PART
I
MICT
was formed as a Delaware corporation on January 31, 2002. On March 14, 2013, the Company changed its corporate name from Lapis
Technologies, Inc. to Micronet Enertec Technologies, Inc. On July 13, 2018, following the sale of its former subsidiary Enertec
Systems Ltd., the Company changed its name from Micronet Enertec Technologies, Inc. to MICT, Inc. The Company’s shares have
been listed for trade on the Nasdaq Capital Market, or Nasdaq, since April 29, 2013.
The
Company’s business relates to its ownership interest in Micronet, a former consolidated subsidiary, formed and based in
Israel, in which the Company previously held a majority ownership interest that has since been diluted to a minority ownership
interest.
As
of December 31, 2018, the Company held 49.89% of Micronet’s issued and outstanding shares, and together with an irrevocable
proxy in our benefit from Mr. David Lucatz, the Company’s President and Chief Executive Officer, the Company held 50.07%
of the voting interest in Micronet as of such date. On February 24, 2019, Micronet closed a public equity offering on the Tel
Aviv Stock Exchange, or the TASE. As a result of Micronet’s offering, our ownership interest in Micronet was diluted from
49.89% to 33.88%. On February 24, 2019, Mr. Lucatz, executed a new irrevocable proxy, or the Micronet Proxy, assigning his voting
power over 1,980,000 shares of Micronet for our benefit. As a result, the Company’s voting interest in Micronet stood at
39.53% of the issued and outstanding shares of Micronet as of such date. The decrease in the Company’s voting interest in
Micronet resulted in the deconsolidation of Micronet’s operating results from our financial statements as of February 24,
2019. Therefore, commencing from February 24, 2019, the Company has accounted for the investment in Micronet in accordance with
the equity method. As a result of the deconsolidation, the Company recognized a net gain of approximately $299,000 in February
2019.
On
September 5, 2019, Micronet closed a public equity offering on the TASE. As a result, our ownership interest in Micronet was diluted
from 33.88% to 30.48%, and our current voting interest in Micronet stands at 37.79% of the issued and outstanding shares of Micronet,
Micronet
operates in the growing commercial Mobile Resource Management, or MRM, market and video analytics device market. Micronet through
both its Israeli and U.S. operational offices, designs, develops, manufactures and sells rugged mobile computing devices that
provide fleet operators and field workforces with computing solutions in challenging work environments. Micronet’s vehicle
portable tablets increase workforce productivity and enhance corporate efficiency by offering computing power and communication
capabilities that provide fleet operators with visibility into vehicle location, fuel usage, speed and mileage. Furthermore, users
are able to manage the drivers in various aspects, such as: driver behavior, driver identification, reporting hours worked, customer/organization
working procedures and protocols, route management and navigation based on tasks and time schedule. End users may also receive
real time messages for various services such as pickup and delivery, repair and maintenance, status reports, alerts, notices relating
to the start and ending of work, digital forms, issuing and printing of invoices and payments. Through its SmartHub product, Micronet
provides its consumers with services such as driver recognition, identifying and preventing driver fatigue, recognizing driver
behavior, preventive maintenance, fuel efficiency and an advanced driver assistance system. In addition, Micronet provides third
party telematics service providers, or TSPs, a platform to offer services such as “Hours of Service.” Micronet previously
commenced and continues to evaluate integration with other TSPs.
Micronet
is currently entering the video analytics device market by developing an all in-one video telematics device known as Micronet
SmartCam. Micronet SmartCam technologically is based on the powerful flexible Android platform, is expected to be a ruggedized,
integrated, and ready-to-go smart camera supporting complete telematics features designed for in-vehicle use. Coupled with vehicle-connected
interfaces, state of the art diagnostic capabilities, and two cameras, it offers video analytics and telematics services, addressing
safety, vehicle health, and tracking needs of commercial fleets. We believe that Micronet SmartCam provides a versatile, advanced,
and affordable mobile computing platform for a variety of fleet management and video analytics solutions. The powerful computing
platform, coupled with the Android 9 operating system, allows the company customers to run their applications or pick and choose
a set of applications and services from Micronet marketplace. Micronet’s customers consist primarily of application service
providers, or ASPs, and solution providers specializing in the MRM market. These companies sell Micronet’s products as part
of their MRM systems and solutions. Currently, Micronet does not sell directly to end users. Micronet customers are generally
MRM solution and service providers, ASP providers in the transportation market, including long haul, local fleets’ student
transportation (yellow busses) and fleet and field management systems for construction and heavy equipment. Micronet products
are used by customers worldwide.
Micronet
operates and conducts its business in the U.S. market through Micronet Inc., a wholly owned subsidiary located in Utah. The Micronet
U.S.-based business, operations and facilities include a logistics warehouse and distribution center, and technical service and
support infrastructure as well as sales and marketing capabilities which allow Micronet to continue expansion into the U.S. market
while support its existing U.S.-based customers with further accessibility and presence to local fleets and local MRM service
providers.
Acquisition
Agreement with BNN Technology PLC
On
December 18, 2018, we, GFH, GFH Merger Subsidiary, Inc., a Delaware corporation and a wholly-owned subsidiary of GFH, or Merger
Sub, BNN, Brookfield Interactive (Hong Kong) Limited, a Hong Kong company and a subsidiary of BNN, or BI China, ParagonEx LTD,
a British Virgin Islands company, or ParagonEx, certain holders of ParagonEx’s outstanding ordinary shares and a trustee
thereof, and Mark Gershinson, in the capacity as the representative of the ParagonEx sellers, entered into an Acquisition Agreement,
or the Acquisition Agreement, pursuant to which, among other things, subject to the satisfaction or waiver of the conditions set
forth in the Acquisition Agreement, Merger Sub would merge with and into the Company, as a result of which each outstanding share
of the Company’s common stock and warrant to purchase the same would be cancelled in exchange for the right of the holders
thereof to receive 0.93 substantially equivalent securities of GFH, after which GFH would acquire (i) all of the issued and outstanding
securities of BI China in exchange for newly issued ordinary shares of GFH and (ii) all of the issued and outstanding ordinary
shares of ParagonEx for a combination of cash in the amount equal to approximately $25 million (the majority of which was raised
in a private placement by GFH), unsecured promissory notes and newly issued ordinary shares of GFH, or collectively, the Transactions.
In
furtherance of the Transactions, and upon the terms and subject to the conditions described in the Acquisition Agreement, BNN
agreed to commence a tender offer, or the Offer, as promptly as practicable and no event later than 15 business days after the
execution of the Acquisition Agreement, to purchase up to approximately 20% of the outstanding shares of the Company’s common
stock at a price per share of $1.65, net to the sellers in cash, without interest, or the Offer Price. On March 13, 2019, the
deadline for the Offer was extended to April 8, 2019. Additionally, following the Transactions, it was contemplated that the certain
of our operating business assets, including our interest in Micronet, would be spun off to our stockholders who continue to retain
shares of our common stock after the Offer. Subject to the terms and conditions of the Acquisition Agreement, and assuming that
none of the shares of our common stock are purchased by BNN in connection with the Offer, our stockholders would own approximately
5.27% of GFH after giving effect to the transactions contemplated by the Acquisition Agreement.
On
May 31, 2019, we terminated the spin-off of Micronet and in June 2019, the Offer was terminated. Effective November 7, 2019, we,
BNN, BI China and ParagonEx, or the Parties, entered into a mutual Termination Agreement, or the Termination Agreement, pursuant
to which the parties agreed to terminate the Acquisition Agreement, effective immediately.
Merger
Agreement with GFH
On
November 7, 2019, we and GFH Intermediate Holdings Ltd., a British Virgin Islands company, or Intermediate, a wholly owned subsidiary
of GFH and MICT Merger Subsidiary Inc., a to-be-formed British Virgin Islands company and a wholly owned subsidiary of MICT, or
Merger Sub, shall upon execution of a joinder, enter into an Agreement and Plan of Merger, or the Merger Agreement, pursuant to
which, among other things, subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement, Merger Sub
will merge with and into Intermediate, with Intermediate continuing as the surviving entity, and each outstanding share of Intermediate’s
common stock shall be cancelled in exchange for the right of the holders thereof to receive a substantially equivalent security
of MICT, or collectively, the Acquisition. GFH will receive an aggregate of 109,946,914 shares of MICT common stock as merger
consideration in the Acquisition.
Concurrent
with the execution of the Merger Agreement, Intermediate entered into (i) a share exchange agreement with Beijing Brookfield Interactive
Science & Technology Co. Ltd., an enterprise formed under the laws of the Peoples Republic of China, or Beijing Brookfield),
pursuant to which Intermediate will acquire all of the issued and outstanding ordinary shares and other equity interest of Beijing
Brookfield from the shareholders of Beijing Brookfield in exchange for 16,310,759 newly issued shares of GFH and (ii) a share
exchange agreement with ParagonEx, shareholders of ParagoneEx specified therein, or the ParagonEx Sellers, and Mark Gershinson,
pursuant to which, the ParagonEx Sellers will transfer to Intermediate all of the issued and outstanding securities of ParagonEx
in exchange for Intermediate’s payment and delivery of $10.0 million in cash, which is to be paid upon the closing of the
Acquisition, and 75,132,504 newly issued shares of GFH deliverable at the closing of the share exchange.
After
giving effect to the Acquisition, the conversion of the Convertible Debentures (as defined below) and the conversion or exercise
of the securities issued by MICT pursuant to the Offering of Series A Convertible Preferred Stock and Warrants and the Offering
of Convertible Note and Warrants, each as defined and further discussed below, it is expected that MICT will have approximately
$15.0 million of cash as well as ownership of ParagonEx and Beijing Brookfield and that MICT’s current stockholders will
own approximately 11,089,532 shares, or 7.64%, of the 145,130,577 shares of MICT’s issued and outstanding common stock.
Consummation
of the transactions contemplated by the Merger Agreement is subject to certain closing conditions, including, among other things,
approval by the stockholders of MICT and receipt of a fairness opinion indicating that the transactions contemplated by the Merger
Agreement are fair to the stockholders of MICT. The Merger Agreement contains certain termination rights for the Company and Intermediate.
The Merger Agreement also contains customary representations, warranties and covenants made by, among others, MICT, Intermediate
and Merger Sub, including as to the conduct of their respective businesses (as applicable) between the date of signing the Merger
Agreement and the closing of the transactions contemplated thereby.
The
Merger Agreement provides that all options to purchase shares of the Company’s common stock that are outstanding and unexercised
shall be accelerated in full effective as of immediately prior to the effective time of the Acquisition. The options shall survive
the closing of the Acquisition for a period of 15 months from the date of the closing of the Acquisition and all equity incentive
plans of the Company shall remain in effect.
Consummation
of the Merger Agreement is subject to various conditions, including the following mutual conditions of the parties unless
waived: (i) the approval of the Merger Agreement by the requisite vote of MICT’s stockholders; (ii) expiration of the
applicable waiting period under any antitrust laws, including the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended; (iii) receipt of requisite regulatory approval, (iv) receipt of required consents and provision of required notices
to third parties, (v) no law or order preventing or prohibiting the Merger or the other transactions contemplated by the
Merger Agreement or the closing of the Merger Agreement; (vi) no restraining order or injunction preventing the Merger or the
other transactions contemplated by the Merger Agreement; (vii) appointment or election of the members of the post-closing
MICT board of directors as agreed, and (viii) the filing of the definitive proxy statement with the Securities and Exchange
Commission, or the SEC.
In
addition, prior to the consummation of the Merger, if the Merger Agreement is terminated after the closing of the Beijing Brookfield
Acquisition or the ParagonEx Acquisition, as the case may be, or if the Acquisition does not close by the outside date set forth in
the Merger Agreement, the transactions contemplated by the Beijing Brookfield Share Exchange Agreement and the ParagonEx Share
Exchange Agreement, may be unwound. In the event of an unwinding of such acquisitions, GFH will return the Beijing Brookfield
shares to BI Interactive and the ParagonEx shares to the Paragon Ex Sellers and in turn BI Interactive and the ParagonEx Sellers
will return the shares of Global Fintech received in the applicable share exchange.
Voting
Agreement. In connection with the execution and delivery of the Merger Agreement, D. L Capital, or DLC, an entity affiliated
with David Lucatz, the President and Chief Executive Officer of MICT, entered into a voting agreement, by and among MICT, GFH
and DLC, or the Voting Agreement, pursuant to which, during the term of such agreement, DLC has agreed to vote all of its capital
shares in MICT in favor of the Merger Agreement, the related ancillary documents and any required amendments to MICT’s organizational
documents, and in favor of all of the transactions in furtherance thereof, and to take certain other actions in support of the
transactions contemplated by the Merger Agreement and will, at every meeting of the stockholders of MICT called for such purpose,
and at every adjournment or postponement thereof (or in any other circumstances upon which a vote, consent or approval is sought,
including by written consent), not vote any of its shares of the common stock at such meeting in favor of, or consent to, and
will vote against and not consent to, the approval of any alternative proposal that is intended, or would reasonably be expected,
to prevent, impede, interfere with, delay or adversely affect in any material respect the transactions contemplated by the Merger
Agreement. The Voting Agreement shall terminate, among other reasons, upon the earlier of the termination of the Merger Agreement
and March 31, 2020.
Offering
of Series A Convertible Preferred Stock and Warrants
On June 4, 2019, we entered into a Securities Purchase Agreement,
or the Preferred Securities Purchase Agreement, with the purchasers named therein, or the Preferred Purchasers, subject to approval
by the Nasdaq Stock Market for as to the eligibility of the transaction, pursuant to which we agreed to sell 3,181,818 shares of
newly designated Series A Convertible Preferred Stock with a stated value of $2.20 per share, or the Preferred Stock. The Preferred
Stock, which shall be convertible into up to 6,363,636 shares of our common stock, shall be sold together with certain common stock
purchase warrants, or the Preferred Warrants, to purchase up to 4,772,727 shares of common stock (representing 75% of the aggregate
number of shares of common stock into which the Preferred Stock shall be convertible), for aggregate gross proceeds of $7 million
to us, or the Preferred Offering. The terms of the Preferred Securities Purchase Agreement were approved by Nasdaq Stock Market
in July 2019 and as a result the company issued the preferred stock along with the warrants.
The Preferred Stock shall be convertible into common stock at
the option of each holder of Preferred Stock at any time and from time to time, at a conversion price of $1.10 per share and shall
also convert automatically upon the occurrence of certain events, including the completion by us of a fundamental transaction.
Commencing on March 31, 2020, cumulative cash dividends shall become payable on the Preferred Stock at the rate per share of 7%
per annum, which rate shall increase to 14% per annum on June 30, 2020. We shall also have the option to redeem some or all of
the Preferred Stock, at any time and from time to time, beginning on December 31, 2019. The holders of Preferred Stock shall vote
together with the holders of common stock as a single class on as-converted basis, and the holders of Preferred Stock holding a
majority-in-interest of the Preferred Stock shall be entitled to appoint an independent director to our board of directors, or
the Preferred Director. The Preferred Securities Purchase Agreement provides for customary registration rights.
The
Preferred Warrants shall have an exercise price of $1.01 (subject to customary adjustment in the event of future stock dividends,
splits and the like), which is above the average price of the common stock during the preceding five trading days of entry into the Preferred Securities Purchase Agreement,
and shall be exercisable immediately, until the earlier of (i) two years from the date of issuance or (ii) the later of (a) 180
days after the closing by the Company of a change of control transaction, or (b) the company’s next debt or equity financing
of at least $20 million.
Offering
of Convertible Note and Warrants
On June 4, 2019, we entered into a Securities Purchase Agreement,
or the Note Purchase Agreement, with BNN, subject to approval by the Nasdaq Stock Market for as to the eligibility of the transaction,
pursuant to which BNN agreed to purchase from us $2 million of convertible notes, which subscription amount shall be subject to
increase by up to an additional $1 million as determined by BNN and us, or collectively, the Convertible Notes. The Convertible
Notes, which shall be convertible into up to 2,727,272 shares of common stock (using the applicable conversion ratio of $1.10 per
share), shall be sold together with certain common stock purchase warrants, or the Note Warrants, to purchase up to 2,727,272 shares
of common stock (representing 100% of the aggregate number of shares of common stock into which the Convertible Notes are convertible),
or the Convertible Note Offering. The Convertible Notes shall have a duration of two years.
The Convertible Notes shall be convertible into common stock
at the option of the Note Purchaser at any time and from time to time, and upon the issuance of one or more Convertible Notes.
Darren Mercer, the Chief Executive Officer of BNN, was appointed to the Company’s board of directors, or the Note Director.
The Note Purchase Agreement provides for customary registration rights. The terms of the note purchase agreement were approved
by Nasdaq Stock Market in July 2019 and as a result the company issued the convertible notes along with the warrants.
The
Note Warrants shall have an exercise price of $1.01 (subject to customary adjustment in the event of future stock dividends, splits
and the like), and shall be exercisable immediately upon receipt of stockholder approval of the Convertible Note Offering, until
the earlier of (i) two years from the date of issuance or (ii) the later of (a) 180 days after the closing by the Company of a
change of control transaction, or (b) the company’s next debt or equity financing of at least $20 million.
On
January 21, 2020, we entered into a Conversion Agreement with BNN, pursuant to which BNN agreed to convert the outstanding Convertible
Notes, issued on July 31, 2019, as part of the initial closing of the Note Purchase Agreement, into 1,818,181 shares of the Company’s
newly-designated Series B Preferred Stock, par value $0.001 per share, with a stated value of $1.10 per share, or the Series B
Preferred, or collectively, the Conversion. In accordance with the Conversion, the Company filed a Certificate of Designation
of Preferences, Rights and Limitations of Series B Preferred with the Secretary of State of the State of Delaware on January 21,
2020 to designate the rights and preferences of up to 1,818,181 shares of Series B Preferred.
Offering
of Secured Convertible Debentures
On
November 7, 2019, we entered into a Securities Purchase Agreement, or the Primary Purchase Agreement, with certain investors
identified therein, or the Primary Purchasers, pursuant to which, among other things, the Primary Purchasers agreed, subject
to the satisfaction or waiver of the conditions set forth in the Primary Purchase Agreement, to purchase from us 5% senior
secured convertible debentures due 2020, or the Primary Convertible Debentures, with an aggregate principal amount of
approximately $15.9 million, or the Primary Convertible Debenture Offering. The proceeds of $15.9 million from the sale of the Primary Convertible
Debentures were funded on January 21, 2020. Concurrently with entry into the Primary
Purchase Agreement, we entered into a separate Securities Purchase Agreement, or the Non-Primary Purchase Agreement and,
together with the Primary Purchase Agreement, the Purchase Agreements, with certain investors identified therein, or the
Non-Primary Purchasers and, together with the Primary Purchasers, the Purchasers, pursuant to which, among other things, the
Non-Primary Purchasers agreed, subject to the satisfaction or waiver of the conditions set forth in the Non-Primary Purchase
Agreement, to purchase from us 5% senior secured convertible debentures due 2020, or the Non-Primary Convertible Debentures,
and, together with the Primary Convertible Debentures, the Convertible Debentures, with an aggregate principal amount of $9.0
million (together with the Primary Convertible Debenture Offering, collectively, the Convertible Debenture Offering. The
Convertible Debentures shall be convertible into our shares of common stock at a conversion price of $1.41 per share. The
Convertible Debentures will be due upon the earlier of (i) six months from the date of issuance and (ii) the termination of
the Merger Agreement. We are obligated to pay interest to the Purchasers on the outstanding principal amount at the rate of
5% per annum, payable quarterly, in cash or, at our option in certain instances, in shares of common stock. We may not
voluntarily prepay any portion of the principal amount of the Convertible Debentures without the prior written consent of the
Purchasers.
Subject
to stockholder approval of an increase in the shares of Common Stock to allow for the full conversion of the Convertible Debentures
into common stock, the Convertible Debentures shall be convertible into common stock at the option of the Purchasers at any time
and from time to time. Upon the closing of the Acquisition and written notice from us to the Purchasers, the Purchasers shall
be forced to convert the Convertible Debentures into our shares of common stock, or the Forced Conversion. Upon the occurrence
of certain events, including, among others, if we fail to file a preliminary proxy statement with respect to the Acquisition on
or prior to November 18, 2019, if the Forced Conversion does not occur on or before January 24, 2020, or certain breaches of the
Primary Purchasers’ Registration Rights Agreement (as defined below), the Primary Purchasers are permitted to require us
to redeem the Primary Convertible Debentures, including any interest that has accrued thereunder, for cash.
