NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Principal Activities
Ideanomics, Inc. (Nasdaq: IDEX) is a Nevada corporation that primarily operates in Asia and the United States through its subsidiaries and VIEs. Unless the context otherwise requires, the use of the terms "we," "us," "our" and the “Company” in these notes to consolidated financial statements refers to Ideanomics, its consolidated subsidiaries and VIEs.
The Company’s chief operating decision maker has been identified as the chief executive officer, who reviews consolidated results when making decisions about allocating resources and assessing performance of the Company. Therefore, the Company operates in one segment with two business units, Ideanomics Mobility and Ideanomics Capital. Ideanomics China is a subsidiary which holds the Company’s China based vehicle operations.
Ideanomics Mobility’s mission is to use EVs and EV battery sales and financing to attract commercial fleet operators that will generate large scale demand for energy, energy storage systems, and energy management contracts. Ideanomics Mobility operates as an end-to-end solutions provider for the procurement, financing, charging and energy management needs for fleet operators of commercial EVs.
Ideanomics Capital is the Company's fintech business unit, which focuses on leveraging technology and innovation to improve efficiency, transparency, and profitability for the financial services industry.
Effects of COVID-19
COVID-19 is an infectious disease cause by severe acute respiratory syndrome coronavirus. The disease was first identified in December 2020 in Wuhan, the capital of China’s Hubei province, and has since spread globally, resulting in the ongoing COVID-19 pandemic. As of August 31, 2022, over 607.6 million cases had been reported across the globe, resulting in 6.5 million deaths.
The spread of COVID-19 has caused significant disruption to society as a whole, including the workplace. The resulting impact to the global supply chain has disrupted most aspects of national and international commerce, with government-mandated social distancing measures imposing stay-at-home and work-from-home orders in almost every country. The effects of social distancing have shut down significant parts of the local, regional, national, and international economies, for limited or extended periods of time, with the exception of government designated essential services.
In many parts of the world, stay-at-home and work-from-home orders were relaxed during the summer of 2021 as the effects of the Coronavirus appeared to lessen, and economic activity began to recover. However, commencing in the autumn and fall of 2021 and continuing, the U.S. as well as countries in Europe, South America and Asia began to experience an increase in new COVID-19 cases, and in some cases local, state, and national governments began to reinstate restrictive measures to stem the spread of the virus. The U.S. and other countries also experienced an increase in new COVID-19 cases after the fall and winter holiday season, with new, more infectious variants of COVID-19 identified. Various vaccines have been developed, with vaccinations programs in effect worldwide, though reaching acceptable levels for worldwide immunization against COVID-19 remains challenging.
The future effects of the virus are difficult to predict, due to uncertainty about the course of the virus, different variants that may evolve, and the supply of the vaccine on a local, regional, and global basis, as well as the ability to implement vaccination programs in a short time frame.
Many of the Company’s operations are in the development or early stage, have not had significant revenues to date, and the Company does not anticipate significant adverse effects on its operations’ revenue as compared to its business plan in the near- or mid-term, although the future effects of COVID-19 may result in regional restrictive measures which may constrain the Company’s operations.
The Company continues to monitor the overall situation with COVID-19 and its effects on local, regional and global economies.
Liquidity and Going Concern
The accompanying consolidated financial statements of the Company have been prepared assuming the Company will continue as a going concern and in accordance with generally accepted accounting principles in the United States of America. The going concern basis of presentation assumes that the Company will continue in operation one year after the date these financial statements are issued and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business. Pursuant to the requirements of the ASC 205, management must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for one year from the date these financial statements are issued.
This evaluation does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented or are not within control of the Company as of the date the financial statements are issued. When substantial doubt exists under this methodology, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Company’s ability to continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued.
The Company has a pending acquisition of VIA, a U.S. manufacturer of electric commercial vehicles including Class 2 through Class 5 cargo vans, trucks, and buses. The Company is in the in the process of obtaining required shareholder approval to acquire 100% of VIA. The total aggregate consideration payable in connection with this transaction is equal to $630.0 million, consisting of an upfront payment at the closing of the transaction of $450.0 million, more than $62.9 million of which has been paid to date (prior to closing) in cash as documented in the form of convertible notes, as well as an earnout payment of up to $180.0 million. In addition, the company has provided an incremental $11.7 million in bridge financing to VIA for the support of ongoing operations due to the delay in closing. This bridge loan will be forgiven at the time of closing. The remaining consideration for the acquisition of VIA is to be consummated with Ideanomics common stock, rather than cash. However, transaction fees are material and estimated to be $45.0 million, and it is anticipated that VIA will require operational and capital funding of at least $260.0 million in the next twelve months. The Company has filed a registration statement on Form S-4 regarding shareholder approval for the transaction. As of the date of these financial statements, the registration statement had not been declared effective, and the financial statements contained therein must be updated to December 31, 2021. An amended S-4 statement with the required updated financial statements is anticipated to be filed with the SEC in the fourth quarter of 2022. The terms of the agreement stated that either party may terminate the agreement under specified conditions as of August 31, 2022, however the Company has exercised its option to extend that date to September 30, 2022.
As of December 31, 2021, the Company had cash and cash equivalents of approximately $269.9 million, of which $11.8 million is held in China and is subject to local foreign exchange regulations in that country, $0.4 million is held at a consolidated entity which requires the minority interest’s permission to withdraw, and additionally two subsidiaries have required capital or liquidity requirements of $2.2 million. The Company also had accounts payable and accrued expenses of $15.6 million, other current liabilities of $7.1 million, current contingent consideration of $0.6 million, lease payments due within the next twelve months of $3.1 million, and payments of short-term and long-term debt due within the next twelve months of $58.1 million. Additionally, the Company has committed to invest in the MDI Fund a total of $25.0 million, of which $20.4 million remains and may be called at any time. The Company had a net loss of $256.7 million for the year ended December 31, 2021, and an accumulated deficit of $605.8 million.
The Company believes that its current level of cash and cash equivalents are not sufficient to fund continuing operations or the addition of the two planned acquisitions in various stages of completion. The Company will need to bring in new capital to support its growth and, as evidenced from its successful capital raising activities in 2020 and 2021, believes it has the ability to continue to do so. However, there can be no assurance that this will occur. As described in Note 15, on October 25, 2021 the Company executed a security purchase agreement with YA II PN, whereby the Company issued a convertible note of $75.0 million, and received aggregate gross proceeds of $75.0 million. The note is scheduled to mature on October 24, 2022 and bears interest at an annual rate of 4.0%, which would increase to 18.0% in the event of default. The note has a fixed conversion price of $1.88. The conversion price is not subject to adjustment except for subdivisions or combinations of common stock. Commencing April 1, 2022, the Company has the obligation to redeem $8.3 million per month, against the unpaid principal. This amount may be reduced by any conversions by YA II or optional redemptions made by the Company. As of December 31, 2021, after the conversion of principal in the amount of $17.5 million, $57.5 million remained outstanding.
The Company has various vehicles through which it could raise a limited amount of equity funding, however, these are subject to market conditions which are not within management’s control. As our Quarterly Report on Form 10-Q was not filed timely,
we will not be Form S-3 eligible until August 9, 2023, which could make fund raising more difficult or more expensive. Management continues to seek to raise additional funds through the issuance of equity, mezzanine or debt securities. As we seek additional sources of financing, there can be no assurance that such financing would be available to us on favorable terms or at all. Our ability to obtain additional financing in the debt and equity capital markets is subject to several factors, including market and economic conditions, our performance and investor sentiment with respect to us and our business and industry. These factors individually and collectively raise doubt about the Company’s ability to continue as a going concern.
As of June 30, 2022, the Company’s principal source of liquidity is its unrestricted cash balance in the amount of $85.5 million of which $12.2 million is held by the Company’s subsidiaries located and China and is subject to foreign exchange control regulations and $2.2 million is minimum regulatory capital required to be held by US operating companies – we do not consider cash balances held in China or required minimum regulatory capital to be part of the Company’s liquid cash balances. The Company had negative cash flow from operating activities of $81.8 million for the six months ended June 30, 2022. The Company has experienced greater net losses and negative cash flows from operating and investing activities in the third quarter consistent with its business plan for ongoing activities and planned acquisitions. As of the date of the filing of this Form 10-K, securing additional financing is in progress, and as such management has limited the extent to which it is taking actions to delay, scale back, or abandon future expenditures. As such, management’s actions to preserve an adequate level of liquidity for a period extending twelve months from the date of the filing of this Form 10-K are no longer sufficient on their own without additional financing, to mitigate the conditions raising substantial doubt about the Company’s ability to continue as a going concern. We currently do not have adequate cash to meet our short or long-term needs. In the event additional capital is raised, it may have a dilutive effect on our existing stockholders.
The Company’s ability to raise capital is critical. On September 1, 2022, the company entered into a SEPA with YA II PN. The Company will be able to sell up to sixty million of the Company’s shares of common stock, par value $0.001 per share (the at the Company’s request any time during the 36 months following the date of the SEPA’s entrance into force. The shares would be purchased at 95.0% of the Market Price (as defined below) and would be subject to certain limitations, including that YA could not purchase any shares that would result in it owning more than 5.0% of the Company’s common stock. Market Price is the lowest daily VWAP of the Common Shares during the three consecutive trading days commencing on the advance notice date, other than the daily VWAP on any excluded days. VWAP means, for any trading day, the daily volume weighted average price of the Common Shares for such trading day on the principal market during regular trading hours as reported by Bloomberg L.P. Pursuant to the SEPA, the Company is required to register all shares which YA may acquire. The Company agreed to file with the SEC a Registration Statement (as defined in the SEPA) registering all of the shares of common stock that are to be offered and sold to YA pursuant to the SEPA. The Company is required to have a Registration Statement declared effective by the SEC before it can raise any funds using the SEPA. Unless earlier terminated as provided under the SEPA, the SEPA shall terminate automatically on the earliest of (i) the first day of the month next following the 36-month anniversary of the Effective Date or (ii) the date on which the YA shall have made payment of Advances (as defined in the SEPA) pursuant to the SEPA for the Common Shares equal to the Commitment Amount (as defined in the SEPA).
Although management continues to use these facilities and other opportunities to raise additional capital through a combination of debt financing, other non-dilutive financing and/or equity financing to supplement the Company’s capitalization and liquidity, management cannot conclude as of the date of this filing that its plans are probable of being successfully implemented.
The accompanying consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
We believe substantial doubt exists about the Company’s ability to continue as a going concern for twelve months from the date of issuance of our financial statements.
Note 2. Immaterial Corrections of Prior Period Financial Statements
The Company has determined that there were immaterial errors in the consolidated financial statements as of and for the year ended December 31, 2020 related to its accounting of the acquisition of 51% of the ownership interests of Tree Technologies, a Malaysian company engaged in the EV market, in December 2019. The Company determined that it did not recognize a deferred tax liability and consequently, additional goodwill, in the initial purchase price allocation of Tree Technologies as of December 31, 2019, which also resulted in certain income tax benefits not being recognized during the year ended December 31, 2020. In addition, the Company determined that it did not recognize certain measurement period adjustments for the Tree
Technologies acquisition as of December 31, 2020 and income tax benefits associated with the impairment of the marketing and distribution agreement acquired in the acquisition during the year ended December 31, 2020.
The Company also determined that a legal agreement the Company entered into whereby the Company took possession of a property in Qingdao, China for no consideration was incorrectly accounted for as a lease in accordance with ASC 842.
Additionally, the Company changed the accounting model for one investment from that of a cost method investment to an equity method investment.
The Company assessed the materiality of these errors in accordance with Staff Accounting Bulletin No. 99, Materiality, and the Company determined that, qualitatively, the amounts, individually and in the aggregate, would have no bearing on the decision-making process of a reasonable investor. Accordingly, the Company is correcting the relevant consolidated financial statements and related footnotes as of and for the year ended December 31, 2020 within these consolidated financial statements.
The Company intends to revise its condensed consolidated financial statements for the periods ended March 31, 2021, June 30, 2021, and September 30, 2021 through subsequent periodic filings.
The following table reflects the impact of the immaterial corrections discussed above on the Company’s previously reported consolidated balance sheet as of December 31, 2020 (in thousands):
| | | | | | | | | | | | | | | | | |
| Previously Reported | |
Adjustments | |
As Revised |
Assets | | | | | |
Goodwill | $ | 1,165 | | | $ | (460) | | | $ | 705 | |
| Operating lease right of use assets | 7,117 | | | (6,962) | | | 155 | |
| Long-term investments | 8,570 | | | (83) | | | 8,487 | |
| Other non-current assets | 517 | | | 6,961 | | | 7,478 | |
Total assets | 234,412 | | | (543) | | | 233,869 | |
| | | | | |
Liabilities | | | | | |
| Other current liabilities | 1,920 | | | 315 | | | 2,235 | |
| Current portion of operating lease liabilities | 430 | | | (315) | | | 115 | |
| Operating lease liability – long term | 6,759 | | | (6,740) | | | 19 | |
Deferred tax liabilities | — | | | 5,045 | | | 5,045 | |
| Other long-term liabilities | 535 | | | 6,740 | | | 7,275 | |
Total liabilities | 32,643 | | | 5,045 | | | 37,688 | |
| | | | | |
Stockholders’ Equity | | | | | |
Accumulated deficit | (346,883) | | | (2,864) | | | (349,747) | |
Accumulated other comprehensive income | 1,256 | | | (25) | | | 1,231 | |
Total Ideanomics, Inc. shareholders’ equity | 186,584 | | | (2,889) | | | 183,695 | |
Non-controlling interest | 6,438 | | | (2,699) | | | 3,739 | |
Total equity | 193,022 | | | (5,588) | | | 187,434 | |
Total liabilities, convertible redeemable preferred stock. redeemable non-controlling interest and stockholders’ equity | $ | 234,412 | | | $ | (543) | | | $ | 233,869 | |
The following table reflects the impact of the immaterial corrections discussed above on the Company’s previously reported consolidated statement of operations for the year ended December 31, 2020 (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | |
| Previously Reported | |
Adjustment | |
As Revised |
| Goodwill impairment | $ | 9,323 | | | $ | 8,766 | | | $ | 18,089 | |
| Loss from operations | (86,879) | | | (8,765) | | | (95,644) | |
| | | | | |
| Income tax benefit | — | | | 3,308 | | | 3,308 | |
| | | | | |
| Impairment of and equity in loss of equity method investees | (16,698) | | | (82) | | | (16,780) | |
| | | | | |
| Net loss | (106,043) | | | (5,538) | | | (111,581) | |
| | | | | |
| Net loss attributable to Ideanomics, Inc. common shareholders | (98,400) | | | (2,864) | | | (101,264) | |
| Basic and diluted loss per share | $ | (0.46) | | | $ | (0.01) | | | $ | (0.47) | |
The following table reflects the impact of the immaterial corrections discussed above on the Company’s previously reported consolidated statement of comprehensive loss for the year ended December 31, 2020 (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | |
| Previously Reported | |
Adjustment | |
As Revised |
| Net loss | $ | (106,043) | | | $ | (5,538) | | | $ | (111,581) | |
| Foreign currency translation adjustments | 3,208 | | | (50) | | | 3,158 | |
| Comprehensive loss | (102,835) | | | (5,588) | | | (108,423) | |
| Comprehensive loss attributable to non-controlling interest | 6,539 | | | 2,699 | | | 9,238 | |
| Comprehensive loss attributable to Ideanomics, Inc. shareholders | $ | (96,480) | | | $ | (2,889) | | | $ | (99,369) | |
In addition, certain additional temporary differences between financial statement amounts and tax amounts at December 31, 2020, relating to the PRC companies were identified after issuance of the financial statements. These resulted in the recognition of $0.3 million additional deferred tax assets, offset by $5,000 additional deferred tax liabilities and $0.3 million additional valuation allowance with no effect on the balance sheet or income statement.
