NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Note
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
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 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 involved with areas
of capital markets such as financial products advisory and creation, with specific focus on the application of blockchain and artificial
intelligence in Fintech.
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.
Basis of Presentation
In the opinion of management, the unaudited
interim consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation
of the results for the interim periods presented. All significant intercompany transactions and balances are eliminated in consolidation.
However, the results of operations included in such financial statements may not necessary be indicative of annual results.
The Company uses the same accounting policies
in preparing quarterly and annual financial statements. Certain information and footnote disclosures normally included in the annual
consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of
America (“U.S. GAAP”) have been condensed or omitted. These unaudited consolidated financial statements should be read
in conjunction with the Company's audited consolidated financial statements and notes thereto included in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission (“SEC”)
on March 16, 2020 (“2019 Form 10-K.”)
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, management evaluates
the Company’s estimates, including those related to the bad debt allowance, variable considerations, fair values of financial
instruments, intangible assets (including digital currencies) 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 values of assets and liabilities.
Significant Accounting Policies
For a detailed
discussion about Ideanomics’ significant accounting policies, refer to Note 2 — “Summary of Significant Accounting
Policies,” in Ideanomics’ consolidated financial statements included in Company’s 2019 Form 10-K. During the
three months ended March 31, 2020, there were no significant changes made to Ideanomics’ significant accounting policies.
Effects of COVID 19
In the three months ended March 31, 2020,
the Company commenced the process of formulating and implementing a share-based compensation plan whereby key employees and certain
consultants of its MEG business unit and wholly-owned subsidiary will benefit.
As one component of this process, the Company
has initially transferred 10,000 common shares of MEG, representing 20.0% of the overall outstanding common shares, to Merry Heart
Technology Limited (“MHTL”), who is intended to act as a trustee over these shares, for a nominal amount. It is the
Company’s intent that this arrangement would be structured in a manner similar to other trusts used to effect share-based
compensation plans, and would qualify as a VIE and consequently be consolidated.
However, the disruption caused by the COVID-19
virus, particularly in China, where many of the Company’s personnel and business advisors are located, has delayed the Company’s
efforts to implement this share-based compensation plan. The Company’s ability to interact with personnel and business advisors
was adversely impacted by temporary office closures, with personnel working remotely, and travel restrictions which prevented the
Company from obtaining final and complete documentation.
The Company anticipates that, with travel
restrictions currently lifted in China, it will complete the formation and implementation of the share-based compensation scheme
by June 30, 2020. At that point, the Company will provide a full accounting of the share-based compensation plan, which, as it
is expected to be consolidated, would have no material effect on its consolidated financial statements. The transfer of the MEG
shares to MHTL is not believed to be substantive, and had the Company given accounting treatment to the transfer without consideration
of the overall share-based compensation plan, the accounting effect would have been a reclass between additional paid-in capital
and non-controlling interest within the consolidated statement of equity. However, to record this entry in isolation would not
be representative of the arrangement when fully consummated, as it is anticipated that the resulting shares would be consolidated
at that point in time.
As of March 31, 2020, no share-based awards
had been granted to employees or consultants.
Note 2. New Accounting Pronouncements
Accounting Pronouncements Not Yet Adopted
In June 2016, the Financial Accounting
Standards Board (“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 the
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 March 31, 2020, the Company had cash
and cash equivalents of $5.9 million and an accumulated deficit of $260.8 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. The Company expects to continue to raise both equity and debt finance to support the Company’s investment
plans and operations.
Due to People’s Republic of China
(“PRC”) regulations governing the transfer of cash outside of the PRC, management does not consider cash balances held
by entities domiciled in the PRC, or subject to PRC regulation, as being available for use in, or as a source of funding, for the
Company’s operations outside of the PRC. The Company’s operations outside of PRC are dependent upon continued to access
to debt and equity funding in the United States and Asia outside of the PRC.
Note 4. Revenue
The following table summarizes the Company’s
revenues disaggregated by revenue source, geography (based on the Company’s business locations), and timing of revenue recognition
(in thousands):
|
|
Three Months Ended
|
|
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
Geographic Markets
|
|
|
|
|
|
|
|
|
Malaysia
|
|
$
|
3
|
|
|
$
|
-
|
|
USA
|
|
|
323
|
|
|
|
26,946
|
|
China
|
|
|
52
|
|
|
|
-
|
|
Total
|
|
$
|
378
|
|
|
$
|
26,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product or Service
|
|
|
|
|
|
|
|
|
Digital asset management services
|
|
$
|
-
|
|
|
$
|
26,600
|
|
Digital advertising services and other
|
|
|
323
|
|
|
|
346
|
|
Electric vehicles*
|
|
|
55
|
|
|
|
-
|
|
Total
|
|
$
|
378
|
|
|
$
|
26,946
|
|
|
|
|
|
|
|
|
|
|
Timing of Revenue Recognition
|
|
|
|
|
|
|
|
|
Products transferred at a point in time
|
|
$
|
378
|
|
|
$
|
346
|
|
Services provided over time
|
|
|
-
|
|
|
|
26,600
|
|
Total
|
|
$
|
378
|
|
|
$
|
26,946
|
|
* The EV revenues for the current quarter
were recorded on an Agency (Net) basis because the Company acted as an agent rather than principal in these transactions.
Note
5. 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 of these VIEs are included in the consolidated financial statements for the year ended December 31, 2019. A shareholder
in one of the VIEs is the spouse of Dr. Bruno Wu (“Dr. Wu”), the Chairman of the Company.
The contractual agreements, 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.
Refer to Note 10 for information on an
additional VIE.
Note
6. Acquisitions and Divestitures
2020
Acquisitions and Divestitures
The Company
has not acquired any companies nor disposed of any subsidiaries in the three months ended March 31, 2020.
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.
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) 9.5 million 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 the three months ended December 31, 2019.
The fair value of the Ideanomics stock
was based upon the closing price of $0.82 on December 26, 2019, and the fair value of the Earnout was estimated to be $15.5 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 15.0%.
Tree Technologies holds the land use rights
for 250 acres of vacant land zoned for industrial development in the Begeng Industrial Area adjacent to Kuantan Port. Kuantan is
the capital city of the state of Pahang on the east coast of Peninsular Malaysia. The Company intends to develop this land and
lease it to Tree Manufacturing for the manufacture of EVs. 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 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 is in the process of completing the fair value analysis of the assets acquired, liabilities assumed, the noncontrolling
interest, and the Earnout, and therefore the known adjustments are incorporated in the table below (in thousands).
Land use rights
|
|
$
|
27,140
|
|
Accounts payable
|
|
|
(743
|
)
|
Noncontrolling interest
|
|
|
(15,583
|
)
|
Goodwill
|
|
|
803
|
|
Marketing and distribution agreement
|
|
|
12,590
|
|
|
|
$
|
24,207
|
|
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”)
|
On September 4, 2018, the Company completed
the acquisition of 65.7% share of Grapevine for $2.4 million in cash. Fomalhaut Limited (“Fomalhaut”), a British Virgin
Islands company and an affiliate of Dr. Wu, was the non-controlling equity holder of 34.4% in Grapevine (the “Fomalhaut Interest”).
Fomalhaut entered into an option agreement, effective as of August 31, 2018 (the “Option Agreement”), with the Company
pursuant to which the Company provided Fomalhaut with the option to sell the Fomalhaut Interest to the Company. The aggregate sale
price for the Fomalhaut Interest was the fair market value of the Fomalhaut Interest as of the close of business on the date preceding
the date upon which the right to sell the Fomalhaut Interest to the Company is exercised by Fomalhaut. If the option 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.
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, Consolidation.
|
(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, Distinguishing Liabilities from Equity. The Company recorded this liability at fair
value of $2.2 million on the date of acquisition. As of December 31, 2019, the Company remeasured this liability to $7.3 million
and the remeasurement loss of $5.1 million was recorded in “Acquisition earn-out expense” in the consolidated statements
of operations. In the three months ended March 31, 2020, the Company recorded an additional remeasurement loss of $0.5 million
in “Acquisition earn-out expense” in the consolidated statements of operations, and partially satisfied the liability
with the issuance of 10.9 million shares of common stock. As of March 31, 2020, the recorded balance of this liability was $1.1
million.
Immediately prior to the consummation of
the transaction, the Company’s investment in DBOT consisted of 37.0% of the common shares outstanding, which had a fair value
of $3.1 million, and the Company recorded a loss of $3.2 million to record the investment in DBOT to its fair value. This loss
was recorded in “Loss on remeasurement of DBOT investment” in the consolidated statements of operations in the three
and nine months ended September 30, 2019. The fair value of the investment in DBOT immediately prior to the consummation of the
transaction was determined in conjunction with the overall fair value determination of the DBOT assets acquired and liabilities
assumed.
