the years ended December 31,  2019   2018   Amount Change   % Change 
Revenue  $44,566,955   $377,742,872   $(333,175,917)   (88)%
Cost of revenue   1,457,773    374,575,038    (373,117,265)   (100)%
Gross profit   43,109,182    3,167,834    39,941,348    1,261%
                     
Operating expenses:                    
Selling, general and administrative expenses   24,862,208    22,471,976    2,390,232    11%
Research and development expense   -    1,654,491    (1,654,491)   (100)%
Professional fees   5,828,385    4,749,799    1,078,586    23%
Depreciation and amortization   2,228,653    352,332    1,876,321    n/m 
Impairment of assets   73,668,525    134,290    73,534,235    n/m 
Acquisition earn-out expense   5,094,095    -    5,094,095    n/m
Total operating expenses   111,681,866    29,362,888    

82,318,978

    n/m 
                     
Loss from operations   (68,572,684)   (26,195,054)   (42,377,630)   n/m 
                     
Interest and other income (expense):                    
Interest expense, net   (5,616,282)   (804,595)   (4,811,687)   n/m 
Loss on extinguishment of debt   (3,940,196)   -    (3,940,196)   0 
Impairment of and equity in loss of equity method investees   (13,718,280)   (180,625)   (13,537,655)   n/m 
Loss on disposal of subsidiaries, net   (951,594)   (1,183,289)   

231,695

    (20)%
Loss on remeasurement of DBOT investment   (3,178,702)   -    (3,178,702)   0 
Other   (433,184)   (99,765)   (333,419)   n/m 
Loss before income taxes and non-controlling interest   (96,410,922)   (28,463,328)   (67,947,594)   n/m 
                     
Income tax (expense) benefit   (417,453)   40,244    (457,697)   n/m 
                     
Net loss   (96,828,375)   (28,423,084)   (68,405,291)   n/m 
                     
Deemed dividend related to warrant repricing   (826,909)   -    (826,909)   n/m 
                     
Net loss attributable to common shareholders   (97,655,284)   (28,423,084)   (69,232,200)   n/m 
                     
Net (income) loss attributable to non-controlling interest   (852,240)   996,728    (1,848,968)   n/m 
                     
Net loss attributable to IDEX common shareholders  $(98,507,524)  $(27,426,356)   (71,081,168)   n/m 
                     
Basic and diluted loss per share  $(0.82)  $(0.35)          

 

Revenues

 

For the years ended December 31,   2019     2018     Amount Change     % Change  
Crude oil   $ -     $ 260,034,401     $ (260,034,401 )     n/m  
Consumer electronics     -       116,723,251       (116,723,251 )     n/m  
Digital asset management services     40,700,000       -       40,700,000       n/m  
Electric vehicles     2,693,891       -       2,693,891       n/m  
Other     1,173,064       985,220       187,844       19  
Total   $ 44,566,955     $ 377,742,872     $ (333,175,917 )     (88 )

 

n/m = Not Meaningful

 

Revenue for the year ended December 31, 2019 was $44.6 million as compared to $377.7 million for the same period in 2018, a decrease of approximately $333.2 million, or 88%. The decrease was mainly due to a change to our business focus from logistics management to digital business consulting services and electric vehicle businesses. Our business strategy and the primary goal for entering the crude oil and electronic trading businesses was to learn about the needs of buyers and sellers in these industries that rely heavily on the shipment of goods. Our activities in the crude oil trading and electronic trading business have been successful in various aspects in 2018, and for strategic reasons we have now phased out of our crude oil trading business and electronics trading business so that we can work towards enabling the application of our Fintech Ecosystem and the operation of MEG as well.

 

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Cost of revenue

 

For the years ended December 31,   2019     2018     Amount Change     % Change  
Crude oil   $ -     $ 260,006,382     $ (260,006,382 )     n/m  
Consumer electronics     -       114,477,226       (114,477,226 )     n/m  
Digital asset management services     466,894       -       466,894       n/m  
Electric vehicles     -       -       -          
Other     990,879       91,430       899,449       n/m  
Total   $ 1,457,773     $ 374,575,038     $ (373,117,265 )     n/m  

 

n/m = Not Meaningful

 

Cost of revenues was $ 1.5 million for the year ended December 31, 2019, as compared to $374.6 million for the year ended December 31, 2018. Our cost of revenues decreased by $373.1 million, or 100%. From a comparability perspective, the cost of revenue during 2018 is not indicative of the new business in 2019. The cost of revenue during 2018 was primarily associated with the logistics management business (oil trading and electronics trading), which traditionally has a very high cost of revenue and low gross margin, while the cost of revenue during 2019 primarily include the personnel cost associated with our digital asset management services and creator payments from the Grapevine business. Majority of the cost associated with the development of the master plan services have already been incurred in 2018. In 2018, due to the uncertainty associated with the future economic benefits when such costs were incurred, the Company expensed those costs during 2018.

 

Gross profit

 

For the years ended December 31,   2019     2018     Amount Change     % Change  
Crude oil   $ -     $ 28,019     $

(28,019) 

      n/m
Consumer electronics     -       2,246,025      

(2,246,025) 

        n/m
Digital asset management services     40,233,106       -      

40,233,106 

        n/m
Electric vehicles     2,693,891       -      

2,693,891 

        n/m
Other     182,185        893,790      

(711,605) 

        n/m
Total   $ 43,109,182     $ 3,167,834     $

39,941,348 

        n/m

 

n/m = Not Meaningful

 

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Gross profit ratio

 

For the years ended December 31,   2019     2018  
-Mobile Energy Group Service                
Crude oil     0 %     0 %
Consumer electronics     0 %     2 %
Digital asset management services     99 %     -  
Electric Vehicles (“EV”)     100 %     -  
Other     16 %     91 %
Total     97 %     1 %

 

Our gross profit for the year ended December 31, 2019 was approximately $43.1 million, as compared to $3.2 million during the same period in 2018. The increase was mainly due to: 1) the Company recorded service revenue from digital asset management services in 2019 and 2) the low cost of revenue with our digital asset management services, which resulted in higher gross profit margin in 2019 compared to the low gross profit margin of the logistics management business in 2018; 3) the revenue from EV is commission revenue and no cost associated with this.

 

Selling, general and administrative expenses

 

Our selling, general and administrative expense for the year ended December 31, 2019 was $24.9 million as compared to $22.5 million for the same period in 2018, an increase of $2.4 million or 11%. The majority of the increase was due to

 

  ·      an increase of $5.7 million in share based compensation that were paid to our employees
  ·      an increase of $0.8 million in severance payments to the former Chief Executive Officer, former Chief Investment Officer and former Chief Strategy Officer; partially offset by
  ·      a decrease of $3.3 million in salary and employee benefits expenses due to the headcount reduction in China operation.

 

Research and development expense

 

Research and development expense decreased to zero for the year ended December 31, 2019 from $1.7 million in the same period in 2018. The majority of the expense in 2018 was related to the early stage technology development.

 

Professional fees

 

Professional fees for the year ended December 31, 2019 was $5.8 million as compared to $4.7 million for the same period in 2018, an increase of approximately $1.1 million. The increase was related to an increase in legal, valuation, audit and tax as well as fees associated with establishing the MEG operation, continuing to build out our technology ecosystem and Ideanomics Capital, and also establishing strategic partnerships and merger and acquisition activity for these business units.

 

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Depreciation and amortization

 

Depreciation and amortization for the year ended December 31, 2019 was $2.2 million as compared to $0.4 million for the same period in 2018, an increase of approximately $1.8 million. The increase was mainly due to the increase in amortization expense from intangible assets acquired during 2019.

 

Impairment of assets

 

The following table summarizes the impairment losses recorded in the year ended December 31, 2019. The Company did not record any material impairment losses in the year ended December 31, 2018.

 

The following table summarizes the impairment losses recorded in the year ended December 31, 2019:

 

Asset Impaired   Note   Caption   Amount  
GTB – digital currency   Note 9 – Goodwill and Intangible Assets    Impairment of assets   $ 61,124,406  
                 
Glory – equity method investment   Note 10 Long-term Investments   Impairment of and equity in loss of equity method investments     13,061,844  
                 
FinTalk assets – other assets   Note 9 – Goodwill and Intangible Assets    Impairment of assets     5,715,000  
                 
Cost method investments   Note 10 Long-term Investments    Impairment of assets     3,026,347  
                 
Fintech buildings   Note 8 Property and Equipment, net   Impairment of assets     2,298,887  
                 
Fintech buildings asset retirement cost   Note 8 Property and Equipment, net   Impairment of assets     1,503,885  
Total           $ 86,730,369  

 

Additional information related to the impairment losses recorded in the year ended December 31, 2019 is as follows:

 

·The Company recorded an impairment loss of $61.1 million in the fourth quarter of 2019 related to GTB of $61.1 million 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.

 

Acquisition earn-out expense

 

The acquisition earn-out expense 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.