The following table reflects the impact of the immaterial corrections discussed above on the Company’s previously reported consolidated statement of cash flows for the year ended December 31, 2020 (in thousands):
| | | | | | | | | | | | | | | | | |
| Previously Reported | |
Adjustment | |
As Revised |
| Cash flows from operating activities | | | | | |
| Net loss | $ | (106,043) | | | $ | (5,538) | | | $ | (111,581) | |
| Income tax benefit | — | | | (3,308) | | | (3,308) | |
| Impairment of and equity in loss of equity method investees | $ | 16,698 | | | $ | 82 | | | $ | 16,780 | |
| Impairment losses | 42,554 | | | 8,765 | | | 51,319 | |
| Net cash used in operating activities | $ | 41,468 | | | $ | — | | | $ | 41,468 | |
Note 3. Summary of Significant Accounting Policies
(a)Basis of Presentation
The consolidated financial statements of Ideanomics, its subsidiaries and VIEs were prepared in accordance with U.S. GAAP and include the assets, liabilities, revenues and expenses of the subsidiaries over which the Company exercises control and, when applicable, entities for which the Company has a controlling financial interest or is the primary beneficiary. Intercompany transactions and balances are eliminated in consolidation.
(b)Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the related disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
On an ongoing basis, the Company evaluates its estimates, including those related to the bad debt allowance, collectability of notes receivable, sales returns, fair values of financial instruments, equity investments, stock-based compensation, intangible assets and goodwill, useful lives of intangible assets and property and equipment, asset retirement obligations, income taxes, and contingent liabilities, among others. The Company bases its estimates on assumptions, both historical and forward looking, that are believed to be reasonable, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities.
(c)Cash and Cash Equivalents
Cash consists of cash on hand, demand deposits, time deposits, and other highly liquid instruments with an original maturity of three months or less when purchased. Investments in money market or similar funds are evaluated in order to determine if the fund meets the definition of cash equivalents. The factors evaluated include the weighted-average maturity date of the fund's underlying securities, the fund's redemption policies, and if the fund's investment attributes are consistent with the investment attributes of an SEC-registered money market fund. Refer to Note 22 for additional information on our credit and foreign currency risks.
(d)Accounts Receivable, net
Accounts receivable are recognized at invoiced amounts and do not bear interest. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company reviews its allowance for doubtful accounts receivable on an ongoing basis. In establishing the required allowance, management considers any historical losses, the customer’s financial condition, the accounts receivable aging, and the customer’s payment patterns. After all attempts to collect a receivable have failed and the potential for recovery is remote, the receivable is written off against the allowance.
(e)Notes receivable
Notes receivable consist of two convertible promissory notes for which the Company had elected the fair value option. The convertible notes receivable were recorded at fair value at the reporting period and any changes to fair value and foreign currency were recorded in earnings. Refer to Note 6 for additional information.
(f)Property and Equipment, net
Property and equipment are stated at cost less accumulated depreciation. Expenditures for major renewals and improvements, which extend the original estimated economic useful lives of applicable assets, are capitalized. Expenditures for normal repairs and maintenance are charged to expense as incurred. The costs and related accumulated depreciation of assets sold or retired are removed from the accounts and any gain or loss thereon is recognized in the consolidated statement of operations. Depreciation is provided for on a straight-line basis over the estimated useful lives of the respective assets. The estimated useful life is 3 to 10 years for furniture and electronic equipment, 3 to 5 years for vehicles, 5 years for shop equipment and the lesser of lease terms or the estimated useful lives of the assets for leasehold improvements.
Construction in progress is stated at the lower of cost or fair value, which includes the cost of construction and other direct costs attributable to the construction. No provision for depreciation is made on construction in progress until such time as the relevant assets are completed and put into use. Construction in progress at December 31, 2020 represents Fintech Village under construction. The Company recorded impairment losses of $3.3 million and $2.3 million in the years ended December 31, 2020 and 2019, respectively, related to Fintech Village’s land, building and capitalized architect costs. Refer to Note 10 for additional information.
In the three months ended December 31, 2021, we closed on the sale of Fintech Village for $2.8 million, incurring commissions and fees of $0.2 million.
Asset Retirement Obligations
Asset retirement obligations generally apply to legal obligations associated with the retirement of a tangible long-lived asset that result from the acquisition, construction or development and the normal operation of a long-lived asset. If a reasonable estimate of fair value can be made, the fair value of a liability for an asset retirement obligation is recognized in the period in which it is incurred or a change in estimate occurs. Asset retirement costs associated with asset retirement obligations are capitalized with the carrying amount of the related long-lived assets and depreciated over the related asset’s estimated useful life. The Company’s asset retirement obligations as of December 31, 2020 were associated with the acquisition of Fintech Village, in which the Company was contractually obligated to remediate certain existing environmental conditions. Refer to Note 10 for additional information regarding Fintech Village.
The Company recorded impairment losses related to retirement asset costs of $0, $2.0 million and $1.5 million in the years ended December 31, 2021, 2020 and 2019, respectively. Refer to Note 10 for more information.
(g)Business Combinations
The Company includes the results of operations of the businesses that are acquired as of the acquisition date. The Company allocates the purchase price of the acquisitions to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase price over the fair values of identifiable assets and liabilities is recorded as goodwill. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.
Contingent consideration in a business combination is included as part of the acquisition cost and is recognized at fair value as of the acquisition date. Fair value is generally estimated by using a probability-weighted discounted cash flow approach, Monte-Carlo simulation model, or scenario-based method. Any liability resulting from contingent consideration is remeasured to fair value at each reporting date until the contingency is resolved, and any changes in fair value are recognized in earnings.
(h)Intangible Assets and Goodwill
The Company accounts for intangible assets and goodwill in accordance with ASC 350. ASC 350 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be evaluated for impairment at least annually. In accordance with ASC 350, goodwill is allocated to reporting units, which are either the operating segment or one reporting level below the operating segment. On an annual basis and more frequently based on triggering events, as of October 1 of each year, management reviews goodwill for impairment by first assessing qualitative factors to determine whether the existence of events or circumstances makes it more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. If it is determined that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, goodwill is further tested for impairment by comparing the carrying amount to the estimated fair value of its reporting units, determined using externally quoted prices (if available) or a discounted cash flow model and, when deemed necessary, a market approach. Goodwill impairment, if any, is measured as the amount by which a reporting unit’s carrying amount exceeds its fair value.
Application of goodwill impairment tests requires significant management judgment, including the identification of reporting units, assigning assets, liabilities and goodwill to reporting units and determination of fair value of each reporting unit. Judgment applied when performing the qualitative analysis includes consideration of macroeconomic, industry and market conditions, overall financial performance of the reporting unit, composition, personnel or strategy changes affecting the reporting unit and recoverability of asset groups within a reporting unit. Judgments applied when performing the quantitative analysis includes estimating future cash flows, determining appropriate discount rates, and making other assumptions. Changes in these judgments, estimates and assumptions could materially affect the determination of fair value for each reporting unit.
The Company recorded an impairment loss of $101.5 million and $18.1 million related to goodwill in the year ended December 31, 2021 and 2020, respectively. Refer to Note 11 for additional information.
The Company has other intangible assets, excluding goodwill, which consist primarily of patents, trademarks, brands and land use rights, which are generally recorded in connection with acquisitions at their fair value. Intangible assets with estimable lives are amortized, generally on a straight-line basis, over their respective estimated useful lives to their estimated residual values and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Title plant consists of costs incurred to construct the title plant and to obtain, organize and summarize historical information for Glenn County title searches. These costs were capitalized until such time as the plant was deemed operational to conduct title searches and issue title insurance policies. Management has determined that the title plant has been properly maintained, has an indeterminable life, and in accordance with ASC 950, has not been amortized. The costs to maintain the current status of the title plant are recorded as a current period expense.
The Company recorded impairment losses related to intangible assets acquired in various acquisitions of $50.6 million and $20.4 million in the years ended December 31, 2021 and 2020, respectively. The Company recorded an impairment loss related to a secure mobile financial information, social and messaging platform of $5.7 million in the year ended December 31, 2019. Refer to Note 11 for additional information.
(i)Digital Currency
In the past, the Company has enter into transactions denominated in digital currency, which may consist of GTB Bitcoin, Ethereum and/or other types of digital currency.
Digital currency is a type of digital asset that is not a fiat currency and is not backed by hard assets or other financial instruments. As a result, the value of digital currency is determined by the value that various market participants place on the respective digital currencies through their transactions. Holders of digital currency make or lose money from buying and selling digital currency.
Given that there is limited precedent regarding the classification and measurement of cryptocurrencies and other digital currencies under U. S. GAAP at the time of the transactions, the Company determined to account for these currencies as indefinite-lived intangible assets in accordance with ASC 350.
In the year ended December 31, 2019, the Company entered into transactions in which it received 8.3 million GTB, valued at the time at $61.1 million. On October 29, 2019, GTB had an unexpected significant decline in quoted price, from $17.00 to $1.84. This decline continued through the three months ended December 31, 2019, and on December 31, 2019 the quoted price was $0.23. As a result of this decline in quoted price, and its inability to convert GTB into other digital currencies which were more liquid, or fiat currency, the Company performed an impairment analysis and recorded an impairment loss of $61.1 million. Refer to Note 11 for additional information.
(j)Inventory
Inventories, which include the costs of material, labor and overhead, are stated at the lower of cost or net realizable value, with cost generally computed on a first-in, first-out basis. Estimated losses from obsolete and slow-moving inventories are recorded to reduce inventory values to their estimated net realizable value and are charged to costs of revenue. At the point of loss recognition, a new cost basis for that inventory is established and subsequent changes in facts and circumstances do not result in a recovery in carrying value.
The majority of the inventory represents finished assemblies and sub assemblies to be used in delivering electric powertrain components and electric tractors to customers.
There were no inventories as of December 31, 2020, as the inventories were acquired with the 2021 Acquisitions.
The composition of inventory is as follows (in thousands):
| | | | | |
| December 31,
2021 |
| Raw materials | $ | 245 | |
| Work in progress | 90 | |
| Finished goods | 5,824 | |
| Total | $ | 6,159 | |
The following table summarizes the movement in the inventory reserve (in thousands):
| | | | | |
| December 31,
2021 |
| Balance at the beginning of the year | $ | — | |
| Increases | (856) | |
| Decreases | — | |
| Balance at the end of the year | $ | (856) | |
(j) Long-term Investments
The Company accounts for equity investments through which management exercises significant influence but does not have control over the investee under the equity method. Under the equity method, the investment is initially recorded at cost and adjusted for the Company’s share of undistributed earnings or losses of the investee. The Company’s share of losses is not recognized when the investment is reduced to zero unless the Company guarantees the investees’ obligations or has committed to providing additional funding.
The equity investments which are not consolidated or accounted for under the equity method are either carried at fair value or under the measurement alternative upon the adoption of the ASU No. 2016-1.
The Company utilizes the measurement alternative for equity investments that do not have readily determinable fair values and measures these investments at cost less impairment plus or minus observable price changes in orderly transactions for an identical or similar investment of the same issuer.
The Company classifies its long-term investments as non-current assets on the consolidated balance sheets.
Impairment of Investments
Management periodically reviews long-term investments for impairment whenever events or changes in business circumstances indicate that the carrying amount of the investment may not be fully recoverable. Management considers impairment indicators such as negative changes in industry and market conditions, financial performance, business prospects, and other relevant events and factors. If indicators exist and the fair value of the investment is below the carrying amount, an impairment loss is recorded to record the investment at fair value. The Company recorded impairment losses of $1.5 million, $0.2 million and $3.0 million in the years ended December 31, 2021, 2020 and 2019, respectively, for equity investments accounted for under the measurement alternative, and recorded impairment losses of $7.9 million, $16.7 million and $13.1 million in the years ended December 31, 2021, 2020 and 2019, respectively, for investments accounted for as equity method investments. Refer to Note 12 for additional information on impairment losses related to investments.
(k) Leases
The Company leases certain office space and equipment from third-parties. Leases with an initial term of 12 months or less are not recorded on the balance sheet and lease expense is recognized on a straight-line basis over the lease term. For leases beginning in 2019 and later, at the inception of a contract management assesses whether the contract is, or contains, a lease. The assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether the right to substantially all the economic benefit from the use of the asset throughout the period is obtained, and (3) whether the Company has the right to direct the use of the asset. At the inception of a lease, management allocates the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments. The Company accounts for lease components (e.g., fixed payments including rent, real estate taxes and insurance costs) separately from the non-lease components (e.g., common-area maintenance costs).