The
proceeds of each Convertible Debenture Offering were placed in separate blocked bank accounts, each of which is subject to a blocked
deposit account control agreement that we entered into. We shall not have access to such proceeds until the closing of the Acquisition
and only upon the satisfaction of certain other requirements, including, among other things, effectiveness of the Resale Registration
Statement (as defined below).
The
Purchase Agreements provide for customary registration rights, pursuant to their respective registration rights agreement to be
entered into at the time of the closing of the Convertible Debenture Offering (each, a Registration Rights Agreement. Pursuant
to the Registration Rights Agreements, we are obligated to, among other things, (i) file a registration statement, or the Resale
Registration Statement, with the SEC for purposes of registering the shares of common stock issuable upon the conversion of the
Convertible Debentures and (ii) use its best efforts to cause the Resale Registration Statement to be declared effective by the
SEC as soon as practicable after filing, and in any event no later than the effectiveness of the Acquisition. The Registration
Rights Agreements contains customary terms and conditions for a transaction of this type, including certain customary cash penalties
on us for our failure to satisfy the specified filing and effectiveness time periods.
Micronet
Micronet
currently operates via its Israeli and U.S facilities, the first located in Herzliya, Israel, near Tel Aviv, and the latter located
in Salt Lake City, Utah. Micronet operates in the MRM market as a global developer, manufacturer and provider of mobile computing
platforms, designed for integration into fleet management and mobile workforce management solutions. In addition, Micronet has
also begun to develop, manufacture and provide video analytics devices for use in the MRM market. This all in-one video telematics
device, known as Micronet SmartCam, incorporates third party proprietary software technologically and is based on the powerful
flexible android platform. The Smart Cam is to be a ruggedized, integrated, and ready-to-go smart camera supporting complete telematics
features designed for in-vehicle use. Coupled with vehicle-connected interfaces, state of the art diagnostic capabilities, and
two cameras, it offers video analytics and telematics services, addressing safety, vehicle health, and tracking needs of commercial
fleets
Micronet’s
products and solutions include rugged mobile computing and video telematics devices (tablets, on-board-computers and dash cams)
and are designed, developed and manufactured to provide fleet operators and field workforces with computing solutions design to
face challenging work environments, such as extreme temperatures, repeated vibrations or dirty and wet or dusty conditions.
Micronet
conducts its sales and support activities mainly through its U.S.-based facilities. Micronet’s customers include leading
international MRM solution and service providers as well as certain Value Added Resellers, or VARs. Micronet maintains an in-house
research and development staff and operates an ISO 9001-2008 certified manufacturing facilities.
Micronet’s
products are targeted for the use in a wide range of MRM industry sectors, which mainly includes:
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haulage
and distribution, which includes short- and long- haul trucking and distribution servicing of urban retail and wholesale needs,
such as delivery of packages, parts and similar items;
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public
transportation, which refers mainly to buses, para-transit, taxis and limousine services;
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construction,
which refers to vehicle fleets that are involved in the construction industry such as cement trucks and heavy equipment; and
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public
safety services, which includes fire departments, ambulances, police and forestry.
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Micronet’s
products are fully programmable based on the android software platform and provide customers with the operational flexibility
to customize such products for their ongoing needs via a comprehensive development tool kit package that enables them to make
certain developments independently and support their own industry-specific applications and solutions.
Micronet’s
key initiatives for future revenue growth include the following:
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expanding
sales activities in the North American and European markets, which will include establishing strong relationships with new
customers and partners;
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offering
a brand new video telematics based solutions integrating among other third party’s software proprietary solutions such
as Micronet SmartCam, which addresses the video analytics segment, a high-growing segment in the telematics
market;
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addressing
the local fleet vertical of the MRM market with tablets that are specifically designed to support sales to local fleets through
multiple value added resellers by offering advanced features at competitive prices;
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supporting
Android OS, to satisfy a wider customer base, enabling independent application programming and integration with various mission
critical automotive system and enterprise-level software solutions;
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upgrading
and enhancing current products and engaging in new product development and launching based on input from clients and partners;
and
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partnering
with major truck manufacturers to develop a built-in, telematics platform.
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We
do not currently have any ongoing business operations relating to the sale, manufacturing, commercialization or research and development
of any products and services and do not have any consolidated subsidiaries with such ongoing business operations. As discussed
above in this Item 1, as of February 24, 2019, we have deconsolidated Micronet’s operating results from our financial statements.
Employees
As
of December 31, 2019, the Company had approximately 6 full-time employees (and as of February 18, 2020, the Company had approximately
6 full-time employees) and Micronet had approximately 38 full-time employees (as of February 18, 2020, Micronet had approximately
37 full-time employees). Of these employees, 10 were employed in manufacturing positions, and the remainder were employed in sales,
research and development, management and administrative positions. Our and Micronet’s employees are not represented by any
collective bargaining agreement, and both we and Micronet have never experienced a work stoppage. Both we and Micronet, to the
best of our knowledge, have good and sustainable relations with our and its employees, respectively. Israeli labor laws and regulations
apply to all employees based in Israel. The laws principally address matters such as paid vacation, paid sick days, length of
the workday, payment for overtime and severance payments upon the retirement or death of an employee or termination of employment
under specified circumstances. The severance payments may be funded, in whole or in part, through a managers’ insurance
fund or a pension fund. The payments to the managers’ insurance fund or pension fund toward severance amount to 8.3% of
wages. Furthermore, Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute
of Israel. Since January 1, 1995, these amounts also include payments for health insurance.
Available
Information
Additional
information about us is contained on our Internet website at www.mict-inc.com. Information on our website is not incorporated
by reference into this report. Under the “IR” section of our website, we make available free of charge our Proxy Statements,
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports
filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as soon
as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our reports filed with the
SEC are also made available on the SEC’s website at www.sec.gov.
Investing
in our securities is highly speculative and involves a high degree of risk. You should carefully consider the following factors
and other information in this Annual Report and our other SEC filings before making a decision to invest in our securities. Additional
risks and uncertainties that we are unaware of may become important factors that affect us. If any of the following events occur,
our business, financial conditions and operating results may be materially and adversely affected. In that event, the trading
price of our common stock and warrants may decline, and you could lose all or part of your investment.
Risks
Related to MICT’s Business and Industry
If
the conditions to the Acquisition are not met, the Acquisition may not occur.
In addition to approval by the stockholders of MICT, specified
conditions must be satisfied or waived to complete the Acquisition. These conditions, described in detail in the Merger Agreement,
include, in addition to shareholder consent and among other requirements: (i) the expiration or termination of any waiting period,
and extension thereof, applicable under any antitrust laws, (ii) receipt or filing of any and all required consents from all applicable
government authorities or third person, (iii) no law or order preventing the transactions by any applicable governmental authority
shall have been issued, enforced or in effect, (iv) no pending litigation to enjoin or restrict the closing, as defined in the
Merger Agreement, by any non-affiliated third-party, (v) the definitive proxy statement shall have been filed with the SEC, (vi)
each party’s representations and warranties are true and correct as of the date of the Merger Agreement and as of the closing
of the Merger Agreement, (vii) each party’s compliance in all material respects with its covenants and agreements to be complied
with or performed on or prior to the closing date of the Acquisition, (viii) no material adverse effect with respect to a party
since the date of the Merger Agreement which remains continuing and uncured, (ix) the effectiveness of the ParagonEx and Beijing
Brookfield Share Exchange Agreements, (x) the appointment of the post-closing board of directors of MICT, (xi) the delivery by
each applicable party of each of the required closing deliveries, (x) the voting agreement and lock-up agreements being in full
force and effect, and (xi) the lack of indebtedness of MICT other than $3,350,000. MICT, ParagonEx and Beijing Brookfield cannot
assure you that all of the conditions will be satisfied. If the conditions are not satisfied or waived, the Acquisition may not
occur, or may be delayed. Such delays may cause MICT, ParagonEx and/or Beijing Brookfield to each lose some or all of the intended
benefits of the Acquisition.
The
Acquisition may not be consummated or may not deliver the anticipated benefits MICT expects.
MICT
is devoting substantially all of its time and resources to consummating the Acquisition; however, there can be no assurance that
such activities will result in the consummation of the Acquisition and the transactions contemplated thereby or that such transaction
will deliver the anticipated benefits or enhance stockholder value. MICT cannot assure you that it will complete the Acquisition
in a timely manner or at all. The Merger Agreement is subject to many closing conditions and termination rights. If the Acquisition
does not occur, the MICT board of directors may elect to attempt to complete an alternative strategic transaction similar to the
Acquisition. Attempting to complete an alternative strategic transaction will be costly and time-consuming, and MICT cannot make
any assurances that a future strategic transaction will occur on terms that provide the same or greater opportunity for potential
value to MICT’s stockholders, or at all. If MICT is unable to close another strategic transaction, the MICT board of directors
may determine to sell or otherwise dispose of MICT’s shares of Micronet, and distribute any remaining cash proceeds to MICT’s
stockholders. In that event, MICT would be required to pay all of its debts and contractual obligations, and to set aside certain
reserves for potential future claims, so MICT would not be able to provide any assurances as to the amount or timing of available
cash or assets available for distribution remaining to distribute to stockholders after paying its obligations and setting aside
funds for reserves.
If
MICT does not successfully consummate the Acquisition, or any other alternative transaction, if any, the MICT board of directors
may decide to pursue a dissolution and liquidation of MICT. In such an event, the amount of cash available for distribution to
MICT’s stockholders will depend heavily on the timing of such liquidation as well as the amount of cash that will need to
be reserved for commitments and contingent liabilities.
There
can be no assurance that MICT can successfully consummate the Acquisition, or any other alternative transaction. If the Acquisition,
or other alternative transaction, is not completed, the MICT board of directors may decide to pursue a dissolution and liquidation
of MICT. In such an event, the amount of cash available for distribution to MICT’s stockholders will depend heavily on the
timing of such decision and, ultimately, such liquidation, because the amount of cash available for distribution continues to
decrease as MICT funds its operations. If the MICT board of directors were to approve and recommend, and MICT’s stockholders
were to approve, a dissolution and liquidation of MICT, MICT would be required under Delaware corporate law to pay MICT’s
outstanding obligations, as well as to make reasonable provision for contingent and unknown obligations, prior to making any distributions
in liquidation to MICT’s stockholders. As a result of this requirement, a portion of MICT’s assets may need to be
reserved pending the resolution of such obligations. In addition, MICT may be subject to litigation or other claims related to
a dissolution and liquidation of MICT. If a dissolution and liquidation were pursued, the MICT board of directors, in consultation
with its advisors, would need to evaluate these matters and make a determination about a reasonable amount to reserve. Accordingly,
holders of MICT common stock could lose all or a significant portion of their investment in the event of a liquidation, dissolution
or winding up of MICT.
MICT
is substantially dependent on its remaining employees to facilitate the consummation of the Acquisition.
MICT’s
ability to successfully complete the Acquisition, or if the Acquisition is not completed, another potential strategic transaction,
depends in large part on its ability to retain certain of its remaining personnel, particularly David Lucatz, MICT’s Chairman
and Chief Executive Officer and Micronet’s President. Despite MICT’s efforts to retain Mr. Lucatz and other key employees,
one or more may terminate their employment on short notice. The loss of the services of any of these employees, and more specifically,
Mr. Lucatz, could potentially harm MICT’s ability to complete the Acquisition, evaluate and pursue strategic alternatives,
as well as fulfill its reporting obligations as a public company.
MICT
is dependent on the services of its executive officers, whose potential conflicts of interest may not permit MICT to effectively
execute its business strategy.
MICT
is currently dependent on the continued services and performance of its executive officers, particularly David Lucatz, MICT’s
Chairman and Chief Executive Officer and Micronet’s Chief Executive Officer and President. Mr. Lucatz also serves as the
President, Chairman and Chief Executive Officer of DLC, the primary asset of which is its ownership of shares
of MICT common stock. In addition, certain members of MICT’s board of directors, particularly, Darren Mercer, the Chief
Executive Officer of BNN, could have a potential conflict in carrying out his duties as a member of our board of directors.
If
Micronet is unable to develop new products and maintain a qualified workforce it may not be able to meet the needs of customers
in the future.
Virtually
all of the products produced and sold by Micronet are highly engineered and require employees with sophisticated manufacturing
and system-integration techniques and capabilities. The markets and industry in which Micronet operates are characterized by rapidly
changing technologies. The products, systems, solutions and needs of Micronet customers change and evolve regularly. Accordingly,
the future performance of Micronet depends on its ability to develop and manufacture competitive products and solutions, and bring
those products to market quickly at cost-effective prices. In addition, because of the highly specialized nature of Micronet’s
business, the hiring and retention of skilled and qualified personnel is necessary to perform the services required by customers.
If Micronet is unable to develop new products that meet customers’ changing needs or successfully attract and retain qualified
personnel, its future revenues and earnings may be adversely affected, and therefore the value of MICT’s equity interest
in Micronet may be adversely affected.
Developing
new technologies entails significant risks and uncertainties that may cause Micronet to incur significant costs and could have
a material adverse effect on its operating results, financial condition, and/or cash flows, and as a result thereof, adversely
affect the value of our equity interest in Micronet.
A
significant portion of Micronet’s business relates to developing sophisticated products and applications. New technologies
may be untested or unproven. In addition, Micronet may incur significant liabilities that are unique to its products and services.
While Micronet maintains insurance for some business risks, there is no guarantee that the insurance policies currently in place,
or as may be added from time to time, will be sufficient to cover all risks or liabilities that may be incurred. Accordingly,
Micronet may be forced to bear substantial costs resulting from risks and uncertainties of its products and products under development,
which could have a material adverse effect on its operating results, financial condition and/or cash flows, and therefore the value of MICT’s equity interest in
Micronet may be adversely affected.
If
Micronet is unable to effectively protect proprietary technology, its business and competitive position may be harmed, which would
have an adverse effect on MICT’s business and financial position.
Micronet’s
success and ability to compete is dependent on its proprietary technology. The steps Micronet has taken to protect its proprietary
rights may not be adequate and Micronet may not be able to prevent others from using its proprietary technology. The methodologies
and proprietary technology that constitute the basis of Micronet’s solutions and products are not protected by patents.
Existing trade secret, copyright and trademark laws and non-disclosure agreements to which Micronet is a party offer only limited
protection. Therefore, others, including Micronet’s competitors, may develop and market similar solutions and products,
copy or reverse engineer elements of Micronet’s production lines, or engage in the unauthorized use of Micronet’s
intellectual property. Any misappropriation of Micronet’s proprietary technology or the development of competitive technology
may have a significant adverse effect on Micronet’s ability to compete and may harm the value of our equity interest in
Micronet.
Substantial
costs as a result of litigation or other proceedings relating to intellectual property rights may be incurred, which would have
an adverse effect on the value of our equity interest in Micronet.
Third
parties may challenge the validity of Micronet’s intellectual property rights or bring claims regarding Micronet’s
infringement of a third party’s intellectual property rights. This may result in costly litigation or other time-consuming
and expensive judicial or administrative proceedings, which could deprive Micronet of valuable rights, cause them to incur substantial
expenses and cause a diversion for technical and management personnel. An adverse determination may subject Micronet to significant
liabilities or require it to seek licenses that may not be available from third parties on commercially favorable terms, if at
all. Further, if such claims are proven valid, through litigation or otherwise, Micronet may be required to pay substantial financial
damages or be required to discontinue or significantly delay the development, marketing, sale or licensing of the affected products
and intellectual property rights. The occurrence of any of the foregoing could have an adverse effect on the value of our equity
interest in Micronet.
Micronet’s
earnings and margins may be negatively impacted if Micronet is unable to perform under its contracts.
When
agreeing to contractual terms, Micronet’s management makes assumptions and projections about future conditions or events.
These projections assess, among other factors:
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the
productivity and availability of labor;
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the
complexity of the work to be performed;
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the
cost and availability of materials;
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the
impact of delayed performance; and
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the
timing of product deliveries.
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If
there is a significant change in one or more of these circumstances or estimates, or if faced with unexpected contract costs,
the profitability of one or more of these contracts may be adversely affected and could affect, among other things,
Micronet’s earnings and margins, and in turn the value of our equity interest in Micronet, due to the fact that
Micronet’s contracts are often made on a fixed-price basis. The occurrence of any of the foregoing could have an
adverse effect on the value of our equity interest in Micronet.
Micronet’s
earnings and margins could be negatively affected by deficient subcontractor performance or the unavailability of raw materials
or components.
Micronet
relies on other companies to provide raw materials, major components and subsystems for its products. Subcontractors perform some
of the services that Micronet provides to its customers. Micronet depends on these subcontractors and vendors to meet contractual
obligations in full compliance with customer requirements. Occasionally, Micronet relies on only one or two sources of supply
that, if disrupted, could have an adverse effect on Micronet’s ability to meet commitments to customers. Micronet’s
ability to perform its obligations as a prime contractor may be adversely affected if one or more of these suppliers is unable
to provide the agreed-upon supplies or perform the agreed-upon services in a timely and cost-effective manner. Further, deficiencies
in the performance of subcontractors and vendors could result in a customer terminating a contract for default. A termination
for default could expose Micronet to liability and adversely affect financial performance and Micronet’s ability to win
new contract, and in turn, adversely affect the value of our equity interest in Micronet.
Micronet
is dependent on major customers for a significant portion of revenues, and therefore, future revenues and earnings could be negatively
impacted by the loss or reduction of the demand for Micronet’s products or services by such customers.
A
significant portion of Micronet’s MRM annual revenues is derived from a few leading customers. As of December 31, 2019,
Micronet’s had three largest customers combined accounted for approximately 74.48% of its revenues.
Most
of Micronet’s major customers do not have any obligation to purchase additional products or services from it. Therefore,
there can be no assurance that any of Micronet’s leading customers will continue to purchase solutions, products or services
at levels comparable to previous years. A substantial loss or reduction in Micronet’s existing programs could adversely
affect its future revenues and earnings and in turn the value of our equity interest in Micronet.
Micronet
operates in a highly competitive and fragmented market and may not be able to maintain a competitive position in the future. Any
such failure to successfully compete could have a material adverse effect on the value of our equity interest in Micronet.
A
number of larger competitors have recently entered the MRM market in which Micronet operates. These large companies have far greater
development and capital resources than Micronet. Further, there are competitors of Micronet that offer solutions, products and
services similar to those offered by Micronet. If they continue, these trends could undermine Micronet’s competitive strength
and position and adversely affect its earnings and financial condition, which could have a material adverse effect on the value
of our equity interest in Micronet.
Micronet
may cease to be eligible for, or receive reduced, tax benefits under Israeli law, which could negatively impact profits in the
future.
Micronet
currently receives certain tax benefits under the Israeli Law Encouragement of Capital Investments of 1959, as a result of the
designation of its production facility as an “Approved Enterprise.” To maintain its eligibility for these tax benefits,
Micronet must continue to meet several conditions including, among others, generating more than 25% of its gross revenues outside
the State of Israel and continuing to qualify as an “Industrial Company” under Israeli tax law. An Industrial Company,
according to the applicable Israeli law (Law for the Encouragement of Industry (Taxes), 1969), is a company that resides in Israel
(either incorporated in Israel or managed and controlled from Israel) that, during the relevant tax year, derives at least 90%
of its income from an Industrial Factory. An Industrial Factory means a factory that is owned by an Industrial Company and where
its manufacturing operations constitute a vast majority of the factory’s total operations/business. The tax benefits of
qualifying as an Industrial Company include a reduction of the corporate tax from 24% for “Regular Entities” and 16%
or 7.5% for “Preferred Enterprises” (depending on the location of industry) in 2019. In addition, in recent years
the Israeli government has reduced the benefits available under this program and has indicated that it may further reduce or eliminate
benefits in the future. There is no assurance that Micronet will continue to qualify for these tax benefits or that such tax benefits
will continue to be available. The termination or reduction of these tax benefits would increase the amount of tax payable by
Micronet and, accordingly, reduce its net profit after tax and negatively impact profits, if any, which may adversely affect the
value of our equity interest in Micronet.