 

Loss from operations

 

Our loss from operations was increased by $42.3 million to $68.5 million for the year ended December 31, 2019, from $26.2 million during 2018. This was mostly due to the impairment losses land acquisition earn-out expense losses incurred in 2019, partly offset by the gross profit from the MEG operation.

 

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Interest expense, net

 

Our interest expense increased $4.8 million to $5.6 million for the year ended December 31, 2019, from $0.8 million during 2018. The interest expense increase during 2019 was primarily due to the amortization of beneficial conversion features and the interest associated with convertible notes issued in 2019. The following table summarizes the breakdown of the interest expense:

 

   Year ended December 31,
2019
   Year ended December 31,
2018
 
Interest, net  $1,380,838   $577,004 
Amortization of beneficial conversion feature   4,235,444    227,591 
Total  $5,616,282   $804,595 

 

Loss on extinguishment of debts

 

The loss on extinguishment of debt of $3.9 million results from modifications made to various convertible notes in the year ended December 31, 2019.

 

Impairment of and equity in loss of equity method investees

 

Impairment of and equity in loss of equity method investments increased by $13.5 million to $13.7 million in the year ended December 31, 2019 from $0.2 million in the year ended December 31, 2018. The most significant increases are due to the losses recorded due to DBOT of $3.7 million, which was an equity-method investee for part of 2019, and an impairment loss of $13.1 million for Glory. Refer to “Impairment of assets” above.

 

Loss on disposal of subsidiaries, net

 

The following table summarizes (gains) and losses recorded in “Loss on disposal of subsidiaries, net” in the years ended December 31, 2019 and 2018: 

 

Subsidiary  Year ended December 31,
2019
   Year ended December 31,
2018
 
Wide Angle and Shanghai Huicang Supplychain Management Ltd.  $-   $1,183,289 
Red Rock Global Capital LTD   (552,215)   - 
Amer Global Technology Limited   (505,148)   - 
Deconsolidation of VIEs   2,008,957    - 
Total  $951,594   $1,183,289 

 

Loss on disposal of subsidiaries increased $2.0 million for year ended December 31, 2019 comparing to the same period in 2018 was due to the disposal of the entities listed above.

 

Net gain/(loss) attributable to non-controlling interest

 

Net gain/(loss) attributable to non-controlling interests was $0.8 million gain in 2019 compared to a net loss of $1.0 million in 2018. The gain in 2019 is primarily due to net gain of taxi revenue from JV with iUnicorn .

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of December 31, 2019, we had cash of $2.6 million. Approximately $2.4 million was held in our Hong Kong, US and Singapore entities and $0.2 million was held in our PRC entities.

 

As discussed in Note 3 to the consolidated financial statements included in this report for going concern and management’s plan, the Company has incurred significant continuing losses in 2019 and 2018, and the total accumulated deficits were $249.0 million and $150.0 million as of December 31, 2019 and 2018, respectively. The Company also used cash for operations of $13.8 million and $20.2 million for the year ended December 31, 2019 and 2018, respectively. The Company’s ability to continue operating is highly dependent upon continued funding from the debt and equity markets. Based on past experience, the Company believes that it will be able to raise the necessary capital to continue operations. 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 included 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 outcome of this uncertainty. 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.

 

49

 

 

The following table provides a summary of our net cash flows from operating, investing, and financing activities.

 

    Year Ended  
    December 31,     December 31,  
    2019     2018  
Net cash used in operating activities   $ (13,783,980 )   $ (20,160,210 )
Net cash used in investing activities     (1,794,856 )     (19,140,641 )
Net cash provided by financing activities     15,114,864       34,898,919  
Effect of exchange rate changes on cash     (9,386 )     (69,141 )
Net increase/(decrease) in cash, cash equivalents and restricted cash     (473,358 )     (4,471,073  
Total cash, cash equivalents and restricted cash at beginning of period     3,106,244       7,577,317  
Cash and cash equivalents at end of period   $ 2,632,886     $ 3,106,244  

 

Operating Activities

 

Cash used in operating activities decreased by $6.4 million for the year ended December 31, 2019 compared to 2018, primarily due to (1) an increase in net loss from $28.4 million in 2018 to $96.8 million in 2019, (2) total non-cash adjustments to net loss was $67.9 million and $6.0 million for the years ended December 31, 2019 and 2018, respectively; and (3) total changes in operating assets and liabilities resulted in an increase of $15.1 million and $2.5 million in cash used in operations activities for the years ended December 31, 2019 and 2018, respectively .

 

Investing Activities

 

Cash used in investing activities decreased by $17.4 million, primarily because the acquisition of Fintech Village, the related costs and surety bond (approximately $10.7 million) and acquisitions of subsidiaries and long-term investments ($8.0 million) during 2018.

 

Financing Activities

 

The Company received $9.1 million from the issuance of convertible notes and $6 million in proceeds in a private placement from the issuance of common shares, warrant and options for the year ended December 31, 2019, to certain investors, including officers, directors and other affiliates. While in the same period in 2018, the Company received $34.9 million.

 

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 ventures accounted for under the equity method of accounting. The Company is not the primary beneficiary of these joint ventures and therefore is not required to consolidate these entities (see Note 8 to the Consolidated Financial Statements).

 

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We do not have other off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity 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.

 

Seasonality

 

The Company’s MEG division operates in the market for fleet sales of commercial EVs and 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 MEG division is building out its network and has not generated sufficient orders to allow it to establish with any degree of certainty an expected pattern of seasonality.

 

OUTLOOK

 

The Company anticipates that its Mobile Energy Group business unit will be the largest contributor to revenues in 2020. The rate at which the MEG division grows is highly correlated with the development of financing structures for fleet purchases of commercial EV.

 

The Company will continue to seek ways to deploy its Delaware Board of Trade (DBOT) ATS as a platform for the issuance of digital securities and tokens, trading of commodities and origination and distribution of private placements. The Company does not anticipate that DBOT will generate material amounts of revenue in 2020 due to the developmental stage the business is in.

 

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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 the 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. Company management has identified certain accounting policies that are significant to the preparation of its financial statements. These accounting policies are important for an understanding of the Company’s financial condition and results of operations. Critical accounting policies are those that are most important to the portrayal of its 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. Company management believes the following critical accounting policies involve the most significant estimates and judgments used in the preparation of its financial statements. Company management has reviewed the critical accounting policies and estimates with the Audit Committee of our Board of Directors.

 

Variable Interest Entities

 

The Company accounts for variable interest entities in accordance with Financial Accounting Standards Boards (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation. Management evaluates the relationships between the Company and the various VIEs and the economic benefit flow of the contractual arrangement with the VIEs. In connection with such evaluation, management also considers whether or not, as a result of such contractual arrangements, the Company controls the legal shareholders’ voting interests and has power of attorney in the VIEs, and therefore which counterparty is able to direct all business activities of the VIEs. As a result of such evaluation, management concluded that the Company is the primary beneficiary of certain VIEs, which are consolidated, 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 has a supply agreement with a consolidated entity. Both of these investments are accounted for as an equity method investment.

 

Management has consulted the Company’s PRC legal counsel in assessing the ability to control the Company’s PRC VIEs. As of December 31, 2019, the Company has terminated the agreements with the PRC VIEs and 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 Contracts 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 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.

 

Additionally, an analysis is performed in order to evaluate whether the Company is acting as a principal, in which case revenue is reported on a gross basis, or as an agent, in which case revenue is reported on a net basis. This analysis considers whether or not the Company obtains 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.

 

The Company’s contracts are typically with large enterprises and consequently are heavily negotiated as to the services to be provided; consequently the accounting treatment for the reporting of revenues may vary materially between contracts including whether the revenue is reported on a 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.

 

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.

 

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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, 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.

 

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 the impairment analyses performed, 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. No impairment losses were recorded in the year ended December 31, 2018.

 

Asset 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. The estimate of the liability for asset retirement obligations is dependent upon many factors, including the type of remediation which is required, the magnitude of the required remediation, and the time frame for the required steps. Asset retirement costs associated with asset retirement obligations are capitalized with the carrying amount of the related long-lived assets and will be depreciated over the related asset’s estimated useful life. The Company’s asset retirement obligations as of December 31, 2019 and 2018 are associated with the acquisition of Fintech Village, in which the Company is contractually obligated to remediate certain existing environmental conditions. The asset retirement cost is included in construction in progress and asset retirement obligation (long-term) in the consolidated balance sheets. The Company will start to amortize the asset retirement costs when the related assets are completed, put into use, and their depreciation commences. In the year ended December 31, 2019, the Company impaired buildings with a carrying amount of $2.3 million, and impaired related asset retirement costs of $1.5 million.

 

Goodwill

 

Goodwill represents the excess of cost over fair value of identifiable net assets acquired and liabilities assumed in a business combination. 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. 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 for 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-not that the fair value of a reporting unit has declined below its carrying 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-not that the fair value of a reporting unit is less than its carrying 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.

 

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.