DBOT 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 (in thousands):
|
|
March 31, 2019
|
|
Revenue
|
|
$
|
27,023
|
|
Net income attributable to IDEX common shareholders
|
|
|
19,480
|
|
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.
The following table summarizes the acquisition-date
fair value of assets acquired and liabilities assumed, as well as the fair value of the non-controlling interest in DBOT recognized
(in thousands):
Cash
|
|
$
|
247
|
|
Other financial assets
|
|
|
1,686
|
|
Financial liabilities
|
|
|
(4,411
|
)
|
Noncontrolling interest
|
|
|
(105
|
)
|
Goodwill
|
|
|
9,324
|
|
Intangible asset – continuing membership agreement
|
|
|
8,255
|
|
Intangible asset – customer list
|
|
|
59
|
|
|
|
$
|
15,055
|
|
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.
2019 Divestitures
|
(d)
|
Red Rock Global Capital LTD (“Red Rock”)
|
In May 2019, the Company determined to
sell the Red Rock business and entered into an agreement with 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 in the three and nine months ended September 30, 2019.
|
(e)
|
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 MHTL, 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 in the three and nine months ended September 30, 2019. $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 in the three
and nine months ended September 30, 2019.
Pro forma results of operations for the
three months ended March 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.
Note 7. Accounts
Receivable
The following table summarizes the Company’s
accounts receivable (in thousands):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Accounts receivable, gross
|
|
$
|
1,833
|
|
|
$
|
2,405
|
|
Less: allowance for doubtful accounts
|
|
|
-
|
|
|
|
-
|
|
Accounts receivable, net
|
|
$
|
1,833
|
|
|
$
|
2,405
|
|
There were no changes in the allowance
for doubtful accounts for the three months ended March 31, 2020 and 2019.
The balance includes the taxi commission revenue receivables
of $1.7 million and $2.3 million from the related party Guizhou Qianxi Green Environmentally Friendly Taxi Service Co, as of March
31, 2020 and December 31, 2019, respectively.
Note
8. Property and Equipment, net
The following table summarizes the Company’s
property and equipment (in thousands):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Furniture and office equipment
|
|
$
|
462
|
|
|
$
|
441
|
|
Vehicle
|
|
|
62
|
|
|
|
62
|
|
Leasehold improvements
|
|
|
212
|
|
|
|
243
|
|
Total property and equipment
|
|
|
736
|
|
|
|
746
|
|
Less: accumulated depreciation
|
|
|
(381)
|
|
|
|
(368)
|
|
Property and equipment, net
|
|
|
355
|
|
|
|
378
|
|
Fintech Village
|
|
|
|
|
|
|
|
|
Land
|
|
|
3,043
|
|
|
|
3,043
|
|
Building
|
|
|
309
|
|
|
|
309
|
|
Assets retirement obligations – environmental remediation
|
|
|
6,496
|
|
|
|
6,496
|
|
Capitalized direct development cost
|
|
|
2,713
|
|
|
|
2,713
|
|
Construction in progress (Fintech Village)
|
|
|
12,561
|
|
|
|
12,561
|
|
Property and Equipment, net
|
|
$
|
12,916
|
|
|
$
|
12,939
|
|
The Company recorded depreciation expense
of $31,536 and $16,609, which is included in its operating expense, for the three months ended March 31, 2020 and 2019, respectively.
Global Headquarters for Technology and
Innovation in Connecticut (“Fintech Village”)
The Company recorded asset retirement obligations
for environmental remediation matters in connection with the acquisition of Fintech Village. The following table summarizes the
activity in the asset retirement obligation for the three months ended March 31, 2020 (in thousands):
|
|
January 1,
2020
|
|
|
Liabilities
Incurred
|
|
|
Remediation
Performed
|
|
|
Accretion
Expense
|
|
|
Revisions
|
|
|
March 31,
2020
|
|
Asset retirement obligation
|
|
$
|
5,094
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $2.7 million as of March 31, 2020 and December 31, 2019, respectively, and are primarily related to legal and architect costs.
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 (in thousands):
Balance as of January 1, 2019
|
|
$
|
705
|
|
Acquisitions
|
|
|
22,639
|
|
Balance as of December 31, 2019
|
|
|
23,344
|
|
Measurement period adjustments
|
|
|
(12,513
|
)
|
Effect of change in foreign currency exchange rates
|
|
|
(42
|
)
|
Balance as of March 31, 2020
|
|
$
|
10,789
|
|
Intangible Assets
The following table summarizes information
regarding amortizing and indefinite lived intangible assets (in thousands):
|
|
March
31, 2020
|
|
|
December
31, 2019
|
|
|
|
Weighted
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software and licenses
|
|
|
-
|
|
|
$
|
97
|
|
|
$
|
(97
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
97
|
|
|
$
|
(97
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
Solid Opinion IP (a)
|
|
|
3.9
|
|
|
|
4,655
|
|
|
|
(1,009
|
)
|
|
|
-
|
|
|
|
3,646
|
|
|
|
4,655
|
|
|
|
(776
|
)
|
|
|
-
|
|
|
|
3,879
|
|
Fintalk intangible assets (b)
|
|
|
-
|
|
|
|
635
|
|
|
|
(635
|
)
|
|
|
-
|
|
|
|
|
|
|
|
635
|
|
|
|
(635
|
)
|
|
|
-
|
|
|
|
-
|
|
Influencer network (c)
|
|
|
8.4
|
|
|
|
1,980
|
|
|
|
(314
|
)
|
|
|
-
|
|
|
|
1,666
|
|
|
|
1,980
|
|
|
|
(264
|
)
|
|
|
-
|
|
|
|
1,716
|
|
Customer contract (c)
|
|
|
1.4
|
|
|
|
500
|
|
|
|
(264
|
)
|
|
|
-
|
|
|
|
236
|
|
|
|
500
|
|
|
|
(222
|
)
|
|
|
-
|
|
|
|
278
|
|
Continuing membership agreement (d)
|
|
|
19.3
|
|
|
|
8,255
|
|
|
|
(310
|
)
|
|
|
-
|
|
|
|
7,945
|
|
|
|
8,255
|
|
|
|
(206
|
)
|
|
|
-
|
|
|
|
8,049
|
|
Customer list
|
|
|
2.3
|
|
|
|
59
|
|
|
|
(15
|
)
|
|
|
-
|
|
|
|
44
|
|
|
|
59
|
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
49
|
|
Trade name (c)
|
|
|
13.4
|
|
|
|
110
|
|
|
|
(12
|
)
|
|
|
-
|
|
|
|
98
|
|
|
|
110
|
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
100
|
|
Technology platform (c)
|
|
|
5.4
|
|
|
|
290
|
|
|
|
(66
|
)
|
|
|
-
|
|
|
|
224
|
|
|
|
290
|
|
|
|
(55
|
)
|
|
|
-
|
|
|
|
235
|
|
Land use rights (e)
|
|
|
99
|
|
|
|
25,739
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,739
|
|
|
|
27,079
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27,079
|
|
Marketing and distribution
agreement (e)
|
|
|
20
|
|
|
|
11,944
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,944
|
|
|
|
11,333
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,333
|
|
Total
|
|
|
|
|
|
|
54,264
|
|
|
|
(2,722
|
)
|
|
|
-
|
|
|
|
51,542
|
|
|
|
54,993
|
|
|
|
(2,275
|
)
|
|
|
-
|
|
|
|
52,718
|
|
Indefinite lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Website name
|
|
|
|
|
|
|
25
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25
|
|
|
|
25
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25
|
|
Patent
|
|
|
|
|
|
|
28
|
|
|
|
-
|
|
|
|
-
|
|
|
|
28
|
|
|
|
28
|
|
|
|
-
|
|
|
|
-
|
|
|
|
28
|
|
Total
|
|
|
|
|
|
$
|
54,317
|
|
|
$
|
(2,722
|
)
|
|
$
|
-
|
|
|
$
|
51,595
|
|
|
$
|
55,046
|
|
|
$
|
(2,275
|
)
|
|
$
|
-
|
|
|
$
|
52,771
|
|
(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 were released in April 2020.
|
(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).
|
(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. In connection with the completion of acquisition accounting, the Company revised the estimated useful life of the marketing and distribution agreement from 5 to 20 years. As amortization of this agreement has not commenced, the revision of the estimated useful life had no effect on the consolidated financial statements. Refer to Note 6(a) for additional information.
|
Amortization expense relating to intangible
assets was $0.4 million and $0.2 million for the three months ended March 31, 2020 and 2019, respectively.