Because
almost all of MICT’s officers and directors are located in non-U.S. jurisdictions, you may have no effective recourse against
management for misconduct.
Currently,
a majority of MICT’s directors and officers are or will be nationals and/or residents of countries other than the United
States, and all or a substantial portion of their assets are located outside the United States. As a result, it may be difficult
for investors to enforce within the United States any judgments obtained against such officers or directors, including judgments
predicated upon the civil liability provisions of the securities laws of the United States or any U.S. state. Additionally, it
may be difficult to enforce civil liabilities under U.S. securities law in original actions instituted in Israel. Israeli courts
may refuse to hear a claim based on a violation of U.S. securities laws because Israel is not the most appropriate forum to bring
such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law
is applicable to hear the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a
fact, which can be a time-consuming and costly process. Certain matters of procedure will also be governed by Israeli law.
Cost
fluctuations in the global hardware and communications market and reducing production costs may have a negative impact on Micronet’s
business and operations, and as a result thereof.
Micronet’s
operations are affected by global hardware prices and communication costs, which are a combined component of the technological
solution offered by Micronet to its customers or end users. Also, in order to continue to compete effectively in the target markets,
Micronet must continue to streamline its production costs and reduce them in order to enable a competitive price for its products.
Micronet must compete among other manufacturers of components and / or products from East Asia including China and India. Micronet’s
ability to streamline the production process depends, among other things, on its ability to integrate production processes in
these areas, as well as to continue to locate target markets and target customers who are interested in purchasing high-end products
that are less sensitive to cost. The occurrence of any of the foregoing could have a negative impact on Micronet’s business
and operations, and as a result thereof, adversely affect the value of our equity interest in Micronet.
Economic
changes in Micronet’s target markets may adversely impact its business, and as a result thereof, adversely affect the
value of our equity interest in Micronet.
Due
to the fact that Micronet’s target markets are mainly located in North America and Europe, the lack of economic stability
in such markets, such as slowdown or changes to the demands for products or services offered by Micronet, may adversely affect
its operations and results, and as a result thereof, adversely affect the value of our equity interest in Micronet.
Micronet’s
financial results may be negatively affected by foreign exchange rate fluctuations.
Micronet’s
revenues are mainly denominated in U.S. Dollars and costs are mainly denominated in New Israeli Shekels (NIS). Where possible,
MICT matches sales and purchases in these and other currencies to achieve a natural hedge. Currently, Micronet does not have a
policy with respect to the use of derivative instruments for hedging purposes, except that Micronet will consider engaging in
such hedging activities on a case by case basis. To the extent MICT is unable to fully match sales and purchases in different
currencies, its business will be exposed to fluctuations in foreign exchange rates.
Cybersecurity
disruptions may impact MICT’s business operations or our efforts to complete the Merger if it becomes a target for such
activities.
MICT
and/or Micronet may be subject to attempted cybersecurity disruptions from a variety of threat actors. If systems for protecting
against cybersecurity disruptions prove to be insufficient, MICT and Micronet, and their customers, employees or third parties
could be adversely affected. Such cybersecurity disruptions could cause physical harm to people or the environment; damage or
destroy assets; compromise business systems; result in proprietary information being altered, lost or stolen; result in employee,
customer or third party information being compromised; or otherwise disrupt business operations. Significant costs to remedy the
effects of such a cybersecurity disruption may be incurred by MICT and Micronet, as well as in connection with resulting regulatory
actions and litigation, and such disruption may harm relationships with customers and impact MICT’s and Micronet’s
business reputation.
Micronet
is subject to regulations in the United States and Europe, which if failed to be met, could negatively impact Micronet’s
and our business and reputation.
Micronet’s
business is subject to certain international standards such as U.S. Federal Communications Commission, or FCC, Part 15B, FCC ID,
CE and Restriction of Hazardous Substances, or RoHS, which define compatibility of interface and telecommunications standards
to those implemented in the United States by the FCC and in Europe by the European Commission, respectively. Micronet’s
solutions and products also need to comply with the E-Mark European standard, which is the standard that defines the compatibility
of interface and telecommunications to all appliances installed in and around an automobile. Micronet is exposed to risks from
regulators, arising from Micronet’s failure to comply with the aforementioned international standards, which define interface
and communication standards, compliance with the standards of the European Common Market, European Conformity, or the CE, and
the requirements of the U.S. Communications Regulatory Commission, the FCC, inclusive of the ELD mandate. If Micronet does not
adhere to these international standards, Micronet may be limited in marketing its products in such markets, and face fines and/or
risks to both our and Micronet’s reputation, and which may also adversely affect our and Micronet’s future revenues
and earnings and the value of our of our equity interest in Micronet.
Risks
Related to Ownership of MICT Securities
Your
ability to influence corporate decisions may be limited because ownership of MICT common stock is concentrated.
As
of the date, Mr. Lucatz, the MICT Chairman, Chief Executive Officer and President, beneficially owned 1,234,200 shares, or approximately
6.4% of MICT’s outstanding common stock. As a result, Mr. Lucatz, may exercise significant control over matters requiring
stockholder approval, including the election of directors and approval of significant corporate transactions. Such concentration
of ownership could also have the effect of delaying or preventing a change in control of MICT, which could have a material adverse
effect on the trading price of its common stock.
Provisions
in MICT’s certificate of incorporation and of Delaware corporate law could make an acquisition of MICT, which may be beneficial
to its stockholders, more difficult and may also prevent attempts by MICT stockholders to replace or remove current or future
members of MICT’s management team.
Provisions
in MICT’s certificate of incorporation, as amended, and MICT’s amended and restated bylaws may discourage, delay or
prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which
you might otherwise receive a premium for MICT common stock. These provisions could also limit the price that investors might
be willing to pay in the future for MICT securities, thereby depressing the market price of MICT’s securities. In addition,
these provisions may frustrate, deter or prevent any attempts by MICT stockholders to replace or remove current management by
making it more difficult for stockholders to replace members of the MICT board of directors. Because the board of directors is
responsible for appointing the members of the MICT management team, these provisions could in turn affect any attempt by stockholders
to replace current members of the MICT management team.
Moreover,
because MICT is incorporated in Delaware, it is governed by the provisions of Section 203 of the General Corporation Law of the
State of Delaware, or the DGCL, which prohibits a person who owns in excess of 15% of outstanding voting stock from merging or
combining with MICT for a period of three years after the date of the transaction in which the person acquired in excess of 15%
of outstanding voting stock, unless the merger or combination is approved in a prescribed manner. MICT has not opted out of the
restrictions under Section 203.
MICT
stockholders may experience significant dilution as a result of any additional financing that results in the issuance of MICT
equity securities and/or debt securities.
To
the extent that additional funds are raised by issuing equity securities, including through convertible debt securities, MICT
stockholders may experience significant dilution. Sales of additional equity and/or convertible debt securities at prices below
certain levels will trigger anti-dilution provisions with respect to certain securities which have been previously issued. If
additional funds are raised through a credit facility, or the issuance of debt securities or preferred stock, lenders or holders
of these debt securities or preferred stock would likely have rights that are senior to the rights of holders of common stock,
and any credit facility or additional securities could contain covenants that would restrict operations.
The
price of MICT’s common stock on Nasdaq has been in the past, and may in the future continue to be volatile, and may continue
to be volatile even if we complete the Acquisition. Volatility in the trading price
of MICT’s common stock could cause purchasers of MICT’s common stock to incur substantial losses.
The
price of MICT’s common stock has been and may continue to be volatile. The market price of MICT’s common stock may
be influenced by many factors, including but not limited to the following:
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developments
regarding the Acquisition and the transactions contemplated thereby;
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announcements
of developments related to MICT’s business;
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quarterly
fluctuations in actual or anticipated operating results;
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announcements
of technological innovations;
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new
products or product enhancements introduced by Micronet or its competitors;
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developments
in patents and other intellectual property rights and litigation;
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developments
in relationships with third party manufacturers and/or strategic partners;
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developments
in relationships with customers and/or suppliers;
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regulatory
or legal developments in the United States, Israel and other countries;
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general
conditions in the global economy; and
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the
other factors described in this “Risk Factors” section.
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For
these reasons and others, you should consider an investment in MICT common stock as risky and invest only if you can withstand
a significant loss and wide fluctuations in the value of such investment.
A
sale by MICT of a substantial number of shares of the common stock or securities convertible into or exercisable for the common
stock may cause the price of the common stock to decline and may impair the ability to raise capital in the future.
MICT’s
common stock is traded on Nasdaq and despite certain increases of trading volume from time to time, there have been periods when
it could be considered “thinly-traded,” meaning that the number of persons interested in purchasing MICT common stock
at or near bid prices at any given time may have been relatively small or non-existent. Financing transactions resulting in a
large amount of newly-issued securities, or other events that cause current stockholders to sell shares, could place downward
pressure on the trading price of MICT common stock. In addition, the lack of a robust resale market may require a stockholder
who desires to sell a large number of shares of common stock to sell those shares in increments over time to mitigate any adverse
impact of the sales on the market price of MICT stock. If MICT stockholders sell, or the market perceives that its stockholders
intend to sell for various reasons, including the ending of restriction on resale, substantial amounts of common stock in the
public market, including shares issued upon the exercise of outstanding options or warrants, the market price of MICT common stock
could fall. Sales of a substantial number of shares of MICT common stock may make it more difficult for MICT to sell equity or
equity-related securities in the future at a time and price that MICT deems reasonable or appropriate. Moreover, MICT may become
involved in securities class action litigation arising out of volatility resulting from such sales that could divert management’s
attention and harm MICT’s business.
If
securities or industry analysts do not publish research or reports or publish unfavorable research about MICT’s business,
the price of its common stock could decline.
MICT
does not currently have any significant research coverage by securities and industry analysts and may never obtain such research
coverage. If securities or industry analysts do not commence or maintain coverage of MICT, the trading price for its common stock
might be negatively affected. In the event such securities or industry analyst coverage is obtained, if one or more of the analysts
who covers MICT or will cover MICT downgrades its securities, the price of MICT common stock would likely decline. If one or more
of these analysts ceases to cover MICT or fails to publish regular reports on it, interest in the purchase of MICT common stock
could decrease, which could cause the price of MICT common stock and trading volume to decline.
If
MICT continues to fail to meet all applicable Nasdaq requirements, Nasdaq may delist its common stock, which could have an adverse
impact on its liquidity and market price.
MICT’s
common stock is currently listed on Nasdaq, which has qualitative and quantitative listing criteria. If MICT continues to be unable
to comply with Nasdaq listing requirements, including, for example, if the closing bid price for MICT common stock continues to
fall below $1.00 per share, in breach of Nasdaq Listing Rule 5550(a)(2), Nasdaq could determine to delist the MICT common stock
which could adversely affect its market liquidity market price. In that regard, on September 1, 2017, and again on July 22, 2019,
MICT received written notice from Nasdaq indicating that it was not in compliance with Nasdaq Listing Rule 5550(a)(2), as the
closing bid price of its common stock had been below $1.00 per share for each of the consecutive 30 business days preceding both
September 1, 2017 and July 22, 2019. On both occasions, MICT was able to regain compliance by maintaining a minimum closing bid
price of at least $1.00 for a minimum of 10 consecutive trading days; however there can be no assurance that MICT will be able
to maintain compliance with the Nasdaq listing requirements, or that the common stock will not be delisted from Nasdaq in the
future. Such delisting could adversely affect the ability to obtain financing for the continuation of MICT’s operations
or prevent us from completing the Acquisition or any other alternative transaction, and could result in the loss of confidence
by investors, customers and employees and cause our shareholders to incur substantial losses.
If
Nasdaq delists MICT’s securities from trading on its exchange and MICT is not able to list its securities on another national
securities exchange, MICT expects its securities could be quoted on an over-the-counter market. If this were to occur, MICT could
face significant material adverse consequences, including:
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a
limited availability of market quotations for its securities;
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reduced
liquidity for its securities;
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a
determination that the MICT’s common stock is a “penny stock” which will require brokers trading in the
MICT’s common stock to adhere to more stringent rules and possibly result in a reduced level of trading activity in
the secondary trading market for MICT’s securities;
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a
limited amount of news and analyst coverage; and
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a
decreased ability to issue additional securities or obtain additional financing in the future.
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We
did not declare or pay cash dividends in either 2018 or 2019 and do not expect to pay dividends for the foreseeable future.
We
have no dividends policy and will consider distributing dividends on a year by year basis. The payment of dividends, if any, in
the future, rests within the discretion of our board of directors and will depend, among other things, upon our earnings, our
capital requirements and our financial condition, as well as other relevant factors. There are no restrictions in our certificate
of incorporation, as amended, or amended and restated bylaws that restrict us from declaring dividends. There are no assurances
that we will pay dividends in the future.
Risks
Related to Israeli Law and Our Operations in Israel
Potential
political, economic and military instability in Israel could adversely affect our operations.
Our
principal offices and one of Micronet’s operating facilities are located in Israel. Accordingly, political, economic and
military conditions in Israel directly affect our and Micronet’s operations. Since the establishment of the State of Israel
in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors. A state of hostility, varying in
degree and intensity, has led to security and economic problems for Israel. Since October 2000, there has been an increase in
hostilities between Israel and the Palestinian Arabs, which has adversely affected the peace process and has negatively influenced
Israel’s relationship with its Arab citizens and several Arab countries, including the Israel-Gaza conflict. Such ongoing
hostilities may hinder Israel’s international trade relations and may limit the geographic markets where Micronet can sell
its products and solutions. Hostilities involving or threatening Israel, or the interruption or curtailment of trade between Israel
and its present trading partners, could materially and adversely affect Micronet’s or our operations.
In
addition, Israel-based companies and companies doing business with Israel have been the subject of an economic boycott by members
of the Arab League and certain other predominantly Muslim countries since Israel’s establishment. Although Israel has entered
into various agreements with certain Arab countries and the Palestinian Authority, and various declarations have been signed in
connection with efforts to resolve some of the economic and political problems in the Middle East, we cannot predict whether or
in what manner these problems will be resolved. Wars and acts of terrorism have resulted in significant damage to the Israeli
economy, including reducing the level of foreign and local investment.
Furthermore,
certain of our officers and employees may be obligated to perform annual reserve duty in the Israel Defense Forces and are subject
to being called up for active military duty at any time. All Israeli male citizens who have served in the army are subject to
an obligation to perform reserve duty until they are between 40 and 49 years old, depending upon the nature of their military
service.
Under
current Israeli law, the Company and Micronet may not be able to enforce our respective Israeli employees’ covenants not
to compete and therefore may be unable to prevent our competitors from benefiting from the expertise of some of our respective
former employees.
Previously,
the Company and Micronet entered, and the Company and Micronet may plan in the future to enter into, non-competition agreements
with our key employees, in most cases within the framework of their employment agreements. These agreements prohibit our key employees,
if they cease working for us, from competing directly with us or working for our competitors for a limited period. Under applicable
Israeli law, the Company and Micronet may be unable to enforce these agreements or any part thereof against our Israeli employees.
If the Company and Micronet cannot enforce its non- competition agreements against their respective Israeli employees, then the
Company and Micronet may be unable to prevent their competitors from benefiting from the expertise of these former employees,
which could impair the Company’s business, results of operations and ability to capitalize on Micronet’s proprietary
information.
Micronet
may become subject to claims for remuneration or royalties for assigned service invention rights by our employees, which could
result in litigation and harm our business.
A
significant portion of the intellectual property covered by Micronet’s products has been developed by Micronet’s employees
in the course of their employment for Micronet. Under the Israeli Patent Law, 5727-1967, or the Patent Law, and recent decisions
by the Israeli Supreme Court and the Israeli Compensation and Royalties Committee, a body constituted under the Patent Law, Israeli
employees may be entitled to remuneration for intellectual property that they develop for us unless they explicitly waive any
such rights. To the extent that Micronet is unable to enter into agreements with its future employees pursuant to which they agree
that any inventions created in the scope of their employment or engagement are owned exclusively by Micronet (as it has done in
the past), Micronet may face claims demanding remuneration. As a consequence of such claims, Micronet could be required to pay
additional remuneration or royalties to its current and former employees, or be forced to litigate such claims, which could negatively
affect its own and our business.
The
Israeli identity of certain of Micronet’s products may adversely affect its ability to sell its products and/or solutions.
The
sale of Micronet’s products is affected in certain countries and may be affected in other countries by the international
status of the State of Israel. Israeli identity may be used in some cases for promoting sales (in light of the recognition of
the technological advantages that exist in Israel) whereas in other cases and is likely to continue to be a disadvantage and result
in the cancellation of transactions.
Provisions
of Israeli law and Micronet’s amended and restated articles of association may delay, prevent or otherwise impede a merger
with, or an acquisition of, our company, which could prevent a change of control, even when the terms of such a transaction are
favorable to Micronet and its shareholders.
As
a company incorporated under the law of the State of Israel, Micronet is subject to Israeli corporate law. Israeli corporate law
regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for
transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to such
types of transactions. For example, a merger may not be consummated unless at least 50 days have passed from the date on which
a merger proposal is filed by each merging company with the Israel Registrar of Companies and at least 30 days have passed from
the date on which the shareholders of both merging companies have approved the merger. In addition, a majority of each class of
securities of the target company must approve a merger. Moreover, a tender offer for all of a company’s issued and outstanding
shares can only be completed if the acquirer receives positive responses from the holders of at least 95% of the issued share
capital. Completion of the tender offer also requires approval of and a majority of the offerees that do not have a personal interest
in the tender offer approves the tender offer, unless, following consummation of the tender offer, the acquirer would hold at
least 98% of the company’s outstanding shares. Furthermore, the shareholders, including those who indicated their acceptance
of the tender offer, may, at any time within six months following the completion of the tender offer, claim that the consideration
for the acquisition of the shares does not reflect their fair market value, and petition an Israeli court to alter the consideration
for the acquisition, unless accordingly, other than those who indicated their acceptance of the tender offer in case the acquirer
stipulated in its tender offer that a shareholder that accepts the offer may not seek such appraisal rights., and the acquirer
or the company published all required information with respect to the tender offer prior to the tender offer’s response
date.
Furthermore,
Israeli tax considerations may make potential transactions unappealing to Micronet or to its shareholders whose country of residence
does not have a tax treaty with Israel exempting such shareholders from Israeli tax.
Micronet’s
amended and restated articles of association also contain provisions that could delay or prevent changes in control or changes
in its management without the consent of its board of directors. These provisions include the following:
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no
cumulative voting in the election of directors, which limits the ability of minority shareholders to elect director candidates;
and
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the
right of Micronet’s board of directors to elect a director to fill a vacancy created by the expansion of the board of
directors or the resignation, death or removal of a director, which may prevent shareholders from being able to fill vacancies
on its board of directors.
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Micronet’s
operations may be disrupted as a result of the obligation of management or key personnel to perform military service.
Micronet’s
employees and consultants in Israel, including members of its senior management, may be obligated to perform one month, and in
some cases longer periods, of military reserve duty until they reach the age of 40 (or older, for citizens who hold certain positions
in the Israeli armed forces reserves) and, in the event of a military conflict or emergency circumstances, may be called to immediate
and unlimited active duty. In the event of severe unrest or other conflict, individuals could be required to serve in the military
for extended periods of time. In response to increases in terrorist activity, there have been periods of significant call-ups
of military reservists. It is possible that there will be similar large-scale military reserve duty call-ups in the future. Micronet’s
operations could be disrupted by the absence of a significant number of our officers, directors, employees and consultants related
to military service. Such disruption could materially adversely affect Micronet’s business and operations.
Risks Related to the Acquisition and the Business of the Post-Acquisition
Entity
The
combined entity may be unable to successfully execute its growth strategy.