 

An impairment loss, if any, is recorded when the fair value of a reporting unit has declined below its carrying amount. The Company has not recorded goodwill impairment charges in the years ended December 31, 2019 and 2018.

 

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 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, 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”).

 

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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 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, further analysis must be performed in order to determine if the impairment, if any, is other-than-temporary. If the impairment is deemed to be other-than-temporary, the fair value of the investment must be determined. In the absence of quoted market prices, management 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 flows, and 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 $3.0 million and $0 in the years ended December 31, 2019 and 2018, respectively, for equity investments accounted for under the measurement alternative, and recorded impairment losses of $13.1 million and $0 in the years ended December 31, 2019 and 2018, respectively, for investments accounted for as equity method investments.

 

New Accounting Pronouncements

 

Information regarding new accounting pronouncements is included in Note 2 to the Consolidated Financial Statements.

 

ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

This Item 7A is not required for Smaller Reporting Companies.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

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IDEANOMICS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

    Page 
Report of Independent Registered Public Accounting Firm   F-2 
Consolidated Financial Statements:     
Consolidated Balance Sheets as of December 31, 2019 and 2018   F-3 
Consolidated Statements of Operations for the years ended December 31, 2019 and 2018   F-4 
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2019 and 2018   F-5 
Consolidated Statements of Equity for the years ended December 31, 2019 and 2018   F-6 
Consolidated Statements of Cash Flows for the years ended December 31, 2019 and 2018   F-7 
Notes to Consolidated Financial Statements   F-8 

 

F-1

 

 

Report of Independent Registered Public Accounting Firm

 

To the shareholders and the board of directors of Ideanomics, Inc.

 

Opinions on the Financial Statements and Internal Control over Financial Reporting

 

We have audited the accompanying consolidated balance sheets of Ideanomics Inc. (the "Company") as of December 31, 2019 and 2018, and the related consolidated statements of operations, comprehensive income, equity, and cash flows for each of the two years in the period ended December 31, 2019, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company's internal control over financial reporting 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 financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of the its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by COSO.

 

Going concern uncertainty

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed 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.

 

Basis for Opinion

 

The Company's management is responsible for these financial statements, 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 financial statements and an opinion on the Company's internal control over financial reporting 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.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

 

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 audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

Definition and Limitations of Internal Control Over Financial Reporting

 

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Emphasis of Matters

 

The Company has significant transactions and relationships with related parties, which are described in Note 15 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.

 

/s/ B F Borgers CPA PC  

 

We have served as the Company’s auditor since 2018.

 

Lakewood, Colorado

 

March 16, 2020 

 

F-2

 

 

IDEANOMICS, INC.

CONSOLIDATED BALANCE SHEETS

 

As of December 31,   2019     2018  
ASSETS                
Current assets:                
Cash and cash equivalents   $ 2,632,886     $ 3,106,244  
Accounts receivable, net     2,404,869       19,370,665  
Licensed content     -       16,958,149  
Prepaid expenses     572,346       2,042,041  
Other current assets     1,841,720       3,594,942  
Total current assets     7,451,821       45,072,041  
Property and equipment, net     12,939,480       15,029,427  
Intangible assets, net     52,770,639       3,036,352  
Goodwill     23,344,299       704,884  
Long-term investments     22,621,497       26,408,609  
Operating lease right of use assets     6,933,582       -  
Other non-current assets     883,126       3,983,799  
Total assets   $ 126,944,444     $ 94,235,112  
                 
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   $ 3,380,482     $ 19,265,094  
Deferred revenue     476,716       405,929  
Accrued salaries     923,323       706,351  
Amount due to related parties     3,962,061       800,822  
Other current liabilities     6,466,007       4,615,346  
Current portion of operating lease liabilities     1,112,733       -  
Current acquisition earn-out liability     12,421,399       -  
Promissory note-short term     3,000,000        
Convertible promissory note due to third-parties     1,752,790          
Convertible promissory note due to related parties     3,260,055       4,140,055  
Total current liabilities     36,755,566       29,933,597  
Deferred tax liabilities     -       513,935  
Asset retirement obligations     5,094,200       8,000,000  
Convertible promissory note due to third parties-long term     5,088,854       11,313,770  
Convertible promissory note due to related parties-long term     1,550,657          
Operating lease liability-long term     6,222,420       -  
Non-current acquisition earn-out liability     12,234,830       -  
Other non-current liabilities     -       -  
Total liabilities     66,946,527       49,761,302  
Commitments and contingencies (Note 19)                
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, 2019 and 2018, respectively     1,261,995       1,261,995  
Equity:                
Common stock - $0.001 par value; 1,500,000,000 shares authorized, 149,692,953 and 102,766,006 shares issued and outstanding as of December 31, 2019 and 2018, respectively     149,692       102,765  
Additional paid-in capital     282,553,877       195,779,576  
Accumulated deficit     (248,482,826 )     (149,975,302 )
Accumulated other comprehensive loss     (663,579 )     (1,664,598 )
Total IDEX shareholder’s equity     33,557,164       44,242,441  
Non-controlling interest     25,178,758       (1,030,626 )
Total equity     58,735,922       43,211,815  
Total liabilities, convertible redeemable preferred stock and equity   $ 126,944,444     $ 94,235,112  

 

* 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 “Acquisitions and Divestitures”)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-3

 

 

IDEANOMICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

For the years ended December 31,   2019     2018  
Revenue from third-parties   $ 1,295,486     $ 278,024,867  
Revenue from related parties     43,271,469       99,718,005  
Total revenue     44,566,955       377,742,872  
Cost of revenue from third-parties     990,879       130,464,906  
Cost of revenue from related parties     466,894       244,110,132  
Gross profit     43,109,182       3,167,834  
                 
Operating expenses:                
Selling, general and administrative expenses     24,862,208       22,471,976  
Research and development expense           1,654,491  
Professional fees     5,828,385       4,749,799  
Depreciation and amortization     2,228,653       352,332  
Acquisition earn-out expense     5,094,095        
Impairment of assets     73,668,525       134,290  
Total operating expenses     111,681,866       29,362,888  
                 
Loss from operations     (68,572,684 )     (26,195,054 )
                 
Interest and other income (expense):                
Interest expense, net     (5,616,282 )     (804,595 )
Loss on extinguishment of debt     (3,940,196 )     -  
Impairment of and equity in loss of equity method investees     (13,718,280 )     (180,625 )
Loss on disposal of subsidiaries, net     (951,594 )     (1,183,289 )
Loss on remeasurement of DBOT investment     (3,178,702 )     -  
Other     (433,184 )     (99,765 )
Loss before income taxes and non-controlling interest     (96,410,922 )     (28,463,328 )
                 
Income tax (expense) benefit     (417,453 )     40,244  
                 
Net loss     (96,828,375 )     (28,423,084 )
                 
Deemed dividend related to warrant repricing     (826,909 )     -  
                 
Net loss attributable to common stockholders     (97,655,284 )     (28,423,084 )
                 
Net (income) loss attributable to non-controlling interest     (852,240 )     996,728  
                 
Net loss attributable to IDEX common shareholders   $ (98,507,524 )   $ (27,426,356 )
                 
Basic and diluted loss per share   $ (0.82 )   $ (0.35 )
                 
Weighted average shares outstanding:                
                 
Basic and diluted     119,766,859       78,386,116  

 

*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 “Acquisitions and Divestitures”)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-4

 

 

IDEANOMICS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

For the years ended December 31,   2019     2018  
Net loss   $ (96,828,375 )   $ (28,423,084 )
Other comprehensive loss, net of nil tax                
Foreign currency translation adjustments     407,288       (882,516 )
Comprehensive loss     (96,421,087 )     (29,305,600 )
Deemed dividend related to warrant repricing     (826,909 )      
Comprehensive loss attributable to non-controlling interest     (844,050 )     978,282  
Comprehensive loss attributable to IDEX common shareholders   $ (98,092,046 )   $ (28,327,318 )

 

* 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 “Acquisitions and Divestitures”)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-5

 

 

IDEANOMICS, INC.