The following table summarizes the expected
amortization expense for the following years (in thousands):
|
|
Amortization
to be
|
|
Years ending December 31,
|
|
recognized
|
|
|
|
|
|
2020 (excluding the three months ended March 31, 2020)
|
|
$
|
1,761
|
|
2021
|
|
|
2,578
|
|
2022
|
|
|
2,457
|
|
2023
|
|
|
2,448
|
|
2024
|
|
|
1,672
|
|
2025 and thereafter
|
|
|
40,626
|
|
Total
|
|
$
|
51,542
|
|
The above table assumes that the amortization
commences on the Land use rights and Marketing and distribution agreement on July 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 Company’s
long-term investments (in thousands):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Non-marketable equity investments
|
|
$
|
5,967
|
|
|
$
|
5,967
|
|
Equity method investments
|
|
|
16,651
|
|
|
|
16,654
|
|
Total
|
|
$
|
22,618
|
|
|
$
|
22,621
|
|
Non-marketable equity investment
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, no impairment losses were recorded in the three months ended March 31, 2020 and 2019.
In the three months ended March 31, 2019,
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 14(b) for additional information.
Equity method investments
The following table summarizes the Company’s
investment in companies accounted for using the equity method of accounting (in thousands):
|
|
|
|
March 31, 2020
|
|
|
|
|
|
January 1, 2020
|
|
|
Addition
|
|
|
Income (loss)
on
investment
|
|
|
Impairment losses
|
|
|
Disposal
|
|
|
Foreign
currency
translation
adjustments
|
|
|
March 31,
2020
|
|
BDCG
|
|
(a)
|
|
$
|
9,800
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9,800
|
|
Glory
|
|
(b)
|
|
|
6,854
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,851
|
|
Total
|
|
|
|
$
|
16,654
|
|
|
$
|
-
|
|
|
$
|
(3
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
16,651
|
|
All the investments above are privately
held companies; therefore, quoted market prices are not available. The Company has received no dividends from equity method investees
in the three months ended March 31, 2020 and 2019.
|
(a)
|
BBD Digital Capital Group Ltd. (“BDCG”)
|
In 2018, the Company signed a joint venture
agreement, with two unrelated parties, to establish BDCG located in the United States for providing block chain services for financial
or energy industries by utilizing artificial intelligence and big data technology in the United States. On April 24, 2018, the
Company acquired 20.0% equity ownership in BDCG from one noncontrolling party for total consideration of $9.8 million which consisted
of $2.0 million in cash and $7.8 million paid in the form of the Company’s capital stock (valued at $2.60 per share and equal
to 3.0 million shares of the Company’s common stock), increasing the Company’s ownership to 60.0%. The remaining 40.0%
of BDCG are held by Seasail Ventures Limited (“Seasail.”) The accounting treatment of the joint venture is based on
the equity method due to variable substantive participating rights (in accordance with ASC 810) granted to Seasail. The new entity
is currently in the process of ramping up its operations. Intelligenta has yet to record revenue or earnings or losses, and therefore
its statement of operations and balance sheet data are not material.
As of March 31, 2020, the excess of the
Company’s investment over its proportionate share of Intelligenta’s net assets was $9.8 million. The difference represents
goodwill and is not being amortized.
|
(b)
|
Glory Connection Sdn. Bhd (“Glory”)
|
On July 18, 2019, the Company entered into
an acquisition agreement to purchase a 34.0% interest in Glory, a Malaysian company, from its shareholder Beijing Financial Holding
Limited, a Hong Kong registered company, for the consideration of 12.2 million restricted common shares of the Company, initially
representing $24.4 million at $2.00 per share, the contract price, and subsequently revised to $20.0 million at $1.64 per share,
the closing price on the date of acquisition. As part of this transaction, the Company was also granted an option to purchase a
40.0% interest in Bigfair Holdings Limited (“Bigfair”) from its shareholder Beijing Financial Holding Limited for an
exercise price of $13.2 million in the form of common shares of the Company. Bigfair currently holds a 51.0% ownership stake in
Glory. The option is exercisable from July 18, 2020 to July 19, 2021. If the option is exercised, the Company would have 20.4%
indirect ownership in Glory in addition to the 34.0% direct ownership it already has.
Upon the initial investment, the Company
performed a valuation analysis and allocated $23.0 million and $1.4 million of the consideration transferred to the equity method
investment and the call option, respectively, which was subsequently revised to $20.0 million and $0, respectively. Glory is currently
in the process of ramping up its operations.
As initially contemplated, Glory, through
its subsidiary Tree Manufacturing, would hold a domestic EV manufacturing license in Malaysia, a marketing and distribution agreement
for EVs in the ASEAN region, as well as the land use rights for 250 acres of vacant land zoned for industrial development in the
Begeng Industrial Area adjacent to Kuantan Port. Kuantan is the capital city of the state of Pahang on the east coast of Peninsular
Malaysia, which was to be the site of the manufacturing operations.
In December 2019, the Company acquired
a 51.0% ownership interest in Tree Technologies. Tree Technologies had previously been granted the land use rights to the 250 acres
of vacant land mentioned above, which was previously anticipated would be owned by Glory. As Glory would no longer receive the
land use rights to the 250 acres of vacant land, the Company evaluated its investment in Glory for impairment, and recorded an
impairment loss of $13.1 million in “Impairment of and equity in loss of equity method investees” in the consolidated
statements of operations in the year ended December 31, 2019.
Tree Technologies has also entered into
a product supply arrangement and a product distribution arrangement with a subsidiary of Glory. The Company performed an assessment
of these arrangements, and determined that Glory is a variable interest entity, but that the Company is not the prime beneficiary.
As of March 31, 2020, the Company accounts for Glory as an equity method investment.
The Company has advanced $0.4 million to
Glory in order to fund its operations, although it had no obligation to do so. The Company’s maximum exposure to Glory is
$7.3 million, the sum of its investment and advances.
As of March 31, 2020, the excess of the
Company’s investment over its proportionate share of Glory’s net assets was $7.1 million. The difference primarily
represents an amortizing intangible asset.
The following table summarizes the income statement information
of Glory for the three months ended March 31, 2020 (in thousands):
|
|
|
|
Revenue
|
|
$
|
1
|
|
Gross profit
|
|
|
(3
|
)
|
Net loss from operations
|
|
|
(10
|
)
|
Net loss
|
|
|
(9
|
)
|
Net loss attributable to Glory
|
|
|
(5
|
)
|
Note
11. Leases
As of March 31, 2020, the Company’s operating lease right
of use assets and operating lease liabilities are $6.1 million and $7.3 million, respectively. The weighted-average remaining lease
term is 5.8 years and the weighted-average discount rate is 7.5%.
As of December 31, 2019, the Company’s operating right
of use assets and operating lease liabilities were $6.9 million and $7.3 million, respectively. As of March 31, 2019, the weighted-average
remaining lease term was 3.8 years and the weighted-average discount rate was 7.25%.
The following table summarizes the components of lease expense
(in thousands):
|
|
Three Months Ended
|
|
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
Operating lease cost
|
|
$
|
487
|
|
|
$
|
602
|
|
Short-term lease cost
|
|
|
85
|
|
|
|
15
|
|
Sublease income
|
|
|
(32
|
)
|
|
|
-
|
|
Total
|
|
$
|
540
|
|
|
$
|
617
|
|
The following table summarizes supplemental information related
to leases (in thousands):
|
|
Three Months Ended
|
|
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
553
|
|
|
$
|
259
|
|
Right of use assets obtained in exchange for new operating lease liabilities
|
|
|
322
|
|
|
|
-
|
|
The following table summarizes the maturity of operating lease
liabilities (in thousands):
|
|
Leased Property
|
|
Years ending December 31
|
|
Costs
|
|
2020
|
|
$
|
1,345
|
|
2021
|
|
|
1,435
|
|
2022
|
|
|
1,423
|
|
2023
|
|
|
1,474
|
|
2024
|
|
|
1,504
|
|
2025 and thereafter
|
|
|
1,874
|
|
Total lease payments
|
|
|
9,055
|
|
Less: Interest
|
|
|
(1,756
|
)
|
Total
|
|
$
|
7,299
|
|
In the three months ended March 31, 2020
the Company ceased to use the premises underlying one lease and vacated the real estate. As a result, the Company recorded an
impairment loss related to the right of use asset of $0.9 million. In the three months ending June 30, 2020, the Company completed
negotiations with the landlord to settle the remaining operating lease liability of $0.9 million by issuing a promissory note
for $0.1 million, bearing an annual interest rate of 4.0%, and which is due and payable on December 31, 2020. The Company will
record a gain of $0.8 million for the extinguishment of the operating lease liability in the three months ending June 30, 2020.