Leases may include one or more options to renew, with renewal terms that can extend the lease term from one year or more. Renewal periods are included in the lease term only when renewal is reasonably certain, which is a high threshold and requires management to apply judgment to determine the appropriate lease term. The Company’s leases do not include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term. Certain lease agreements include rental payments adjusted periodically for inflation. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. All of the Company’s leases are classified as operating leases. The Company has elected not to recognize right-of-use assets and lease liabilities for short-term leases that have a term of 12 months or less. The effect of short-term leases and initial direct costs on our right-of-use asset and lease liability was not material.
ASC 842 requires the Company to make certain assumptions and judgments in applying the guidance, including determining whether an arrangement includes a lease, determining the term of a lease when the contract has renewal or cancellation provisions, and determining the discount rate.
As the rate implicit in the lease is not usually available, the Company used an incremental borrowing rate based on the information available at the adoption date of ASC 842 in determining the present value of lease payments for existing leases. The Company uses information available at the lease commencement date, or in the event of leases assumed in a business combination, the acquisition date, to determine the discount rate for any new leases.
In the years ended December 31, 2021 and 2020, the Company recorded impairment losses of $0.1 million and $6.3 million related to right of use assets subsequent to vacating the real estate. The Company did not record impairment losses related to right of use assets for the year ended December 31, 2019.
Refer to Note 13 for additional information.
(l) Product Warranties
Certain of the Company’s products are sold subject to standard product warranty terms, which generally include post-sales support and repairs or replacement of a product at no additional charge for a specified period of time. Accruals for estimated expenses related to product warranties are made at the time revenue is recognized and are recorded as a component of costs of revenue. The Company estimates the liability for warranty claims based on standard warranties, the historical frequency of claims and the cost to replace or repair products under warranty. Factors that influence the warranty liability include the number of units sold, the length of warranty term, historical and anticipated rates of warranty claims and the cost per claim. The warranty liability as of December 31, 2021 is $0.5 million and is included in “Other current liabilities” within the consolidated balance sheet. The warranty liability has not changed substantially subsequent to WAVE's acquisition.
(m) Convertible Promissory Notes
The Company accounts for its convertible notes at issuance by allocating the proceeds received among freestanding instruments according to ASC 470, based upon their relative fair values. The fair value of debt and common stock is determined based on the closing price of the common stock on the date of the transaction, and the fair value of warrants, if any, is determined using the Black-Scholes Merton option-pricing model. Convertible notes are subsequently carried at amortized cost. The fair value of warrants is recorded as additional paid-in capital, with a corresponding debt discount from the face amount of the convertible note.
The discounts on the convertible notes, consisting of amounts ascribed to warrants are amortized to interest expense, using the effective interest method, over the terms of the related convertible notes.
Each convertible note is also analyzed for the existence of embedded derivatives, which may require bifurcation from the convertible note and separate accounting treatment.
The Company also analyzes the features of its convertible notes which, when triggered, mandate a downward adjustment to the instrument’s strike price (or conversion price) if equity shares are issued at a lower price (or equity-linked financial instruments are issued at a lower strike price) than the instrument’s then-current strike price. The purpose of the feature is typically to protect the instrument’s counterparty from future issuances of equity shares at a more favorable price.
(n) Fair Value Measurements
U.S. GAAP requires the categorization of financial assets and liabilities, based on the inputs to the valuation technique, into a three-level fair value hierarchy. The various levels of the fair value hierarchy are described as follows:
•Level 1 - Unadjusted quoted market prices for identical assets and liabilities in an active market that the Company has the ability to access.
•Level 2 - Quoted prices in markets that are not active or model inputs that are observable for substantially the full term of the asset or liability.
•Level 3 - Prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.
The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The Company reviews the valuation techniques used to determine if the fair value measurements are still appropriate on an annual basis, and evaluates and adjusts the unobservable inputs used in the fair value measurements based on current market conditions and third-party information.
The fair values of certain financial assets and liabilities, such as cash and cash equivalents, accounts receivable, notes receivable, accrued expenses and other current liabilities approximate carrying amounts because of the short-term nature of these instruments. Investments that are classified as available-for-sale are measured at fair value on a recurring basis.
Our financial and non-financial assets and liabilities that are measured at fair value on a nonrecurring basis include goodwill and other intangible assets, asset retirement obligations, and adjustment in carrying amount of equity securities for which the measurement alternative of cost less impairment plus or minus observable price changes is used.
(o) Assets and Liabilities Held for Sale
The Company classifies assets and liabilities (disposal group) to be sold as held for sale in the period in which all of the following criteria are met: (1) management, having the authority to approve the action, commits to a plan to sell the disposal groups; (2) the disposal group is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such disposal group; (3) an active program to locate a buyer and other actions required to complete the plan to sell the disposal group have been initiated; (4) the sale of the disposal group is probable, and (5) transfer of the disposal group is expected to qualify as a completed sale within one year, except if events or circumstances beyond the Company’s control extend the period of time required to sell the disposal group beyond one year; (6) the disposal group is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and (7) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
The Company initially measures a disposal group that is classified as held for sale at the lower of its carrying amount or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. Gains are not recognized on the sale of a disposal group until the date of sale. The Company assesses the fair value of a disposal group, less any costs to sell, each reporting period it remains classified as held for sale and reports any subsequent losses as an adjustment to the carrying amount of the disposal group.
As part of this assessment, the Company also evaluates the criteria for reporting the disposal group as a discontinued operation. Factors which the Company considers includes, but is not limited to, the level of continuing involvement, if any, whether the disposal constitutes a strategic shift, and the relative magnitude of revenue, net income or loss, and total assets.
(p) Foreign Currency Translation
The Company uses the United States dollar as its reporting currency. The Company’s worldwide operations utilize the local currency or USD as the functional currency, where applicable. For certain foreign subsidiaries, USD is used as the functional currency. This occurs when the subsidiary is considered an extension of the parent. The functional currency of certain subsidiaries and VIEs located in the PRC and Hong Kong is either the RMB or HKD. In the consolidated financial statements, the financial information of the entities which use RMB and HKD as their functional currency has been translated into USD: assets and liabilities are translated at the exchange rates on the balance sheet date, equity amounts are translated at the historical exchange rates, and revenues, expenses, gains and losses are translated using the average rate for the period. Translation adjustments arising from these are reported as foreign currency translation adjustments and are shown as a component of “Accumulated other comprehensive loss” in the equity section of the consolidated balance sheets.
Transactions denominated in currencies other than functional currency are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated in the functional currency at the applicable rates of exchange in effect at the balance sheet date. Foreign currency (gains) losses of $0.2 million, $(0.1) million, and $0.1 million were recorded in the years ended December 31, 2021, 2020, and 2019, respectively.
(q) Escrow and Trust Deposits
In providing escrow services, the Company holds funds for others in a fiduciary capacity, pending completion of real estate transactions. A separate, self-balancing set of accounting records is maintained to record escrow transactions. Escrow trust funds held for others are not the Company’s and, therefore, are excluded from the consolidated balance sheet, however, the Company remains contingently liable for the disposition of these deposits. Escrow trust balances at December 31, 2021 were $21.4 million. It is a common industry practice for financial institutions where escrow funds are deposited to either reimburse or to directly provide for certain costs related to the delivery of escrow services. The Company follows the practice of non-recognition of costs borne by the financial institution where escrow funds are deposited.
There were no escrow trust balances as of December 31, 2020 as these were acquired with the acquisition of Timios in January 2021.
(r) Revenue Recognition General
The Company recognizes revenue when its customer obtains control of promised goods or services in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. For most of the Company’s customer arrangements, control transfers to customers at a point in time, as that is generally when legal title, physical possession and risk and rewards of goods/services transfer to the customer. In certain arrangements, control transfers over time as the customer simultaneously receives and consumes the benefits as the Company completes the performance obligations.
Our contracts with customers may include multiple performance obligations. For such arrangements, revenue is allocated to each performance obligation based on its relative standalone selling price. Standalone selling prices are based on the observable prices charged to customers or adjusted market assessment or using expected cost-plus margin when one is available. Adjusted market assessment price is determined based on overall pricing objectives taking into consideration market conditions and entity specific factors.
The Company performs an analysis of the relevant terms of its sales contracts, including whether or not it controls the product prior to sale, whether or not it incurs inventory risk, and other factors in order to determine if revenue should be recorded as a principal or agent.
Certain customers may receive discounts or rebates, which are accounted for as variable consideration. Variable consideration is estimated based on the expected amount to be provided to customers, and initially reduces revenues recognized.
The Company records deferred revenues when cash payments are received or due in advance of performance, including amounts which are refundable.
The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. The Company expenses as incurred any commissions or other fees which, if capitalizable, would have an amortization period of less than one year.
The Company recognizes revenue either on a Principal or Agent basis, depending on the terms of the underlying transaction, including the ability to control the product and the level of inventory risk taken. Revenues recognized in a Principal capacity are reported gross, while revenues recognized as an Agent are reported net.
Substantially all of the deferred revenue as of December 31, 2019 was recognized as revenue in the year ended December 31, 2020.
Title, Closing and Appraisal Revenue
Premiums from title insurance policies written by independent agencies are recognized net of commission costs when the policies are reported to the Company upon the closing of a transaction and not before the effective date of the policy. Regulation of title insurance rates varies by state. Premiums are charged to customers based on rates predetermined in coordination with each states’ respective Department of Insurance.
A closing or escrow is a transaction pursuant to an agreement of a buyer, seller, borrower, or lender wherein an impartial third-party, such as the Company, acts in a fiduciary capacity on behalf of the parties in accordance with the terms of such agreement in order to accomplish the directions stated therein. Services provided include, among others, acting as escrow or other fiduciary agent, obtaining releases, and conducting the actual closing or settlement. Closing and escrow fees are recognized upon closing of the escrow, which is generally at the same time of the closing of the related real estate transaction.
Revenue from appraisal services are primarily related to establishing the ownership, legal status and valuation of the property in a real estate transaction. In these cases, the Company does not issue a title insurance policy or perform duties of an escrow agent. Revenues from these services are recognized upon delivery of the service to the customer.
EV and Related Revenue
For product sales, the Company considers practical and contractual limitations in determining whether there is an alternative use for the product. For example, long-term design and build contracts are typically highly customized to a customer’s
specifications. For contracts with no alternative use and an enforceable right to payment for work performed to date, including a reasonable profit if the contract were terminated at the customer’s convenience for reason other than nonperformance, the Company recognizes revenue over time. All other product sales are recognized at a point in time.
For contracts recognized over time, revenue is determined each quarter, on the basis of accumulated project expenses in relation to estimated accumulated project expenses upon completion.
For contracts recognized at a point in time, the Company recognizes revenue when control passes to the customer, which is generally based on shipping terms that address when title and risk and rewards pass to the customer. However, the Company also considers certain customer acceptance provisions as certain contracts with customers include installation, testing, certification or other acceptance provisions. In instances where contractual terms include a provision for customer acceptance, the Company considers whether it has previously demonstrated that the product meets objective criteria specified by either the seller or customer in assessing whether control has passed to the customer.
For service contracts, the Company recognizes revenue as the services are rendered if the customer is benefiting from the service as it is performed, or otherwise upon completion of the service. Separately priced extended warranties are recognized as a separate performance obligation over the warranty period.
The transaction price in the contracts consists of fixed consideration and the impact of variable consideration including returns, rebates and allowances, and penalties. Variable consideration is generally estimated using a probability-weighted approach based on historical experience, known trends, and current factors including market conditions and status of negotiations.
For design and build contracts, the Company may at times collect progress payments from the customer throughout the term of the contract, resulting in contract assets or liabilities depending on the timing of the payments. Contract assets consist of unbilled amounts when revenue recognized exceeds customer billings. Contract liabilities consist of advance payments and billings in excess of revenue recognized. Costs to obtain a contract (e.g., commissions) for contracts greater than one year are deferred and amortized in a manner consistent with revenue recognition of the related contract.
The Company enters into contracts with governmental agencies for services and products. These contracts are analyzed in order to determine if they should be accounted for under a revenue recognition model pursuant to ASC 606 or a grant model pursuant to ASC 958. If accounted for pursuant to a grant model, the Company must determine if the grant is conditional or unconditional, and if conditional any barriers exist which must be overcome. If unconditional, the grant is recognized as revenue immediately, and if conditional, the grant is recognized as revenue as and when the barriers are overcome. The significant barrier to the current conditional grants are that the expenses incurred must meet the qualifications as established by the respective governmental agencies, so that the grant revenue is recognized as the qualified expenses are incurred. Revenue recorded pursuant to a grant model are recorded as “Other revenue.”
(s) Advertising and Marketing Costs
Advertising and marketing costs are expensed as incurred. Advertising and marketing costs were $2.3 million, $0.2 million and $24,394 in the years ended December 31, 2021, 2020 and 2019, respectively.
(t) Research and Development Costs
The Company expenses research and development costs, which may be incurred for the design, development, experimentation and testing of products related to the automotive industry.
(u) Share-Based Compensation
The Company awards share options and other equity-based instruments to its employees, directors and consultants (collectively “share-based payments.”) Compensation cost related to such awards is measured based on the fair value of the instrument on the grant date. The Company recognizes the compensation cost over the period the individual is required to provide service in exchange for the award, which generally is the vesting period. The amount of cost recognized is adjusted to reflect the effect of forfeiture as they occur. When no future services are required to be performed by the individual in exchange for an award of equity instruments, and if such award does not contain a performance or market condition, the cost of the award is expensed on the grant date. The Company recognizes compensation cost for an award with only service conditions that has a graded vesting schedule on a straight-line basis over the requisite service period for the entire award, provided that the cumulative amount of compensation cost recognized at any date at least equals the portion of the grant-date value of such award that is vested at that date. For options with market conditions, the fair value of each award is estimated on the date of grant using a Monte-Carlo
valuation model and the fair value of each option recognized as compensation expense over the derived service period. For options with performance conditions, the fair value of each award is estimated on the date of grant using the Black-Scholes Merton valuation model and the fair value of each option recognized as compensation expense over the implicit service period. When using the Black-Scholes model to determine the fair value of the awards granted, management noted it could not rely on its historical exercise data to develop an accurate expected term as the Company has made significant structural changes in its business via multiple acquisitions and divestures over the last few years. Thus, the Management deemed the Company’s use of the “simplified” method to develop the estimate of the expected term for the stock options to be appropriate. The simplified method uses the mid-point between the vesting period and the contractual term for each grant as the expected term.