One
of the combined entity’s strategies is to pursue organic growth by increasing product offerings, expanding into new verticals
and new markets such as China. The combined entity also intends to continue to expand and upgrade the reliability and scalability
of the PaaS offering and other aspects of its proprietary technology. The combined entity may not be able to successfully execute
all or any of these initiatives, and the results may vary from the expectations of the combined entity or others. Further, even
if these initiatives are successful, the combined entity may not be able to expand and upgrade its technology systems and infrastructure
to accommodate increases in the business activity in a timely manner, which could lead to operational breakdowns and delays, loss
of customers, a reduction in the growth of its customer base, increased operating expenses, financial losses, increased litigation
or customer claims, regulatory sanctions or increased regulatory scrutiny. In addition, the combined entity will need to continue
to attract, hire and retain highly skilled and motivated executives and employees to both execute the growth strategy and to manage
the resulting growth effectively.
The
combined entity may be unable to integrate the businesses of ParagonEx and Beijing Brookfield successfully.
ParagonEx and Beijing Brookfield are independent companies that
have never operated as a combined entity before. Until now, each of ParagonEx and Beijing Brookfield has pursued its own separate
businesses in different geographic locations. Upon consummation of the Acquisition, the combined entity will need to integrate
the operations of these two companies that currently operate in different industries and geographic locations into a single operation.
Although we believe the business of ParagonEx and Beijing Brookfield are complementary and there will be synergies from the integration
of the two companies, we cannot assure you that the Acquisition will produce the expected or intended results. The failure to address
problems encountered in connection with such integration could cause the combined entity to fail to realize the anticipated benefits
or incur unanticipated liabilities, any of which could have a materially adverse effect on the business, financial condition, results
of operations and cash flows of the combined entity, which could negatively impact its stock price.
The
combined entity’s acquisition strategy may result in significant transaction expenses, integration and consolidation risks
and risks associated with entering new markets, and the combined entity may not operate profitably.
One
of the combined entity’s strategies is to pursue growth through acquisitions of smaller players in the industry. Such acquisitions
involve significant transaction expenses, including, but not limited to, fees paid to legal, financial, tax and accounting advisors,
filing fees and printing costs. Acquisitions also present risks associated with offering new products or entering new markets
and integrating the acquired companies.
Other
areas where the combined entity may face risks include:
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diversion
of management time and focus from operating the business of the combined entity to address challenges that may arise in integrating
the acquired business;
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transition
of operations, users and user accounts onto existing platforms or onto platforms of the acquired company;
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failure
to successfully further develop the acquired business;
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failure
to realize anticipated operational or financial synergies;
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implementation
or remediation of controls, procedures, and policies at the acquired company;
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the
need to integrate operations across different cultures and languages and to address the particular economic, currency, political,
and regulatory risks associated with specific countries;
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liability
for activities of the acquired company before the acquisition, such as violations of laws and regulatory requirements, commercial
disputes, tax liabilities, infringement of third-party rights in intellectual property and other known and unknown liabilities;
and
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integration
of the acquired business’ accounting, human resource and other administrative systems, and coordination of trading and
sales and marketing functions.
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Future
acquisitions could also result in dilutive issuances of the equity securities of the combined entity, the incurrence of debt,
amortization expenses, impairment of goodwill and purchased long-lived assets, and restructuring charges, any of which could harm
the financial condition or results of operations and cash flows of the combined entity. Additionally, any new businesses that
may be acquired by the combined entity, once integrated with the existing operations, may not produce expected or intended results.
The failure to address these risks or other problems encountered in connection with future acquisitions could cause the combined
entity to fail to realize the anticipated benefits of such acquisitions or incur unanticipated liabilities, any of which could
have a materially adverse effect on the business, financial condition, results of operations and cash flows of the combined entity.
None
of GFH, Beijing Brookfield or ParagonEx have any formal risk management policies or procedures and those applied by them may not
be effective and may leave them exposed to unidentified or unexpected risks.
GFH,
Beijing Brookfield and ParagonEx are dependent on the professional expertise and experience of their management and staff to assess
risks. GFH, Beijing Brookfield and ParagonEx do not have any formal written policies or procedures for identifying, monitoring
or controlling risks, including risks related to human error, customer defaults, market movements, technology, fraud or money-laundering,
and such risks are evaluated by their respective management teams and boards of directors on an ad-hoc basis. Such practices and
methods used by GFH, Beijing Brookfield and ParagonEx for managing risk are discretionary by nature and are based on internally
developed controls and observed historical market behavior, and also involve reliance on standard industry practices. These methods
may not adequately prevent losses, particularly as they relate to extreme market movements, which may be significantly greater
than historical fluctuations in the market. The risk-management methods utilized by GFH, Beijing Brookfield and ParagonEx also
may not adequately prevent losses due to technical errors if their testing and quality control practices are not effective in
preventing failures. In addition, GFH, Beijing Brookfield and ParagonEx may elect to adjust their risk-management policies to
allow for an increase in risk tolerance, which could expose it to the risk of greater losses. The risk-management methods used
by GFH, Beijing Brookfield and ParagonEx rely on a combination of technical and human controls and supervision that are subject
to error and failure. These methods may not protect GFH, Beijing Brookfield and ParagonEx against all risks or may protect them
less than anticipated, in which case the business, financial condition and results of operations and cash flows of GFH, Beijing
Brookfield and ParagonEx may be materially adversely affected.
MICT
shareholders may be unable to ascertain the merits or risks of Beijing Brookfield’s and ParagonEx’s operations and
the business of these companies are outside of MICT management’s area of expertise.
To the extent we complete the Acquisition, we will be affected
by numerous risks inherent in both Beijing Brookfield’s and ParagonEx’s business operations. Furthermore, after completion
of the Acquisition, the business of GFH will be entirely different from MICT’s business. Although MICT’s management
has endeavored to evaluate the risks inherent in the proposed Merger, MICT cannot assure you that it can adequately ascertain or
assess all of the significant risk factors.
Subsequent to the completion of the Acquisition, MICT may
be required to take write-downs or write-offs, restructuring and impairment or other charges that could have a significant negative
effect on its financial condition and its share price, which could cause you to lose some or all of your investment.
MICT cannot assure you that the due diligence MICT has conducted
on GFH, and its subsidiaries Beijing Brookfield and ParagonEx has revealed all material issues that may be present with regard
to such companies, or that it would be possible to uncover all material issues through a customary amount of due diligence or that
risks outside of MICT’s control will not later arise. Each of GFH, Beijing Brookfield and ParagonEx are privately held companies
and MICT therefore has made its decision to pursue the Acquisition on the basis of limited information, which may result in a business
combination that is not as profitable as expected, if at all. As a result of these factors, MICT may be forced to later write-down
or write-off assets, restructure operations, or incur impairment or other charges that could result in reporting losses. Even if
MICT’s due diligence successfully identifies certain risks, unexpected risks may arise and previously known risks may materialize
in a manner not consistent with MICT’s preliminary risk analysis. Even though these charges may be non-cash items and would
not have an immediate impact on MICT’s liquidity, the fact that MICT reports charges of this nature could contribute to negative
market perceptions about MICT or MICT’s securities. Accordingly, we cannot predict the impact that the Acquisition will have
on GFH’s securities.
Furthermore, the Acquisition Agreement by which MICT will be
acquiring GFH stipulates that all representations and warranties provided by GFH with regard to its businesses, will expire upon
completion of the acquisition. Consequently, MICT will be limited in its ability to pursue a claim against GFH for breach of any
of its representations and warranties that are discovered after the completion date, unless MICT is able to prove that such breach
amounted to fraudulent misrepresentation or resulted from a similar act of malicious intent.
MICT’s ability to be successful following the Acquisition
will be dependent upon the efforts of the MICT Board and key personnel and the loss of such persons could negatively impact the
operations and profitability of MICT’s post-combination business.
MICT’s ability to be successful following the Acquisition
will be dependent upon the efforts of the MICT Board and key personnel. Furthermore, the business of MICT following the Acquisition
will be made up mostly of GFH’s business, and will be entirely different from MICT’s current business. It is only contemplated
that two of MICT’s existing directors will serve on the MICT board of directors for a limited period of time, and MICT
cannot assure you that MICT’s board of directors and key personnel will be effective or successful or remain with MICT. In
addition to the other challenges they will face, the new members of MICT’s board of directors, other than the MICT continuing
directors, may be unfamiliar with the requirements of operating a public company, which could cause MICT’s management to
have to expend time and resources helping them become familiar with such requirements.
It is estimated that, pursuant to the Merger Agreement, MICT’s
current public stockholders will only own a minimal interest of MICT. Accordingly, the future performance of MICT will depend upon
the quality of the post-Merger board of directors, management and key personnel of MICT and the MICT’s ability to retain
such managers and key personnel over time.
Failure to complete the Acquisition could harm the price
of MICT’s common stock and the future business and operations of each company.
If the Merger Agreement is terminated and the board of directors
of the respective parties determine to seek another business combination, there can be no assurance that either MICT or GFH will
be able to find a partner willing to provide equivalent or more attractive consideration than the consideration to be provided
in connection with the Acquisition.
Some of MICT’s officers and directors have interests
in the Acquisition that are different from yours and that may influence them to support or approve the Merger without regard to
your interests.
Certain officers and directors of MICT, like those of other
companies, participate in compensation arrangements that provide them with interests in the Acquisition that are different from
yours, including, among others, the continued service as an officer or director of the combined organization for some limited period
of time, severance benefits and the potential ability to sell an increased number of shares of common stock of the combined organization
in accordance with Rule 144 under the Securities Act of 1933, as amended, or the Securities Act. For example, such officers and
directors may receive compensation for their services generally, as well as in connection with the Acquisition, and subject to
and upon the consummation of the Acquisition, MICT will issue to our former director, Miki Balin, and two of our current directors,
Chezy (Yehezkel) Ofir and Jeffrey P. Bialos, including our Chief Executive Officer, Mr. David Lucatz, 300,000 options to purchase
MICT common stock (1,200,000 options in the aggregate) with an exercise price equal to $1.41, which shall be granted as success
bonuses under MICT’s existing stock incentive plans or under GFH’s 2019 equity plan (including the 2019 Israeli sub-plan)
and which shall be, converted into certain replacement stock options of MICT.
The securityholders of MICT will have a reduced ownership
and voting interest in, and will exercise less influence over the management of, the combined organization following the completion
of the Acquisitions as compared to their current ownership and voting interests in MICT.
After the completion of the Acquisition, the current
stockholders of MICT will own a smaller percentage of the combined organization than their ownership of their respective
companies prior to the Transactions. Immediately after the closing of the Acquisition, it is anticipated that
MICT stockholders will own approximately 7.64% of the common stock of the combined organization and GFH stockholder will own
approximately 75.76% of the common stock of MICT. These estimates are subject to adjustment.
During the pendency of the Acquisition, MICT and GFH may
not be able to enter into a business combination with another party at a favorable price because of restrictions in the Merger
Agreement, which could adversely affect their respective businesses.
Covenants in the Merger Agreement impede the ability of MICT
and GFH to make acquisitions, subject to certain exceptions relating to fiduciary duties, as set forth below, or to complete other
transactions that are not in the ordinary course of business pending completion of the Acquisition. As a result, if the Acquisition
is not completed, the parties may be at a disadvantage to their competitors during such period. In addition, while the Merger Agreement
is in effect, each party is generally prohibited during the interim period from soliciting, initiating, encouraging or entering
into certain extraordinary transactions, such as merger, sale of assets or other business combination outside the ordinary course
of business with any third party, subject to certain exceptions relating to fiduciary duties, as set forth below. Any such transactions
could be favorable to such party’s stockholders.
Certain provisions of the Merger Agreement may discourage
third parties from submitting alternative takeover proposals, including proposals that may be superior to the arrangements contemplated
by the Merger Agreement.
The terms of the Merger Agreement prohibit each of MICT and
GFH from soliciting alternative takeover proposals or cooperating with persons making unsolicited takeover proposals, except, in
the case of MICT, in the limited circumstances when its board of directors determines in good faith that an unsolicited alternative
takeover proposal is or is reasonably likely to be inconsistent with the board of directors’ fiduciary duties.
The market price of MICT’s common stock is expected
to be volatile, and the market price of the common stock may drop following the Acquisition.
The market price of MICT’s common stock following the
Acquisition could be subject to significant fluctuations. Some of the factors that may cause the market price of MICT’s common
stock to fluctuate include:
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changes
in laws or regulations applicable to MICT’s business and operations;
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introduction
of new products, services or technologies by MICT’s competitors;
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failure
to meet or exceed financial and development projections MICT may provide to the public;
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failure
to meet or exceed the financial and development projections of the investment community;
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announcements
of significant acquisitions, strategic collaborations, joint ventures or capital commitments by MICT or its competitors;
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additions
or departures of key personnel;
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significant
lawsuits, including patent or stockholder litigation;
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if
securities or industry analysts do not publish research or reports about MICT’s business, or if they issue an adverse
or misleading opinions regarding its business and stock;
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general
market or macroeconomic conditions;
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sales
of its common stock by MICT or its shareholders in the future;
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trading volume of MICT’s common stock; and
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period-to-period
fluctuations in MICT’s financial results
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Moreover, the stock markets in general have experienced substantial
volatility that has often been unrelated to the operating performance of individual companies. These broad market fluctuations
may also adversely affect the trading price of MICT’s common stock.
In the past, following periods of volatility in the market price
of a company’s securities, stockholders have often instituted class action securities litigation against those companies.
Such litigation, if instituted, could result in substantial costs and diversion of management attention and resources, which could
significantly harm MICT’s profitability and reputation.
An active market for MICT’s common stock may not develop,
which would adversely affect the liquidity and price of MICT’s common stock.
The price of MICT’s common stock may vary significantly
due to factors specific to MICT as well as to general market or economic conditions. Furthermore, an active trading market for
MICT’s common stock may never develop or, if developed, it may not be sustained. You may be unable to sell your securities
unless a market can be established and sustained.
The market price of MICT’s common stock may decline
as a result of the Acquisition.
The market price of MICT’s common stock may decline as
a result of the Acquisition for a number of reasons including if:
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investors react negatively to the prospects of MICT’s business and the prospects of the Acquisition;
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the effect of the Acquisition on MICT’s business and prospects is not consistent with the expectations of financial or industry analysts; or
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MICT does not achieve the perceived benefits of the Acquisition as rapidly or to the extent anticipated by financial or industry analysts.
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MICT’s stockholders may not realize a benefit from
the Acquisition commensurate with the ownership dilution they will experience in connection with the Merger.
If MICT is unable to realize the full strategic and financial
benefits currently anticipated from the Acquisition, MICT’s stockholders will have experienced substantial dilution of their
ownership interests in MICT without receiving any commensurate benefit, or only receiving part of the commensurate benefit to the
extent MICT is able to realize only part of the strategic and financial benefits currently anticipated from the Merger.
Following the Acquisition, if securities or industry analysts
do not publish or cease publishing research or reports about MICT, its business, or its market, or if they change their recommendations
regarding MICT common stock adversely, the price and trading volume of the MICT common stock could decline.
The trading market for MICT’s common stock will be influenced
by the research and reports that industry or securities analysts may publish about MICT, its business, its market, or its competitors.
Securities and industry analysts do not currently, and may never, publish research on MICT. If no securities or industry analysts
commence coverage of MICT, MICT’s stock price and trading volume would likely be negatively impacted. If any of the analysts
who may cover MICT change their recommendation regarding MICT’s share adversely, or provide more favorable relative recommendations
about our competitors, the price of the MICT’s common stock would likely decline. If any analyst who may currently cover
MICT were to cease coverage of MICT or fail to regularly publish reports on it, we could lose visibility in the financial markets,
which could cause MICT’s stock price or trading volume to decline.
Future sales of shares by stockholders could cause MICT’s
stock price to decline.
If stockholders of MICT sell, or indicate an intention to sell,
substantial amounts of MICT’s common stock in the public market after legal restrictions on resale discussed in this Annual
Report on Form 10-K lapse, the trading price of MICT’s common stock could decline. Based on shares outstanding as of the
date of this Annual Report on Form 10-K, and shares expected to be issued upon completion of the Acquisition, MICT is expected
to have outstanding a total of approximately 145,130,577 shares of common stock immediately following the completion of the Acquisition.
Of such shares, all of the shares being issued to GFH pursuant to the Merger Agreement, which shall be subject to a lock-up agreement
for a period of twelve (12) months following the closing of the Acquisition, shall become available for sale. All other outstanding
shares of common stock will be freely tradable, without restriction, in the public market. If these shares are sold, the trading
price of MICT’s common stock shares could decline.
Risks related to recent and potential
changes to regulatory legislation in the British Virgin Islands could lead to increased costs of GFH in complying with additional
regulatory and reporting requirements.
As the global regulatory and tax environment
evolves, GFH may be subject to new or different statutory and regulatory requirements (for example, on January 1, 2019 the Economic
Substance (Companies and Limited Partnerships) Act, 2018 of the British Virgin Islands (the “Economic Substance Act”)
came into force and related regulations and guidance are anticipated in due course). It is difficult to predict what impact the
adoption of these laws or regulations, or changes in the interpretation of existing laws or regulations could have on GFH, however,
compliance with various additional obligations may create significant additional costs that may be borne by GFH or otherwise affect
the management and operation of GFH.
Item
1B.
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Unresolved
Staff Comments.
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Not applicable.
We currently maintain office space in Herzliya,
Israel.
The Company has terminated the lease and
it shall be terminated effectively on March 2020. We have engaged in an alternative lease agreement for nearby offices in Herzliya
as well. Under the new lease we are sharing certain office space with Micronet (under a sub-lease) and we are currently occupying
25% of the space and approximately 1,092 square feet and our monthly rent obligation is approximately $2,337 (25% of the total
rent, paid on a pro rata basis).
Item
3.
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Legal
Proceedings.
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From time to time, we may become subject
to litigation incidental to our business.
In March 2017, MICT entered into an Investment
Banking Agreement, or the Sunrise Agreement, with Sunrise Securities LLC and Trump Securities LLC, or collectively, Sunrise, through
Sunrise’s principal, Amnon Mandelbaum, pursuant to which Sunrise agreed to assist MICT in identifying, analyzing, structuring,
and negotiating suitable business opportunities, such as a sale of stock or assets, merger, tender offer, joint venture, financing
arrangement, private placement, or any similar transaction or combination thereof. The parties initially disagreed as to the amount
of the fee that would be payable upon the closing of the transactions contemplated by the Merger Agreement. There are also questions
about the applicability of the Sunrise Agreement to the Acquisition, and it is thus not clear whether or not Sunrise shall be
owed any transaction fee upon the closing of the Acquisition. There can be no assurance that a settlement will be reached with
respect to this disagreement.
If Sunrise asserts a claim for fees and a
settlement is not reached, it could result in litigation or other legal proceedings, which may cause MICT and/or GFH (which, pursuant
to the Merger Agreement, shall be responsible for the settlement and payment of any claims brought under the Sunrise Agreement)
to incur substantial costs defending such dispute, and which could delay the closing of the Acquisition or result in the termination
of the Merger Agreement.
Item
4.
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Mine
Safety Disclosures.
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Not applicable.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
NOTE 1 — DESCRIPTION OF BUSINESS
Overview
MICT Inc., we, or the Company, was formed
as a Delaware corporation on January 31, 2002. On March 14, 2013, the Company changed its corporate name from Lapis Technologies,
Inc. to Micronet Enertec Technologies, Inc. On July 13, 2018, following the sale of its former subsidiary Enertec Systems Ltd.,
the Company changed the Company name from Micronet Enertec Technologies, Inc. to MICT, Inc. Our shares have been listed for trade
on the Nasdaq Capital Market, or Nasdaq, since April 29, 2013.
The Company’s business relates to its
ownership interest in its Israel-based, former subsidiary, Micronet Ltd., or Micronet, in which the Company previously held a
majority ownership interest that has since been diluted to a minority ownership interest. Micronet operates in the growing commercial
Mobile Resource Management, or MRM, market. Micronet through both its Israeli and U.S. operational offices designs, develops, manufactures
and sells rugged mobile computing devices that provide fleet operators and field workforces with computing solutions in challenging
work environments.