The above table summarizing the maturity
of operating lease liabilities does not encompass the settlement of the above mentioned lease liability as it had not been completed
as of March 31, 2020.
Note
12. Promissory Notes
The following table summarizes the outstanding promissory notes
as of March 31, 2020 and December 31, 2019 (dollars in thousands):
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
Interest
Rate
|
|
Principal
Amount
|
|
|
Carrying
Amount*
|
|
|
Principal
Amount
|
|
|
Carrying
Amount*
|
|
|
Maturity Date
|
Convertible Note-Mr. McMahon (Note 14 (a))
|
|
4.0%
|
|
$
|
3,000
|
|
|
$
|
3,290
|
|
|
$
|
3,000
|
|
|
$
|
3,260
|
|
|
December 31, 2022
|
Convertible Note -SSSIG (Note 14 (a))
|
|
4.0%
|
|
|
1,252
|
|
|
|
1,313
|
|
|
|
1,252
|
|
|
|
1,301
|
|
|
February 8, 2020, in process of renewal
|
Convertible Note-SSSIG (Note 14 (a))
|
|
4.0%
|
|
|
250
|
|
|
|
253
|
|
|
|
250
|
|
|
|
250
|
|
|
November 25 2020
|
Convertible Note-Advantech (a)
|
|
8.0%
|
|
|
12,000
|
|
|
|
5,120
|
|
|
|
12,000
|
|
|
|
3,193
|
|
|
June 28, 2021
|
Senior Secured Convertible Note (b)
|
|
10.0%
|
|
|
850
|
|
|
|
542
|
|
|
|
850
|
|
|
|
348
|
|
|
August 22, 2020
|
Senior Secured Convertible Note (c)
|
|
10.0%
|
|
|
3,580
|
|
|
|
2,250
|
|
|
|
3,580
|
|
|
|
1,896
|
|
|
March 27, 2021
|
Senior Secured Convertible Note (d)
|
|
4.0%
|
|
|
5,000
|
|
|
|
3,223
|
|
|
|
3,000
|
|
|
|
1,405
|
|
|
December 2020
|
Promissory Note (e)
|
|
6.0%
|
|
|
3,000
|
|
|
|
3,045
|
|
|
|
3,000
|
|
|
|
3,000
|
|
|
November 25, 2020
|
Total
|
|
|
|
$
|
28,932
|
|
|
|
19,036
|
|
|
$
|
26,932
|
|
|
|
14,653
|
|
|
|
Less: Current portion
|
|
|
|
|
|
|
|
|
10,626
|
|
|
|
|
|
|
|
8,013
|
|
|
|
Long-term Note, less current portion
|
|
|
|
|
|
|
|
$
|
8,410
|
|
|
|
|
|
|
$
|
6,640
|
|
|
|
*Carrying amount includes the accrued interest.
The following table summarizes future maturities of long-term
debt, contractual obligations for interest, as well as projected interest expense resulting from the amortization of debt discounts
as of March 31, 2020 (in thousands):
|
|
Principal
|
|
|
Interest
|
|
2020
|
|
$
|
9,100
|
|
|
$
|
9,658
|
|
2021
|
|
|
19,832
|
|
|
|
4,415
|
|
Total
|
|
$
|
28,932
|
|
|
$
|
14,073
|
|
As of March 31, 2020 and December 31, 2019,
the Company was in compliance with all ratios and covenants.
(a) $12.0 Million Convertible Note - Advantech
On June 28, 2018, the Company entered into
a convertible note purchase agreement with Advantech Capital Investment II Limited (“Advantech”) in the aggregate principal
amount of $12.0 million (the “Advantech Note.”) The Advantech Note bears interest at a rate of 8.0% and matures on
June 28, 2021, and is convertible into the shares of the Company’s common stock at a stated conversion price, subject to
adjustment if subsequent equity shares have a lower conversion price (“down round provision.”) The stated conversion
price was initially $1.82 per share, which was subsequently reset to $1.00 in October 2019 due to the down round provision and
subsequent equity issuances at $1.00.
The Company received aggregate gross proceeds
of $12.0 million, net of $34,133 for the issuance expenses paid by Advantech.
Down Round Price Adjustment on October
30, 2019
As a result of the additional financing on October 30, 2019,
the conversion price of the Advantech Note was reduced from $1.82 to $1.00. The initial difference between the conversion price
and the fair value of the common stock on the commitment date resulted in a beneficial conversion feature (“BCF”) recorded
of $1.4 million and increased by $10.6 million due to the down round provision adjustment in October 2019.
For the three months ended March 31, 2020
and 2019, total interest expense recognized was $1.9 million and $0.4 million, respectively. The carrying amounts as of March 31,
2020 and December 31, 2019 are reflected net of discounts of $8.6 million and $10.2 million, respectively, associated with the
BCF of the Advantech Note. This amount is being amortized based on the effective interest method through the first demand redemption
date as applicable.
The agreement also requires the Company
to comply with certain covenants, including restrictions on the use of the proceeds and other conditions of the convertible note
offering.
(b) $2.05 Million Senior Secured Convertible Debenture
due in August 2020 - ID Venturas 7
On February 22, 2019, the Company executed
a security purchase agreement with ID Venturas 7, LLC (“IDV”), whereby the Company issued $2.1 million of senior secured
convertible note (“February IDV Note”). The February IDV Note bears interest at a rate of 10.0% per year payable either
in cash or in kind at the option of the Company on a quarterly basis and matures on August 22, 2020. In addition, IDV is entitled
to the following: (1) the convertible note is senior secured; (2) convertible at an adjusted $1.00 (original $1.84) per share of
Company common stock at the option of IDV, subject to adjustments if subsequent equity shares have a lower conversion price, (3)
1.2 million shares of common stock of the Company; and (4) a warrant exercisable for 1.6 million shares of common stock which the
February IDV Note is convertible into at an exercise price of $1.00 (original $1.84) per share and will expire in 7 years, which
was extended from 5 years.
The Company received aggregate gross proceeds
of $2.0 million, net of $50,000 for the issuance expenses paid by IDV. Total funds received were allocated to the February IDV
Note, common shares and warrants based on their relative fair values in accordance with ASC 470, Debt (“ASC 470.”)
The fair value of the February IDV Note and common shares was based on the closing price of the Company’s common stock on
February 22, 2019. The fair value of the warrants was determined using the Black-Scholes option-pricing model, with the following
assumptions: expected life of 5 years, expected dividend rate of 0%, volatility of 111.83% and an interest rate of 2.48%.
The fair value of the warrants was recorded as additional paid-in capital and a corresponding discount on the carrying amount of
the February IDV Note. The Company recognized a BCF of $0.6 million as an increase in additional paid-in capital and corresponding
discount on the carrying amount of the February IDV Note, which was the fair value of the common shares at the commitment date
for the February IDV Note, less the effective conversion price.
Interest on the February IDV Note is payable
quarterly starting from April 1, 2019. The February IDV Note is redeemable at the option of the Company in whole at an initial
redemption price of the principal amount of the February IDV Note plus additional warrants and accrued and unpaid interest to the
date of redemption.
The Company is also subject to penalty
fee at 8.0% per annum for late payments of interests and compensation for the loss of IDV on failure to timely deliver conversion
shares upon conversion.
The security purchase agreement contains
customary representations, warranties and covenants. The February IDV Note was collateralized by the Company’s equity interest
in Grapevine and the Company had the right to request the removal of the guarantee and collateral by the issuance of additional
250,000 shares of common stock.
Modification/Extinguishment
On September 27, 2019, the Company issued
250,000 shares of common stock to IDV in exchange for the release of Grapevine as collateral. The issuance of the common shares
in exchange for the removal of collateral was treated as a modification of the February IDV Note pursuant to the guidance of ASC
470. The Company concluded that the February IDV Note qualified for debt extinguishment as the 10.0% cash flow test was met. As
a result, the carrying amount of $0.8 million of the February IDV Note was written off and the amended note was recorded at its
fair value of $1.7 million. The Company recognized a non-cash loss on extinguishment of debt in the amount of $1.2 million and
the intrinsic value of reacquisition of BCF is zero as of September 27, 2019.
Down Round Price Adjustment on October
30, 2019
As a result of the additional financing
on October 30, 2019, the Company entered into a letter agreement with IDV pursuant to which the Company agreed to reduce the conversion
price of the February IDV Note and the exercise price of the warrants from $1.84 to $1.00. The Company recognized $1.4 million
of remeasured BCF as an increase in additional paid-in capital and a corresponding discount on the carrying amount of the February
IDV Note and $0.2 million of deemed dividend on warrant repricing for the difference between the fair value of the unadjusted warrants
and adjusted warrants. The fair value of the adjusted warrants was determined using the Black-Scholes option-pricing model based
on the following assumptions: expected life of 5 years, expected dividend rate of 0%, volatility of 112.0%, and an interest rate
of 2.48%. This resulted in a BCF of $1.4 million.