(v) Income Taxes
The Company accounts for income taxes in accordance with the asset and liability method. Deferred taxes are recognized for the future tax consequences attributable to temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and income tax purposes using enacted rates expected to be in effect when such amounts are realized or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established, as needed, to reduce the amount of deferred tax assets if it is considered more-likely-than-not that some portion or all of the deferred tax assets will not be realized.
The Company recognizes the effect of uncertain income tax positions only if those positions are more-likely-than-not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50.0% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company’s policy is to record interest and penalties related to income taxes as a component of income tax expense. There were no material interest or penalties for the years ended December 31, 2021, 2020 and 2019, respectively.
On December 22, 2017, the TCJA was signed into law, which among other effects, reduces the U.S. federal CIT rate to 21.0% from 34.0% (or 35.0% in certain cases) beginning in 2019, and requires companies to pay a one-time transition tax on certain unrepatriated earnings from non-U.S. subsidiaries that is payable over eight years. No tax was due under this provision. The TCJA also makes the receipt of future non-U.S. sourced income of non-U.S. subsidiaries tax-free to U.S. companies and creates a new minimum tax on the earnings of non-U.S. subsidiaries relating to the parent’s deductions for payments to the subsidiaries.
(w) Net Loss Per Share Attributable to Ideanomics Shareholders
Net loss per share attributable to our shareholders is computed in accordance with ASC 260. The two-class method is used for computing earnings per share. Under the two-class method, net income is allocated between common shares and participating securities based on dividends declared (or accumulated) and participating rights in undistributed earnings as if all the earnings for the reporting period had been distributed. The Company’s convertible redeemable preferred shares are participating securities because the holders are entitled to receive dividends or distributions on an as converted basis. For the years presented herein, the computation of basic loss per share using the two-class method is not applicable as the Company is in a net loss position and net loss is not allocated to other participating securities, since these securities are not obligated to share the losses in accordance with the contractual terms.
Basic net loss per share is computed by dividing net loss attributable to Ideanomics common shareholders by the weighted average number of common shares outstanding during the period. Options and warrants are not considered outstanding in computation of basic earnings per share. Diluted net loss per share is computed by dividing net loss attributable to Ideanomics common shareholders by the weighted-average number of common shares and potential common shares outstanding during the period under the treasury stock method. Potential common shares include options and warrants to purchase common shares, preferred shares and convertible promissory notes, unless they were anti-dilutive. The computation of diluted net loss per share does not assume conversion, exercise, or contingent issuance of securities that would have an anti-dilutive effect (i.e. an increase in earnings per share amounts or a decrease in loss per share amounts) on net loss per share.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02 which requires lessees to recognize a right-of-use asset and lease liability for all leases. Recognition, measurement and presentation of expenses depends on classification as a finance or operating lease. The Company adopted ASU 2016-02 as of January 1, 2019, using a modified retrospective transition method. The Company elected the practical expedient to not apply the provisions of ASC 842 to leases of twelve months or less.
The lease liability was based on the present value of the remaining minimum lease payments, determined under ASC 842, discounted using the Company’s incremental borrowing rate at the effective date of January 1, 2019, using the original lease
term as the tenor. As permitted under the transition guidance, the Company elected the package of practical expedients that permitted the Company to not reassess (1) whether a contract is or contains a lease, (2) the classification of existing leases, and (3) whether previously capitalized costs continue to qualify as initial indirect costs. The application of the practical expedients did not have a significant impact on the measurement of the operating lease liability. The adoption of ASU 2016-02 resulted in the recording of operating right-of-use assets and the related lease liabilities of $3.6 million and $3.7 million, respectively, as of January 1, 2019. The difference between the additional right-of-use assets and lease liabilities was immaterial. The adoption of ASU 2016-02 did not materially impact the consolidated statement of operations and had no impact on the consolidated statement of cash flows. Refer to Note 13 for additional information.
In July 2017, the FASB issued ASU No. 2017-11, which applies to issuers of financial instruments with down round features. A down round feature is a term in an equity-linked financial instrument (i.e. a freestanding warrant contract or an equity conversion feature embedded within a host debt or equity contract) that triggers a downward adjustment to the instrument’s strike price (or conversion price) if equity shares are issued at a lower price (or equity-linked financial instruments are issued at a lower strike price) than the instrument’s then-current strike price. The purpose of the feature is typically to protect the instrument’s counterparty from future issuances of equity shares at a more favorable price. ASU 2017-11 amends (1) the classification of such instruments as liabilities or equity by revising the certain guidance relative to evaluating if they must be accounted for as derivative instruments, and (2) the guidance on recognition and measurement of freestanding equity-classified instruments. The Company adopted ASU 2017-11 as of January 1, 2019 on a prospective basis. Refer to Note 15 for additional information.
In June 2018, the FASB issued ASU No. 2018-07, which largely aligns the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payments to employees. ASU 2018-07 also clarifies that any share-based payment issued to a customer should be evaluated under ASC 606. The Company adopted ASU 2018-07 as of January 1, 2019 on a modified retrospective basis. There was no impact to the consolidated financial statements because the Company did not have material payments in the year ended December 31, 2019.
In December 2019, the FASB issued ASU No. 2019-12, which simplifies the accounting for income taxes by removing certain exceptions currently provided for in ASC 740 and by amending certain other requirements of ASC 740. The Company adopted ASU 2019-12 effective January 1, 2021. The effect of the adoption of ASU 2019-12 was not material.
In August 2020, the FASB issued ASU No. 2020-06, which simplifies the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models results in fewer embedded conversion features being separately recognized from the host contract as compared with current U.S. GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting, and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as additional paid-in capital. ASU 2020-06 also amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. The Company adopted ASU 2020-06 effective January 1, 2021. As the Company had no outstanding convertible instruments as of that date, the adoption of ASU 2020-06 had no effect.
Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes will result in earlier recognition of credit losses. In November 2019, the FASB issued ASU 2019-10, which defers the effective date of ASU 2016-13 to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, for public entities which meet the definition of a smaller reporting company on the date the ASU was issued. The Company will adopt ASU 2016-13 effective January 1, 2023. Management is currently evaluating the effect of the adoption of ASU 2016-13 on the consolidated financial statements. The effect will largely depend on the composition and credit quality of our investment portfolio and the economic conditions at the time of adoption.
In May 2021, the FASB issued ASU No. 2021-04, which provides guidance on modifications or exchanges of a freestanding equity-classified written call option that is not within the scope of another Topic. An entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after
modification or exchange as an exchange of the original instrument for a new instrument, and provides further guidance on measuring the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange. ASU 2021-04 also provides guidance on the recognition of the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange on the basis of the substance of the transaction, in the same manner as if cash had been paid as consideration. The Company will adopt ASU 2021-04 on January 1, 2022. The Company has no freestanding equity-classified written call options. The effect will largely depend on the terms of written call options or financings issued or modified in the future.
In October 2021, the FASB issued ASU No. 2021-08, which will require companies to apply the definition of a performance obligation under ASC Topic 606 to recognize and measure contract assets and contract liabilities (i.e., deferred revenue) relating to contracts with customers that are acquired in a business combination. Under current U.S. GAAP, an acquirer generally recognizes assets acquired and liabilities assumed in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers, at fair value on the acquisition date. ASU No. 2021-08 will result in the acquirer recording acquired contract assets and liabilities on the same basis that would have been recorded by the acquiree before the acquisition under ASC Topic 606. ASU No. 2021-08 is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating the impact of this ASU on its financial statements and the effects will be based upon the contract assets and liabilities acquired in the future.
Note 4. Revenue
The following table summarizes the Company's revenues disaggregated by revenue source, geography (based on the Company's business locations), and timing of revenue recognition (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended |
| | December 31,
2021 | | December 31,
2020 | | December 31,
2019 |
| Geographic Markets | | | | | | |
| Malaysia | | $ | 65 | | | $ | 83 | | | $ | — | |
| USA | | 84,303 | | | 1,631 | | | 41,873 | |
| PRC | | 29,712 | | | 25,045 | | | 2,693 | |
| Total | | $ | 114,080 | | | $ | 26,759 | | | $ | 44,566 | |
| | | | | | |
| Product or Service | | | | | | |
| Digital asset management services | | $ | — | | | $ | — | | | $ | 40,700 | |
| Digital advertising services and other | | 231 | | | 1,631 | | | 1,173 | |
| Title and escrow services | | 72,686 | | | — | | | — | |
| Electric vehicle products | | 31,123 | | | 19,462 | | | — | |
| Electric vehicle services | | 204 | | — | | | 2,693 | |
| Combustion engine vehicles | | — | | | 5,160 | | | — | |
| Charging, battery and powertrain products | | 5,886 | | | 506 | | | — | |
| Charging, battery and powertrain services | | 2,645 | | | — | | | — | |
| Other revenue | | 1,305 | | | — | | | — | |
| Total | | $ | 114,080 | | | $ | 26,759 | | | $ | 44,566 | |
| | | | | | |
| Timing of Revenue Recognition | | | | | | |
| Products and services transferred at a point in time | | $ | 110,079 | | | $ | 26,729 | | | $ | 3,866 | |
| Products and services provided over time | | 4,001 | | | 30 | | | 40,700 | |
| Total | | $ | 114,080 | | | $ | 26,759 | | | $ | 44,566 | |
The following table provides information about client receivables, contract liabilities and contract assets from contracts with customers:
| | | | | | | | | | | |
| Year ended |
| December 31, 2021 | | December 31, 2020 |
| Balances from contracts with customers: | | | |
| Accounts receivable | $ | 3,338 | | | $ | 7,400 | |
| Deferred revenue | 5,392 | | | 1,129 | |
| Contract assets | 2,772 | | | — | |
In the years ended December 31, 2021, 2020 and 2019, the Company recognized revenue of $0.6 million, $0.5 million, and $0.3 million recorded in deferred revenue as of the beginning of the period.
In the years ended December 31, 2021, 2020 and 2019, the Company recorded grant revenue of $1.3 million, $0.0 million, and $0.0 million in "Other revenue" in the consolidated statements of operations.
In the year ended December 31, 2021 the Company recorded a contract asset of $0.6 million as US Hybrid has an amount due of this amount from a customer contract for which US Hybrid has not yet performed the performance obligations. The Company expects to recognize this revenue of $0.6 million in the year ending December 31, 2022, and at that time will reclassify the contract asset.
Note 5. Available-for-Sale Securities
The Company accounts for its available-for-sale securities at their fair value, with changes in fair value, if any, recorded in other comprehensive income.
The following table provides certain information related to available-for-sale debt securities (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2021 |
| Cost | | Interest | | Unrealized Gains | | Unrealized Losses | | Impairment | | Estimated Fair Value |
| Silk EV Note | $ | 15,000 | | | $ | 833 | | | $ | 4 | | | $ | (20) | | | $ | (15,817) | | | $ | — | |
| Total available-for-sale securities | $ | 15,000 | | | $ | 833 | | | $ | 4 | | | $ | (20) | | | $ | (15,817) | | | $ | — | |
Silk EV Convertible Promissory Note
On January 28, 2021, the Company invested $15.0 million in Silk EV via a convertible promissory note. Silk is an Italian engineering and design services company that has recently partnered with FAW to form a new company Silk-FAW to produce fully electric, luxury vehicles for the Chinese and global auto markets.
The principal amount of the convertible promissory note is $15.0 million, is unsecured, bears interest at an annual rate of 6.0%, and the scheduled maturity date is January 28, 2022.
Upon a qualified equity financing, as defined, the outstanding principal and accrued interest convert into equity securities sold in the qualified equity financing at a conversion price equal to the cash price for the equity securities times 0.80.
The convertible promissory note contains certain customary events of default and other rights and obligations of the parties.
SILK EV did not remit payment of principal and interest on the scheduled maturity date of January 28, 2022, and the Company has sent a notice of default. The Company determined that the Silk EV note was fully impaired and recorded an impairment loss of $15.8 million recorded in "Asset impairments" in the year ended December 31, 2021.
Note 6. Notes Receivable
The following table provides certain information related to notes receivable consists of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2021 |
| Cost | | Interest | | Unrealized Gains | | Unrealized Losses | | Impairment | | Estimated Fair Value |
| VIA Note (a) | $ | 42,500 | | | $ | 578 | | | $ | — | | | $ | — | | | $ | — | | $ | 43,078 | |
| Inobat Note (b) | | 11,819 | | | | 10 | | | | — | | | | — | | | | — | | | 11,829 | |
| Total notes receivable | $ | 54,319 | | | $ | 588 | | | $ | — | | | $ | — | | | $ | — | | | $ | 54,907 | |
(a)VIA Convertible Promissory Note
On August 30, 2021, the Company invested $42.5 million in VIA, in the form of a convertible promissory note. VIA is a leading electric commercial vehicle company with proven advanced electric drive technology, delivering sustainable mobility solutions for a more livable world. VIA designs, manufactures and markets electric commercial vehicles, with superior life-cycle economics, for use across a broad cross-section of the global fleet customer base.
The principal amount of the convertible promissory note is $42.5 million, is unsecured, bears interest at an annual rate of 4.0%, and the scheduled maturity date is the earlier of the closing date of the acquisition or one year after the agreement is terminated according to its terms.
The convertible promissory note contains certain customary events of default and other rights and obligations of the parties. The company expects to convert this promissory note in conjunction with the closing of the acquisition of VIA. Management assessed the probability of closing the acquisition in determining the recoverability of the promissory note.
The fair value of the VIA convertible promissory note was valued using a scenario-based approach utilizing Level 3 inputs. The significant unobservable inputs include the probability of the consummation of the acquisition and the implied yield rate.
Significant increases or decreases in any of those inputs in isolation would result in a significantly different fair value measurement. The following table summarizes the significant inputs and assumptions used in the model:
| | | | | | | | |
| | December 31, 2021 |
| Probability | | 90 | % |
| Yield rate | | 4.0 | % |
(b)Inobat Convertible Promissory Note
On December 24, 2021, the Company invested €10.0 million ($11.4 million) in Inobat via a convertible promissory note, that is due December 24, 2022. Inobat specializes in the research, development, manufacture, and provision of innovative electric batteries custom-designed to meet the specific requirements of global mainstream and specialist OEMs within the automotive, commercial vehicle, motorsport, and aerospace sectors. Inobat is a European based battery manufacturer, that has a battery research and development facility and pilot line under development in Slovakia.