As of December 31, 2018, the Company
held 49.89% of Micronet’s issued and outstanding shares, and together with an irrevocable proxy in our benefit from Mr.
David Lucatz, the Company’s President and Chief Executive Officer, we held 50.07% of the voting interest in Micronet as
of such date. On February 24, 2019, Micronet closed a public equity offering on the Tel Aviv Stock Exchange, or the TASE. As
a result of Micronet’s offering, our ownership interest in Micronet was diluted from 49.89% to 33.88%. On February 24,
2019, Mr. David Lucatz, our President and Chief Executive Officer, executed an irrevocable proxy assigning his voting power
over 1,980,000 shares of Micronet for our benefit. As a result, our voting interest in Micronet stood at 39.53% of the issued
and outstanding shares of Micronet. The decrease in the Company’s voting interest in Micronet resulted in the
deconsolidation of Micronet’s operating results from our financial statements as of February 24, 2019. Therefore,
commencing from February 24, 2019, the Company accounts for the investment in Micronet in accordance with the equity method.
As a result of the deconsolidation, the Company recognized a net gain of $299 in February 2019.
On September 5, 2019, Micronet closed a public
equity offering on the TASE. As a result, our ownership interest in Micronet was diluted from 33.88% to 30.48%, and our current
voting interest in Micronet stands at 37.79% of the issued and outstanding shares of Micronet.
NOTE 1 — DESCRIPTION OF BUSINESS
(CONT.)
Micronet’s vehicle portable
tablets offers computing power and communication capabilities that provide fleet operators with visibility into vehicle
location, fuel usage, speed and mileage. Furthermore, users are able to manage the drivers in various aspects, such as:
driver behavior, driver identification, reporting hours worked, customer/organization working procedures and protocols, route
management and navigation based on tasks and time schedule. End users may also receive real time messages for various
services such as pickup and delivery, repair and maintenance, status reports, alerts, notices relating to the start and
ending of work, digital forms, issuing and printing of invoices and payments. Through its SmartHub product, Micronet provides
its consumers with services such as driver recognition, identifying and preventing driver fatigue, recognizing driver
behavior, preventive maintenance, fuel efficiency and an advanced driver assistance system. In addition, Micronet provides
third party telematics service providers, or TSPs, a platform to offer services such as “Hours of Service.”
Micronet previously commenced and continues to evaluate integration with other TSPs.
Micronet is currently entering the video analytics
device market by developing an all in-one video telematics device known as Micronet SmartCam. Micronet SmartCam technologically,
based on the powerful flexible android platform, is expected to be a ruggedized, integrated, and ready-to-go smart camera
supporting complete telematics features designed for in-vehicle use. Coupled with vehicle-connected interfaces, state of the art
diagnostic capabilities, and two cameras, it offers video analytics and telematics services, addressing safety, vehicle health,
and tracking needs of commercial fleets. We believe that Micronet SmartCam provides a versatile, advanced, and affordable mobile
computing platform for a variety of fleet management and video analytics solutions. The powerful computing platform, coupled with
the Android 9 operating system, allows the company customers to run their applications or pick and choose a set of applications
and services from Micronet marketplace. Micronet’s customers consist primarily of application service providers, or ASPs,
and solution providers specializing in the MRM market. These companies sell Micronet’s products as part of their MRM systems
and solutions. Currently, Micronet does not sell directly to end users. Micronet customers are generally MRM solution and service
providers, ASP providers in the transportation market, including long haul, local fleets’ student transportation (yellow
busses) and fleet and field management systems for construction and heavy equipment. Micronet products are used by customers worldwide.
Micronet operates and conducts its business
in the U.S. market through Micronet Inc., a wholly owned subsidiary located in Utah. The Micronet U.S.-based business, operations
and facilities include a logistics warehouse and distribution center, and technical service and support infrastructure as well
as sales and marketing capabilities which allow Micronet to continue expansion into the U.S. market while support its existing
U.S.-based customers with further accessibility and presence to local fleets and local MRM service providers.
Acquisition Agreement with BNN Technology
PLC
On December 18, 2018, we, Global Fintech Holdings Ltd., a British
Virgin Islands corporation, or GFH, GFH Merger Subsidiary, Inc., a Delaware corporation and a wholly-owned subsidiary of GFH, or
Merger Sub, BNN, Brookfield Interactive (Hong Kong) Limited, a Hong Kong company and a subsidiary of BNN, or BI China, ParagonEx
LTD, a British Virgin Islands company, or ParagonEx, certain holders of ParagonEx’s outstanding ordinary shares and a trustee
thereof, and Mark Gershinson, in the capacity as the representative of the ParagonEx sellers, entered into an Acquisition Agreement,
or the Acquisition Agreement, pursuant to which, among other things, subject to the satisfaction or waiver of the conditions set
forth in the Acquisition Agreement, Merger Sub would merge with and into the Company, as a result of which each outstanding share
of the Company’s common stock and warrant to purchase the same would be cancelled in exchange for the right of the holders
thereof to receive 0.93 substantially equivalent securities of GFH, after which GFH would acquire (i) all of the issued and outstanding
securities of BI China in exchange for newly issued ordinary shares of GFH and (ii) all of the issued and outstanding ordinary
shares of ParagonEx for a combination of cash in the amount equal to approximately $25 million (the majority of which was raised
in a private placement by GFH), unsecured promissory notes and newly issued ordinary shares of GFH, or collectively, the Transactions.
NOTE 1 — DESCRIPTION OF BUSINESS
(CONT.)
In furtherance of the Transactions, and upon the terms and subject
to the conditions described in the Acquisition Agreement, BNN agreed to commence a tender offer, or the Offer, as promptly as practicable
and no event later than 15 business days after the execution of the Acquisition Agreement, to purchase up to approximately 20%
of the outstanding shares of the Company’s common stock at a price per share of $1.65, net to the sellers in cash, without
interest, or the Offer Price. On March 13, 2019. the deadline for the Offer was extended to April 8, 2019. Additionally, following
the Transactions, it was contemplated that the certain of the company’s operating business assets, including company’s interest
in Micronet, would be spun off to company’s stockholders who continue to retain shares of company’s common stock after the Offer.
Subject to the terms and conditions of the Acquisition Agreement, and assuming that none of the shares of company’s common stock
are purchased by BNN in connection with the Offer, company’s stockholders would own approximately 5.27% of GFH after giving effect
to the transactions contemplated by the Acquisition Agreement.
On May 31, 2019, we terminated the spin-off
of Micronet and in June 2019, the Offer was terminated. Effective November 7, 2019, we, BNN, BI China and ParagonEx (the “Parties”)
entered into a mutual Termination Agreement (the “Termination Agreement”), pursuant to which the parties agreed to
terminate the 2018 Acquisition Agreement, effective immediately.
Merger Agreement with GFH
On November 7, 2019, company’s, GFH
Intermediate Holdings Ltd., a British Virgin Islands company (“Intermediate”) that is wholly owned by GFH entered
into, and MICT Merger Subsidiary Inc., a to-be-formed British Virgin Islands company and a wholly owned subsidiary of MICT (“Merger
Sub”), shall upon execution of a joinder enter into, an Agreement and Plan of Merger (the “Merger Agreement”),
pursuant to which, among other things, subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement,
Merger Sub will merge with and into Intermediate, with Intermediate continuing as the surviving entity, and each outstanding share
of Intermediate’s common stock shall be cancelled in exchange for the right of the holders thereof to receive a substantially
equivalent security of MICT (collectively, the “Acquisition”). GFH will receive an aggregate of 109,946,914 shares
of MICT common stock as merger consideration in the Acquisition.
Concurrent with the execution of the Merger
Agreement, Intermediate entered into (i) a share exchange agreement with Beijing Brookfield Interactive Science & Technology
Co. Ltd., an enterprise formed under the laws of the Peoples Republic of China (“Beijing Brookfield”), pursuant to
which Intermediate will acquire all of the issued and outstanding ordinary shares and other equity interest of Beijing Brookfield
from the shareholders of Beijing Brookfield in exchange for 16,310,759 newly issued shares of GFH and (ii) a share exchange agreement
with ParagonEx, shareholders of ParagoneEx specified therein (the “ParagonEx Sellers”) and Mark Gershinson, pursuant
to which, the ParagonEx Sellers will transfer to Intermediate all of the issued and outstanding securities of ParagonEx in exchange
for Intermediate’s payment and delivery of $10.0 million in cash, which is to be paid upon the closing of the Acquisition,
and 75,132,504 newly issued shares of GFH deliverable at the closing of the share exchange.
After giving effect to the Acquisition,
the conversion of the Convertible Debentures (as defined below) and the conversion or exercise of the securities issued by MICT
pursuant to the Offering of Series A Convertible Preferred Stock and Warrants and the Offering of Convertible Note and Warrants,
each as further below, it is expected that MICT will have approximately $15.0 million of cash as well as ownership of ParagonEx
and Beijing Brookfield and that MICT’s current stockholders will own approximately 11,089,532 shares, or 7.64%, of the 145,130,577
shares of MICT common stock outstanding.
NOTE 1 — DESCRIPTION OF BUSINESS
(CONT.)
Consummation of the transactions contemplated
by the Merger Agreement is subject to certain closing conditions, including, among other things, approval by the stockholders of
MICT and receipt of a fairness opinion indicating that the transactions contemplated by the Merger Agreement are fair to the stockholders
of MICT. The Merger Agreement contains certain termination rights for the Company and Intermediate. The Merger Agreement also contains
customary representations, warranties and covenants made by, among others, MICT, Intermediate and Merger Sub, including as to the
conduct of their respective businesses (as applicable) between the date of signing the Merger Agreement and the closing of the
transactions contemplated thereby.
The Merger Agreement provides that all
options to purchase shares of the Company’s common stock that are outstanding and unexercised shall be accelerated in full
effective as of immediately prior to the effective time of the Acquisition. The options shall survive the closing of the Acquisition
for a period of 15 months from the date of the closing of the Acquisition and all equity incentive plans of the Company shall remain
in effect.
Consummation of the Merger Agreement is
subject to various conditions, including the following mutual conditions of the parties unless waived: (i) the approval of the
Merger Agreement by the requisite vote of MICT’s stockholders; (ii) expiration of the applicable waiting period under any
antitrust laws, including the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; (iii) receipt of requisite regulatory
approval, (iv) receipt of required consents and provision of required notices to third parties, (v) no law or order preventing
or prohibiting the Merger or the other transactions contemplated by the Merger Agreement or the Closing; (vi) no restraining order
or injunction preventing the Merger or the other transactions contemplated by the Merger Agreement; (vii) appointment or election
of the members of the post-Closing MICT board of directors as agreed, and (viii) the filing of the definitive proxy statement with
the SEC.
In addition, prior to the consummation
of the Merger, if the Merger Agreement is terminated after the closing of the Beijing Brookfield Acquisition or the ParagonEx Acquisition,
as the case may be, or if the Merger does not close by the outside date set forth in the Merger Agreement, the transactions contemplated
by the Beijing Brookfield Share Exchange Agreement and the ParagonEx Share Exchange Agreement, may be unwound. In the event of
an unwinding of such acquisitions, GFH will return the Beijing Brookfield shares to BI Interactive and the ParagonEx shares to
the Paragon Ex Sellers and in turn BI Interactive and the ParagonEx Sellers will return the shares of Global Fintech received in
the applicable share exchange.
Voting Agreement. In connection with
the execution and delivery of the Merger Agreement, D. L Capital (“DLC”), an entity affiliated with David Lucatz,
the President and Chief Executive Officer of MICT, entered into a voting agreement, by and among MICT, GFH and DLC (the “Voting
Agreement”), pursuant to which, during the term of such agreement, DLC has agreed to vote all of its capital shares in MICT
in favor of the Merger Agreement, the related ancillary documents and any required amendments to MICT’s organizational documents,
and in favor of all of the transactions in furtherance thereof, and to take certain other actions in support of the transactions
contemplated by the Merger Agreement and will, at every meeting of the stockholders of MICT called for such purpose, and at every
adjournment or postponement thereof (or in any other circumstances upon which a vote, consent or approval is sought, including
by written consent), not vote any of its shares of the Common Stock at such meeting in favor of, or consent to, and will vote
against and not consent to, the approval of any alternative proposal that is intended, or would reasonably be expected, to prevent,
impede, interfere with, delay or adversely affect in any material respect the transactions contemplated by the Merger Agreement.
The Voting Agreement shall terminate, among other reasons, upon the earlier of the termination of the Merger Agreement and March
31, 2020.
Offering of Series A Convertible Preferred
Stock and Warrants
On June 4, 2019, we entered into a
Securities Purchase Agreement (the “Preferred Securities Purchase Agreement”) with the purchasers named therein
(the “Preferred Purchasers”) subject to approval by the Nasdaq Stock Market for as to the eligibility of the
transaction, pursuant to which we agreed to sell 3,181,818 shares of newly designated Series A Convertible Preferred Stock
with a stated value of $2.20 per share (the “Preferred Stock”). The Preferred Stock, which shall be convertible
into up to 6,363,636 shares of the company’s common stock, par value $0.001 per share (the “Common Stock”),
shall be sold together with certain Common Stock purchase warrants (the “Preferred Warrants”) to purchase up to
4,772,727 shares of Common Stock (representing 75% of the aggregate number of shares of Common Stock into which the Preferred
Stock shall be convertible), for aggregate gross proceeds of $7 million to us (the “Preferred Offering”). The
terms of the Preferred Securities Purchase Agreement were approved by Nasdaq Stock Market on July 31, 2019 and as a result
the company issued the preferred stock along with the warrants.
NOTE 1 — DESCRIPTION OF BUSINESS
(CONT.)
The Preferred Stock shall be convertible
into Common Stock at the option of each holder of Preferred Stock at any time and from time to time at a conversion price of
$1.10 per share, and shall also convert automatically upon the occurrence of certain events, including the completion by us
of a fundamental transaction. Commencing on March 31, 2020, cumulative cash dividends shall become payable on the Preferred
Stock at the rate per share of 7% per annum, which rate shall increase to 14% per annum on June 30, 2020. We shall also have
the option to redeem some or all of the Preferred Stock, at any time and from time to time, beginning on December 31, 2019.
The holders of Preferred Stock shall vote together with the holders of Common Stock as a single class on as-converted basis,
and the holders of Preferred Stock holding a majority-in-interest of the Preferred Stock shall be entitled to appoint an
independent director to the company’s board of directors (the “Preferred Director”). The Preferred
Securities Purchase Agreement provides for customary registration rights.
The Preferred Warrants shall have an
exercise price of $1.01 (subject to customary adjustment in the event of future stock dividends, splits and the like), which
is above the average price of the Common Stock during the preceding five trading days of entry into the Preferred Securities
Purchase Agreement, and shall be exercisable immediately, until the earlier of (i) two years from the date of issuance or
(ii) the later of (a) 180 days after the closing by the Company of a change of control transaction, or (b) the
company’s next debt or equity financing of at least $20 million.
Offering of Convertible Note and Warrants
On June 4, 2019, we entered into a
Securities Purchase Agreement (the “Note Purchase Agreement”) with BNN subject to approval by the Nasdaq Stock
Market for as to the eligibility of the transaction, pursuant to which BNN agreed to purchase from us $2 million of
convertible notes, which subscription amount shall be subject to increase by up to an additional $1 million as determined by
BNN and us (collectively, the “Convertible Notes”). The Convertible Notes, which shall be convertible into up to
2,727,272 shares of Common Stock (using the applicable conversion ratio of $1.10 per share), shall be sold together with
certain Common Stock purchase warrants (the “Note Warrants”) to purchase up to 2,727,272 shares of Common Stock
(representing 100% of the aggregate number of shares of Common Stock into which the Convertible Notes are convertible) (the
“Convertible Note Offering”). The Convertible Notes shall have a duration of two (2) years.
The Convertible Notes shall be
convertible into Common Stock at the option of the Note Purchaser at any time and from time to time, and upon the issuance of
one or more Convertible Notes. Darren Mercer, the Chief Executive Officer of BNN, was appointed to the Company’s board
of directors (the “Note Director”). The Note Purchase Agreement provides for customary registration rights. The
terms of the note purchase agreement were approved by Nasdaq Stock Market on July 31, 2019 and as a result the company issued
the convertible notes along with the warrants.
The Note Warrants shall have an exercise price
of $1.01 (subject to customary adjustment in the event of future stock dividends, splits and the like), and shall be exercisable
immediately upon receipt of stockholder approval of the Convertible Note Offering, until the earlier of (i) two years from the
date of issuance or (ii) the later of (a) 180 days after the closing by the Company of a change of control transaction, or (b)
the company’s next debt or equity financing of at least $20 million.
In accordance with ASC 470 “Debt”, the Company analyzed
the Note Purchase Agreement and the Preferred Securities Purchase Agreement (as described above) as combined transaction, as both
agreements were signed simultaneously with an overall objective and as a result allocated the total proceeds between convertible
notes, the warrants and Series A Convertible Preferred Stock based on their relative fair value at the closing date. The Company
analyzed the warrants issued, the convertible conversation feature and Series A Convertible Preferred Stock and concluded that
they meet the definition of an equity instrument.
On January 21, 2020, we entered into a
Conversion Agreement with BNN, pursuant to which BNN agreed to convert the outstanding convertible note, issued on July 31,
2019, into 1,818,181 shares of the Company’s newly-designated Series B Preferred Stock, par value $0.001 per share, with
a stated value of $1.10 per share (the “Series B Preferred”) (collectively, the “Conversion”). In accordance
with the Conversion, the Company filed a Certificate of Designation of Preferences, Rights and Limitations of Series B Preferred
with the Secretary of State of the State of Delaware on January 21, 2020 to designate the rights and preferences of up to 1,818,181
shares of Series B Preferred.
NOTE 1 — DESCRIPTION OF BUSINESS
(CONT.)
Offering of Secured Convertible Debentures
On November 7, 2019, we entered into a Securities
Purchase Agreement (the “Primary Purchase Agreement”) with certain investors identified therein (the “Primary
Purchasers”) pursuant to which, among other things, the Primary Purchasers agreed, subject to the satisfaction or waiver
of the conditions set forth in the Primary Purchase Agreement, to purchase from us 5% senior secured convertible debentures due
2020 (the “Primary Convertible Debentures”) with an aggregate principal amount of approximately $15.9 million (the
“Primary Convertible Debenture Offering”). The proceeds of $15.9 million from the sale of the Primary Convertible
Debentures were funded on January 21, 2020. Concurrently with entry into the Primary Purchase Agreement, we entered
into a separate Securities Purchase Agreement (the “Non-Primary Purchase Agreement” and, together with the Primary
Purchase Agreement, the “Purchase Agreements”) with certain investors identified therein (the “Non-Primary Purchasers”
and, together with the Primary Purchasers, the “Purchasers”) pursuant to which, among other things, the Non-Primary
Purchasers agreed, subject to the satisfaction or waiver of the conditions set forth in the Non-Primary Purchase Agreement, to
purchase from us 5% senior secured convertible debentures due 2020 (the “Non-Primary Convertible Debentures” and,
together with the Primary Convertible Debentures, the “Convertible Debentures”) with an aggregate principal amount
of $9.0 million (together with the Primary Convertible Debenture Offering, collectively, the “Convertible Debenture Offering”).
The Convertible Debentures shall be convertible into our shares of Common Stock at a conversion price of $1.41 per share. The
Convertible Debentures will be due upon the earlier of (i) six months from the date of issuance and (ii) the termination of the
Merger Agreement. We are obligated to pay interest to the Purchasers on the outstanding principal amount at the rate of 5% per
annum, payable quarterly, in cash or, at our option in certain instances, in shares of Common Stock. We may not voluntarily prepay
any portion of the principal amount of the Convertible Debentures without the prior written consent of the Purchasers.