Conversion
During the three months ended December
31, 2019, $1.2 million of the February IDV Note, plus interest, were converted into 1.2 million shares of common stock of the Company.
As a result of the conversions, the Company recognized interest expense of $1.0 million with a corresponding adjustment to debt
discount.
The discounts on the February IDV Note
for the warrants and BCF are being amortized to interest expense, using the effective interest method, over the term of the February
IDV Note. As of March 31, 2020, and December 31, 2019, the carrying amount is reflected net of discounts of $0.3 million and $0.5
million, respectively. Total interest expense recognized was $0.2 million and $0.3 million for the three months ended March 31,
2020 and 2019, respectively.
(c) $3.58 Million Senior Secured Convertible Debenture
due in March 2021 - ID Venturas 7
On September 27, 2019, the Company executed
a security purchase agreement with IDV (“IDV September Agreement”), whereby the Company issued $2.5 million of senior
secured convertible note in September (“September IDV Note”) and issued an additional $1.1 million of secured convertible
notes subsequently based on additional investment rights in the IDV September Agreement. The September IDV Notes bear interest
at a rate of 10.0% per year payable either in cash or in kind at the option of the Company on a quarterly basis and mature on
March 27, 2021. In addition, IDV is entitled to the following: (1) the convertible note is senior secured; (2) convertible at
an adjusted $1.00 (original $1.84) per share of Company common stock at the option of IDV, subject to adjustments if subsequent
equity shares have a lower conversion price, (3) 1.5 million shares of common stock of the Company, and (4) a warrant exercisable
for 4.7 million shares of common stock at an exercise price of $1.00 (original $1.84) per share and will expire in 7 years, which
was extended from 5 years.
The Company received net proceeds of $3.5
million (aggregate gross proceeds of $3.6 million, net of $65,000 for the issuance expenses paid to IDV). Total gross proceeds
were allocated to the September IDV Note, common shares and warrants based on their relative fair values in accordance with ASC
470. The fair value of the September IDV Note and common shares was based on the closing price of the common stock on September
27, 2019. The fair value of the warrants was determined using the Black-Scholes option-pricing model, with the following assumptions:
expected life of 5 years, expected dividend rate of 0%, volatility of 122.44% and an average interest rate of 1.66%. The
fair value of the warrants was recorded as additional paid-in capital and corresponding discount on the carrying amount of the
September IDV Note. The Company recognized a BCF as a discount on September IDV Note at its intrinsic value, which was the fair
value of the common shares at the commitment date, less the effective conversion price. The Company recognized $1.3 million of
BCF in total as an increase in additional paid-in capital and corresponding discount on the carrying amount of the September IDV
Note.
The September IDV Note is redeemable at
the option of the Company in whole at an initial redemption price of the principal amount of the September IDV Note plus additional
warrants and accrued and unpaid interest to the date of redemption.
The security purchase agreement contains
customary representations, warranties and covenants. The September IDV Note is collateralized by the Company’s equity interest
in DBOT.
The Company is also subject to penalty
fee at 8.0% per annum for late payments of interests and compensation for the loss of IDV on failure to timely deliver conversion
shares upon conversion.
Down Round Price Adjustment on October
30, 2019
On October 29, 2019 the Company entered
into a letter agreement with IDV pursuant to which the Company agreed to reduce the conversion price of the debentures and the
exercise price of the warrants from $1.84 to $1.00 for the February IDV Note and the September IDV Note due to the lower conversion
price and exercise price agreed in the additional issuance in October, 2019. The Company recognized $0.2 million of remeasured
BCF as an increase in additional paid-in capital and corresponding discount on the carrying amount of the September IDV Note and
$0.1 million of deemed dividend on warrant repricing for the difference between the fair value of the unadjusted warrants and adjusted
warrants.
The discount on the September IDV Note
for the warrants and BCF are being amortized to interest expense, using the effective interest method, over the term of the September
IDV Note. As of March 31, 2020 and December 31, 2019, the carrying amount is reflected net of discounts of $1.4 million and $1.8
million, respectively. Total interest expense recognized was $0.4 million for the three months ended March 31, 2020.
Additional Issuance for No Additional
Consideration - Consent of IDV for Subsequent Financing with YA II PN
On December 19, 2019, the Company executed
an additional issuance agreement with IDV, pursuant to which the Company obtained a consent from IDV for subsequent financing with
YA II PN in exchange for: (1) 2.0 million shares of the Company’s common stock; (2) the warrant to purchase 1.0 million shares
of the Company’s common stock at an exercise price of $1.00 with a 7 year term in the form of prior warrants issued to IDV;
and (3) a 2 year extension of the exercise period for all outstanding warrants held by IDV.
The additional issuance above and the exercise
period extension in exchange for the consent was treated as a modification of the September IDV Note pursuant to the guidance of
ASC 470. The Company concluded that the September IDV Note qualified for debt extinguishment as the 10.0% cash flow test was met.
As a result, the carrying amount of $0.4 million of the September IDV Note was written off and the amended note was recorded at
its fair value of $2.2 million along with a BCF at intrinsic value of $0.5 million. The Company measured and recognized the intrinsic
value of the BCF at its reacquisition price $0.5 million on December 19, 2019 and recognized a non-cash loss on extinguishment
of debt in the amount of $2.7 million in accordance with ASC 470. In addition, the Company recognized a deemed dividend of $0.5
million for the extension of exercise period for all applicable warrants issued to IDV.
(d) $5.0 Million Senior Secured Convertible Debenture
due in December 2020 - YA II PN
On December 19, 2019, the Company completed
the initial closing with respect to a securities purchase agreement with YA II PN, Ltd, a company incorporated under the laws of
the Cayman Islands (“YA II PN”), where YA II PN has agreed to purchase from the Company up to $5.0 million (with 4%
discount) in units consisting of secured convertible debentures (the “Convertible Debentures”), which shall be convertible
into shares of the Company’s common stock at lower of: (1) $1.50 per share, or (2) 90% of the lowest 10 day volume weighted
average price (“VWAP”) with a floor price at $1.00, subject to adjustments if subsequent equity shares have a lower
conversion price, and shares of the Company’s common stock. The purchase and sale of the units shall take place in three
closings:
|
1.
|
First Closing: $2.0 million of Convertible Debentures and 1.4 million shares of common stock closed on December 19, 2019;
|
|
2.
|
Second Closing $1.0 million of Convertible Debentures and 0.7 million shares of common stock closed on December 31, 2019 upon filing the registration statement; and
|
|
3.
|
Third Closing: $2.0 million of Convertible Debentures and 1.4 million shares of common stock closed on February 13, 2020 when such registration statement was declared effective by the SEC.
|
The Convertible Note matures in December
2020 and accrues interest at an 4.0% interest rate. YA II PN also received: (1) a warrant (the “Warrant I”) exercisable
for 1.7 million shares of common stock at $1.50 with an expiration date 60 months from the date of the agreement, and (2) a warrant
(the “Warrant II”) exercisable for 1.0 million shares of common stock at $1.00 with an expiration date of 12 months
from the date of the agreement.
The Company received aggregate gross proceeds
of $2.9 million (net of $0.1 million discount) as of December 31, 2019 and received $2.0 million in February 2020. Total funds
received were allocated to the Convertible Debentures, common shares and warrants based on their relative fair values in accordance
with ASC 470. The fair value of the Convertible Debentures and common shares was based on the closing price of the common stock
on December 19, 2019. The fair value of the warrants was determined using the Black-Scholes option-pricing model, with the following
assumptions: expected life of 5 years (1 year for Warrant II), expected dividend rate of 0%, volatility of 122.44% and an interest
rate of 1.66% (1.54% for Warrant II). The fair value of the warrants was recorded as additional paid-in capital and a corresponding
discount on the carrying amount of the Convertible Debentures. There was no BCF because its intrinsic value is zero since the stock
price of the common shares at the commitment date for the Convertible Debentures is greater than the effective conversion price.
The Convertible Debentures are redeemable
at the option of the Company in whole or in part at an initial redemption price of the principal amount of the Convertible Debentures
plus a redemption premium equal to 15% of the amount being redeemed and accrued and unpaid interest to the date of redemption.
The security purchase agreement contains customary representations, warranties and covenants.
The discounts on the Convertible Debentures
for the warrants and BCF are being amortized to interest expense, using the effective interest method, over the term of the Convertible
Debentures. As of March 31, 2020 and December 31, 2019, the carrying amount is reflected net of discounts of $1.8 million and $1.6
million, respectively. Total interest expense recognized was $0.5 million for the three months ended March 31, 2020.