CONSOLIDATED STATEMENTS OF EQUITY

For the years ended December 31, 2019 and 2018

 

    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, 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  
Share-based compensation     -       -       -       -       9,112,633       -       -       9,112,633       -       9,112,633  
Common stock issuance for convertible note (ID Venturas)     -       -       4,838,399       4,838       9,639,499       -       -       9,644,337       -       9,644,337  
Common stock issuance for convertible note (YA II)                     2,136,987       2,137       1,543,259       -       -       1,545,396       -       1,545,396  
Common stock issuance for convertible note conversion (ID Venturas)     -       -       1,211,504       1,211       1,198,800       -       -       1,200,011       -       1,200,011  
Common stock issuance for debt     -       -       67,878       68       109,932       -       -       110,000       -       110,000  
Common stock issuance for RSU vested     -       -       129,840       130       (130 )     -       -       -       -       -  
Common stock issuance for assets (SolidOpinion)     -       -       4,500,000       4,500       7,150,500       -       -       7,155,000       -       7,155,000  
Common stock issuance for assets (Fintalk)     -       -       2,860,963       2,861       5,347,139       -       -       5,350,000       -       5,350,000  
Common stock issuance for acquisition (Grapevine)     -       -       590,671       591       491,027       -       -       491,618       (491,618 )     -  
Common stock issuance for investment     -       -       815,217       815       1,499,475       -       -       1,500,290       -       1,500,290  
Common stock issuance for investment (Glory)     -       -       12,190,000       12,190       19,979,410       -       -       19,991,600       -       19,991,600  
Common stock issuance for acquisition (DBOT)     -       -       5,851,830       5,852       9,708,186       -       -       9,714,038       104,648       9,818,686  
Common stock issuance for investment     -       -       1,658,227       1,658       1,225,430       -       -       1,227,088       -       1,227,088  
Common stock issuance for acquisition (Tree Technologies)     -       -       9,500,000       9,500       7,780,500       -       -       7,790,000       24,985,086       32,775,086  
Investment from SSSIG     -       -       575,431       576       (576 )     -       -       -       -       -  
Capital contribution from noncontrolling interest shareholder     -       -       -       -       -       -       -       -       321,324       321,324  
Convertible note reset conversion price (Advantech)     -       -       -       -       10,615,385       -       -       10,615,385       -       10,615,385  
Deconsolidation of Amer     -       -       -       -       -       -       -       -       445,894       445,894  
Deconsolidation of VIEs     -       -       -       -       1,373,832       -     585,540       1,959,372     -       1,959,372
Net loss     -       -       -       -       -       (98,507,524 )     -       (98,507,524 )     852,240       (97,655,284 )
Foreign currency translation adjustments, net of nil tax     -       -       -       -       -       -       415,479       415,479       (8,191 )     407,288  
Balance, December 31, 2019     -       -       149,692,953     $ 149,692     $ 282,553,877     $ (248,482,826 )   $ (663,579 )   $ 33,557,164     $ 25,178,758     $ 58,735,922  

 

* The above consolidated statements of equity include Guang Min. The acquisition of Guang Min 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 “Acquisitions and Divestitures”)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-6

 

 

IDEANOMICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

For the years ended December 31,   2019     2018  
Cash flows from operating activities:                
Net loss   $ (96,828,375 )   $ (28,423,084 )
Adjustments to reconcile net loss to net cash used in operating activities                
Share-based compensation expense     9,112,633       3,412,977  
Depreciation and amortization     2,228,653       352,332  
Non-cash interest expense     5,510,604       698,385  
Impairment of and equity in losses of equity method investees     13,718,280       180,625  
Loss on impairment of intangible assets     66,839,406       134,290  
Loss on disposal of subsidiaries     951,579       1,183,289  
Loss on remeasurement of DBOT investment     3,178,702       -  
Digital tokens received as payment for services     (40,700,000 )     -  
Impairment of property and equipment     3,802,772       -  
Disposal of equity method investments     245,139          
Impairment of cost method investment     3,026,347       -  
                 
Change in assets and liabilities:                
Accounts receivable     (2,277,822 )     7,591,420  
Inventory             216,453  
Prepaid expenses and other assets     2,880,674       (1,296,872 )
Accounts payable     2,861,561       (7,564,499 )
Deferred revenue     167,545       183,579  
Amount due to related parties (interest)     (1,256,382 )     120,000  
Accrued expenses, salary and other current liabilities     12,754,704       3,050,895  
Net cash used in operating activities     (13,783,980 )     (20,160,210 )
                 
Cash flows from investing activities:                
Acquisition of property and equipment     (1,816,390 )     (6,762,248 )
Disposal of subsidiaries, VIEs, net of cash disposed     644,712       (41,976 )
Acquisition of subsidiaries, net of cash acquired     (623,178 )     (2,784,243 )
Investments in intangible assets     -       (301,495 )
Payments for long term investments     -       (5,266,880 )
Deposit for surety bond and other     -       (3,983,799 )
Net cash used in investing activities     (1,794,856 )     (19,140,641 )
                 
Cash flows from financing activities                
Proceeds from issuance of convertible notes     9,132,300       13,000,000  
Proceeds from issuance of shares, stock options and warrant     2,821,323       21,532,127  
Proceeds from amounts due to related parties     3,161,241       366,792  
Net cash provided by financing activities     15,114,864       34,898,919  
Effect of exchange rate changes on cash     (9,386 )     (69,141 )
Net increase (decrease) in cash, cash equivalents and restricted cash     (473,358 )     (4,471,073 )
                 
Cash, cash equivalents and restricted cash at the beginning of the year     3,106,244       7,577,317  
                 
Cash, cash equivalents and restricted cash at the end of the year   $ 2,632,886     $ 3,106,244  
                 
Supplemental disclosure of cash flow information:                
Cash paid for income tax   $ -     $ -  
Cash paid for interest     72,889       -  
                 
Disposal of assets in exchange of GTB     20,218,920        -  
Service revenue received in GTB     40,700,000       -  
Issuance of shares for acquisition of intangible assets     10,005,000       -  
Issuance of shares for acquisition of long-term investments     40,714,634       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 “Acquisitions and Divestitures”)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-7

 

 

IDEANOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1. Organization and Principal Activities

 

Ideanomics, Inc. (Nasdaq: IDEX) is a Nevada corporation that primarily operates in Asia and the United States through its subsidiaries and variable interest entities (“VIEs”). Unless the context otherwise requires, the use of the terms "we," "us", "our" and the “Company” in these notes to consolidated financial statements refers to Ideanomics, Inc, its consolidated subsidiaries and variable interest entities (“VIEs.”)

 

The Company’s chief operating decision maker has been identified as the chief executive officer, who reviews consolidated results when making decisions about allocating resources and assessing performance of the Company. Therefore, the Company operates in one segment with two business units, the Mobile Energy Group (“MEG”), and Ideanomics Capital. As the chief executive officer previously reviewed two operating segments separately for this purpose, the Company has changed its presentation accordingly, from two reportable segments to one reportable segment.

 

The segment reporting changes were retrospectively applied to all periods presented.

 

MEG’s mission is to use electronic vehicles (“EVs”) and EV battery sales and financing to attract commercial fleet operators that will generate large scale demand for energy, energy storage systems, and energy management contracts. MEG operates as an end-to-end solutions provider for the procurement, financing, charging and energy management needs for fleet operators of commercial EVs.

 

Ideanomics Capital is focused on the trading of traditional over the counter (“OTC”) securities, and is implementing a new trading platform to improve its competitive position in the trading of traditional OTC securities and provide enhanced functionality to allow for the trading of digital securities when all necessary regulatory approvals have been obtained.

 

The Company also seeks to identify industries and business processes where blockchain and AI technologies can be profitably deployed to disrupt established industries and business processes.

 

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, the 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, useful lives of intangible assets and property and equipment, asset retirement obligations, income taxes, and contingent liabilities, among others. The 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 amounts of assets and liabilities.

 

(c) Cash and Cash Equivalents

 

Cash consists of cash on hand and demand deposits with an original maturity of three months or less when purchased. Refer to Note 20 (d) and (e) for additional information on our credit and foreign currency risks.

 

F-8

 

 

(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.

 

(e) Licensed Content

 

The Company previously obtained content through content license agreements with studios and distributors. The Company recognized licensed content when the license fee and the specified content titles were known or reasonably determinable. Prepaid license fees were classified as an asset (licensed content) and accrued license fees payable were classified as a liability on the consolidated balance sheets.

 

The Company amortized licensed content in cost of revenues over the contents’ contractual availability based on the expected revenue derived from the licensed content, beginning with the month of first availability, such that our revenues bore a representative amount of the cost of the licensed content. Management reviewed factors that impacted the amortization of licensed content at each reporting date, including factors that may bear direct impact on expected revenue from specific content titles. Changes in the expected revenue from licensed content could have had a significant impact on the amortization pattern.

 

Management evaluated the recoverability of the licensed content whenever events or changes in circumstances indicated that its carrying amount may not have been recoverable. No impairment losses were recorded in the years ended December 31, 2019 and 2018. The Company sold the entire licensed content in March 2019.

 

(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 furniture, 3 years for electronic equipment, 5 years for vehicles and lesser of lease terms or the estimated useful lives of the assets for leasehold improvements.

 

Construction in progress is stated at cost, which includes the cost of construction and other direct costs attributable to the construction. No 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, 2019 and 2018 represents Fintech Village under construction. Refer to Note 8 for additional information.

 

Asset 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, 2019 and 2018 are associated with the acquisition of Fintech Village, in which the Company is contractually obligated to remediate certain existing environmental conditions. The Company will start to amortize the asset retirement costs if and when the related assets are completed, put into use and depreciation commences. In the year ended December 31, 2019, the Company impaired buildings with a carrying amount of $2.3 million, and impaired related asset retirement costs of $1.5 million. Refer to Note 8 for more information.