Subject to stockholder approval of an increase
in the shares of Common Stock to allow for the full conversion of the Convertible Debentures into Common Stock, the Convertible
Debentures shall be convertible into Common Stock at the option of the Purchasers at any time and from time to time. Upon the
closing of the Acquisition and written notice from us to the Purchasers, the Purchasers shall be forced to convert the Convertible
Debentures into our shares of Common Stock (the “Forced Conversion”). Upon the occurrence of certain events, including,
among others, if we fail to file a preliminary proxy statement with respect to the Acquisition on or prior to November 18, 2019,
if the Forced Conversion does not occur on or before January 24, 2020, or certain breaches of the Primary Purchasers’ Registration
Rights Agreement (as defined below), the Primary Purchasers are permitted to require us to redeem the Primary Convertible Debentures,
including any interest that has accrued thereunder, for cash.
The Proceeds of $15.9 million from the sale of
the Primary Convertible Debentures were funded on January 21, 2020 and placed in a separate blocked account that shall remain
subject to a deposit account control agreement until the closing of the Merger. We shall not have access to such proceeds
until the closing of the Acquisition and only upon the satisfaction of certain other requirements, including, among other
things, effectiveness of the Resale Registration Statement (as defined below).
The Purchase Agreements provide for customary
registration rights, pursuant to their respective registration rights agreement to be entered into at the time of the closing
of the Convertible Debenture Offering (each, a “Registration Rights Agreement”). Pursuant to the Registration Rights
Agreements, the we are obligated to, among other things, (i) file a registration statement (the “Resale Registration Statement”)
with the SEC for purposes of registering the shares of Common Stock issuable upon the conversion of the Convertible Debentures
and (ii) use its best efforts to cause the Resale Registration Statement to be declared effective by the SEC as soon as practicable
after filing, and in any event no later than the effectiveness of the Acquisition. The Registration Rights Agreements contains
customary terms and conditions for a transaction of this type, including certain customary cash penalties on us for our failure
to satisfy the specified filing and effectiveness time periods.
NOTE 1 — DESCRIPTION OF BUSINESS (CONT.)
Offering of Secured Convertible Debentures
(Cont.)
On November 12, 2019, the Company filed an Amended Certificate
of Designation of the Preferences, Rights and Limitations with the Secretary of State of Delaware to remove the prohibition on
forced conversions of the Company’s Series A Preferred Stock, par value $0.001 per share, into shares of common stock in
the event the Company’s stockholders approve the Acquisition after December 31, 2019.
The proceeds of the Convertible Debenture Offering,
approximately $25 million out of which $15.9 million were received on January 2020, have been placed in a blocked bank
account, pursuant to a deposit account control agreement, to be entered into. The Company shall not have access to such
proceeds until the closing of the Acquisition and only upon the satisfaction of certain other requirements, including, among
other things, effectiveness of the Resale Registration Statement.
In connection with the Convertible Debentures, on January
17, 2020, the Company, certain of its subsidiaries, the Primary Purchasers and the representative thereof, as collateral agent,
entered into a security agreement, or the Primary Security Agreement. Pursuant to the Primary Security Agreement, the Company
and certain of its subsidiaries granted to the Primary Purchasers a first priority security interest in, a lien upon and a right
of set-off against all of their personal property (subject to certain exceptions) to secure the Primary Convertible Debentures.
On January 17, 2020, the parties also entered into a registration rights agreement, or the Primary Registration Rights Agreement.
Pursuant to the Primary Registration Rights Agreement, the Company has agreed to, among other things, (i) file a registration
statement, or the Resale Registration Statement with SEC within seven business days following the filing of an initial proxy statement
with respect to the contemplated merger by and among the Company, Intermediate, and Merger Sub, for purposes of registering the
shares of common stock issuable upon conversion of the Primary Convertible Debentures, and (ii) use
its best efforts to cause the Resale Registration Statement to be declared effective by the SEC as soon as practicable after filing,
and in any event no later than the effectiveness of the Acquisition. The Primary
Registration Rights Agreement contains customary terms and conditions for a transaction of this type, including certain customary
cash penalties on the Company for its failure to satisfy the specified filing and effectiveness time periods.
In July 2019, the Company paid all of its
outstanding bank loans in the amount of $251. During 2019, the Company repaid the entire outstanding principal balance of the Series
B Convertible Debentures to YA II in the aggregate amount of $1,225, which was paid in shares of the Company’s common stock,
and in October 31, 2019, the Company paid all of its outstanding principal balance, together with its accrued interest and a required
10% premium, of the Series A Convertible Debentures issued to YA II in the aggregate amount of $2,057 cash.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of Presentation
The accompanying consolidated financial statements
are prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP).
Principle of Consolidation
The consolidated financial statements include
the financial statements of the Company and its subsidiaries. All significant inter-company transactions and balances among the
Company and its subsidiaries are eliminated upon consolidation.
Functional Currency
The functional currency of MICT is the
U.S. dollar. The functional currency of certain subsidiaries is their local currency. The financial statements of those companies
are included in consolidation, based on translation into U.S. dollars. Assets and liabilities are translated at year-end-exchange
rates, while revenues and expenses are translated at monthly average exchange rates during the year. Differences resulting from
translation are presented in the consolidated statements of comprehensive income.
Use of Estimates
The preparation of the financial statements
in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts
of revenue and expenses during the reporting periods. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents are considered by the Company
to be highly-liquid investments, including inter-alia, short-term deposits with banks, which do not exceed maturities of three
months at the time of deposit and which are not restricted.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONT.)
Allowance for Doubtful Accounts
The Company establishes an allowance for doubtful accounts to
ensure trade and receivables are not overstated due to uncollectability. The allowance for doubtful accounts was based on specific
receivables, which their collection, in the opinion of Company’s management, is in doubt. Trade receivables are charged off
in the period in which they are deemed to be uncollectible. As of December 31, 2019, and 2018, the allowance for doubtful accounts
amounted to $116 and $1,330, respectively.
Inventories
Inventories of raw materials are stated at the lower of cost
(first-in, first-out basis) or realizable value. Cost of work in process is comprised of direct materials, direct production costs
and an allocation of production overheads based on normal operating capacity.
Property and Equipment
Property and equipment are stated at cost, net of accumulated
depreciation. Depreciation is calculated by the straight-line method over their estimated useful lives. Annual rates of depreciation
are as follows:
Leasehold improvements
|
|
Over the shorter of the lease term or
the life of the assets
|
Machinery and equipment
|
|
7-14 years
|
Furniture and fixtures
|
|
10-14 years
|
Transportation equipment
|
|
7 years
|
Computer equipment
|
|
3 years
|
Stock Based Compensation
The Company accounts for stock based compensation under the
fair market value method under which compensation cost is measured at the grant date based on the value of the award and is recognized
over the service period, which is usually the vesting period. For stock options, fair value is determined using an option-pricing
model that takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility
of the underlying stock, the expected dividends on it, and the risk-free interest rate over the expected life of the option.
Research and Development Costs
Research and development costs are charged to statements of
income as incurred net of grants from the Israel Innovation Authority (formerly known as the Israel Office of the Chief Scientist
of the Ministry of Economy), or IIA.
Earnings (Loss) per Share
Net loss per share is computed by dividing the net loss by the
weighted average number of common shares outstanding. The calculation of the basic and diluted earnings per share is the same for
all periods presented, as the effect of the potential common shares equivalents is anti-dilutive due to the Company’s net
loss position for all periods presented.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONT.)
Long-Lived Assets and Intangible Assets
Intangible assets that are not considered to have an indefinite
useful life are amortized using the straight-line basis over their estimated useful lives. The company evaluates property and equipment
and purchased intangible assets with finite lives for impairment whenever events or changes in circumstances indicate the carrying
value of an asset may not be recoverable. The Company assesses the recoverability of the assets based on the undiscounted future
cash flow and recognizes an impairment loss when the estimated undiscounted future cash flow expected to result from the use of
the asset plus the net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset.
When the Company identifies an impairment, it reduces the carrying amount of the asset to its estimated fair value based on a discounted
cash flow approach or, when available and appropriate, to comparable market values. As of December 31, 2017, no indicators of impairment
have been identified. As of December 31, 2018 all intangible assets were fully amortized.
Goodwill
Previously the goodwill was recorded at Micronet. The goodwill
impairment test was conducted in two steps. In the first step, Micronet determines the fair value of the reporting unit. If the
net book value of the reporting unit exceeds the fair value, the Micronet would then perform the second step of the impairment
test, which required the allocation of the reporting unit’s fair value of all its assets and liabilities in a manner similar
to acquisition cost allocation, with any residual fair value being allocated to goodwill. The implied fair value of the goodwill
was then compared to the carrying value to determine impairment, if any.
Micronet has one operating segment and one operating unit related
to its product offerings in the MRM market. As of December 31, 2018, Micronet’s market capitalization was
significantly lower than the net book value of the reporting unit. In establishing the appropriate market capitalization, the
Micronet looked at the date that the annual impairment test is performed (December 31, 2018). In order to calculate its market
capitalization, Micronet used the price per share of NIS 0.46. Following the results of the step one test, Micronet continued
to the second step, which was performed by allocating the reporting unit’s fair value to all of its assets and liabilities,
with any residual fair value being allocated to goodwill. Micronet determined that the carrying value of goodwill should be impaired
and therefore an impairment of $1.466 million was recorded.
Revenue Recognition
With respect to Micronet applicable revenue
recognition GAAP requirements, Micronet implements a revenue recognition policy pursuant to which it recognizes its revenues at
the amount to which it expects to be entitled when control of the products or services is transferred to its customers. Control
is generally transferred when the Company has a present right to payment and title and the significant risks and rewards of ownership
of products are transferred to its customers. There is limited discretion needed in identifying the point control passes: once
physical delivery of the products to the agreed location has occurred, Micronet no longer has physical possession of the product
and will be entitled at such time to receive payment while relieved from the significant risks and rewards of the goods delivered.
For most of Micronet’s products sales, control transfers when products are shipped.
Comprehensive Income (Loss)
FASB ASC Topic 220-10, “Reporting Comprehensive
Income,” requires the Company to report in its consolidated financial statements, in addition to its net loss, comprehensive
income (loss), which includes all changes in equity during a period from non-owner sources including, as applicable, foreign currency
items, and other items.
The Company’s other comprehensive income
for all periods presented is related to the translation from functional currency to the presentation currency.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONT.)
Income Taxes
Deferred
taxes are determined utilizing the “asset and liability” method, whereby deferred tax asset and liability account
balances are determined based on differences between financial reporting and the tax basis of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a
valuation allowance, when it’s more likely than not that deferred tax assets will not be realized in the foreseeable future.
The Company applied FASB ASC Topic 740-10-25,
“Income Taxes,” which provides guidance for recognizing and measuring uncertain tax positions and prescribes a threshold
condition that a tax position must meet for any of the benefits of the uncertain tax position to be recognized in the financial
statements. It also provides accounting guidance on derecognizing, classification and disclosure of these uncertain tax positions.
The Company’s policy on classification of all interest and penalties related to unrecognized income tax positions, if any,
is to present them as a component of income tax expense.
Financial Instruments
|
1.
|
Concentration of credit risks:
|
Financial instruments that
have the potential to expose the Company to credit risks are mainly cash and cash equivalents, bank deposit accounts and
marketable securities.
The Company holds cash and cash
equivalents, securities and deposit accounts at large banks in Israel, thereby substantially reducing the risk of loss.
The Company performs ongoing credit
evaluations of its loans to related parties for the purpose of determining the appropriate allowance impairment and has a convection
feature as a collateral. An appropriate allowance for impairment is included in the accounts.
|
2.
|
Fair value measurement:
|
The Company measures fair value
and discloses fair value measurements for financial and non-financial assets and liabilities. Fair value is based on the price
that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at
the measurement date.
The accounting standard establishes
a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels,
which are described below:
|
Level 1:
|
Quoted
prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy
gives the highest priority to Level 1 inputs.
|
|
Level 2:
|
Observable
prices that are based on inputs not quoted on active markets, but corroborated by market data.
|
|
Level 3:
|
Unobservable
inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
|
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONT.)
Financial Instruments(Cont.)
In determining fair value, the Company utilizes
valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible
and considers counterparty credit risk in its assessment of fair value.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, “Leases
(Topic 842),” which establishes the principles to report transparent and economically neutral information about the assets
and liabilities that arise from leases. This guidance results in a more faithful representation of the rights and obligations arising
from operating and capital leases by requiring lessees to recognize the lease assets and lease liabilities that arise from leases
in the statement of financial position and to disclose qualitative and quantitative information about lease transactions, such
as information about variable lease payments and options to renew and terminate leases. This guidance is effective for interim
and annual periods beginning after December 15, 2018. We used the modified retrospective transition approach in ASU No. 2018-11
and apply the new lease requirements through a cumulative-effect adjustment in the period of adoption. The new standard had no
effect on our consolidated financial statements, as we have no right of use assets and, or lease liabilities. The new standard
provides a number of optional practical expedients in transition. We elected the package of practical expedients, which permits
us not to reassess, under the new standard, our prior conclusions about lease identification, lease classification and initial
direct costs. We used the practical expedient under which, a lease that, at the commencement date, has a lease term of 12 months
or less and does not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise. We didn’t
elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to us. Further,
this new accounting standard had no a material impact on our debt covenants. The implementation of this standard didn’t have
a material impact on our results of operations.
NOTE 3 — FAIR VALUE MEASUREMENTS
Items carried at fair value on an
ongoing basis as of December 31, 2019 and 2018 are classified in the table below in one of the three categories described in
Note 2.
|
|
Fair value measurements
|
|
|
|
December 31, 2018
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash and cash equivalents
|
|
$
|
2,174
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,174
|
|
Total
|
|
$
|
2,174
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,174
|
|
|
|
Fair value measurements using input type
|
|
|
|
December 31, 2019
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash and cash equivalents
|
|
$
|
3,154
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,154
|
|
Restricted cash
|
|
|
45
|
|
|
|
-
|
|
|
|
-
|
|
|
|
45
|
|
Short-term loan to Related party Micronet Ltd, net
|
|
|
-
|
|
|
|
281
|
|
|
|
-
|
|
|
|
281
|
|
Total
|
|
|
3,199
|
|
|
|
281
|
|
|
|
-
|
|
|
|
3,480
|
|
NOTE 4 — INVENTORIES
Inventories are stated at the lower of cost
or market, computed using the first-in, first-out method. Inventories consist of the following:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Raw materials
|
|
$
|
-
|
|
|
$
|
3,800
|
|
Work in process and finished product
|
|
|
-
|
|
|
|
545
|
|
|
|
$
|
-
|
|
|
$
|
4,345
|
|
NOTE 5 — PROPERTY AND EQUIPMENT,
NET
Property and equipment consists of the following
as of December 31, 2019 and 2018:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Building
|
|
$
|
-
|
|
|
$
|
1,851
|
|
Computer equipment
|
|
|
15
|
|
|
|
790
|
|
Dies
|
|
|
|
|
|
|
553
|
|
Furniture and fixtures
|
|
|
23
|
|
|
|
313
|
|
Machinery and equipment
|
|
|
7
|
|
|
|
299
|
|
Transportation equipment
|
|
|
68
|
|
|
|
62
|
|
|
|
|
113
|
|
|
|
3,868
|
|
Less accumulated depreciation
|
|
|
(84
|
)
|
|
|
(3,207
|
)
|
|
|
$
|
29
|
|
|
$
|
661
|
|
Depreciation expenses totaled $88 and $312,
for the years ended December 31, 2019 and 2018, respectively.
NOTE 6 — INTANGIBLE ASSETS AND OTHERS,
NET
Composition:
|
|
Useful life
|
|
December 31,
|
|
|
|
years
|
|
2019
|
|
|
2018
|
|
Original amount:
|
|
|
|
|
|
|
|
|
Technology
|
|
5
|
|
$
|
-
|
|
|
$
|
2,010
|
|
Customer related intangible assets
|
|
3-5
|
|
|
-
|
|
|
|
3,470
|
|
|
|
|
|
$
|
-
|
|
|
$
|
5,480
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
|
|
|
Technology
|
|
5
|
|
$
|
-
|
|
|
$
|
2,010
|
|
Customer related intangible assets
|
|
3-5
|
|
|
-
|
|
|
|
3,470
|
|
|
|
5
|
|
$
|
-
|
|
|
$
|
5,480
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Amount:
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Prepaid lease expenses and capitalization of license
|
|
|
|
|
-
|
|
|
|
434
|
|
|
|
|
|
$
|
-
|
|
|
$
|
434
|
|
NOTE
7 — SHORT-TERM BANK LOANS:
Composition:
|
|
Interest rate
as of
December 31,
|
|
|
|
Total short-term liabilities
|
|
|
|
2018
|
|
Linkage
|
|
December 31,
|
|
|
|
%
|
|
basis
|
|
2019
|
|
|
2018
|
|
Due to banks
|
|
Prime plus 2.45%
Prime plus 2.5%
|
|
NIS
|
|
$
|
-
|
|
|
$
|
2,330
|
|
Current portion
|
|
|
|
|
|
|
-
|
|
|
|
476
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
2,806
|
|
As of December 31, 2018, the Company had short-term
bank credit of $2,806 comprised as follows: $476 current portion of long-term loans of Micronet and $1,566 of short-term bank loans
that bear interest of prime plus 2.45% through prime plus 2.5% paid either on a monthly or weekly basis and long term loans of
$764 that were classified to the short term loans due to the fact Micronet does not meet its covenants.
In
July 2019, the Company paid all of its outstanding bank loans in the amount of $251.
As of December 31, 2019, the Company had no
short-term bank credit.
NOTE 8 — LOANS FROM OTHERS
On March 29, 2018, the Company and MICT Telematics
Ltd. (formerly known as Enertec Electronics Ltd.), or MICT Telematics, a subsidiary of the Company, executed and closed on a
securities purchase agreement with YA II whereby the Company issued and sold to YA II (1) certain Series A Convertible
Debentures in the aggregate principal aggregate amount of $3,200, or the Series A Debentures, and (2) a Series B Convertible
Debenture in the principal aggregate amount of $1,800, or the Series B Debenture. The Series A Debentures were issued in
exchange for the cancellation and retirement of certain promissory notes issued by the Company to YA II on October 28, 2016,
December 22, 2016, June 8, 2017 and August 22, 2017, with a total outstanding aggregate principal amount of $3,200. The
Series B Debenture was issued and sold for aggregate gross cash proceeds of $1,800.
In addition, pursuant to the terms of the securities purchase
agreement, the Company agreed to issue to YA II a warrant to purchase up to 375,000 shares of the Company’s common stock
at an exercise price of $2.00 per share, a warrant to purchase up to 200,000 shares of the Company’s common stock at an exercise
price of $3.00 per share and a warrant to purchase up to 112,500 shares of the Company’s common stock at an exercise price
of $4.00 per share.
In conjunction with the issuance of the Series A Debentures
and the Series B Debentures, a total of $273 in fees and expenses were deducted from the aggregate gross proceeds and paid to YA
II.
On December 17, 2018, the Company entered into an
agreement with YA with respect to the warrants to purchase an aggregate of 1,187,500 shares of the Company’s common
stock held by YA, with exercise prices ranging from $1.5 to $4.00 and expiration dates ranging from June 30, 2021 to March
29, 2023.
Pursuant to the YA Agreement, in connection with the transactions
contemplated by the Acquisition Agreement and effective upon the consummation of the acquisition, the Warrants shall be replaced
by certain new warrants, or the Replacement Warrants, exercisable at $2.00 per share for a number of ordinary shares of MICT equal
to the number of shares underlying the Warrants immediately prior to the effectiveness of the acquisition (subject to adjustment
as described therein). YA II also agreed that it would not convert the Series A Debentures and the Series B Debenture into more
than one million shares of the Company’s common stock during the period between the execution of the YA Agreement and the
earlier to occur of the effectiveness of the acquisition or the termination of the Acquisition Agreement.
As of February 21, 2019, the Company issued
to YA II 250,000 shares of its common stock as part of a conversion of $250 of the Series A Debenture at a conversion price of
$1.00 per share.
On March 13, 2019, the Company issued an additional
996,817 shares of its common stock as part of a conversion of $1,000 of the Series A Debenture at a conversion price of $1.10 per
share.
On October 31, 2019, the Company paid
all of its outstanding principal balance together with its accrued interest and required 10% premium of the Series A
Debentures in the aggregate amount of $2,057.