(e) $3.0 Million Promissory Note due in November
2020 – New Castle County
On November 25, 2015, DBOT, the subsidiary
which the Company acquired in 2019, entered into a promissory note with New Castle County, a political subdivision of the State
of Delaware in the aggregate principal amount of $3.0 million (the “New Castle County Notes”). The New Castle County
Notes bear interest at a rate of 6.0%, and mature on November 25, 2020. For the three months ended March 31, 2020, the Company
recorded interest expense of $45,000 related to the Note. The agreement also requires the Company to comply with certain covenants,
including restrictions on new indebtedness offering and liens.
Note 13. Stockholders’ Equity, Convertible Preferred Stock and Redeemable Non-controlling
Interest
Convertible Preferred Stock
The Board of Directors has authorized 50.0
million shares of convertible preferred stock, $0.001 par value, issuable in series. As of March 31, 2020 and December 31, 2019,
7.0 million shares of Series A preferred stock were issued and outstanding. The Series A preferred stock shall be entitled to one
vote per common stock on an as-converted basis and is only entitled to receive dividends when and if declared by the Board.
Redeemable Non-controlling Interest
The Company and Qingdao Chengyang Xinyang
Investment Company Limited (“Qingdao”) formed a joint venture Qingdao Chengyang Mobo New Energy Vehicle Sales Service
Company Limited (“JV”). Qingdao entered into a capital subscription agreement for a total of RMB 200.0 million ($28.0
million), and made the first capital contribution of RMB 50.0 million in the three months ended March 31, 2020. The remaining
RMB 150.0 million ($21.0 million) are payable in three installments of RMB 50.0 million ($7.0 million) upon the JV attaining certain
revenue or market value benchmarks.
The investment agreement stipulates that
the JV must pay Qingdao dividends at the rate of 6.0%. After one year, Qingdao may sell its investment to an institutional investor,
and after three years may redeem its investment for the face amount plus 6.0% interest less dividends paid. The redemption feature
is neither mandatory nor certain. Due to the redemption feature, the Company has classified the investment outside of permanent
equity.
The following table summarizes activity
for the redeemable non-controlling interest for the three months ended March 31, 2020 (in thousands):
|
|
|
|
January 1, 2020
|
|
$
|
-
|
|
Initial investment
|
|
|
7,047
|
|
Accretion of dividend
|
|
|
106
|
|
Loss attributable to non-controlling interest
|
|
|
(80
|
)
|
Adjustment to redemption value
|
|
|
80
|
|
March 31, 2020
|
|
$
|
7,153
|
|
Common Stock
The Board of Directors has authorized 1,500
million shares of common stock, $0.001 par value.
2020 Equity Transactions
Refer to Note 12 for information related
to issuance of commons stock with convertible notes, Note 15 for information related to the issuance to common stock for warrant
exercise, and Note 6(c) for the information related to the issuance of common stock for DBOT contingent consideration.
2019 Equity Transactions
Refer to Note 9 for information related
to the issuance of common stock for assets and Note 12 for information related to the issuance of common stock in connection with
convertible notes, and Note 6 for information related to the issuance of common stock for acquisitions.
On March 5, 2019 the Company entered into
an agreement to acquire a company based in Malaysia, and placed 25.5 million common shares into an escrow account. The agreement
was terminated in July 2019 and the common shares removed from escrow.
Note
14. Related Party Transactions
$3.0 Million Convertible Note with
Mr. Shane McMahon (“Mr. McMahon”)
On May 10, 2012, Mr. McMahon, the Company’s Vice Chairman,
made a loan to the Company in the amount of $3.0 million. In consideration for the loan, the Company issued a convertible note
to Mr. McMahon in the aggregate principal amount of $3.0 million (the “Note ”) at a 4.0% interest rate computed
on the basis of a 365-day year. The Company entered several amendments with respect to the effective conversion price (changed
from $1.75 to $1.50), convertible stocks (changed from of Series E Preferred Stock to Common Stock). The last amendment was made
on May 9, 2020, and extended the maturity date to December 31, 2022.
The accumulated interest payable as of
March 31, 2020 and December 31, 2019 was $0.3 million and $0.3 million, respectively. For the three months ended March 31, 2020
and 2019, the Company recorded interest expense of $29,918 and $29,589 related to the Note. The Company did not pay such interest
to Mr. McMahon in the three months ended March 31, 2020 and 2019.
$2.5 Million Convertible Promissory
Note with SSSIG
On February 8, 2019, the Company entered
into a convertible promissory note agreement with SSSIG, an affiliate of Dr. Wu, in the aggregate principal amount of $2.5 million.
The convertible promissory note bears interest at a rate of 4.0%, was scheduled to mature on February 8, 2020, and is convertible
into shares of the Company’s common stock at a conversion price of $1.83 per share anytime at the option of SSSIG. The Company
is in the process of negotiating an extended due date, and believes it has the ability to do so.
As of March 31, 2020, the Company received
$1.3 million from SSSIG. The Company has not received the remaining $1.2 million as of the date of this report. For the three
months ended March 31, 2020 and 2019, the Company recorded interest expense of $12,489 and $10,617, respectively, related to the
Note. The Company has not paid the interest on this note.
$1.0 Million Convertible Promissory
Note with SSSIG
On November 25, 2019, the Company entered
into a convertible promissory note agreement with SSSIG, an affiliate of Dr. Wu, in the aggregate principal amount of $1.0 million.
The convertible promissory note bears interest at a rate of 4.0%, matures on November 25, 2021, and is convertible into the shares
of the Company’s common stock at a conversion price of $1.25 per share anytime at the option of SSSIG. As of March 31, 2020,
the Company received $0.25 million from SSSIG. For the three months ended March 31, 2020, the Company recorded interest expense
of $3,493. The Company has not paid the interest on this note.
(b) Transactions with GTD
Disposal of Assets in exchange of
GTB
In March 2019, the Company completed the
sale of the following assets (with total carrying amount of $20.4 million) to GTD, a minority shareholder based in Singapore, in
exchange for 1.3 million GTB. The Company considers the arrangement as a nonmonetary transaction and the fair values of GTB are
not reasonably determinable due to the reasons described below. Therefore, GTB received are recorded at the carrying amount of
the assets exchanged and the Company did not recognize any gain or loss based on ASC 845, Nonmonetary Transactions.
|
·
|
License content (net carrying amount $17.0 million)
|
|
·
|
13% ownership interest in Nanjing Shengyi Network Technology
Co., Ltd (“Topsgame”)
(carrying amount of $3.2 million which was included in long-term
investment as a non-marketable equity investment)
|
|
·
|
Animation copy right (net carrying amount $0.2 million which was included in intangible assets.)
|
Digital asset management services
The Company recognized revenue for the
master plan development services over the contract period based on the progress of the services provided towards completed satisfaction.
Based on ASC 606, Revenue from Contracts with Customers, at contract inception, the Company considered the following factors
to estimate the value of GTB (noncash consideration): 1) it only trades in one exchange, which operations have been less than
one year; 2) its historical volatility is high; and 3) the Company’s intention at the time to hold the majority of GTB,
as part of its digital asset management services; and 4) associated risks related to holding GTB. Therefore, the value of 7.1
million GTB using Level 2 measurement was $40.7 million with a 76% discount to the fixed contract price agreed upon by both parties
when signing the contract. The Company considered similar assets exchanges in Singapore and considered the volatility of the quoted
prices and determined a discount of 76%. The estimated value of GTB is calculated using the Black-Scholes valuation model using
the following assumptions: expected terms 3.0 years; volatility 155%; dividend yield: zero and risk-free interest rate 2.25%.
As of December 31, 2019, all performance obligations associated with the development of the master plan for GTD’s assets
had been satisfied. Accordingly, the Company recognized revenue of $40.7 million in the year ended December 31, 2019.
Impairment loss
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.
(c) Severance payments
On February 20, 2019, the Company accepted
the resignation of former Chief Executive Officer, former Chief Investment Officer and former Chief Strategy Officer and agreed
to pay $0.8 million in total for salary, severance and expenses. The Company paid $0.6 million in the first quarter of 2019 and
recorded $0.2 million in “Other current liabilities” on its consolidated balance sheet as of December 31, 2019. The
$0.8 million severance expenses were recorded in “Selling, general and administrative expenses” in the consolidated
statements of operations.
(d) Borrowing from Dr. Wu. and his affiliates
In the three months ended March 31, 2020,
the Company’s net borrowings from Dr. Wu and his affiliates decreased by $2.5 million due to repayments. The Company recorded
these borrowings in “Amount due to related parties” in its consolidated balance sheet as of March 31, 2020. These borrowings
bear no interest.