 

(g) Business Combinations

 

The Company includes the results of operations of the businesses that are acquired as of the acquisition date. The 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.

 

(h) Intangible Assets and Goodwill

 

The Company accounts for intangible assets and goodwill in accordance with Accounting Standards Codification (“ASC”) 350, Intangibles – Goodwill and 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. 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, in 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 it 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 amount 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.

 

F-9

 

 

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 has other intangible assets, not including 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 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. No impairment losses were recorded in the year ended December 31, 2018. Refer to Note 9(b) 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 current GAAP, the Company has determined to account for these currencies as indefinite-lived intangible assets in accordance with ASC 350, Intangibles-Goodwill and Other (“ASC 350”) until further guidance is issued by the Financial Accounting Standards Board (“FASB”).

 

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(g) for additional information.

 

(j) 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 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, 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.

 

The Company classifies its long-term investments as non-current assets on the consolidated balance sheets.

 

Impairment of Investments

 

Management periodically reviews long-term investments for impairment 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 investment is below the carrying amount, an impairment loss is recorded to record the investment at fair value. The Company recorded impairment losses of $3.0 million and $0 in the years ended December 31, 2019 and 2018, respectively, for equity investments accounted for under the measurement alternative, and recorded impairment losses of $13.1 million and $0 in the years ended December 31, 2019 and 2018, respectively, for investments accounted for as equity method investments. Refer to Note 10 for additional information on impairment losses.

 

F-10

 

 

(k) Leases

 

The Company adopted ASU No. 2016-02 (“ASU 2016-02”) as of January 1, 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. Leases entered into prior to January 1, 2019, are accounted for under ASC 840, Leases (“ASC 840”) and were not reassessed. 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).

 

Most leases include one or more options to renew, with renewal terms that can extend the lease term from one year or more. The exercise of lease renewal options is at the Company’s sole discretion. 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 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.

 

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 will use information available at the lease commencement date to determine the discount rate for any new leases.

 

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 from a convertible note among freestanding instruments according to ASC 470, Debt, 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 as a debt discount from the face amount of the convertible note. Each convertible note is analyzed for the existence of a beneficial conversion feature (“BCF”), 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.

 

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 evaluates and adjusts the unobservable inputs used in the fair value measurements based on current market conditions and third-party information.

 

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, other current liabilities and convertible notes. The fair values of these assets and liabilities approximate carrying amounts because of the short-term nature of these instruments.

 

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 amount of equity securities for which the measurement alternative of cost less impairment plus or minus observable price changes is used. Refer to Notes 2(f), 2(h), 2(i) and 2(j) for additional information on impairment losses.

 

F-11

 

 

(n) Assets and Liabilities Held for Sale

 

The Company classifies assets and liabilities (disposal group) to be 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 is recognized in the period in which the held for 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 USD as the functional currency, where applicable. For certain foreign subsidiaries, USD is used as the functional 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”). 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” in the consolidated statements of operations.

 

(p) Revenue Recognition

 

The Company adopted ASU No. 2014-09, Revenue from Contracts with Customers, and other related ASUs (collectively, ASC 606, Revenue from Contracts with Customers) (“ASC 606”) as of 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. For 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 completes 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 based on the 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 conditions and entity specific factors.

 

Certain customers may receive discounts, which are accounted for as variable consideration. Variable consideration is estimated based on the expected amount to be provided to customers, and reduces revenues recognized.

 

The Company records deferred revenues when cash payments are received or due in advance of performance, including amounts which are refundable. Substantially all of the deferred revenue as of December 31, 2018 was recognized as revenue in the year ended December 31, 2019.

 

The Company does not disclose the value 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 expensed as incurred. Advertising and marketing costs were $24,394 and $0.2 million in the years ended December 31, 2019 and 2018, respectively.

 

F-12

 

 

(r) Research and Development Costs

 

The Company expenses research and development costs, including costs to develop software products or the software component 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 -based applications used to deliver our services. The Company capitalizes 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. The Company ceased research and development activities during the year ended December 31, 2018. All the software developed in the year ended December 31, 2018 did not reach technological feasibility and therefore no costs were capitalized.

 

(s) Share-Based Compensation

 

The Company awards share options and other equity-based instruments to its employees, directors and consultants (collectively “share-based 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 employee 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 expected forfeiture prior to vesting. When no future services are required to be performed by the employee 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.

 

(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-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-not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% 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, 2019 and 2018.

 

On December 22, 2017 the Tax 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% from 34% (or 35% 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. The Tax Act 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 (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 common 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 by dividing net loss attributable to IDEX common shareholders by the weighted average number of common 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 by dividing net loss attributable to IDEX common shareholders by the weighted average number of common shares and potential common shares outstanding during the period under the treasury stock method. Potential common shares include options and warrants to purchase common shares, preferred shares and convertible promissory 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.

 

F-13

 

 

(v) Reclassifications of a General Nature

 

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.

 

Recently Adopted Accounting Pronouncements

 

In February 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”) “Leases (Topic 842),” which requires lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating lease. The Company adopted ASU 2016-02 as of January 1, 2019, using a modified retrospective transition method. As a result, the consolidated balance sheet prior to January 1, 2019 was not restated, and continues to be reported under ASC Topic 840, “Leases.”

 

The lease liability is 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, the Company elected several practical expedients that permit the Company to not reassess (1) whether a contract is or contains a lease, (2) the classification of existing leases, and (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 liability. The adoption of ASU 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 January 1, 2019. The difference between the additional right-of-use assets and lease liabilities was 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 10 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 accounted for as derivative instruments, and (2) the guidance on recognition and measurement of freestanding equity-classified instruments. The Company adopted ASU 2017-11 as of January 2019 on a prospective basis. Refer to Note 13 for additional information.

 

In June 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 Accounting Standards Codification (“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.

 

In May 2014, the FASB issued ASU No. 2014-09 (“ASU 2014-09”) “Revenue from Contracts with Customers (Topic 606),” which relates to how an entity recognizes the revenue it expects to be entitled to for the transfer of promised goods and services to customers. The Company adopted ASU 2014-09 as of January 1, 2018 using the modified retrospective method applied to those contracts/sales orders which were not completed as of January 1, 2018. The effect from the adoption of ASU 2014-09 was not material to the consolidated financial statements. Refer to Note 2 (p) above and Note 4 for additional information.

 

In January 2016, the FASB issued ASU No. 2016-01 (“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. The Company adopted ASU 2016-01 as of January 1, 2018 on a prospective basis and elected to use the measurement alternative for the non-marketable equity securities, defined as cost adjusted for changes from observable transactions for identical or similar investments of the same issuer, less impairment. The adoption of ASU 2016-01 did not have a material impact on the consolidated financial statements. Refer to Note 10 for additional information.

 

In November 2016, the FASB issued ASU No. 2016-18 (“ASU 2016-18”) "Statement 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 Company adopted ASU 2016-18 as of January 1, 2018 on a retrospective basis. The new guidance changed the presentation of restricted cash in the consolidated statements of cash flows.

 

In January 2017, the FASB issued ASU No. 2017-01 (“ASU 2017-01”) “Business Combinations (Topic 805): Clarifying the Definition of a Business.” ASU 2017-01 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. ASU 2017-01 is intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 provides a more robust framework to use in determining when a set of assets and activities is a business, provides more consistency in applying the guidance, reduces the costs of application, and makes the definition of a business more operable. The Company adopted ASU 2017-01 as of January 1, 2018 on a prospective basis. The adoption of ASU 2017-01 did not have a material impact on the consolidated financial statements. Refer to Note 6 for additional information.

 

F-14

 

 

 

Accounting Pronouncements Not Yet Adopted

 

In June 2016, the FASB issued ASU No. 2016-13 (“ASU 2016-13”) "Financial Instruments - Credit Losses” (“ASC 326”): Measurement of Credit Losses on Financial 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. In 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, 2023. Management is currently evaluating the effect of the adoption of ASU 2016-13 on the 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 December 2019, the FASB issued ASU No. 2019-12 (“ASU 2019-12”) “Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes.” ASU 2019-12 will simplify the accounting for income taxes by removing certain exceptions currently provided for in ASC 740, “Income Taxes” (“ASC 740”), and by amending certain other requirements of ASC 740. The changes resulting from ASU 2019-12 will be made on a retrospective or modified retrospective basis, depending on the specific exception or amendment. For public business entities, the amendments in ASU 2019-12 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company will adopt ASU 2019-12 effective January 1, 2021. Management is currently evaluating the effect of the adoption of ASU 2019-12 on the consolidated financial statements.

 

Note 3. Going Concern and Management’s Plans

 

As of December 31, 2019, the Company had cash and cash equivalents of approximately $2.6 million and an accumulated deficit of approximately $248.5 million.  Additionally, the Company has incurred losses since its inception and must continue to rely on proceeds from debt and equity issuances to pay for ongoing operating expenses in order to execute its business plan.

 

The Company expects to continue to raise both equity and debt finance to support the Company’s investment plans and operations. 