The principal amount of the convertible promissory note is €10.0 million ($11.4 million) is unsecured, bears interest at an annual rate of 8.0%, and the scheduled maturity date is December 28, 2022.
The convertible promissory note contains certain customary events of default and other rights and obligations of the parties.
The fair value of the Inobat convertible promissory note was valued using a scenario-based approach utilizing Level 3 inputs. The significant unobservable inputs include the probability of a qualified financing and the implied yield rate. Significant increases or decreases in any of those inputs in isolation would result in a significantly different fair value measurement. The following table summarizes the significant inputs and assumptions used in the model:
| | | | | | | | |
| | December 31, 2021 |
| Probability | | 50 | % |
| Yield rate | | 17.5 | % |
Note 7. PRC VIE Structures and Arrangements
In the year ended December 31, 2019, the Company consolidated certain VIEs located in the PRC in which it held variable interests and was the primary beneficiary through contractual agreements. The Company was the primary beneficiary because it had the power to direct activities that most significantly affected their economic performance and had the obligation to absorb or right to receive the majority of their losses or benefits. The results of operations and financial position of these VIEs are included in the consolidated financial statements for the year ended December 31, 2019. A shareholder in one of the VIEs is the spouse of Dr. Wu, the former Chairman of the Company.
The contractual agreements which granted the Company the power to direct the VIEs activities that most significantly affected their economic performance, as well to cause the Company to have the obligation to absorb or right to receive the majority of their losses or benefits, were terminated by all parties on December 31, 2019. As a result, the Company deconsolidated the VIEs as of December 31, 2019. The deconsolidation resulted in a net loss of $2.0 million, which included the transfer of cumulative translation adjustments of $0.6 million, recorded in “(Loss) gain on disposal of subsidiaries, net” in the consolidated statements of operations, and a statutory income tax of $0.2 million in the year ended December 31, 2019.
Note 8. Acquisitions and Divestitures
The Company continually evaluates potential acquisitions that align with the Company’s strategy of accelerating the adoption of electric vehicles. The Company has completed a number of acquisitions that have been accounted for as purchases and have resulted in the recognition of goodwill in the Company’s Consolidated Financial Statements. This goodwill arises because the purchase prices for these businesses exceeds the fair value of acquired identifiable net assets due to the purchase prices reflecting a number of factors including the future earnings and cash flow potential of these businesses, the multiple to earnings, cash flow and other factors at which similar businesses have been purchased by other acquirers, the competitive nature of the processes by which the Company acquired the businesses and the complementary strategic fit and resulting synergies these businesses bring to existing operations.
The Company may divest certain businesses from time to time based upon review of the Company’s portfolio considering, among other items, factors relative to the extent of strategic and technological alignment and optimization of capital deployment, in addition to considering if selling the businesses results in the greatest value creation for the Company and for shareholders.
2021 Acquisitions and Divestitures
The Company has completed the below acquisitions in the year ended December 31, 2021. The accompanying consolidated financial statements include the operations of the acquired entities from their respective acquisition dates. All of the acquisitions have been accounted for as business combinations. Accordingly, consideration paid by the Company to complete the acquisitions is initially allocated to the acquired assets and liabilities assumed based upon their estimated acquisition date fair values. The recorded amounts for assets acquired and liabilities assumed are provisional and subject to change during the measurement period, which is up to 12 months from the acquisition date. Management considers the valuations final for Timios, WAVE, US Hybrid and Solectrac.
The acquisitions below are collectively defined as the 2021 Acquisitions.
Timios
On January 8, 2021, the Company purchased 100% of Timios and its affiliates, a privately held company, pursuant to a stock purchase agreement for a purchase price of $40.0 million, net of cash acquired of $6.5 million. The purchase price was paid in cash and pursuant to the Agreement, $5.1 million of the cash consideration was paid into escrow pending a one year indemnification review.
Timios is a nationwide title and settlement solutions provider, which has been expanding in recent years though offering innovative solutions for real estate transactions, including residential and commercial title insurance, closing and settlement
services, as well as specialized offers for the mortgage industry. The Company expects Timios to become one of the cornerstones of the Company's fintech business unit.
Revenue of $72.7 million and net loss of $13.6 million for the year ended December 31, 2021, related to Timios have been included in the consolidated financial statements since the acquisition.
The final purchase price allocation for Timios is summarized in the table below in the “Acquisition Method Accounting Estimates” section of this note.
Refer to Note 11 for information related to an impairment charge recognized for the Timios reporting unit during the year ended December 31, 2021.
WAVE
On January 15, 2021, the Company purchased 100.00% of WAVE, a privately held company, pursuant to an agreement and plan of merger for a purchase price of $15.0 million of cash plus a total of 12.6 million unregistered shares of the Company’s common stock, valued at $40.0 million at the date of closing. Pursuant to the Wave Agreement, $5.0 million of the cash consideration was paid into escrow pending a one-year indemnification review. The agreement provided that 3.6 million shares of the Company’s common stock be held back at closing, to be released upon the receipt of certain customer consents not obtained prior to closing.
WAVE is a technology company focused on creating practical and economical solutions for the worldwide transit and off-road EV markets and is a leading provider of wireless charging solutions for medium and heavy duty EVs. The Company expects WAVE to create immediate synergies with its existing EV initiatives as it brings wireless charging to the Company’s current product offerings.
As of December 31, 2021, 0.5 million shares of the Company’s common stock remain unissued pending receipt of a final consent. Since receipt of this consent is probable, the Company has included the total common shares to be issued as contingent consideration in the amount of $11.4 million as of the acquisition date and recorded this as a component of equity. Pursuant to the original agreement, if any such consent is not obtained within six months following the closing date, the portion of the common stock allocated to such consent in the agreement would not be issued to the sellers. The Company has extended the time frame for this contractual provision as the receipt of the consents is outside the control of the former WAVE shareholders.
In addition to the purchase price to be paid at closing, the WAVE Agreement contains three earnouts that could result in additional payments of up to $30.0 million to the sellers based upon: (1) revenue and gross profit margin metrics in calendar year 2021; (2) revenue and gross profit margin metrics in calendar year 2022; and (3) revenue and gross profit margin metrics for 2021 and 2022 collectively. The Company considers this earnout to be contingent consideration that as of the acquisition date is unlikely to occur and has therefore attributed zero value for purposes of the preliminary purchase price allocation. No earnout was earned for the period ending December 31, 2021. The Company will continue to monitor the fair value of this contingent considerations with any changes being recorded in the consolidated statement of operations if and when a change occurs.
The Company also agreed to a performance and retention plan for the benefit of certain WAVE’s employees which could result in up to $10.0 million paid to such employees if certain gross revenue targets and certain gross profit margins are achieved for calendar years 2021 and 2022. The Company has concluded that this performance and retention plan does not constitute purchase consideration and will be recorded as compensation expense when the criteria are probable of being met. The Company has not accrued any of this retention plan as the revenue and gross profit margin criteria are not probable of being met.
During the three months ended December 31, 2021, the Company recorded a change to the previously disclosed purchase price allocation to reflect a liability for $0.8 million for a sales tax obligation that the Company was previously unaware of, however since this amount is fully indemnified by the sellers, the Company recorded a $0.8 million receivable. There was no adjustment to the carrying value of goodwill. Additionally, during the three months ended December 31, 2021 the Company concluded its analysis of any limitations on net operating loss carryforwards and certain built-in losses following ownership changes. The Company concluded that $7.7 million of historic net operating losses could not be utilized by the Company. This resulted in a reduction of $1.4 million of deferred tax assets and an increase to goodwill for the same amount. This amount was recorded as a measurement period adjustment in 2021 and is included in the purchase price allocation table below.
Revenue of $7.0 million and net loss of $7.2 million for the year ended December 31, 2021, related to WAVE have been included in the consolidated financial statements since the date of acquisition.
The final purchase price allocation for WAVE is summarized in the table below in the “Acquisition Method Accounting Estimates” section of this note.
Refer to Note 11 for information related to an impairment charge recognized for the WAVE reporting unit during the year ended December 31, 2021.
US Hybrid
On June 10, 2021, the Company purchased 100% of US Hybrid, a privately held company, pursuant to an agreement and plan of merger for a purchase price of $50.0 million in a combination of $30.0 million in cash and 6.6 million in unregistered shares of the Company’s common stock, valued at $20.9 million at the date of closing. Pursuant to the agreement, $1.0 million of the cash consideration was paid into escrow pending a true up of net working capital within 90 days of the closing date. The agreement provided that the 6.6 million shares were paid into an indemnity escrow to satisfy future indemnification obligations of the selling shareholders, if any.
US Hybrid specializes in the design and manufacturing of zero-emission electric powertrain components including traction motors, controllers, auxiliary drives, energy storage and fuel cell engines for electric, hybrid, and fuel cell medium and heavy-duty municipality vehicles, commercial trucks, buses, and specialty vehicles throughout the world. The Company expects US Hybrid to become another cornerstone in the Company’s mission to reduce commercial fleet greenhouse gas emissions through advanced EV technologies and forward-thinking partnerships.
The Company has also agreed to a performance and retention plan for the benefit of certain US Hybrid employees which could result in up to $16.7 million paid to such employees if certain gross revenue targets, gross profit margins and certain operational targets are achieved for annual performance periods commencing July 1, 2021 and concluding on June 30, 2024. The Company has concluded that this performance and retention plan does not constitute purchase consideration and will be recorded as compensation expense when the criteria are probable of being met. As of December 31, 2021 the Company has accrued $1.0 million of this retention plan as certain criteria for the first performance period were partially met. Criteria associated with the second and third performance periods are not probable of being met and will be evaluated on a regular basis once those performance periods commence.
Revenue of $2.7 million and net loss of $4.8 million, for the year ended December 31, 2021, related to US Hybrid have been included in the consolidated financial statements since the date of acquisition.
The final purchase price allocation for US Hybrid is summarized in the table below in the “Acquisition Method Accounting Estimates” section of this note.
Refer to Note 11 for information related to an impairment charge recognized for the US Hybrid reporting unit during the year ended December 31, 2021. Refer to Note 26 for a subsequent event that occurred in July 2022 that affected US Hybrid.
Solectrac
On June 11, 2021, the Company purchased the remaining 78.6% of Solectrac, a privately held company, pursuant to an agreement and plan of merger for a purchase price of $17.7 million plus $0.3 million paid upon the true up of the Net Working Capital. The Company had previously acquired 21.4% of Solectrac in 2020. The Company now owns 100% of Solectrac. The purchase price was paid in cash and pursuant to the agreement $2.0 million of the cash consideration was paid into an indemnity escrow to satisfy future indemnification obligations of the selling shareholders, if any. In conjunction with the acquisition of Solectrac, the Company remeasured the 21.4% previously accounted for as an equity method investment. The Company determined the enterprise value using external specialists in support of the preliminary purchase price allocation referenced in the table below. The Company used this enterprise value to remeasure the previous equity investment by grossing up the value of the 21.4% equity ownership to reflect the proceeds paid to gain control of Solectrac. This remeasurement resulted in a gain of $2.9 million recorded in the year ended December 31, 2021, this was recorded in Gain (loss) on remeasurement of investment, in our consolidated statement of operations.
Solectrac is a manufacturer and distributor of clean agricultural equipment of 100% battery-powered, all-electric tractors for agriculture and utility operations. Solectrac tractors provide an opportunity for farmers around the world to power their tractors
by using the sun, wind, and other clean renewable sources of energy. The Company expects Solectrac to create immediate synergies with its existing EV initiatives as it brings a rapidly growing agricultural sector to the Company’s current product offerings.
In addition to the purchase price, the Solectrac Agreement contains three earnouts that could result in additional payments of up to $6.0 million to the sellers based upon: (1) revenue and gross profit margin metrics in calendar year 2021; (2) revenue and gross profit margin metrics in calendar year 2022; and (3) revenue and gross profit margin metrics in calendar year 2023. The Company considers this earnout to be contingent consideration that as of the acquisition date is probable to occur in certain years and has attributed $1.6 million as additional consideration for purposes of the preliminary purchase price allocation. During the three months ended December 31, 2021 the Company re-evaluated the likelihood of the earnout being achieved in light of macro-economic events impacting the supply chain timeframes and adoption of electric tractors. The Company concluded that the fair value of the contingent consideration approximated $0.1 million and $1.5 million has been recorded as an income for the year ended December 31, 2021 in the consolidated statement of operations, other income (expense) caption. The Company will continue to monitor the fair value of this contingent consideration with any changes being recorded in the consolidated statement of operations if and when a change occurs.
The Company has also agreed to a performance and retention plan for the benefit of certain Solectrac employees which could result in up to $3.0 million paid to such employees if certain gross revenue targets, gross profit margins and certain operational targets are achieved for calendar years 2021, 2022 and 2023. The Company has concluded that this performance and retention plan does not constitute purchase consideration and will be recorded as compensation expense when the criteria are probable of being met. As of December 31, 2021 the Company has not accrued any of this retention plan as the various criteria are not yet probable of occurring.
Revenue of $1.8 million and net loss of $1.9 million, for the year ended December 31, 2021, respectively, have been included in the consolidated financial statements.
The final purchase price allocation for Solectrac is summarized in the table below in the “Acquisition Method Accounting Estimates” section of this note.
Acquisition Method Accounting Estimates
The Company makes an initial allocation of the purchase price at the date of acquisition based upon its understanding of the fair value of the acquired assets and assumed liabilities. The Company obtains the information used for the purchase price allocation during due diligence and through other sources. In the months after closing, as the Company obtains additional information about the acquired assets and liabilities, including through tangible and intangible asset appraisals, and learns more about the newly acquired business, it is able to refine the estimates of fair value and more accurately allocate the purchase price.