(e) Long Term Investment to
Qianxi
In November 2019, the Company entered
into a share transfer agreement with Sichuan Shenma Zhixing Technology Co.(“Shenma”) to acquire its 1.72% ownership
in Qianxi with the consideration of $4.9 million, which will be paid in six installments. Shenma needs to complete the share transfer
registration prior to May 31, 2020, otherwise it will return the investment payment to the Company. The Company has recorded the
first installment $0.5 million on the “Other Non-Current Assets” since the share transfer registration is not completed
yet.
(f) Borrowing from Beijing Financial Holdings Limited
The Company recorded the borrowings of $0.4 million in “Amount
due to related parties” in its consolidated balance sheet as of March 31, 2020, and $0.7 million in “Other current
liabilities” in its consolidated balance sheet as of December 31, 2019. Effective January 1, 2020, Beijing Financials Holding
limited is considered a related party because MHTL is intended to act as a trustee over 10,000 common shares of MEG to effect a
share-based compensation plan and has the same owner of Beijing Financial Holdings Limited.
Note
15. Share-Based Compensation
As of March 31, 2020, the Company had 13.3 million options,
0.1 million restricted shares and 8.0 million warrants outstanding.
The Company awards common stock and stock
options to employees and directors as compensation for their services, and accounts for its stock option awards to employees
and directors pursuant to the provisions of ASC 718, Stock Compensation. The fair value of each option award is estimated
on the date of grant using the Black-Scholes Merton valuation model. The Company recognizes the fair value of each option as compensation
expense ratably using the straight-line attribution method over the service period, which is generally the vesting period.
Effective as of December 3, 2010 and amended
on August 3, 2018, the Company’s Board of Directors approved the 2010 Stock Incentive Plan (“the 2010 Plan”)
pursuant to which options or other similar securities may be granted. As of March 31, 2020, the maximum aggregate number of shares
of common stock that may be issued under the 2010 Plan increased from 4.0 million shares to 31.5 million shares. As of March 31,
2020, options available for issuance are 15.8 million shares.
For the three months ended March 31, 2020
and 2019, total share-based payments expense was $2.2 million and $0.2 million, respectively.
The following table summarizes stock option
activity for the three months ended March 31, 2020:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregated
|
|
|
|
Options
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Outstanding
|
|
|
Price
|
|
|
Life (Years)
|
|
|
Value
|
|
Outstanding at January 1, 2020
|
|
|
14,936,726
|
|
|
$
|
2.13
|
|
|
|
8.48
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
(711,583
|
)
|
|
|
1.95
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(897,917
|
)
|
|
|
1.98
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at March 31, 2020
|
|
|
13,327,226
|
|
|
|
2.15
|
|
|
|
8.17
|
|
|
|
-
|
|
Vested and expected to be vested as of March 31, 2020
|
|
|
13,327,226
|
|
|
|
2.15
|
|
|
|
8.17
|
|
|
|
-
|
|
Options exercisable at March 31, 2020 (vested)
|
|
|
7,930,354
|
|
|
|
2.26
|
|
|
|
7.67
|
|
|
|
-
|
|
As of March 31, 2020, $8.1 million
of total unrecognized compensation expense related to non-vested share options is expected to be recognized over a weighted average
period of 0.9 years. The total fair value of shares vested in the three months ended March 31, 2020 and 2019 was $2.2 million
and $6,312, respectively. Cash received from options exercised in the three months ended March 31, 2020 and 2019 $0
and $0, respectively.
There were no options granted in the three
months ended March 31, 2020.
In
connection with certain of the Company’s financings and service agreements, the Company issued warrants to service providers
to purchase common stock of the Company. The warrants issued to Warner Brother were expired without exercise on January 31, 2019.
The Company issued warrants to IDV and YA II PN, Ltd. in connection with senior secured convertible notes and the
weighted average exercise price was $1.10 and the weighted average remaining life was 6 years. Refer to Note 12 for additional
information on promissory notes.
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
Outstanding and
|
|
|
Outstanding and
|
|
|
Exercise
|
|
|
Expiration
|
Warrants Outstanding
|
|
Exercisable
|
|
|
Exercisable
|
|
|
Price
|
|
|
Date
|
$2.05 million IDV
|
|
|
1,671,196
|
|
|
|
1,671,196
|
|
|
$
|
1.00
|
|
|
2/22/2026
|
$3.58 million IDV
|
|
|
4,658,043
|
|
|
|
4,658,043
|
|
|
|
1.00
|
|
|
9/27/2026
|
$5.0 million YA II PN
|
|
|
1,666,667
|
|
|
|
1,666,667
|
|
|
|
1.50
|
|
|
12/13/2024
|
$5.0 million YA II PN *
|
|
|
-
|
|
|
|
1,000,000
|
|
|
|
1.00
|
|
|
|
|
|
|
7,995,906
|
|
|
|
8,995,906
|
|
|
|
|
|
|
|
*YA II PN exercised 1,000,000 warrants on March 31, 2020 and
the Company received $1.0 million proceeds.
The following table summarizes
the unvested restricted shares is as follows:
|
|
|
|
|
Weighted-average
|
|
|
|
Shares
|
|
|
fair value
|
|
Non-vested restricted shares outstanding at January 1, 2020
|
|
|
55,086
|
|
|
$
|
2.38
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
Non-vested restricted shares outstanding at March 31, 2020
|
|
|
55,086
|
|
|
|
2.38
|
|
As of March 31, 2020, there was $0 of unrecognized compensation
cost related to unvested restricted shares.
Note
16. Earnings (Loss) Per Common Share
The following table summarizes the Company’s
earnings (loss) per share for the three months ended March 31, 2020 and 2019 (USD in thousands, except per share amounts):
|
|
Three Months Ended
|
|
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
Net earnings (loss) attributable to common stockholders
|
|
$
|
(12,348
|
)
|
|
$
|
19,927
|
|
Interest expense attributable to convertible promissory notes
|
|
|
-
|
|
|
|
738
|
|
Net earnings (loss) assuming dilution
|
|
$
|
(12,348
|
)
|
|
$
|
20,665
|
|
Basic weighted average common shares outstanding
|
|
|
157,859,642
|
|
|
|
105,345,673
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
Convertible preferred shares- Series A
|
|
|
-
|
|
|
|
933,333
|
|
Convertible promissory notes
|
|
|
-
|
|
|
|
10,022,230
|
|
Diluted potential common shares
|
|
|
157,859,642
|
|
|
|
116,301,236
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.08
|
)
|
|
$
|
0.19
|
|
Diluted
|
|
$
|
(0.08
|
)
|
|
$
|
0.18
|
|
Basic earnings (loss) per common share
attributable to the Company’s shareholders is calculated by dividing the net loss attributable to the Company’s shareholders
by the weighted average number of outstanding common shares during the period.
Diluted earnings (loss) per share is calculated
by taking net loss, divided by the diluted weighted average common shares outstanding. Diluted net loss per share equals basic
net loss per share because the effect of securities convertible into common shares is anti-dilutive.
The following table includes the number
of shares that may be dilutive potential common shares in the future. The holders of these shares do not have a contractual obligation
to share in the Company’s losses and thus these shares were not included in the computation of diluted loss per share because
the effect was antidilutive. (in thousands)
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Warrants
|
|
|
7,996
|
|
|
|
8,996
|
|
Options and RSUs
|
|
|
13,382
|
|
|
|
14,938
|
|
Series A Preferred Stock
|
|
|
933
|
|
|
|
933
|
|
DBOT contingent shares
|
|
|
818
|
|
|
|
8,501
|
|
Convertible promissory note and interest
|
|
|
24,218
|
|
|
|
21,678
|
|
Total
|
|
|
47,347
|
|
|
|
55,046
|
|
Note
17. Income Taxes
As of March 31, 2020, the Company had $88.2
million of the U.S domestic cumulative tax loss carryforwards and $29.7 million of the foreign cumulative tax loss carryforwards,
which may be available to reduce future income tax liabilities in certain jurisdictions. No U.S. tax loss carry forwards expire
after 2017 based on new tax law. These PRC tax loss carryforwards will expire beginning year 2020 to year 2024.
During the three months ended March 31,
2020 income tax expense is nil because of net operating loss and deferred tax assets related to the net operating loss carryovers
utilized had been offset by a valuation allowance. Company had established a 100% valuation allowance against its net deferred
tax assets due to its history of pre-tax losses and the likelihood that the deferred tax assets will not be realized.
During the three months ended March 31,
2019, the Company recorded an income tax benefit of $0.1 million which consisted of a $4.7 million expense related to current operations
and a $4.8 million benefit from a reduction in the beginning of the year deferred tax valuation allowance. This resulted in an
effective tax rate of (1%). The effective tax rate for the three months ended March 31, 2019 differs from the U.S. statutory tax
rate primarily due to the effect of taxes on foreign earnings, non-deductible expenses and the reduction in the beginning of the
year deferred tax valuation allowance.