 

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 development 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 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.

  

F-15

 

 

Note 4. Revenue

 

The following table summarizes the Company’s revenues disaggregated by revenue source and geography. Refer to Note 2 for additional information on revenue recognition.

 

    2019     2018  
Geographic Markets                
Singapore   $ -     $ 260,034,401  
USA     41,873,064       638,412  
Hong Kong     -       117,070,059  
PRC     2,693,891       -  
    $ 44,566,955     $ 377,742,872  
Product or Service                
Crude oil   $ -     $ 260,034,401  
Consumer electronics     -       116,723,251  
Digital asset management services     40,700,000       -  
Electronic Vehicles     2,693,891       -  
Other     1,173,064       985,220  
Total   $ 44,566,955     $ 377,742,872  
                 
Timing of Revenue Recognition                
Products and services transferred at a point in time   $ 3,866,955     $ 377,742,872  
Services provided over time     40,700,000       -  
Total   $ 44,566,955     $ 377,742,872  

 

Note 5. 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 years ended December 31, 2019 and 2018, and as of December 31, 2018. A shareholder in one of the VIEs is the spouse of Bruno Wu (“Dr. Wu”), the 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 “Loss on disposal of subsidiaries, net” in the consolidated statements of operations, and a statutory income tax of $0.2 million.

 

For these consolidated VIEs, their assets were not available to the Company and their creditors did not have recourse to the Company. As of December 31, 2018, assets (mainly long-term investments) that could only be used to settle obligations of these VIEs were $3.5 million, and the Company was the major creditor for the VIEs.

 

Prior to December 31, 2019, in order to operate certain legacy YOD 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”). These contractual agreements were initially set to expire in March 2030 and April 2036, respectively, and could not be terminated by the VIEs, except with the consent of, or a material breach by the Company. A shareholder in SSF is the spouse of Dr. Wu, the Chairman of the Company.

 

F-16

 

 

The key terms of the VIE Agreements are summarized as follows:

 

Equity Pledge Agreement

 

The VIEs’ Shareholders pledged all of their equity interests in the VIEs (the “Collateral”) to YOD On Demand (Beijing) Technology Co., Ltd (“YOD WFOE”), the Company’s wholly-owned subsidiary in the 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 were set to expire upon satisfaction of all obligations under the Technical Services Agreement and Call Option Agreement.

 

The Equity Pledge Agreement was terminated by all parties on December 31, 2019.

 

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 was to be determined by YOD WFOE at its sole discretion, subject to any restrictions imposed by PRC law. The term of the agreement was until all of the equity interest in the VIEs held by the VIEs’ Shareholders were transferred to YOD WFOE, or its designee and could not be terminated by any part to the agreement without consent of the other parties.

 

The Call Option Agreement was terminated by all parties on December 31, 2019.

 

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 could not transfer any of its equity interest in VIEs to any party other than YOD WFOE. The Power of Attorney agreements could not be terminated except until all of the equity in VIEs had been transferred to YOD WFOE or its designee.

 

The Power of Attorney agreements were terminated by all parties on December 31, 2019.

 

Technical Service Agreement

 

YOD WFOE 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 by YOD WFOE. As compensation for providing the services, YOD WFOE was entitled to receive service fees from the VIEs equivalent to YOD WFOE’s cost plus 20.0 to 30.0% of such costs as calculated on accounting policies generally accepted in the PRC. YOD WFOE and the VIEs agreed to periodically review the service fee and make adjustments as deemed appropriate. The term of the Technical Services Agreement was perpetual, and could only be terminated upon written consent of both parties.

 

The Technical Services Agreement was terminated by all parties on December 31, 2019.

 

F-17

 

 

Spousal Consent

 

Pursuant to the Spousal Consent, undersigned by the respective spouse of the VIEs’ Shareholders, the spouses unconditionally and irrevocably agreed to the execution of the Equity Pledge Agreement, Call Option Agreement and Power of Attorney agreement. The spouses agreed to not make any assertions in connection with the equity interest of the VIEs 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 pledged 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 obtained any equity interests of the VIEs which were held by the VIEs’ Shareholders, the spouses agreed to be bound by the VIE agreements, including the Technical Services Agreement, and comply with the obligations thereunder, including signing a series of written documents in substantially the same format and content as the VIE agreements.

 

The Spousal Consents were terminated by all parties on December 31, 2019. 

 

Letter of Indemnification

 

Pursuant to the Letter of Indemnification among YOD WFOE and each nominee shareholder, YOD WFOE 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. YOD WFOE further waived and released 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 were taken in good faith and were not opposed to YOD WFOE’s best interests. The VIEs’ Shareholders were not entitled to dividends or other benefits generated therefrom, or to receive any compensation in connection with this arrangement. The Letter of Indemnification was to remain valid until either the nominee shareholder or YOD WFOE terminates the agreement by giving the other party hereto 60 days’ prior written notice.

 

The Letter of Indemnification was terminated by all parties on December 31, 2019.

 

Management Services Agreement

 

In addition to VIE agreements described above, the Company’s 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”) entered into a Management Services Agreement with each VIE.

 

Pursuant to such Management Services Agreement, YOD Hong Kong 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 YOD Hong Kong. As compensation for providing the services, YOD Hong Kong was entitled to receive a fee from the VIE, upon demand, equal to 100.0% 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 could also request ad hoc quarterly payments of the aggregate fee, which payments would be credited against the VIE’s future payment obligations.

 

In addition, at the sole discretion of YOD Hong Kong, the VIE was 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 could be lawfully conducted, employed, owned or operated by YOD Hong Kong, including:

 

  (a) business opportunities presented to, or available to the VIE could be pursued and contracted for in the name of YOD Hong Kong rather than the VIE, and at its discretion, YOD Hong Kong could 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 could 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 could 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 could 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 could 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 Management Services Agreement was terminated by all parties on December 31, 2019.

 

F-18

 

 

Loan Agreement

 

Pursuant to the Loan Agreement dated April 5, 2016, YOD WFOE 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 Chairman, for the purpose of establishing SSF and for development of its business. As of December 31, 2018, RMB27.6 million ($4.2 million) had been lent to VIEs’ Shareholders which had contributed all of the RMB27.6 million ($4.2 million) in the form of capital contribution to SSF. The loan could only be repaid by a transfer by the VIEs’ Shareholders of their equity interests in SSF to YOD WOFE or YOD WOFE’s designated persons, through (1) YOD WOFE having the right, but not the obligation to at any time purchase, or authorize a designated person to purchase, all or part of the VIEs’ Shareholders’ equity interests in SSF at such price as YOD WOFE shall determine (the “Transfer Price”), (2) all monies received by the VIEs’ Shareholders through the payment of the Transfer Price being used solely to repay YOD WOFE for the loans, and (3) 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 WOFE in cash. Otherwise, the loans were deemed to be interest free. The term of the Loan Agreement was perpetual, and could only be terminated upon the VIEs’ Shareholders receiving repayment notice, or upon the occurrence of an event of default under the terms of the agreement. The loan extended to the Nominee Shareholders and the capital of SSF are fully eliminated in the consolidated financial statements.

 

The Loan Agreement was terminated by all parties on December 31, 2019. The termination of the Loan Agreement resulted in a loss of $5.1 million.

 

Therefore, the Company considers that there was no asset of the VIEs that could be used only to settle obligation of the Company, except for the registered capital of VIEs amounting to RMB38.2 million ($5.8 million) as of December 31, 2018.

 

Note 6. Acquisitions and Divestitures

 

2019 Acquisitions

 

(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) 9,500,000 shares of Ideanomics common stock, and (3) earnout payments (the ”Earnout”) 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 Earnout is based upon revenue targets over three 12 month periods beginning in Q4 2019.

 

The fair value of the Ideanomics stock was based upon the closing price of $0.82 on December 26, 2019, and the preliminary fair value of the Earnout was estimated to be $17.3 million, and was recorded as a liability on the date of acquisition. The Company estimated the fair value of the Earnout 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 30.0%

 

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. Tree Technologies holds 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.

 

The following table summarizes the acquisition-date preliminary 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 recorded provisional amounts for these items as well as for the Earnout mentioned above. The Company expects to finalize the fair value analysis of the assets acquired, liabilities assumed, the noncontrolling interest, and the Earnout within one year subsequent to the acquisition, and therefore adjustments to assets and liabilities will occur and may be significant.

 

Cash  $229 
Land use rights   27,078,944 
Accounts payable   (743,250)
Noncontrolling interest   (24,985,292)
Goodwill   13,316,226 
Marketing and distribution agreement   11,332,473 
   $25,999,330 

 

F-19

 

 

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; should the Company fail to fulfill its obligations to pay the transfer tax payable it would forfeit its land use rights.

 

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, 2018, and related information, are not presented.

 

(b)Acquisition of Grapevine Logic, Inc. (“Grapevine”)

 

Refer to Note 6(d) for additional information on the acquisition of Grapevine, and the initial terms of the agreement and the Option Agreement (as subsequently defined).