The fair values of acquired intangibles are determined based on estimates and assumptions that are deemed reasonable by the Company. Significant assumptions include the discount rates and certain assumptions that form the basis of the forecasted results of the acquired business including earnings before interest, taxes, depreciation and amortization, revenue, revenue growth rates, royalty rates and technology obsolescence rates. These assumptions are forward looking and could be affected by future economic and market conditions. The Company engages third-party valuation specialists who review the Company’s critical assumptions and calculations of the fair value of acquired intangible assets in connection with significant acquisitions.
Only facts and circumstances that existed as of the acquisition date are considered for subsequent adjustment. The Company will make appropriate adjustments to the purchase price allocation prior to completion of the measurement period, as required.
The table below reflects the Company’s estimates of the acquisition date fair values of the assets acquired and liabilities assumed for the 2021 Acquisitions (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Solectrac | | US Hybrid | | Timios | | WAVE |
| Purchase Price | | | | | | | |
| Cash paid at closing, including working capital estimates | $ | 18,025 | | | $ | 30,139 | | | $ | 46,576 | | | $ | 15,000 | |
| Fair value of previously held interest | 5,287 | | | — | | | | | |
| Fair value of common stock | — | | | 20,877 | | | — | | | 28,616 | |
| Fair value of contingent consideration | 1,640 | | | — | | | — | | | 11,418 | |
| Total purchase consideration | 24,952 | | | 51,016 | | | 46,576 | | | 55,034 | |
| | | | | | | |
| Purchase Price Allocation | | | | | | | |
| Assets acquired | | | | | | | |
| Current assets | 2,700 | | | 3,793 | | | 7,292 | | | 2,820 | |
| Property, plant and equipment | 30 | | | 5 | | | 429 | | | — | |
| Other assets | 45 | | | 52 | | | 48 | | | — | |
| Intangible assets – tradename | 4,210 | | | 1,740 | | | 8,426 | | | 12,630 | |
| Intangible assets – lender relationships | — | | | — | | | 16,600 | | | — | |
| Intangible assets - technology | 2,350 | | | 5,110 | | | | | |
| Intangible assets – patents | — | | | — | | | — | | | 13,000 | |
| Intangible assets - non-compete | — | | | 520 | | | — | | | — | |
| Intangible assets – licenses | — | | | — | | | 1,000 | | | — | |
| Indefinite lived title plant | — | | | — | | | 500 | | | — | |
| Goodwill | 17,714 | | | 42,218 | | | 21,824 | | | 35,689 | |
| Total assets acquired | 27,049 | | | 53,438 | | | 56,119 | | | 64,139 | |
| | | | | | | |
| Liabilities assumed: | | | | | | | |
| Current liabilities | (509) | | | (1,602) | | | (4,306) | | | (4,578) | |
| Deferred tax liability | (1,588) | | | (820) | | | (5,237) | | | (4,527) | |
| Total liabilities assumed | (2,097) | | | (2,422) | | | (9,543) | | | (9,105) | |
| | | | | | | |
| Net assets acquired | $ | 24,952 | | | $ | 51,016 | | | $ | 46,576 | | | $ | 55,034 | |
| | | | | | | |
The useful lives of the intangible assets acquired is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Solectrac | | US Hybrid | | Timios | | WAVE |
| Intangible assets – tradename | 6 | | 7 | | 15 | | 15 |
| Intangible assets – lender relationships | — | | | — | | | 7 | | — | |
| Intangible assets – technology | 10 | | 13 | | — | | | — | |
| Intangible assets – patents | — | | | — | | | — | | | 14 |
| Intangible assets - non-compete | — | | | 5 | | — | | | — | |
| Intangible assets – licenses | — | | | — | | | 15 | | — | |
| Weighted average useful life | 7.4 | | 11 | | 10 | | 14.5 |
Excluding the impact of any impairments, the estimated amortization expense related to these intangible assets for each of the years subsequent to December 31, 2021 is as follows (amounts in thousands):
| | | | | |
| 2022 remaining | $ | 6,511 | |
| 2023 | 6,511 | |
| 2024 | 6,511 | |
| 2025 | 6,511 | |
| 2026 | 6,511 | |
| 2027 and beyond | 27,473 | |
| Total | $ | 60,028 | |
Amortization expense related to intangible assets created as a result of the 2021 Acquisitions of $4.9 million has been recorded for the year ended December 31, 2021.
Cumulative Goodwill, excluding any impairments, in the amount of $117.4 million was recorded as a result of the 2021 Acquisitions. The goodwill from the 2021 Acquisitions represents future economic benefits that we expect to achieve as a result of the acquisitions, Goodwill is calculated as the excess of the consideration transferred over the net assets acquired and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. The goodwill is not expected to be deductible for tax purposes for any of the 2021 Acquisitions. Goodwill will not be amortized but instead will be tested for impairment at least annually and more frequent if certain indicators of impairment are present.
Transaction Costs
Transaction costs describe the broad category of costs the Company incurs in connection with signed and/or closed acquisitions. Transaction costs include expenses associated with legal, accounting, regulatory, and other transition services rendered in connection with acquisition, travel expense, and other non-recurring direct expenses associated with acquisitions. The Company incurred transaction costs of $3.8 million during the year ended December 31, 2021 related to the 2021 Acquisitions. In addition, the Company incurred transaction costs of $3.7 million during the year ended December 31, 2021, associated with the proposed VIA acquisition. Transaction costs have been included in selling, general and administrative expenses in the consolidated statements of operations and in cash flows from operating activities in the consolidated statements of cash flows.
Pro forma Financial Information
The unaudited pro forma results presented below include the effects of the Company’s acquisitions as if the acquisitions had occurred on January 1, 2020. The Company filed an Amended Form 8-K on April 6, 2021 to disclose unaudited pro forma financial information, and explanatory notes, related to the acquisition of Timios as it met the criteria of a significant acquisition. The remainder of the 2021 Acquisitions did not meet the criteria of a significant acquisition, in aggregate or individually.
The pro forma adjustments are based on historically reported transactions by the acquired companies. The pro forma results do not include any material, nonrecurring adjustments directly attributable to the 2021 Acquisitions. The pro forma results do not include any anticipated synergies or other expected benefits of the acquisitions. The unaudited pro forma financial information below is not necessarily indicative of either future results of operations or results that might have been achieved had the acquisitions occurred on January 1, 2020.
| | | | | | | | | | | | | | | | | |
| | Year Ended | |
| | December 31, 2021 | | December 31, 2020 | |
| (Amounts in thousands, except per share and share data) | | | | | |
| | | | | |
| Total revenue | | $ | 117,617 | | | $ | 114,588 | | |
| | | | | |
| Net loss attributable to IDEX common shareholders | | (257,281) | | | (94,097) | | |
| | | | | |
| Earnings (loss) per share | | | | | |
| Basic and Diluted | | $ | (0.57) | | | $ | (0.40) | | |
| | | | | |
| Weighted average shares outstanding | | | | | |
| Basic and Diluted | | 447,829,204 | | | 232,707,448 | | |
Divestitures
On April 20, 2021, Ideanomics entered into a stock purchase agreement with FNL the owner and operator of the social media platform Hoo.be, pursuant to which Ideanomics made an investment into FNL, including cash, Ideanomics common stock, and 100% of the common stock outstanding of Grapevine, a wholly-owned subsidiary of the Company focused on influencer marketing. Subsequent to this transaction, the Company owned 29.0% of the outstanding common stock of FNL.
The Company recognized a disposal loss of $1.2 million as a result of the deconsolidation of Grapevine, and such loss was recorded in “(Loss) gain on disposal of subsidiaries, net” in the consolidated statements of operations. Through its ownership in FNL, the Company has retained a 29.0% interest in Grapevine. The disposal loss of $1.2 million includes the adjustment recorded to adjust the retained interest of 29.0% in Grapevine to its fair value on the date of disposal. The fair value of the retained interest in Grapevine was determined based on the present value of estimated future cash flows which are Level 3 unobservable inputs in the fair value hierarchy. The Company prepared cash flow projections based on management's estimates of revenue growth rates and operating margins, taking into consideration the historical performance and the current macroeconomic industry and market conditions.
2020 Acquisitions and Divestitures
The Company has not acquired any companies nor disposed of any subsidiaries in the year ended December 31, 2020, with the exception of the disposition of its remaining 10.0% interest in Amer as disclosed below.
In the year ended December 31, 2020, the Company commenced the liquidation of a consolidated entity and therefore deconsolidated the entity. As a result of the deconsolidation, the Company recorded a gain of $0.3 million in "(Loss) gain on disposal of subsidiaries, net” and bad debt expense of $0.2 million in "Selling, general and administrative expense" in the consolidated statements of operations.
2019 Acquisitions and Divestitures
(a)Acquisition of Tree Technologies
On December 26, 2019, the Company completed the acquisition of a 51.0% interest in Tree Technologies, a Malaysian company engaged in the EV market. The acquisition price was comprised of (1) $0.9 million in cash, (2) 9.5 million shares of Ideanomics common stock, and (3) contingent consideration of up to $32.0 million over three years, to be paid in cash or Ideanomics common shares at the election of the Company. The contingent consideration was initially based upon revenue targets over three 12 month periods beginning in the three months ended December 31, 2019; due to financing delays and resulting production delays, these three 12 month periods commenced on July 1, 2020. In the year ended December 31, 2020, the Company recorded remeasurement gains of $7.0 million in "Change in fair value of contingent consideration, net" in the consolidated statements of operations. As of December 31, 2020, the recorded balance of this liability was $8.3 million.
The fair value of the Ideanomics stock was based upon the closing price of $0.82 on December 26, 2019, and the fair value of the contingent consideration was estimated to be $15.5 million, and revised to $15.3 million upon finalization of the purchase, and was recorded as a liability on the date of acquisition. The Company estimated the fair value of the contingent consideration using a scenario-based method which incorporates various estimates, including projected gross revenue for the periods, probability estimates, discount rates and other factors. This fair value measurement is based on significant Level 3 inputs. The resulting probability-weighted cash flows were discounted using the Company’s estimated weighted average cost of capital of 15.0%.
Tree Technologies holds the land use rights for 250 acres of vacant land zoned for industrial development in the Gebeng Industrial Area adjacent to Kuantan Port. Kuantan is the capital city of the state of Pahang on the east coast of Peninsular Malaysia. The Company intends to develop this land and lease it to Tree Manufacturing for the manufacture of EVs. As part of the acquisition, Tree Technologies acquired an exclusive right to market and distribute the EVs manufactured by Tree Manufacturing. The goodwill arising from the acquisition consists largely of the synergies expected from the fulfillment of these contracts. None of the goodwill recognized is expected to be deductible for tax purposes.
The following table summarizes the acquisition-date fair value of assets acquired and liabilities assumed, as well as the fair value of the non-controlling interest in Tree Technologies recognized. The Company has completed the fair value analysis of the assets acquired, liabilities assumed, the noncontrolling interest, and the contingent consideration, and therefore the adjustments are incorporated in the table below (in thousands):
| | | | | |
| Land use rights | $ | 27,140 | |
| Accounts payable | (743) | |
| Noncontrolling interest | (15,452) | |
| Goodwill | 468 | |
| Marketing and distribution agreement | 12,590 | |
| Total | $ | 24,003 | |
The completion of the fair value analysis resulted in measurement period adjustments of $12.8 million, primarily to the amount initially assigned to the noncontrolling interest, and reduced the amount of goodwill recorded.
The accounts payable above of $0.7 million primarily represents the transfer tax payable for the land use rights for the 250 acres of vacant land, which the Company paid in the three months ended September 30, 2020.
Tree Technologies had not commenced operations as of the acquisition date, therefore pro forma results as if the acquisition had occurred as of January 1, 2019, and related information, are not presented.
Refer to Note 11 for information regarding the impairment of the marketing and distribution agreement.
(b)Acquisition of Grapevine
On September 4, 2018, the Company completed the acquisition of 65.7% share of Grapevine for $2.4 million in cash. Fomalhaut, a British Virgin Islands company and an affiliate of Dr. Wu, the former Chairman of the Company, was the non-controlling equity holder of the Fomalhaut Interest. Fomalhaut entered into an option agreement, effective as of August 31, 2018 (the “Option Agreement,”) with the Company pursuant to which the Company provided Fomalhaut with the option to sell the Fomalhaut Interest to the Company. The aggregate sale price for the Fomalhaut Interest was the fair market value of the Fomalhaut Interest as of the close of business on the date preceding the date upon which the right to sell the Fomalhaut Interest to the Company is exercised by Fomalhaut. If the option was to be exercised, the sale price for the Fomalhaut Interest was payable in a combination of one-third in cash and two-thirds in the Company’s shares of common stock at the then market value on the exercise date.
In May 2019, the Company entered into two amendments to the Option Agreement. The aggregate exercise price for the Option was amended to the greater of: (1) fair market value of the Fomalhaut Interest in Grapevine as of the close of business on the date preceding the date upon which the option is exercised; and (2) $1.84 per share of the Company’s common stock. It was also agreed that the full amount of the exercise price was to be paid in the form of common stock of the Company.
In June 2019, the Company issued 0.6 million shares in exchange for a 34.3% ownership in Grapevine as a result of the exercise of the Option. At the completion of this transaction the Company owned 100.0% of Grapevine. At the date of the
transaction, the carrying amount of the non-controlling interest in Grapevine was $0.5 million. The difference between the value of the consideration exchanged of $1.1 million and the carrying amount of the non-controlling interest in Grapevine is recorded as a debit to additional paid-in capital based on ASC 810.
Refer to Note 11 for information regarding the impairment of Grapevine’s influencer network.
(c)Acquisition of JUSTLY (formerly known as Delaware Board of Trade (“DBOT”))
In April 2019, the Company entered into a securities purchase agreement to acquire 6.9 million shares in DBOT in exchange for 4.4 million shares of the Company’s common stock at $2.11 per share. In July 2019, the Company entered into another securities purchase agreement to acquire an additional 2.2 million shares in DBOT in exchange for 1.4 million shares of the Company’s common stock at $2.11 per share. The two transactions, which increased the Company’s ownership in DBOT to 99.0% as of that date, were completed in July 2019. The securities purchase agreements required the Company to issue contingent consideration in the form of additional shares of the Company’s common stock in the event the stock price of the common stock falls below $2.11 at the close of trading on the date immediately preceding the lock-up date, which was 9 months from the closing date. The Company accounted for the contingent consideration as a liability in accordance with ASC 480. The Company recorded this liability at fair value of $2.2 million on the date of acquisition. As of December 31, 2019, the Company remeasured this liability to $7.3 million and the remeasurement loss of $5.1 million was recorded in “Change in fair value of contingent consideration, net” in the consolidated statements of operations. In the year ended December 31, 2020, the Company recorded remeasurement losses of $1.5 million in “Change in fair value of contingent acquisition, net” in the consolidated statements of operations, and partially satisfied the liability with the issuance of 13.1 million shares of common stock. As of December 31, 2020, the recorded balance of this liability was $0.6 million. The contractual period which required periodic remeasurement has expired, and therefore the Company will not remeasure this liability in the future.