There was no identified unrecognized tax
benefit as of March 31, 2020 and December 31, 2019.
Note
18. Commitments and Contingencies
Lawsuits and Legal Proceedings
From time to time, the Company may become
involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject
to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm the business.
Shareholder Class Action
On July 19, 2019, a purported class action,
captioned Jose Pinto Claro Da Fonseca Miranda v. Ideanomics, Inc., was filed in the United States District Court for the Southern
District of New York against the Company and certain of its current and former officers. While the Company believes that the Class
Action is without merit and plans to vigorously defend itself against these claims, there can be no assurance that the Company
will prevail in the lawsuits. The Company cannot currently estimate the possible loss or range of losses, if any, that it may experience
in connection with these litigations.
Note
19. Concentration, Credit and Other Risks
The EV industry is relatively new in China,
and the PRC government has not adopted a clear regulatory framework to regulate the industry. Therefore, there is some degree of
uncertainty regarding the regulatory requirements of the PRC government in the EV industry. If the PRC government enacts new laws
and regulations, or adopt new interpretations or policies with respect to the current laws and regulations, that require licenses
or permits for the operation of the Company’s existing or future businesses, the Company cannot ensure that it has all the
permits or licenses required for its EV business or that the Company will be able to obtain or maintain permits or licenses in
a timely manner.
(b)
|
Concentration of Credit Risks
|
Financial instruments that potentially
subject the Company to significant concentration of credit risk primarily consist of cash and accounts receivable. As of March
31, 2020, and December 31, 2019, the Company’s cash was held by financial institutions (located in the PRC, Hong Kong, the
United States, Malaysia and Singapore) that management believes have acceptable credit. Accounts receivable are typically unsecured.
The risk with respect to accounts receivable is mitigated by regular credit evaluations that the Company performs on its distribution
partners and its ongoing monitoring of outstanding balances.
(c)
|
Foreign Currency Risks
|
A majority of the Company’s operating
transactions are denominated in RMB and a significant portion of the Company’s assets and liabilities is denominated in RMB.
RMB is not freely convertible into foreign currencies. The value of the RMB is subject to changes in the central government policies
and to international economic and political developments. In the PRC, certain foreign exchange transactions are required by laws
to be transacted only by authorized financial institutions at exchange rates set by the People’s Bank of China (“PBOC”).
Remittances in currencies other than RMB by the Company in China must be processed through PBOC or other China foreign exchange
regulatory bodies which require certain supporting documentation in order to complete the remittance.
Cash consist of cash on hand and demand
deposits at banks, which are unrestricted as to withdrawal.
Time deposits, which mature within one
year as of the balance sheet date, represent interest-bearing certificates of deposit with an initial term of greater than three
months when purchased. Time deposits which mature over one year as of the balance sheet date are included in non-current assets.
Note
20. Fair Value Measurement
The following table summarizes information
about the Company’s financial instruments measured at fair value on a recurring basis, grouped into Level 1 to 3 based on
the degree to which the input to fair value is observable (in thousands):
|
|
March 31, 2020
|
|
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
|
Total
|
|
Acquisition earn-out liability1
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,096
|
|
|
$
|
1,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
1 This represents the liability
incurred in connection with the acquisition of DBOT shares during the third quarter of 2019 and as subsequently remeasured as
of March 31, 2020 as disclosed in Note 6(c).
The fair value of the acquisition earn-out
liability as of March 31, 2020 and December 31, 2019 was valued using the Black-Scholes Merton method.
The following table summarizes the significant
inputs and assumptions used in the model :
|
|
March
31, 2020
|
|
|
December
31, 2019
|
|
Risk-free interest rate
|
|
|
0.1
|
%
|
|
|
1.6
|
%
|
Expected volatility
|
|
|
30
|
%
|
|
|
30
|
%
|
Expected term
|
|
|
0.08 years
|
|
|
|
0.25 years
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
The significant unobservable inputs used
in the fair value measurement of the acquisition earn-out liability includes the risk-free interest rate, expected volatility,
expected term and expected dividend yield. Significant increases or decreases in any of those inputs in isolation would result
in a significantly different fair value measurement.
The following table summarizes the reconciliation
of Level 3 fair value measurements (in thousands):
|
|
Acquisition Earn-out Liability
|
|
January 1, 2020
|
|
$
|
7,311
|
|
Settlement
|
|
|
(6,747
|
)
|
Remeasurement (loss)/gain recognized in the income statement
|
|
|
532
|
|
March 31, 2020
|
|
$
|
1,096
|
|
The acquisition of Tree Technologies also resulted in an acquisition
earn-out liability, initially recorded as $17.3 million and subsequently revised to $15.5 million upon the completion of acquisition
accounting. As the business case upon which the acquisition earn-out liability was determined assumes that manufacturing and distribution
commences in July, 2020, as of yet there have been no changes in conditions which would cause the remeasurement of this liability.
Refer to Note 6(a) for additional information.
Note
21. Subsequent Events
Standby Equity Distribution Agreement
On April 3, 2020, the Company entered into
a Standby Equity Distribution Agreement (the “SEDA”) with YA II PN, Ltd., (“YA”). Pursuant to the SEDA,
the Company will be able to sell up to $50.0 million of its common stock at the Company’s request any time during the 36
months following the date of the SEDA’s entrance into force. The shares would be purchased at 90% of the market price, which
is defined as the lowest daily volume weighted average price of the Company’s common stock during the 5 consecutive trading
days commencing on the trading day immediately following the Company’s delivery of an advance notice to YA, and would be
subject to certain limitations, including that YA could not purchase any shares that would result in it owning more than 4.99%
of the Company’s common stock.
Pursuant to the SEDA, the Company shall
use the net proceeds from any sale of the shares for working capital purposes, including the repayment of outstanding debt. There
are no other restrictions on future financing transactions. The SEDA does not contain any right of first refusal, participation
rights, penalties or liquidated damages. The Company did not pay any additional amounts to reimburse or otherwise compensate YA
in connection with the transaction, except for a commitment fee equivalent to 1.0 million shares of Ideanomics’ common stock
to be issued and offered to a subsidiary of YA, and which shares are also registered pursuant to the Company’s effective
shelf registration statement on Form S-3, File No. 333- 237251.
Small Business Association Paycheck
Protection Program
On April 10, 2020 the Company borrowed
$0.3 million at an annual rate of 1.0% from a commercial bank through the Small Business Association Paycheck Protection Program.
The loan is payable in 18 installments of $18,993 commencing on November 10, 2020, with a final payment due on April 10, 2022.
The Company may apply for forgiveness of this loan in an amount equal to the sum of the following costs incurred in the eight
weeks following the disbursement of the loan: (1) payroll costs, (2) interest on a covered mortgage obligation, (3) payment on
a covered rent obligation, and (4) any covered utility payment.
On May 1, 2020 Grapevine borrowed $0.1
million at an annual rate of 1.0% from a commercial bank through the Small Business Association Paycheck Protection Program. The
loan is payable in 18 installments of approximately $7,000 commencing on December 1, 2020, with a final payment due on May 1,
2022. The Company may apply for forgiveness of this loan in an amount equal to the sum of the following costs incurred in the
eight weeks following the disbursement of the loan: (1) payroll costs, (2) interest on a covered mortgage obligation, (3) payment
on a covered rent obligation, and (4) any covered utility payment.
Cautionary Note Regarding Forward Looking Statements
This Form 10-Q contains “forward-looking”
statements that involve risks and uncertainties. You can identify these statements by the use of forward-looking words such as
"may", "will", "expect", "anticipate", "estimate", "believe", "continue",
or other similar words. You should read statements that contain these words carefully because they discuss the Company’s
future expectations, contain projections of the Company’s future results of operations or financial condition or state other
"forward-looking" information. The Company believes that it is important to communicate its future expectations to its
investors. However, these forward-looking statements are not guarantees of future performance and actual results may differ materially
from the expectations that are expressed, implied or forecasted in any such forward-looking statements. There may be events in
the future that we are unable to accurately predict or control, including weather conditions and other natural disasters which
may affect demand for the Company’s products, and the product-development and marketing efforts of its competitors. Examples
of these events are more fully described in the Company’s 2019 Form 10-K under Part I. Item 1A. Risk Factors.
Unless required by law, the Company undertakes
no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
However, readers should carefully review the reports and documents the Company files from time to time with the SEC, particularly
its Quarterly Reports on Form 10-Q, Annual Report on Form 10-K, Current Reports on Form 8-K and all amendments to those reports.