 

In May 2019, the Company entered into two 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 shall 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 810-10-45-23.

 

(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%, were completed in July 2019. The securities purchase agreements required the Company to issue additional shares of the Company’s common stock (“True-Up 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 is 9 months from the closing date. The Company accounted for the additional True-Up Common Stock consideration as a liability in accordance with ASC 480. 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 “Acquisition earn-out expense” in the consolidated statements of operations.

 

Immediately prior to the consummation of the transaction, the Company’s investment in DBOT 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. 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 operates three 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 executes 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:

 

   December 31, 2019   December 31, 2018 
Revenue  $44,675,864   $378,242,165 
Net loss attributable to IDEX common shareholders   (99,417,257)   (30,164,664)

 

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, 2018. Actual future results may vary considerably based on a variety of factors beyond the Company’s control.

 

F-20

 

 

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:

 

Cash  $246,929 
Other financial assets   1,686,464 
Financial liabilities   (4,411,140)
Noncontrolling interest   (104,649)
Goodwill   9,323,189 
Intangible asset – continuing membership agreement   8,255,440 
Intangible asset – customer list   58,830 
   $15,055,063 

 

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, continuing membership agreements have useful life of 20 years and the customer list has useful life of 3 years.

 

2018 Acquisitions

 

(d)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. Grapevine is an end-to-end influencer marketing platform that facilitates collaboration between advertisers and brands with video based social influencers and content creators. The goodwill arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of the Company and Grapevine. None of the goodwill recognized is expected to be deductible for income tax purposes. The transaction was accounted for as a business combination.

 

The following table summarizes the amounts of the assets acquired and liabilities assumed recognized at the acquisition date, as well as the fair value at the acquisition date of the non-controlling interest in Grapevine:

 

Cash  $508,000 
Other financial assets   388,000 
Financial liabilities   (747,000)
Noncontrolling interest   (679,000)
Goodwill   705,000 
Influencer network   1,980,000 
Customer contracts   500,000 
Trade name   110,000 
Technology platform   290,000 
Deferred tax liabilities   (570,000)
   $2,485,000 

 

Pro forma results of operations for Grapevine have not been presented because it is not material to the consolidated results of operations. For all intangible assets acquired and purchased during the year ended December 31, 2018, the influencer network has a weighted-average useful life of 10 years, customer contracts have a weighted-average useful life of 3 years, the trade name has a weighted-average useful life of 15 years and technology platform has a weighted-average useful life of 7 years.

 

Fomalhaut Limited (“Fomalhaut”), a British Virgin Islands company and an affiliate of Dr. Wu, is 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 is 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 is exercised, the sale price for the Fomalhaut Interest is 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. The Option Agreement will expire on August 31, 2021. Refer to Note 6(b) for additional information on the amendment and exercise of the Option Agreement.

 

(e)Shanghai Guang Ming Investment Management (“Guang Ming”)

 

On April 24, 2018, the Company completed the acquisition of 100.0% equity ownership in Guang Ming, a PRC limited liability company, for a total purchase price of $0.4 million in cash. One of the two selling shareholders is a related party, an affiliate of Dr. Wu. Guang Ming holds a special fund management license. The acquisition will help the Company develop a fund management platform. Under ASC 805-50-05-5 and ASC 805-50-30-5, the transaction was accounted for as a reorganization of entities under common control, in a manner similar to a pooling of interest, using historical costs. As a result of the reorganization, the net assets of Guang Ming were transferred to the Company, and the accompanying consolidated financial statements have been prepared as if the current corporate structure had been in place at the beginning of periods presented in which the common control existed.

 

F-21

 

 

2019 Divestitures

 

The Company may divest certain businesses from time to time based upon review of the Company’s portfolio considering, among other items, factors relative to the extent of strategic and technological alignment and optimization of capital deployment, in addition to considering if selling the businesses results in the greatest value creation for the Company and for shareholders.

 

(f)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 Redrock Capital Group Limited, an affiliate of Dr. Wu, to sell its entire interest in Red Rock for consideration of $0.7 million. The Company decided to sell Red Rock primarily because it has incurred operating losses and its business is no longer needed based on the Company’s business plan. The transaction was completed in July 2019 and the Company recorded a disposal gain of $0.6 million recorded in “Loss on disposal of subsidiaries, net” in the consolidated statements of operations.

 

(g)Amer Global Technology Limited (“Amer”)

 

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 Amer. The parties subsequently entered into several amendments including (1) changing the name of Amer to Logistorm Technology Limited, (2) issuing 39,500 new shares in Amer or 71.8% ownership interest to BCC instead of Tekang, (3) issuing 5,500 new shares in Amer or 10.0% ownership interest to Merry Heart Technology Limited (“MHT”) and (4) the Company is responsible for 20.0% of any potential tax obligation associated with Amer, if Amer fails to be publicly listed in 36 months from the closing date of this transaction. The Company concluded that it’s not probable that this contingent liability would be incurred. As a result of this transaction, the Company’s ownership interest in Amer was diluted from 55.0% to 10.0%. The transaction was completed on August 31, 2019.

 

The Company recognized a disposal gain of $0.5 million as a result of the deconsolidating Amer, and such gain was recorded in “Loss on disposal of subsidiaries, net” in the consolidated statements of operations. $0.1 million of the gain is attributable to the 10.0% ownership interest retained in Amer. In addition, on the date Amer was deconsolidated, the Company recorded a bad debt expense of $0.6 million relating to a receivable due from Amer to a subsidiary of the Company, which was recorded in “Selling, general and administrative expense” in the consolidated statements of operations.

 

The following table summarizes the consolidated statement of operations for the year ended December 31, 2018, on an unaudited pro forma basis, as if the dilution of the Company’s interest in Amer had been consummated as of January 1, 2018:

 

   December 31, 2018 
Revenue  $261,026,833 
Net loss from operations   (25,031,090)
Net loss   (27,243,059)
Net loss attributable to IDEX common shareholders   (26,246,331)

 

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.

 

2018 Divestitures

 

(h)Wide Angle and Shanghai Huicang Supplychain Management Ltd.

 

In December 2018, the Company entered into an agreement with Hooxi, an entity listed on the TSX venture exchange in Canada, and completed the sale of its investment (55.0% interest) in Wide Angle and Shanghai Huicang Supplychain Management Ltd., whose operations mainly focus on magazines printing, for a nominal amount. This business had annual sales of $0.3 million and continued to incur losses with minimal net assets. The transaction resulted in a loss of $1.2 million and was recorded in “Loss on disposal of subsidiaries, net” in the consolidated statements of operations.

 

F-22

 

 

 

Note 7.   Accounts Receivable

 

The following table summarizes the Company’s accounts receivable:

 

   December 31,   December 31, 
   2019   2018 
Accounts receivable, gross  $2,404,972   $19,370,665 
Less: allowance for doubtful accounts   (103)   - 
Accounts receivable, net  $2,404,869   $19,370,665 

 

The following table summarizes the movement of the allowance for doubtful accounts:

 

    December 31,     December 31,  
    2019     2018  
Balance at the beginning of the year   $ -     $ 3,646  
Disposal of Zhong Hai Shi Xun     -       (3,646 )
Acquisition of DBOT     (103     -  
Balance at the end of the year   $ (103 )   $ -  

 

F-23

 

 

Note 8.   Property and Equipment, net

  

The following table summarizes the Company’s property and equipment:

 

    December 31,     December 31,  
    2019     2018  
Furniture and office equipment   $ 441,283     $ 357,064  
Vehicle     62,052       63,135  
Leasehold improvements     242,627       200,435  
Total property and equipment     745,962       620,634  
Less: accumulated depreciation     (367,509)       (186,514 )
Land     3,042,777       3,042,777  
Building     308,779       2,607,666  
Assets retirement obligations – environmental remediation     6,496,115       8,000,000  
Capitalized direct development cost     2,713,356       944,864  
Construction in progress (Fintech Village)     12,561,026        14,595,307  
Property and Equipment, net     12,939,480     $ 15,029,427  

 

The Company recorded depreciation expense of $0.1 million and $0.1 million in the years ended December 31, 2019 and 2018, respectively.

 

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. In order to obtain the surety bond, the Company was required to post $3.6 million in cash collateral with the bonding company and recorded in “Other non-current assets” in the consolidated balance sheet as of December 31, 2018. The Company recorded asset retirement obligations in the amount of $8.0 million as of December 31, 2018 which was the estimates performed by the Seller and at a discount to the purchase price, therefore, the Company considered it a reasonable estimate of fair value of its asset retirement obligation pursuant to ASC 410-20-25-6. The Company will assess asset retirement obligations periodically as assessment and remediation efforts progress or as additional technical or legal information becomes available.