Immediately prior to the consummation of the transaction, the Company’s investment in DBOT consisted of 37.0% of the common shares outstanding, which had a fair value of $3.1 million, and the Company recorded a loss of $3.2 million to record the investment in DBOT to its fair value. This loss was recorded in “Loss on remeasurement of DBOT investment” in the consolidated statements of operations in the year ended December 31, 2019. The fair value of the investment in DBOT immediately prior to the consummation of the transaction was determined in conjunction with the overall fair value determination of the DBOT assets acquired and liabilities assumed.
DBOT operated three companies: (1) DBOT ATS LLC, an SEC recognized ATS; (2) DBOT Issuer Services LLC, focused on setting and maintaining issuer standards, as well as the provision of issuer services to DBOT designated issuers; and (3) DBOT Technology Services LLC, focused on the provision of market data and marketplace connectivity. The goodwill arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of the Company and DBOT, as the Company expected to execute its business plan of selling digital tokens and digital assets and other commodities on an approved ATS.
The consolidated statements of operation for the year ended December 31, 2019 include the results of DBOT from July 2019 to December 31, 2019. For the time period from July 2019 through December 31, 2019, DBOT contributed $15,838 and $1.9 million to the Company’s revenue and net loss, respectively.
The following table summarizes supplemental information on an unaudited pro forma basis, as if the acquisition had been consummated as of January 1, 2019 (in thousands):
| | | | | |
| December 31, 2019 |
| Revenue | $ | 44,675 | |
| Net loss attributable to IDEX common shareholders | $ | (99,417) | |
The unaudited pro forma results of operations do not purport to represent what the Company’s results of operations would actually have been had the acquisition occurred on January 1, 2019. Actual future results may vary considerably based on a variety of factors beyond the Company’s control.
The following table summarizes the acquisition-date fair value of assets acquired and liabilities assumed, as well as the fair value of the non-controlling interest in DBOT recognized (in thousands):
| | | | | |
| |
| Cash | $ | 247 | |
| Other financial assets | 1,686 | |
| Financial liabilities | (4,411) | |
| Noncontrolling interest | (105) | |
| Goodwill | 9,324 | |
| Intangible asset – continuing membership agreement | 8,255 | |
| Intangible asset – customer list | 59 | |
| Total | $ | 15,055 | |
The excess of the consideration over the fair value of the net assets acquired has been recorded as goodwill, of which none is expected to be deductible for tax purposes. For all intangible assets acquired, the continuing membership agreements were determined to have a useful life of 20 years and the customer list a useful life of 3 years.
Refer to Note 11 for information regarding the impairment of DBOT's goodwill, continuing membership agreement, and customer list.
2019 Divestitures
(d)Red Rock
In May 2019, the Company determined to sell the Red Rock business and entered into an agreement with Redrock Capital Group Limited, an affiliate of Dr. Wu, the former Chairman of the Company, to sell its entire interest in Red Rock for consideration of $0.7 million. The Company decided to sell Red Rock primarily because it had incurred operating losses and its business was no longer needed based on the Company’s business plan. The transaction was completed in July 2019 and the Company recorded a disposal gain of $0.6 million recorded in “(Loss) gain on disposal of subsidiaries, net” in the consolidated statements of operations in the year ended December 31, 2019.
(e)Amer Global Technology Limited
On June 30, 2019, the Company entered into an agreement with BCC and Tekang pursuant to which Tekang will inject certain assets in the robotics and electronic internet industry and Internet of Things business consisting of manufacturing data, supply chain management and financing, and lease financing of industrial robotics into Amer in exchange for 71.8% of ownership interest in Amer. The parties subsequently entered into several amendments including: (1) changing the name of Amer to Logistorm Technology Limited, (2) issuing 39,500 new shares in Amer or 71.8% ownership interest to BCC instead of Tekang, (3) issuing 5,500 new shares in Amer or 10.0% ownership interest to MHTL, and (4) the Company is responsible for 20.0% of any potential tax obligation associated with Amer, if Amer fails to be publicly listed in 36 months from the closing date of this transaction. The Company concluded that it’s not probable that this contingent liability would be incurred. As a result of this transaction, the Company’s ownership interest in Amer was diluted from 55.0% to 10.0%. The transaction was completed on August 31, 2019.
The Company recognized a disposal gain of $0.5 million as a result of the deconsolidating Amer, and such gain was recorded in “(Loss) gain on disposal of subsidiaries, net” in the consolidated statements of operations in the year ended December 31, 2019. $0.1 million of the gain is attributable to the 10.0% ownership interest retained in Amer. In addition, on the date Amer was deconsolidated, the Company recorded a bad debt expense of $0.6 million relating to a receivable due from Amer to a subsidiary of the Company, which was recorded in “Selling, general and administrative expense” in the consolidated statements of operations in the year ended December 31, 2019.
Pro forma results of operations for the year ended December 31, 2019 have not been presented because they are not material to the consolidated results of operations. Amer had no revenue and minimal operating expenses in the year ended December 31, 2019.
In the three months ended September 30, 2020, the Company sold its remaining 10.0% interest in Amer to Fintalk Media Inc., a related party, for a nominal amount. As the Company had no basis in its remaining interest in Amer, the gain recognized on the sale was de minimis. As part of this transfer, the Company is no longer liable for the contingent liability mentioned above.
Note 9. Accounts Receivable
The following table summarizes the Company’s accounts receivable (in thousands):
| | | | | | | | | | | |
| December 31,
2021 | | December 31,
2020 |
| Accounts receivable, gross | $ | 4,945 | | | $ | 8,619 | |
| Less: allowance for doubtful accounts | (1,607) | | | (1,219) | |
| Accounts receivable, net | $ | 3,338 | | | $ | 7,400 | |
As of December 31, 2021 and 2020, the gross balance includes the taxi commission revenue receivables from the related party Qianxi of $1.3 million and $1.2 million, respectively.
The following table summarizes the movement of the allowance for doubtful accounts (in thousands):
| | | | | | | | | | | | | | | | | |
| December 31,
2021 | | December 31,
2020 | | December 31,
2019 |
| Balance at the beginning of the year | $ | (1,219) | | | $ | — | | | $ | — | |
| Increase in the allowance for doubtful accounts | (350) | | | (1,219) | | | — | |
| Effect of change in foreign currency exchange rates | (38) | | | — | | | — | |
| Balance at the end of the year | $ | (1,607) | | | $ | (1,219) | | | $ | — | |
In the years ended December 31, 2021 and 2020, the Company increased its allowance for doubtful accounts by $0.4 million for accounts receivable from a third-party and $1.2 million from the related party Qianxi, respectively.
Note 10. Property and Equipment, net
The following table summarizes the Company’s property and equipment (in thousands):
| | | | | | | | | | | |
| December 31,
2021 | | December 31,
2020 |
| Furniture and office equipment | $ | 1,432 | | | $ | 315 | |
| Vehicles | 900 | | | 229 | |
| Leasehold improvements | 581 | | | 246 | |
| Shop equipment | 825 | | | — | |
| Total property and equipment | 3,738 | | | 790 | |
| Less: accumulated depreciation | (833) | | | (460) | |
| Property and equipment, net | $ | 2,905 | | | $ | 330 | |
| | | |
| Fintech Village | | | |
| Land | $ | — | | | $ | 2,750 | |
| | | |
| Retirement asset costs - environmental remediation | — | | | 4,500 | |
| | | |
| Fintech Village | $ | — | | | $ | 7,250 | |
The Company recorded depreciation expense of $0.5 million, $0.1 million and $0.1 million in the years ended December 31, 2021, 2020 and 2019, respectively.
Fintech Village
On October 10, 2018, the Company purchased a 58-acre former University of Connecticut campus in West Hartford from the State of Connecticut for $5.2 million in cash and also assumed responsibility of the environmental remediation. The Company obtained a surety bond in favor of the seller in connection with the Company’s environmental remediation obligations. The Company initially recorded asset retirement obligations in the amount of $8.0 million, which was the estimate performed by the seller and at a discount to the purchase price, therefore, the Company considered it a reasonable estimate of fair value of its asset retirement obligation pursuant to ASC 410.
On January 28, 2021, the Company’s Board accepted an offer of $2.8 million for Fintech Village, and subsequently signed a sale contract on March 15, 2021.
In the year ended December 31, 2021, the Company closed on the sale of Fintech Village for $2.8 million, excluding commissions and other costs of $0.2 million.
The asset retirement obligations were derecognized in the year ended December 31, 2021.
The following table summarizes the activity in the asset retirement obligation for the year ended December 31, 2021, and 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| January 1,
2021 | | Liabilities
Incurred | | Remediation
Performed | | Accretion
Expense | | Derecognition | | December 31,
2021 |
| Asset retirement obligation | $ | 4,653 | | | $ | — | | | $ | — | | | $ | — | | | $ | (4,653) | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| January 1,
2020 | | Liabilities
Incurred | | Remediation
Performed | | Accretion
Expense | | Derecognition | | December 31,
2020 |
| Asset retirement obligation | $ | 5,094 | | | $ | — | | | $ | (441) | | | $ | — | | | $ | — | | | $ | 4,653 | |
In the year ended December 31, 2020, the Company impaired the remaining building with a carrying amount of $0.3 million and land with a carrying amount of $0.3 million and the related asset retirement cost with a carrying amount of $2.0 million and the capitalized architect costs with a carrying amount of $2.7 million.
In the year ended December 31, 2019, the Company impaired buildings with a carrying amount of $2.3 million, which were subsequently demolished, and impaired related asset retirement costs of $1.5 million.
Note 11. Goodwill and Intangible Assets
A reporting unit is the level at which goodwill is tested for impairment, and is defined as an operating segment or one level below an operating segment, if certain criteria are met. Under its current corporate structure, the Company has one operating segment and seven reporting units.
Goodwill
The following table summarizes changes in the carrying amount of goodwill for the years ended December 31, 2021, 2020 and 2019 (in thousands):
| | | | | |
| Balance as of Balance of January 1, 2019 | $ | 705 | |
| Acquisitions | 30,949 | |
| Balance as of January 1, 2020 | 31,654 | |
| Measurement period adjustments | (12,848) | |
| Effect of change in foreign currency exchange rates | (12) | |
| Impairment loss (a) | (18,089) | |
| Balance as of January 1, 2021 | 705 | |
| Measurement period adjustments | 186 | |
| Impairment (b,c,d,f) | (101,470) | |
| |
| Acquisitions | 117,445 | |
| Effect of change in foreign currency exchange rates | (1) | |
| Disposal of Grapevine (e) | (704) | |
| Balance as of December 31, 2021 | $ | 16,161 | |
(a)Throughout 2020, the Company pursued its initial business goals for DBOT involving the sale of digital securities and brokering commodity products, more specifically investigating applications to new and underserved markets, or targeting of specific transactions, such as the origination of foreign securities, the formation of an investment vehicle with a third-
party, or the securitization of digital assets. These efforts did not come to fruition, and the Company concluded sufficient impairment indicators existed to evaluate the fair value of DBOT’s intangible assets. As part of this fair value analysis, the Company determined that the goodwill associated with the DBOT acquisition was fully impaired and recorded an impairment loss of $9.3 million. Refer to Note 11 for information regarding the impairment of the continuing membership agreement and customer list.
The Company acquired Tree Technologies in December, 2019 and determined that there were immaterial errors in the initial accounting for the acquisition. A deferred tax liability should have been recorded in connection with the acquisition, with a corresponding amount of goodwill of $8.3 million. Tree Technologies business objectives developed more slowly than originally projected, due to a revaluation of the market opportunity, both in the context of the time and amount of investment required to achieve the originally projected results, and further complicated by various factors, including COVID-19, the temporary closures of businesses in the area, which resulted in the lack of demand for motorbikes, rolling business and government shutdowns, and supply chain constraints. The Company determined that sufficient impairment indicators existed and decided to perform a quantitative impairment analysis in the three months ended December 31, 2020.
Under the income approach, the Company estimated the fair value of Tree Technologies based on the present value of estimated future cash flows which are Level 3 unobservable inputs in the fair value hierarchy. The Company utilized cash flow projections based on information known and knowable at that time, and included management's estimates of revenue growth rates and operating margins, taking into consideration the historical performance and the then current macroeconomic industry and market conditions. The Company based the discount rate on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to Tree Technologies’ ability to execute on its business plan.
(b)On July 26, 2021, Timios experienced a systems outage that was caused by a cybersecurity incident, which caused disruption to parts of Timios’ business, including its ability to perform its mortgage title, closing and escrow services offerings. This resulted in an adverse impact on Timios’ revenues in that one significant customer was lost and other customers have reduced their volume. The Company determined that an indicator of potential impairment existed and decided to perform an interim quantitative tangible and intangible asset and goodwill impairment tests for its Timios reporting unit.
Based on the results of this interim quantitative impairment test, the fair value of the Timios reporting unit was below the carrying value of its net assets. The decline in the fair value of the Timios reporting unit resulted from the cybersecurity event described above, which lowered the projected revenue and profitability levels of the reporting unit. The fair value of the Timios reporting unit was based on the income approach. Under the income approach, the Company estimated the fair value of the reporting unit based on the present value of estimated future cash flows which are Level 3 unobservable inputs in the fair value hierarchy. The Company prepared cash flow projections based on management's estimates of revenue growth rates and operating margins, taking into consideration the historical performance and the current macroeconomic industry and market conditions. The Company based the discount rate on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the Timios’ ability to execute on the projected cash flows. The fair value of Timios’ reporting unit is based on management’s best estimates, and should actual results differ from those estimates, future impairment charges may be required in future periods.