On June 4, 2019, the Company entered
into a Securities Purchase Agreement (the “Note Purchase Agreement”) with BNN, pursuant to which BNN agreed to
purchase from us $2 million of convertible notes, which subscription amount shall be subject to increase by up to an
additional $1 million as determined by BNN and us (collectively, the “Convertible Notes”). The Convertible Notes,
which shall be convertible into up to 2,727,272 shares of Common Stock (using the applicable conversion ratio of $1.10 per
share), shall be sold together with certain Common Stock purchase warrants (the “Note Warrants”) to purchase up
to 2,727,272 shares of Common Stock (representing 100% of the aggregate number of shares of Common Stock into which the
Convertible Notes are convertible) (the “Convertible Note Offering”). The Convertible Notes shall have a duration
of two (2) years.
Subject to stockholder approval of the Convertible
Note Offering, the Convertible Notes shall be convertible into Common Stock at the option of the Note Purchaser at any time and
from time to time, and upon the issuance of one or more Convertible Notes. Darren Mercer, the Chief Executive Officer of BNN, was
appointed to the Company’s board of directors (the “Note Director”). The Note Purchase Agreement provides for
customary registration rights.
On January 21, 2020, the Company entered
into a conversion agreement with BNN see note 19.
NOTE 9 — LOSS OF CONTROL OF SUBSIDIARY
As of December 31, 2018, we held 49.89% of
Micronet’s issued and outstanding shares, and together with an irrevocable proxy in our benefit from Mr. David Lucatz, our
President and Chief Executive Officer, we held 50.07% of the voting interest in Micronet as of such date. On February 24, 2019,
Micronet closed a public equity offering on the TASE. As a result of Micronet’s offering, our ownership interest in Micronet
was diluted from 49.89% to 33.88%. On February 24, 2019, Mr. David Lucatz, our President and Chief Executive Officer, executed
an irrevocable proxy assigning his voting power over 1,980,000 shares of Micronet for our benefit. As a result, the voting interest
in Micronet stood at 39.53% of the issued and outstanding shares of Micronet. The decrease in the Company’s voting interest
in Micronet resulted in the loss of control of Micronet. As a result, effective as of February 24, 2019, we no longer include Micronet’s
operating results in our financial statements. Therefore, commencing from February 24, 2019, the Company began to account for the
investment in Micronet in accordance with the equity method.
NOTE 9 — LOSS OF CONTROL OF
SUBSIDIARY (CONT.)
On September 5, 2019, Micronet closed a public
equity offering on the TASE. As a result, our ownership interest in Micronet was diluted from 33.88% to 30.48%, and our current
voting interest in Micronet stands at 37.79% of the issued and outstanding shares of Micronet.
The Company recorded
an impairment of its investment in Micronet and change in fair value in loan to Micronet as of December 31, 2019 in the total amount
of $281.
The method used for
determining fair value of the investment in Micronet was based on a quoted market price on the TASE.
While Micronet is
a publicly traded company in Israel, its shareholder base is widely spread and we continue to be Micronet’s largest shareholder,
as of September 5, 2019 maintaining a voting interest of 37.79% of its issued and outstanding shares as of September 5, 2019.
We believe that since most items that may require shareholder approval required majority consent, we exert significant influence
over such voting matters which may include the appointment and removal of directors. In that regard, to date, we have appointed
a majority of the directors of Micronet’s board of directors.
Based on the above, although we do
not control Micronet and thus do not consolidate Micronet’s financial statements according to U.S. GAAP. We also do not consider
Micronet to be a discontinued operation since we did not view the dilution of our interesta as a strategic shift that had or will
have a major effect on our operations. .
The following is a summary of Micronet’s operation for
the year ended December 31, 2019, and the impact on the Company:
|
|
Year ended
December 31,
|
|
|
|
2019
|
|
Revenues
|
|
$
|
8,747
|
|
|
|
|
|
|
Gross profit
|
|
|
1,361
|
|
Loss from operations
|
|
|
(3,052
|
)
|
|
|
|
|
|
Net Loss
|
|
$
|
(3,268
|
)
|
|
|
|
|
|
Net loss in equity method (*)
|
|
|
(608
|
)
|
|
|
|
|
|
Impairment of equity method investment
|
|
|
(187
|
)
|
*including Gain from change of ownership interests
|
|
|
101
|
|
NOTE 10 — Loan
to MICRONET LTD.
On September 19, 2019, MICT Telematics Ltd., or MICT Telematics,
a wholly owned subsidiary of MICT, Inc., entered into a loan agreement with Micronet,, pursuant to which MICT Telematics loaned
Micronet $250 (“First Loan”) on certain terms and conditions, or the First Loan. The proceeds from the First Loan were
designed for Micronet working capital and general corporate needs. The First Loan did not bear any interest and was due and payable
upon the earlier of (i) December 31, 2019; or (ii) at such time Micronet receives an investment of at least $250 from non-related
parties.
NOTE 10 — Loan
to MICRONET LTD. (CONT.)
In view of Micronet’s working capital
needs, On November 18, 2019 the Company entered into an additional loan agreement with Micronet for the loan of $125, pursuant
to terms and conditions identical to those governing the First Loan including in connection with repayment terms (“Second
Loan”), Accordingly prior to the approval of the Convertible Loan by Micronet shareholders ss of December 31 2019, the
company transferred to Micronet pursuant to the First and Second Loan, a total sum of $375.
On January 1st 2020 the Convertible Loan agreement which the
company agreed to loan Micronet a total of $500 (the “Convertible Loan”) was approved by Micronet’s shareholders
meeting and at such time the First and Second Loan were converted to convertible notes along with the reminder amounts due to be
loaned under of the Convertible Loan in the sum of $125 was loaned to the Company ($500 in the aggregate). Accordingly prior to
the approval of the Convertible Loan by Micronet shareholders as of December 31 2019, the company transferred to Micronet pursuant
to the First and Second Loan, a total sum of $375.
The Convertible Loan bears interest at a rate of 3.95%
calculated and is due on a quarterly basis. In addition, the Convertible Loan, if not converted, shall be repaid in four
equal installments, the first of such installment payable following the fifth quarter after the issuance of the Convertible
Loan, with the remaining three installments due on each subsequent quarter thereafter, such that the Convertible Loan shall
be repaid in full upon the lapse of 24 months from its grant. In addition, the outstanding principal balance of the
Convertible Loan, and all accrued and unpaid interest, Interest is convertible at the Company’s option, at a conversion
price equal to 0.38 NIS per Micronet share. Pursuant to the Convertible Loan agreement, Micronet also agreed to issue the
Company an option to purchase up to one share of Micronet’s ordinary shares for each ordinary share that is issued as a
result of a conversion of the Convertible Loan at an exercise price of 0.60 NIS per share, exercisable for a period of 15
months.
The company recognized an impairment loss on financial assets
derived from the measurement preformed by compering the quoted market price of Micronet’s share on the Tel-Aviv stock exchange
t its carrying value. As of December 31, 2019 the company recorded a financial expenses on the loan amounted to $94.
NOTE 11 — ACCRUED SEVERANCE PAY,
NET
|
The Company is liable for severance pay to its employees pursuant to the applicable local laws prevailing in the respective countries of employment and employment agreements. For Israeli employees, the liability is partially covered by individual managers’ insurance policies under the name of the employee, for which the Company makes monthly payments. The Company may make withdrawals from the managers’ insurance policies only for the purpose of paying severance pay.
|
|
The amounts accrued and the amounts funded with managers’ insurance policies are as follows:
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Accrued severance pay
|
|
$
|
50
|
|
|
$
|
208
|
|
Less - amount funded
|
|
|
|
|
|
|
(98
|
)
|
|
|
$
|
50
|
|
|
$
|
110
|
|
NOTE 12 — PROVISION FOR INCOME TAXES
A.
|
Basis of Taxation
United States:
On December 22, 2017, the U.S. Tax Cuts and
Jobs Act, or the Act, was enacted, which significantly changed U.S. tax laws. The Act lowered the tax rate of the Company. The
statutory federal income tax rate was 21% in 2018 and in 2019.
Israel:
The Company’s Israeli subsidiaries
and associated are governed by the tax laws of the state of Israel which had a general tax rate of 23% in 2019 and 23% in
2018. The Company is entitled to various tax benefits in Israel by virtue of being granted the status of an “Approved
Enterprise Industrial Company” as defined by the tax regulations. The benefits include, among other things, a reduced
tax rate.
In December 2016, the Israeli government published
the Economic Efficiency Law (2016) (legislative amendments to accomplish budget goals for the years 2019 and 2018). According to
such law, in 2017 the general tax rate was decreased by 1% and starting in 2018 was decreased by 2%; so that the tax rate was 23%
in 2019 and was 23% in 2018 and onwards. In addition, the tax rate that applies to Preferred Enterprises in preferred areas was
be decreased by 1.5% to 7.5% starting January 1, 2017.
|
|
|
Year ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Current:
|
|
|
|
|
|
|
Domestic
|
|
$
|
-
|
|
|
$
|
(7
|
)
|
Foreign (Israel)
|
|
|
(17
|
)
|
|
|
(62
|
)
|
|
|
|
(17
|
)
|
|
|
(69
|
)
|
|
|
|
|
|
|
|
|
|
Taxes related to prior years
|
|
|
-
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Deferred taxes, net
|
|
|
-
|
|
|
|
(522
|
)
|
Total provision for income taxes
|
|
$
|
(17
|
)
|
|
$
|
(606
|
)
|
C.
|
The reconciliation of income tax at the U.S. statutory rate to the Company’s effective tax rate as follows:
|
|
|
2019
|
|
|
2018
|
|
U.S. federal statutory rate
|
|
|
21
|
%
|
|
|
21
|
%
|
Tax rate difference between U.S. and Israel
|
|
|
2
|
%
|
|
|
2
|
)%
|
Effect of Israeli tax rate benefit
|
|
|
-
|
%
|
|
|
(7
|
)%
|
Effect of previous years
|
|
|
-
|
%
|
|
|
-
|
%
|
Change in valuation allowance
|
|
|
(16
|
)%
|
|
|
(9
|
)%
|
Others
|
|
|
(7
|
)%
|
|
|
(7
|
)%
|
Effective tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
NOTE 12 — PROVISION FOR INCOME TAXES
(CONT.)
D.
|
Deferred Tax Assets and Liabilities
|
Deferred tax reflects the net tax effects
of temporary differences between the carrying amounts of assets or liabilities for financial reporting purposes and the amounts
used for income tax purposes. As of December 31, 2019 and 2018, the Company’s deferred taxes were in respect of the following:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Net operating loss carry forward
|
|
$
|
1,799
|
|
|
$
|
1,509
|
|
Provisions for employee rights and other temporary differences
|
|
|
20
|
|
|
|
278
|
|
Deferred tax assets before valuation allowance
|
|
|
1,819
|
|
|
|
1,787
|
|
Valuation allowance
|
|
|
(1,819
|
)
|
|
|
(1,787
|
)
|
Deferred tax assets
|
|
|
-
|
|
|
|
-
|
|
Deferred tax liability
|
|
|
-
|
|
|
|
-
|
|
Deferred tax assets, net
|
|
$
|
-
|
|
|
$
|
-
|
|
E.
|
Tax losses
As of December 31, 2019, the Company’s net operating loss carry
forward amounted to approximately $8,567 based on the tax report of 2018 along with 2019 estimated tax results, which may be utilized
to offset future taxable income for United States federal tax purposes. This net operating loss carry forward begins to expire
in 2022. Since it is more likely than not that the Company will not realize a benefit from this net operating loss carry
forward, a 100% valuation allowance has been recorded to reduce the deferred tax asset to its net realizable value.
|
F.
|
Tax Assessments
The Company received final tax assessments
in the United States through tax year 2012, and with regard to the Israeli subsidiaries received final tax assessments up until
tax year 2012.
|
G.
|
Uncertain Tax Position
The Company did not record any liability for
income taxes associated with unrecognized tax benefits during 2018 and 2019.
|
NOTE 13 — RELATED PARTIES
MICT’s policy is to enter into transactions
with related parties on terms that are on the whole no less favorable to it than those that would be available from unaffiliated
parties at arm’s length. Based on its experience in the business sectors in which it operates and the terms of the transactions
with unaffiliated third parties, MICT believes that all of the transactions described below met this policy standard at the time
they occurred.
On November 7, 2012, the board of directors
and the audit committee of Micronet approved the entry into the Micronet Agreement which is a management and consulting services
agreement with DLC, an entity controlled by Mr. Lucatz, MICT’s Chief Executive Officer and significant shareholder, pursuant
to which effective November 1, 2012, Mr. Lucatz agreed to devote 60% of his time to Micronet matters for the three year term of
the agreement and Micronet agreed to pay the Micronet Management Fees to the entities controlled by Mr. Lucatz, and cover other
monthly expenses. Such agreement was further subject to the approval of Micronet’s stockholders, which was obtained at a
special meeting held on January 30, 2013 for that purpose and went into effect following its execution on February 8, 2013. The
Micronet Agreement was extended on November 1, 2015 for three years on the same terms and conditions and was approved by Micronet’s
board of directors on October 11, 2015 and Micronet’s shareholders on November 16, 2015. Effective July 6, 2017, DLC has
consented to reduce the Micronet Management Fees to NIS 23,000 and by its further consent, as of October 31, 2018 management and
consulting services are rendered for no consideration.
On November 26, 2012, DLC entered into a management
and consulting services agreement with MICT, effective November 1, 2012, which provides that MICT would pay the entities controlled
by Mr. Lucatz: (i) management fees of $13,333 on a monthly basis, and cover other monthly expenses, (ii) an annual bonus of 3%
of the amount by which the annual EBITDA for such year exceeds the average annual EBITDA for 2011 and 2010, and (iii) a bonus of
0.5% of the purchase price of any acquisition or capital raising transaction, excluding the public offering contemplated at such
time, completed by us during the term of the agreement.
On June 6, 2018, the Compensation Committee
of MICT approved maintaining Mr. Lucatz’s annual base salary of $400,000. In addition, on June 6, 2018, the Compensation
Committee of MICT approved a discretionary cash bonus to Mr. Lucatz, MICT’s Chief Executive Officer, in the aggregate amount
of $300,000 as well the issuance of a stock option to purchase 300,000 shares of MICT’s common stock, with an exercise price
of $1.32 per share, with 100,000 shares of common stock vesting immediately and 100,000 shares of common stock vesting on each
of the first two anniversaries of the date of grant. The bonus and option were granted to Mr. Lucatz in light of his contributions
to MICT’s successful sale of its then wholly owned subsidiary, Enertec Systems 2001 Ltd.
On November 19, 2018, the Company and DLC,
a company owned by our President and Chief Executive Officer, each provided, separately and jointly, to Micronet, a commitment
to provide Micronet with an aggregate amount of $400,000, subject to the Company being the sole investor in a transaction between
the Company and Micronet, of a minimum investment of $250,000, whereby DLC would provide up to an additional $150,000. As of December
15, 2018, this commitment is no longer in effect.
On February 24, 2019, Mr. David Lucatz, our
Chairman of the Board of Directors, President and Chief Executive Officer, participated in Micronet’s public equity offering
on the TASE. Mr. Lucatz purchased 1,980 units, with each unit consisting of 1,000 ordinary shares of Micronet and options to purchase
400 ordinary shares of Micronet, at a price per unit of NIS 435 (approximately $123), for an aggregate investment of NIS 435,000
(approximately $123,000) by Mr. Lucatz. As a result of this offering, the Company’s ownership and voting interests in Micronet
were each diluted. Mr. Lucatz subsequently executed the Micronet Proxy.
Subject to, and upon closing of, the Acquisitions, MICT will
agreed to issue to certain of its current and former directors, including its Chief Executive Officer,/officers the following awards
(i) our former director, Miki Balin, and two of our current directors, Chezy (Yehezkel) Ofir and Jeffrey P. Bialos, including our
Chief Executive Officer, Mr. David Lucatz, 300,000 options to purchase MICT common stock (1,200,000 options in the aggregate) with
an exercise price equal to the purchase price per share of Merger Sub stock which shall be granted as success bonuses under MICT’s
existing 2012 and 2014 Stock Incentive Plans or under the Merger Sub equity plan (including the Merger Sub Israeli sub-plan) and
which shall be, converted into replacement options of MICT Replacement Options (as described in Section 2.6(b) of the Acquisition
Merger Agreement) and which, for the, avoidance of doubt, and notwithstanding the termination of the employment or directorship
of the, option holder, shall expire on the 15 month anniversary of the closing date); and (ii) up to an additional, 300,000 restricted
shares of MICT common stock, to be issued to officers and service providers of MICT.
Transactions with related parties
|
|
Year ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Consulting fee paid to controlling shareholder
|
|
$
|
400
|
|
|
$
|
400
|
|
Bonus paid to controlling shareholder
|
|
|
36
|
|
|
|
300
|
|
Others
|
|
|
22
|
|
|
|
|
|
Stock based compensation granted to controlling shareholder
|
|
|
50
|
|
|
|
218
|
|
Total
|
|
|
508
|
|
|
|
918
|
|
NOTE 14
— SHAREHOLDER’S EQUITY
Common stock confers upon its holders the
rights to receive notice to participate and vote in general meetings of the Company, and the right to receive dividends if declared.
Pursuant to our 2012 Stock Incentive Plan
as amended and approved at the Company’s Annual Meeting of Shareholders in December 2018, the board of directors is authorized
to award stock options to purchase shares of common stock to our officers, directors, employees and certain others, up to a total
of 5,000,000 shares of common stock, subject to adjustments in the event of a stock split, stock dividend, recapitalization or
similar capital change. Stock based compensation amounted to $61 and $377 for the years ended December 31, 2019 and 2018, respectively.
The exercise price of the options granted
under the 2012 Stock Incentive Plan is set by the board of directors and will not be less than the closing sale price on Nasdaq
Capital Market at the grant date. As of December 31, 2019, 3,652,400 shares of common stock remain available for future awards
under the 2012 Stock Incentive Plan. Under the 2012 Stock Incentive Plan, unless determined otherwise by the board, options generally
vest over a two or three year period from the date of grant and expire 10 years after the grant date. Unvested options are forfeited
90 days following the termination of employment. Any options that are forfeited before expiration become available for future grants.
On July 17, 2014 the Company adopted the 2014
Stock Incentive Plan pursuant to which the board of directors is authorized to issue stock options, restricted stock and other
awards to officers, directors, employees, consultants and other service providers. The board of directors initially reserved 100,000
shares of the Company’s common stock for issuance pursuant to awards that may be made pursuant to the 2014 Stock Incentive
Plan. The 2014 Stock Incentive Plan was amended in December 2018 and the number of shares of the Company’s common stock reserved
for issuance under the plan was increased to 600,000 shares. The 2014 Stock Incentive Plan was approved by the stockholders on
September 30, 2014 and the amendment to the 2014 Stock Incentive Plan was approved by the stockholders on December 26, 2018. As
of December 31, 2019, 76,775 shares of common stock remain available for future awards under the 2014 Stock Incentive Plan.
The following table summarizes information
about stock options outstanding and exercisable as of December 31, 2019:
Options Outstanding
|
|
|
Options Exercisable
|
|
Number
Outstanding on
December 31,
2019
|
|
|
Weighted Average
Remaining
Contractual Life
|
|
|
Number
Exercisable on
December 31,
2019
|
|
|
Exercise Price
|
|
|
|
|
Years
|
|
|
|
|
|
$
|
|
|
15,000
|
|
|
|
3.5
|
|
|
|
15,000
|
|
|
|
4.30
|
|
|
341,000
|
|
|
|
5
|
|
|
|
341,000
|
|
|
|
4.30
|
|
|
656,000
|
|
|
|
8.5
|
|
|
|
556,000
|
|
|
|
1.32
|
|
|
125,000
|
|
|
|
8.75
|
|
|
|
125,000
|
|
|
|
1.4776
|
|
|
30,000
|
|
|
|
9.25
|
|
|
|
-
|
|
|
|
-
|
|
|
1,167,000
|
|
|
|
|
|
|
|
1,037,000
|
|
|
|
|
|
NOTE 14 — SHAREHOLDER’S EQUITY
(CONT.)