 

The following table summarizes the activity in the asset retirement obligation for the year ended December 31, 2019:

 

   January 1,
2019
   Liabilities
Incurred
   Remediation
Performed
   Accretion
Expense
   Revisions   December 31,
2019
 
Asset retirement obligation  $8,000,000   $               -   $2,905,800   $                    -   $                   -   $5,094,200 

 

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 Agreement"), pursuant to which the State of Connecticut may provide up to $10.0 million of financial assistance (the “Funding”) which in such case shall be evidenced by a promissory note, provided, however, that the aggregate principal of the funding shall not exceed 50% of the cost of the project. The Company will provide security for its obligation to repay the Funding to the State of Connecticut in the form of a first position mortgage. The Company agrees that in exchange for the Funding it will provide a minimum number of jobs at a minimum annual amount of compensation by December 31, 2021. Failure of the Company to do so will subject it to certain cash penalties for each employee below the minimum employment threshold. If the Company meets the employment obligations it is eligible for forgiveness of up to $10.0 million of the Funding. The Company will agree to certain covenants with respect to the Funding and such Funding may become immediately due and payable upon the occurrence of certain standard events of default. There were no borrowings from the Funding as of December 31, 2019 and 2018.

 

F-24

 

 

The Company capitalized direct costs incurred on Fintech Village and the capitalized cost is recorded as part of Construction in progress. Capitalized costs were $2.7 million and $0.9 million as of December 31, 2019 and 2018, respectively, and are primarily related to the legal and architect costs. 

 

In the year ended December 31, 2019, the Company impaired buildings with a carrying amount of $2.3 million, which were subsequently demolished, and impaired related asset retirement costs of $1.5 million.

 

The Company has identified Fintech Village as a non-core asset and is evaluating its strategies for divesting of this asset.

 

Note 9.  Goodwill and Intangible Assets

 

Goodwill

 

The following table summarizes changes in the carrying amount of goodwill for the years ended December 31, 2019 and 2018:

 

       
Balance as of January 1, 2018   $ -  
Acquisitions     704,884  
Balance as of December 31, 2018     704,884  
Acquisitions     22,639,415  
Balance as of December 31, 2019   $ 23,344,299  

 

Intangible Assets

 

The following table summarizes information regarding amortizing and indefinite lived intangible assets:

 

    December 31, 2019     December 31, 2018  
    Weight
Average
Remaining
Useful Life
    Gross
Carrying
Amount
    Accumulated
Amortization
    Impairment
Loss
    Net
Balance
    Gross
Carrying
Amount
    Accumulated
Amortization
    Impairment
Loss
    Net Balance  
Amortizing Intangible Assets                                                      
Animation Copyright       $  -     -     -     -     301,495     (64,606   -     236,889  
Software and licenses   -     97,308     (97,308   -     -     97,308     (93,251   -     4,057  
Solid Opinion IP (a)   4.2     4,655,000     (775,833   -     3,879,167     -     -     -     -  
Fintalk intangible assets (b)   -     6,350,000     (635,000   (5,715,000   -     -     -     -     -  
Influencer network (c)   8.7     1,980,000     (264,000   -     1,716,000     1,980,000     (66,000   -     1,914,000  
Customer contract (c)   1.7     500,000     (222,222   -     277,778     500,000     (55,556   -     444,444  
Continuing membership agreement (d)   19.5     8,255,440     (206,386   -     8,049,054     -     -     -     -  
Customer list   2.5     58,830     (9,805   -     49,025     -     -     -     -  
Trade name (c)   13.7     110,000     (9,778   -     100,222     110,000     (2,444   -     107,556  
Technology platform (c)   5.7     290,000     (55,238   -     234,762     290,000     (13,808   -     276,192  
Land use rights (e)   99     27,078,944     -     -     27,078,944     -     -     -     -  
  Marketing and distribution agreement (e)   5     11,332,473     -     -     11,332,473     -     -     -     -  
Total         60,707,995     (2,275,570 )   (5,715,000   52,717,425     3,278,803     (295,665   -     2,983,138  
Indefinite lived intangible assets                                                      
Website name  (f)         159,504     -     (134,290   25,214     159,504     -     (134,290   25,214  
Patent          28,000     -     -     28,000     28,000     -     -     28,000  
GTB (g)         61,124,407     -     (61,124,407   -     -     -     -     -  
Total       $ 122,019,906   $ (2,275,570 $ (66,973,697 $ 52,770,639   $ 3,466,307   $ (295,665 $ (134,290 $ 3,036,352  

 

  a) During the first quarter of 2019, the Company completed the acquisition of certain assets from SolidOpinion in exchange for 4.5 million shares of the Company’s common stock with a fair value of $7.2 million. The assets acquired included cash of $2.5 million and intellectual property (“IP”) which is complementary to the IP of Grapevine. The parties agreed that 0.5 million of such shares of common stock (“Escrow Shares”) will be held in escrow until February 19, 2020 in connection with SolidOpinion’s indemnity obligations pursuant to the agreement. SolidOpinion has the rights to vote and receive the dividends paid with respect to the Escrow Shares. The Escrow Shares were scheduled to be released on February 19, 2020, and the Company has commenced the necessary steps to release the shares from escrow.
  b) In September 2018, the Company entered into an agreement to purchase Fintalk Assets from Sun Seven Star International Limited, a Hong Kong company and an affiliate of Dr. Wu. FinTalk Assets include 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 initial purchase price for the Fintalk Assets was $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 this amount in prepaid expenses as of December 31, 2018 because the transaction had not closed. The purchase price was later amended to $6.4 million, payable with $1.0 million in cash and 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 the fourth quarter of 2019, management determined these assets had no future use and recorded an impairment loss of $5.7 million.
  c) During the third quarter of 2018, the Company completed the acquisition of 65.7% share of Grapevine. Refer to Note 6(b) and 6(d).
  d) During the third quarter of 2019, the Company completed the acquisition of additional shares in DBOT, which increased its ownership to 90.0 %. Intangible assets of $8.3 million were recognized on the date of acquisition. Refer to Note 6(c)
  e) During the fourth quarter of 2019, the Company completed the acquisition of a 51.0% interest in Tree Technologies, a Malaysian company engaged in the EV market. Refer to Note 6(a) for additional information.
  f) The Company recorded an impairment loss for the YOD website in the amount of $0.1 million in the year ended December 31, 2018 since the website was no longer in use.
  g) During the first quarter of 2019, the Company completed the sale of certain intangible assets to GTD, and entered into a service agreement with GTD, a minority shareholder, in exchange for GTB. As a result of these transactions, the Company received 8.3 million GTB. 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 15(b) for additional information.

 

Amortization expense, excluding impairment losses of $66.8 million and $0.1 million mentioned above, relating to intangible assets was $2.1 million and $0.2 million for the years ended December 31, 2019, and 2018, respectively.

 

F-25

 

 

The following table summarizes future expected amortization expense:

 

Years ending December 31,   Amortization to
be recognized
 
2020   $ 4,316,830  
2021     4,261,274  
2022     4,140,358  
2023     4,130,553  
2024 and thereafter     35,868,410  
Total   $ 52,717,425

 

The above table assumes that the amortization commences on the Land use rights and Marketing and distribution agreement on January 1, 2020; however, actual amortization may commence at a later date as EV production commences.

 

Note 10.  Long-term Investments

 

The following table summarizes the composition of long-term investments:

 

   December 31,   December 31, 
   2019   2018 
Non-marketable equity investment  $5,967,911   $9,452,103 
Equity method investment   16,653,586    16,956,506 
Total  $22,621,497   $26,408,609 

 

Non-marketable equity investment

 

Our non-marketable equity investments are investments in privately held companies without readily determinable fair values 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. Based on management’s analysis of certain investment’s performance, impairment losses of $3.0 million and $0 were recorded in the years ended December 31, 2019 and 2018 and are recorded in “Impairment of assets” in the consolidated statements of operations.

 

The Company sold one non-marketable equity investment with a carrying amount of $3.2 million for GTB and recognized no gain or loss on the sale. Refer to Note 15(b) for additional information.

 

F-26

 

 

Equity method investments

 

The following table summarizes the Company’s investment in companies accounted for using the equity method of accounting:

 

      December 31, 2019    
      January 1, 2019     Addition     Income (loss)
on
investment
    Reclassification to subsidiaries       Impairment losses       Disposal     Foreign
currency
translation
adjustments
    December 31,
2019
 
Wecast Internet (a)   $ 4,114     $ -     $ 4     $ -     $ (6,048   $  -     $ 1,930     $ -  
Hua Cheng (b)     308,666       -       (33,189 )     -       -       (245,138     (30,339 )     -  
BDCG (c)     9,800,000       -       -       -       -       -       -       9,800,000  
DBOT (d)     6,843,726       -       (3,719,735 )     (3,123,991     -       -       -       -  
Glory (e)     -       19,991,600       (76,170 )     -       (13,061,844     -       -       6,853,586  
Total     $ 16,956,506     $ 19,991,600     $ (3,829,090 )   $ (3,123,991   $  (13,067,892 )   $  (245,138   $ (28,409 )   $ 16,653,586  

 

       December 31, 2018 
       January 1, 2018   Addition