B.
|
Stock Option Plan - (continued):
|
|
|
2019
|
|
|
2018
|
|
|
|
Number of
Options
|
|
|
Weighted Average Exercise Price
|
|
|
Number of
Options
|
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
$
|
|
|
|
|
|
$
|
|
Options outstanding at the beginning of year:
|
|
|
1,297,000
|
|
|
|
2.34
|
|
|
|
536,000
|
|
|
|
4.30
|
|
Changes during the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
30,000
|
|
|
|
1.32
|
|
|
|
861,000
|
|
|
|
1.34
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(160,000
|
)
|
|
|
2.81
|
|
|
|
(100,000
|
)
|
|
|
4.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at end of year
|
|
|
1,167,000
|
|
|
|
2.24
|
|
|
|
1,297,000
|
|
|
|
2.34
|
|
Options exercisable at year-end
|
|
|
1,037,000
|
|
|
|
2.36
|
|
|
|
1,097,000
|
|
|
|
1.35
|
|
Subject to, and upon closing of the Acquisition
Agreement, the securities issued upon the exercise or conversion of outstanding options will be in accordance with the terms on
which they were granted initially.
The fair value of each option granted is estimated
on the date of grant, using the Black-Scholes option-pricing model with the following weighted average assumptions: dividend yield
of 0% for all years; expected volatility: 2018 – 37.30% 2019-48.61%; risk-free interest rate: 2018 – 2.81% 2019-2.6%;
and expected life: 2018- 6 years 2019-6.5 years.
The Company is required to assume a dividend
yield as an input in the Black-Scholes model. The dividend yield assumption is based on the Company’s historical experience
and expectation of future dividends payouts and may be subject to change in the future.
The Company uses historical volatility in
accordance with FASB ASC Topic 718, “Compensation - stock compensation”. The computation of volatility uses historical
volatility derived from the Company’s exchange-traded shares.
The risk-free interest assumption is the implied
yield currently available on U.S. Treasury zero-coupon bonds, issued with a remaining term equal to the expected life term of the
Company’s options.
Pre-vesting rates forfeitures were zero based
on pre-vesting forfeiture experience.
The Company uses the simplified method to
compute the expected option term for options granted.
During
2019, the board of the directors approved the grant of 30,000 options with exercise prices of $1.32, out of which 0 options
expire during the year.
NOTE 14 — SHAREHOLDER’S EQUITY
(CONT.)
On February, 2019, and on April, 2019 and on December,
2019, the Company issued 145,300, 275,300 and 80,000, respectively, shares of its common stock to its lawyers, directors,
employees and consultants. The Company recognized total expenses of $603 in the year ended on December 31, 2019.
On June 4, 2019, we entered into a Securities
Purchase Agreement (the “Preferred Securities Purchase Agreement”) with the purchasers named therein (the “Preferred
Purchasers”), pursuant to which we agreed to sell 3,181,818 shares of newly designated Series A Convertible Preferred Stock
with a stated value of $2.20 per share (the “Preferred Stock”). The Preferred Stock, which shall be convertible into
up to 6,363,636 shares of our common stock, par value $0.001 per share (the “Common Stock”), shall be sold together
with certain Common Stock purchase warrants (the “Preferred Warrants”) to purchase up to 4,772,727 shares of Common
Stock (representing 75% of the aggregate number of shares of Common Stock into which the Preferred Stock shall be convertible),
for aggregate gross proceeds of $7 million to us (the “Preferred Offering”).
The Preferred Stock shall be convertible
into Common Stock at the option of each holder of Preferred Stock at any time and from time to time, at a conversion price of
$1.10 per share and shall also convert automatically upon the occurrence of certain events, including the completion by us of
a fundamental transaction. Commencing on March 31, 2020, cumulative cash dividends shall become payable on the Preferred
Stock at the rate per share of 7% per annum, which rate shall increase to 14% per annum on June 30, 2020. We shall also have
the option to redeem some or all of the Preferred Stock, at any time and from time to time, beginning on December 31, 2019.
The holders of Preferred Stock shall vote together with the holders of Common Stock as a single class on as-converted basis,
and the holders of Preferred Stock holding a majority-in-interest of the Preferred Stock shall be entitled to appoint an
independent director to our board of directors (the “Preferred Director”). The Preferred Securities Purchase
Agreement provides for customary registration rights.
The Preferred Warrants shall have an
exercise price of $1.01 (subject to customary adjustment in the event of future stock dividends, splits and the like), which
is above the average price of the Common Stock during the preceding five trading days of entry into the Preferred Securities
Purchase Agreement, and shall be exercisable immediately, until the earlier of (i) two years from the date of issuance or
(ii) the later of (a) 180 days after the closing by the Company of a change of control transaction, or (b) the
company’s next debt or equity financing of at least $20 million.
On July 29, 2019, the Company completed the
first closing in the Preferred Offering, pursuant to which it sold 2,386,363 shares of Preferred Stock and 3,579,544 accompanying
Preferred Warrants for aggregate gross proceeds of $5,250. The Company paid an aggregate of $420 in fees in with respect to the
Preferred Offering.
In December 31, 2019 the company received
additional amount of $1,200, During January 2020 the company received additional amount of $550, see also note 19.
Offering of Convertible Note and Warrants
On June 4, 2019, we entered into a Securities
Purchase Agreement (the “Note Purchase Agreement”) with BNN, subject to approval by the Nasdaq Stock Market for as to the
eligibility of the transaction, pursuant to which BNN agreed to purchase from us $2 million
of convertible notes, which subscription amount shall be subject to increase by up to an additional $1 million as determined by
BNN and us (collectively, the “Convertible Notes”). The Convertible Notes, which shall be convertible into up to 2,727,272
shares of Common Stock (using the applicable conversion ratio of $1.10 per share), shall be sold together with certain Common Stock
purchase warrants (the “Note Warrants”) to purchase up to 2,727,272 shares of Common Stock (representing 100% of the
aggregate number of shares of Common Stock into which the Convertible Notes are convertible) (the “Convertible Note Offering”).
The Convertible Notes shall have a duration of two (2) years.
The Convertible Notes shall be convertible into Common Stock
at the option of the Note Purchaser at any time and from time to time, and upon the issuance of one or more Convertible Notes.
Darren Mercer, the Chief Executive Officer of BNN, was appointed to the Company’s board of directors (the “Note Director”).
The Note Purchase Agreement provides for customary registration rights. The terms of the note purchase agreement were approved
by Nasdaq Stock Market on July 31, 2019 and as a result the company issued the convertible notes along with the warrants.
The Note Warrants shall have an exercise price
of $1.01 (subject to customary adjustment in the event of future stock dividends, splits and the like), and shall be exercisable
immediately upon receipt of stockholder approval of the Convertible Note Offering, until the earlier of (i) two years from the
date of issuance or (ii) the later of (a) 180 days after the closing by the Company of a change of control transaction, or (b)
the company’s next debt or equity financing of at least $20 million.
On January 21, 2020, we entered into a
Conversion Agreement with BNN, pursuant to which BNN agreed to convert the outstanding convertible note, issued on July 31,
2019, into 1,818,181 shares of the Company’s newly-designated Series B Preferred Stock, par value $0.001 per share, with
a stated value of $1.10 per share (the “Series B Preferred”) (collectively, the “Conversion”). In accordance
with the Conversion, the Company filed a Certificate of Designation of Preferences, Rights and Limitations of Series B Preferred
with the Secretary of State of the State of Delaware on January 21, 2020 to designate the rights and preferences of up to 1,818,181
shares of Series B Preferred., see also note 19.
NOTE 15 — SEGMENT REPORTING
The Company accounts for its segment information
in accordance with the provisions of FASB ASC Topic 280-10, “Segment Reporting,” or ASC 280-10. ASC 280-10 establishes
annual and interim reporting standards for operating segments of a company. ASC 280-10 requires disclosures of selected segment-related
financial information about products, major customers, and geographic areas based on the Company’s internal accounting methods.
Following Enertec’ sale, the Company has one
segment reporting only.
|
1.
|
Geographic Areas Information:
|
Sales: Classified by Geographic Areas:
The following presents total revenue for the
years ended December 31, 2019 and 2018 by geographic area:
|
|
Year ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
United States
|
|
$
|
327
|
|
|
$
|
10,834
|
|
Israel
|
|
|
14
|
|
|
|
119
|
|
Other
|
|
|
136
|
|
|
|
3,209
|
|
Total
|
|
$
|
477
|
|
|
$
|
14,162
|
|
There were two customers that represented
38% and 17% of the Company’s total revenue in 2018. There were two customers that represented 23% and 21% of the Company’s
total revenue in 2019.
NOTE 16 — SUPPLEMENTARY
FINANCIAL STATEMENTS INFORMATION
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Prepaid expenses
|
|
$
|
926
|
|
|
$
|
164
|
|
Government departments and agencies receivables
|
|
|
11
|
|
|
|
129
|
|
Others
|
|
|
-
|
|
|
|
46
|
|
|
|
$
|
937
|
|
|
$
|
339
|
|
B.
|
Other Current Liabilities:
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Employees and wage-related liabilities
|
|
$
|
29
|
|
|
$
|
442
|
|
Deferred revenues and credit card
|
|
|
-
|
|
|
|
88
|
|
Accrued expenses
|
|
|
254
|
|
|
|
442
|
|
Other
|
|
|
7
|
|
|
|
239
|
|
|
|
$
|
290
|
|
|
$
|
1,211
|
|
C.
|
Earnings (loss) per Share:
|
Net loss per share is computed by dividing the net loss by the
weighted average number of common shares outstanding. The calculation of the basic and diluted earnings per share is the same for
all periods presented, as the effect of the potential common shares equivalents is anti-dilutive due to the Company’s net
loss position for all periods presented.
The following table sets forth the computation
of basic and diluted net earnings (losses) per share attributable to MICT Inc:
|
|
Year ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Numerator:
|
|
|
|
|
|
|
Amount for basic earnings per share
|
|
$
|
(4,217
|
)
|
|
$
|
(2,610
|
)
|
Effect of dilutive instruments
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Amount for diluted earnings per share
|
|
|
(4,217
|
)
|
|
|
(2,610
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share - weighted average of shares
|
|
|
10,697,329
|
|
|
|
9,166,443
|
|
Loss per share attributable to MICT Inc.:
|
|
|
|
|
|
|
|
|
Basic and diluted continued operation
|
|
$
|
(0.39
|
)
|
|
$
|
(0.81
|
)
|
Basic and diluted discontinued operation
|
|
$
|
-
|
|
|
$
|
0.56
|
|
Anti-Dilutive Potentially dilutive securities
|
|
|
26,174,731
|
|
|
|
10,529,588
|
|
NOTE 17 — DISCONTINUED OPERATION
On December 31, 2017, the Company, Enertec
Systems 2001 Ltd., or Enertec, previously our wholly-owned subsidiary, and Enertec Management Ltd., entered into a Share Purchase
Agreement, or the Share Purchase Agreement, with Coolisys Technologies Inc., or Coolisys, a subsidiary of DPW Holdings, Inc., or
DPW, pursuant to which the Company agreed to sell the entire share capital of Enertec to Coolisys. As consideration for the sale
of Enertec’s entire share capital, Coolisys agreed to pay, at the closing of the transaction, a purchase price of $5,250
as well as assume up to $4,000 of Enertec debt. Enertec met the definition of a component as defined by Accounting Standards Codification,
or ASC, Topic 205. The Company believes the sale represented a strategic shift in its business. Accordingly, its assets and liabilities
were classified as held for sale and the results of operations in the statement of operations and prior periods’ results
have been reclassified as a discontinued operation. On May 22, 2018, the Company closed on the sale, or the Closing, of all of
the outstanding equity of Enertec pursuant to the Share Purchase Agreement.
At the Closing, the Company received aggregate
gross proceeds of approximately $4,700, of which 10% will be held in escrow for up to 14 months after the Closing to satisfy certain
potential indemnification claims (see below). Therefore, the Company has recorded such escrowed amount on its balance sheet as
restricted cash and a liability. The final consideration amount was adjusted, pursuant to the terms of the Share Purchase Agreement,
as a result of adjustments relating to certain Enertec debts at the Closing. In addition, Coolisys also assumed approximately $4,000
of Enertec’s debt. The Company’s capital gain from the sale of Enertec, based on the Company’s balance sheet
at the closing date was approximately $6,800.
In conjunction with, and as a condition to,
the closing of the Share Purchase Agreement, the Company, Enertec, Coolisys, DPW and Mr. David Lucatz, the Company’s Chief
Executive Officer, agreed to execute a consulting agreement, or the Consulting Agreement, whereby the Company, via Mr. Lucatz,
will provide Enertec with certain consulting and transitional services over a 3 year period as necessary and requested by the Coolisys
(but in no event to exceed 20% of Mr. Lucatz’s time). Coolisys (via Enertec) will pay the Company an annual consulting fee
of $150,000 as well as issue the Company 150,000 restricted shares of DPW Class A common stock, or the DPW Equity, for such services,
to be vested and released from restriction in three equal installments, with the initial installment vesting the day after the
closing and the remaining installments vesting on each of the first 2 anniversaries of the closing. In the event of a change of
control in the Company, or if Mr. Lucatz shall no longer be employed by the Company, the rights and obligations under the Consulting
Agreement shall be assigned to Mr. Lucatz along with the DPW Equity.
As of the date of
this Annual Report, the Escrow Amount remains in escrow as a result of an indemnification claim by Coolisys alleging for certain
misrepresentations in the Share Purchase Agreement resulting in losses to Coolisys estimated by Coolisys at least US$4,000,000.
There
is no ongoing litigation, the Company’s position is that here is no ground for this claim and the company currently preparing a
response to Coolisys latest notice.
NOTE 17 — DISCONTINUED OPERATION
(CONT.)
The following is the composition from discontinued
operation through May 22, 2018:
|
|
For the Period between
|
|
|
|
January 1,
2018 to
May 22,
2018
|
|
|
|
|
|
Revenues
|
|
$
|
1,512
|
|
Cost of revenues
|
|
|
2,655
|
|
Gross (loss)
|
|
|
(1,143
|
)
|
Operating expenses:
|
|
|
|
|
Research and development
|
|
|
120
|
|
Selling and marketing
|
|
|
204
|
|
General and administrative
|
|
|
376
|
|
Total operating expenses
|
|
|
700
|
|
Loss from operations
|
|
|
(1,843
|
)
|
Capital gain
|
|
|
6,844
|
|
Finance expense, net
|
|
|
(102
|
)
|
Profit before provision for income taxes
|
|
|
4,899
|
|
Taxes on income
|
|
|
5
|
|
Net profit
|
|
$
|
4,894
|
|
|
|
For the Period between
|
|
|
|
January 1,
2018 to
May 22,
2018
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
131
|
|
Net cash used in investing activities
|
|
|
(39
|
)
|
Net cash provided by (used in) financing activities
|
|
|
(63
|
)
|
|
|
|
|
|
NET CASH INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
29
|
|
|
|
|
|
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF THE PERIOD
|
|
|
4,503
|
|
|
|
|
|
|
TRANSLATION ADJUSTMENT OF CASH AND CASH EQUIVALENTS
|
|
|
(147
|
)
|
|
|
|
|
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF THE PERIOD
|
|
$
|
4,385
|
|
NOTE 18 — LEGAL PROCEEDINGS
In March 2017, MICT entered into an Investment Banking Agreement,
or the Sunrise Agreement, with Sunrise Securities LLC and Trump Securities LLC, or collectively, Sunrise, through Sunrise’s
principal, Amnon Mandelbaum, pursuant to which Sunrise agreed to assist MICT in identifying, analyzing, structuring, and negotiating
suitable business opportunities, such as a sale of stock or assets, merger, tender offer, joint venture, financing arrangement,
private placement, or any similar transaction or combination thereof. The parties initially disagreed as to the amount of the fee
that would be payable upon the closing of the transactions contemplated by the Merger Agreement. There are also questions about
the applicability of the Sunrise Agreement to the Acquisition, and it is thus not clear whether or not Sunrise shall be owed any
transaction fee upon the closing of the Acquisition. There can be no assurance that a settlement will be reached with respect to
this disagreement.
If Sunrise asserts a claim for fees and a settlement is not
reached, it could result in litigation or other legal proceedings, which may cause MICT and/or GFH (which, pursuant to the Merger
Agreement, shall be responsible for the settlement and payment of any claims brought under the Sunrise Agreement) to incur substantial
costs defending such dispute, and which could delay the closing of the Acquisition or result in the termination of the Merger Agreement.
NOTE 19 — SUBSEQUENT EVENTS
On January 21, 2020, we entered into a
Conversion Agreement with BNN, pursuant to which BNN agreed to convert the outstanding convertible note, issued on July 31,
2019, into 1,818,181 shares of the Company’s newly-designated Series B Preferred Stock, par value $0.001 per share, with
a stated value of $1.10 per share (the “Series B Preferred”) (collectively, the “Conversion”). In accordance
with the Conversion, the Company filed a Certificate of Designation of Preferences, Rights and Limitations of Series B Preferred
with the Secretary of State of the State of Delaware on January 21, 2020 to designate the rights and preferences of up to 1,818,181
shares of Series B Preferred.
The Series B Preferred shall be convertible
into shares of the Company’s common stock, par value $0.001 per share, at any time after the Company shall have received
shareholder approval, and shall also convert automatically upon the occurrence of certain events, including the completion by the
Company of a fundamental transaction. The Series B Preferred shall be non-voting and non-redeemable.
As a result of (i) the Conversion and (ii)
the recent receipt of $1,750,000 in connection with the sale and issuance of additional shares of Series A Preferred Stock, par
value $0.001 per share, pursuant to that certain Securities Purchase Agreement entered into by and among the Company and certain
purchasers
In connection with that certain
previously disclosed Securities Purchase Agreement (the “Primary Purchase Agreement”) entered into on
November 7, 2019 by and among MICT, Inc., a Delaware corporation (the “Company”) and certain investors
identified therein (the “Primary Purchasers”), pursuant to which, among other things, the Primary
Purchasers agreed, subject to satisfaction or waiver of the conditions set forth in the Primary Purchase Agreement, to
purchase from the Company certain 5% senior secured convertible debentures due 2020 (the “Primary Convertible
Debentures”) with an aggregate principal amount of approximately $15.9 million, the Company has entered into the
following additional material definitive agreements. The Proceeds from the sale of the Primary Convertible Debentures were
funded on January 21, 2020 and placed in a separate blocked account that shall remain subject to a deposit account control
agreement until the closing of the Merger:
NOTE 19 — SUBSEQUENT EVENTS
(CONT.)
Primary Security Agreement
On January 17, 2020, the Company, certain
of its subsidiaries, the Primary Purchasers and the representative thereof, as collateral agent, entered into a security agreement
(the “Primary Security Agreement”). Pursuant to the Security Agreement, the Company and certain of its subsidiaries
granted to the Primary Purchasers a first priority security interest in, a lien upon and a right of set-off against all of their
personal property (subject to certain exceptions) to secure the Primary Convertible Debentures.
Primary Registration Rights Agreement
On January 17, 2020, the Company and each
of the Primary Purchasers entered into a registration rights agreement (the “Primary Registration Rights Agreement”).
Pursuant to the Primary Registration Rights Agreement, the Company has agreed to, among other things, (i) file a registration statement
(the “Resale Registration Statement”) with the Securities and Exchange Commission (the “SEC”)
within seven business days following the filing of an initial proxy statement with respect to the contemplated merger by and among
the Company, GFH Intermediate Holdings Ltd., a British Virgin Islands company, and MICT Merger Subsidiary Inc., a to-be-formed
British Virgin Islands company and a wholly-owned subsidiary of MICT (the “Merger”), for purposes of registering
the shares of common stock issuable upon conversion of the Primary Convertible Debentures, and (ii) use
its best efforts to cause the Resale Registration Statement to be declared effective by the SEC as soon as practicable after filing,
and in any event no later than the effectiveness of the Merger. The Primary Registration Rights Agreement contains customary terms
and conditions for a transaction of this type, including certain customary cash penalties on the Company for its failure to satisfy
the specified filing and effectiveness time periods.
F-39