The quantitative analysis indicated that the carrying amount of the Timios reporting unit exceeded its fair value by $19.5 million. As a result, the Company recorded a goodwill impairment charge of $5.6 million, and impairment charges related to the Timios tradename and lender relationships of $0.7 million and $13.2 million, respectively, in the three months ended September 30, 2021.
(c)For the year ended December 31, 2021, market conditions and supply chain issues have had an adverse impact on WAVE’s business forecasts. The projections have negatively impacted WAVE’s performance, resulting in lower gross margins and revenue forecasts being reduced. As a result, the Company recorded a goodwill impairment charge of $35.7 million for the year ended December 31, 2021.
(d)For the period ended December 31, 2021, market conditions and supply chain issues have had an adverse impact on US Hybrid’s business forecasts. The projections have negatively impacted US Hybrid’s performance, resulting in lower gross margins and revenue forecasts being reduced. As a result, the Company recorded a goodwill impairment charge of $42.2 million for the year ended December 31, 2021.
(e)During the three months ended June 30, 2021, the Company completed the sale of Grapevine. Refer to Note 8 for additional information.
(f)For the period ended December 31, 2021, market conditions and supply chain issues have had an adverse impact on Solectrac's business forecasts. The projections have negatively impacted Solectrac's performance, resulting in lower gross margins and revenue forecasts being reduced. As a result, the Company recorded a goodwill impairment charge of $17.7 million for the year ended December 31, 2021.
Intangible Assets
The following table summarizes information regarding amortizing and indefinite lived intangible assets (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2021 | | December 31, 2020 |
| Weight
Average
Remaining
Useful Life | | Gross
Carrying
Amount | | Accumulated
Amortization | | Impairment
Loss | | Net
Balance | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Balance |
| Amortizing Intangible Assets | | | | | | | | | | | | | | | |
| Influencer network (a,g) | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,137 | | | $ | (462) | | | $ | 675 | |
| Customer contract (a,g) | — | | | — | | | — | | | — | | | — | | | 500 | | | (389) | | | 111 | |
| Continuing membership agreement (b) | 17.5 | | 1,179 | | | (649) | | | — | | | 530 | | | 1,179 | | | (619) | | | 560 | |
| Patents, trademarks and brands (a,d,g,f,h,i) | 57.0 | | 39,820 | | | (2,715) | | | (30,492) | | | 6,613 | | | 110 | | | (17) | | | 93 | |
| Technology platform (a,g) | — | | | — | | | — | | | — | | | — | | | 290 | | | (97) | | | 193 | |
| Land use rights (c) | 97.0 | | 27,102 | | | (411) | | | — | | | 26,691 | | | 28,162 | | | (142) | | | 28,020 | |
| Licenses (d) | 14.0 | | 1,000 | | | (65) | | | — | | | 935 | | | — | | | — | | | — | |
| Lender relationships (d) | 6.0 | | 16,600 | | | (1,638) | | | (12,550) | | | 2,412 | | | — | | | — | | | — | |
| Internally developed software (e) | 2.6 | | 452 | | | (76) | | | — | | | 376 | | | — | | | — | | | — | |
| Software (h,j) | 13.7 | | 4,492 | | | (178) | | | — | | | 4,314 | | | — | | | — | | | — | |
| Non-compete (i) | 4.5 | | 520 | | | (57) | | | (463) | | | — | | | — | | | — | | | — | |
| Technology (h,i) | 21.9 | | 7,460 | | | (347) | | | (7,113) | | | — | | | — | | | — | | | — | |
| Assembled workforce | 1.9 | | 150 | | | (6) | | | — | | | 144 | | | — | | | — | | | — | |
| Total | | | 98,775 | | | (6,142) | | | (50,618) | | | 42,015 | | | 31,378 | | | (1,726) | | | 29,652 | |
| Indefinite lived intangible assets | | | | | | | | | | | | | | | |
| Title plant (d) | | | 500 | | | — | | | — | | | 500 | | | — | | | — | | | — | |
| Website name | | | 25 | | | — | | | — | | | 25 | | | 25 | | | — | | | 25 | |
| Title License | | | 6 | | | — | | | — | | | 6 | | | — | | | — | | | — | |
| Patent | | | — | | | — | | | — | | | — | | | 28 | | | — | | | 28 | |
| Total | | | $ | 99,306 | | | $ | (6,142) | | | $ | (50,618) | | | $ | 42,546 | | | $ | 31,431 | | | $ | (1,726) | | | $ | 29,705 | |
(a)During the three months ended September 30, 2018, the Company completed the acquisition of 65.7% share of Grapevine. Refer to Note 8. In connection with the previously mentioned business analysis of Grapevine, the Company determined that the attrition rate of the influencer network had accelerated, and performed an impairment analysis, and recorded an impairment loss of $0.8 million. As a result of this analysis of the influencer network, the Company also determined that the remaining useful life of the influencer network should be reduced to two years, effective January 1, 2021.
(b)During the three months ended September 30, 2019, the Company completed the acquisition of additional shares in DBOT, which increased its ownership to 99.0%. Intangible assets of $8.3 million were recognized on the date of acquisition. As part of the determination of the fair value of DBOT's intangible assets mentioned above, the Company utilized the cost method to determine the fair value of the continuing membership agreement, and determined the fair value was $0.6 million, and recorded an impairment loss of $7.1 million. The Company also recorded an impairment loss of $30,000 related to DBOT's customer list. Refer to Note 8 for additional information related to the acquisition.
(c)During the three months ended December 31, 2019, the Company completed the acquisition of a 51.0% interest in Tree Technologies, a Malaysian company engaged in the EV market. As part of the acquisition, Tree Technologies acquired an exclusive right to market and distribute the EVs manufactured by Tree Manufacturing. Upon acquisition, the fair value of this agreement was determined to be $11.3 million. In the three months ended December 31, 2020, Tree Technologies obtained a domestic EV manufacturing license in Malaysia; and therefore determined it would not purchase vehicles from Tree Manufacturing. The Company subsequently severed all commercial relationships with Tree Manufacturing.
Accordingly, the Company determined there was no underlying value to the marketing and distribution agreement, and recorded an impairment loss of $12.5 million. Refer to Note 8 for additional information related to the acquisition.
(d)During the three months ended March 31. 2021, the Company completed the acquisition of 100.0% interest in Timios. Refer to Note 8 for additional information related to the acquisition.
(e)Relates to software development costs capitalized during the three months ended September 30, 2021 at Timios. The asset was placed into service in July 2021.
(f)During three months ended March 31, 2021, the Company completed the acquisition of 100% interest in WAVE. Refer to Note 8 for additional information related to the acquisition.
(g)During the three months ended June 30, 2021, the Company completed a stock purchase agreement with FNL, pursuant to which Ideanomics made an investment into FNL, including cash, Ideanomics common stock, and 100% of the common stock outstanding of Grapevine.
(h)During three months ended June 30, 2021, the Company completed the acquisition of privately held Solectrac. Solectrac develops 100% battery-powered, all-electric tractors for agriculture and utility operations. Refer to Note 8 for additional information related to the acquisition.
(i)During three months ended June 30, 2021, the Company completed the acquisition of privately held US Hybrid Corporation. US Hybrid specializes in the design and manufacturing of zero-emission electric powertrain components. Refer to Note 8 for additional information related to the acquisition.
(j)Relates to software costs capitalized during the three months ended September 30, 2021.
During the three months ended March 31, 2019, the Company completed the sale of certain intangible assets to GTD, and entered into a service agreement with GTD, a minority shareholder, in exchange for GTB. As a result of these transactions, the Company received 8.3 million GTB. On October 29, 2019, GTB had an unexpected significant decline in quoted price, from $17.00 to $1.84. This decline continued through the fourth quarter of 2019, and on December 31, 2019 the quoted price was $0.23. As a result of this decline in quoted price, and its inability to convert GTB into other digital currencies which were more liquid, or fiat currency, the Company performed an impairment analysis in the fourth quarter of 2019 and recorded an impairment loss of $61.1 million. Refer to Note 17 for additional information on the transactions denominated in GTB.
Amortization expense, excluding impairment losses of $13.9 million, $20.5 million and $66.8 million for the years ended December 31, 2021, 2020 and 2019, respectively, mentioned above, relating to intangible assets was $5.5 million, $5.2 million and $2.1 million for the years ended December 31, 2021, 2020 and 2019, respectively.
The following table summarizes future expected amortization expense (in thousands):
| | | | | | | | |
| Years ending December 31, | | Amortization to be
recognized |
| 2022 | | $ | 4,199 | |
| 2023 | | 4,183 | |
| 2024 | | 3,918 | |
| 2025 | | 3,454 | |
| 2026 | | 3,404 | |
| 2027 and thereafter | | 22,857 | |
| Total | | $ | 42,015 | |
Note 12. Long-term Investments
The following table summarizes the composition of long-term investments (in thousands):
| | | | | | | | | | | | | | | | |
| | December 31,
2021 | | December 31,
2020 | | |
| Non-marketable equity investments | | $ | 7,500 | | | $ | 4,787 | | | |
| Equity method investments | | 28,088 | | | 3,700 | | | |
| Total | | $ | 35,588 | | | $ | 8,487 | | | |
Non-marketable equity investments
Our non-marketable equity investments are investments in privately held companies without readily determinable fair values are carried at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
The Company reviews its equity securities without readily determinable fair values on a regular basis to determine if the investment is impaired. For purposes of this assessment, the Company considers the investee’s cash position, earnings and revenue outlook, liquidity and management ownership, among other factors, in its review. If management’s assessment indicates that an impairment exists, the Company estimates the fair value of the equity investment and recognizes an impairment loss that is equal to the difference between the fair value of the equity investment and its carrying amount. Based on management’s analysis of certain investment’s performance, impairment losses of $4.5 million, $0.2 million and $3.0 million were recorded in the years ended December 31, 2021, 2020 and 2019, and are recorded in “Asset impairments” in the consolidated statements of operations.
Equity method investments
The following table summarizes the Company’s investment in companies accounted for using the equity method of accounting (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | January 1, 2021 | | Addition | | Income (loss)
on investment | | Reclassification
to subsidiaries | | Impairment
losses | | Reclassification to equity method investee | | Dilution loss due to investee share issuance | | December 31, 2021 |
| Solectrac | (a) | $ | 2,556 | | | $ | — | | | $ | (153) | | | $ | (2,372) | | | $ | — | | | $ | — | | | $ | (31) | | | $ | — | |
| Energica | (b) | — | | | 13,555 | | | (1,226) | | | — | | | — | | | — | | | — | | | 12,329 | |
| FNL | (c) | — | | | 3,505 | | | (899) | | | — | | | — | | | 250 | | | — | | | 2,856 | |
| MDI Fund | (d) | — | | | 4,646 | | | (881) | | | — | | | — | | | — | | | — | | | 3,765 | |
| TM2 | (e) | 1,144 | | | 7,226 | | | (506) | | | — | | | (7,864) | | | — | | | — | | | — | |
| PEA | (f) | — | | | 9,138 | | | — | | | — | | | — | | | — | | | — | | | 9,138 | |
| Total | | $ | 3,700 | | | $ | 38,070 | | | $ | (3,665) | | | $ | (2,372) | | | $ | (7,864) | | | $ | 250 | | | $ | (31) | | | $ | 28,088 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| | January 1, 2020 | | Addition | | Income (loss)
on investment | | Reclassification
to subsidiaries | | Impairment
losses | | Reclassification to equity method investee | | Dilution loss due to investee share issuance | | December 31, 2020 |
| TM2 | (e) | $ | 1,227 | | | $ | — | | | $ | (83) | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,144 | |
| Intelligenta | (g) | $ | 9,800 | | | $ | — | | | $ | — | | | $ | — | | | $ | (9,800) | | | $ | — | | | $ | — | | | $ | — | |
| Glory | (h) | 6,854 | | | — | | | (4) | | | — | | | (6,850) | | | — | | | — | | | — | |
| Solectrac | (a) | — | | | 2,600 | | | (44) | | | — | | | — | | | — | | | — | | | 2,556 | |
| Total | | $ | 17,881 | | | $ | 2,600 | | | $ | (131) | | | $ | — | | | $ | (16,650) | | | $ | — | | | $ | — | | | $ | 3,700 | |
| | | | | | | | | | | | | | | | |
The Company has received no dividends from equity method investees in the years ended December 31, 2021, 2020 and 2019.
(a)Solectrac
On October 22, 2020, the Company acquired 1.4 million common shares, representing 15.0% of the total common shares outstanding, of Solectrac for a purchase price of $0.91 per share, for total consideration of $1.3 million. On November 19, 2020, Ideanomics acquired an additional 1.3 million shares of common stock for $1.00 per share, for a subsequent investment of $1.3 million. The Company’s ownership in Solectrac was diluted to 24.3% as of March 31, 2021 due to the new share issuance by Solectrac during the three months ended March 31, 2021.
On June 11, 2021, Ideanomics entered into a stock purchase agreement and plan of merger with Solectrac and its shareholders, and acquired the remaining common shares outstanding of Solectrac for total consideration of $17.7 million. Ideanomics now owns 100% of Solectrac, and commenced consolidation of Solectrac on that date.
Refer to Note 8 for additional information on the acquisition of Solectrac.
(b)Energica
On March 3, 2021, the Company entered into an investment agreement with Energica. The Company invested €10.1 million ($13.6 million) for 6.1 million ordinary shares of Energica at a subscription price of €1.78 ($2.21) for each ordinary share. Pursuant to the purchase of the shares the Company will hold 20.0% of Energica’s share capital. From March 3, 2021 through September 30, 2021 the Company has the right to participate in any equity financing by Energica. Ideanomics was restricted from selling any of the shares for a period of 90 days.
Energica is the world’s leading manufacturer of high performance electric motorcycles and the sole manufacturer of the FIM Enel MotoE™ World Cup. Energica motorcycles are currently on sale through the official network of dealers and importers.
The Company has decided to account for Energica on a one quarter lag as Energica, which is publicly traded on the Milan stock exchange, is only required to prepare and file semi-annual and annual financial statements, and the time frame in which the filings must be complete is much more lenient than in the U.S. Energica prepares its financial statements in accordance with Article 2423 et seq of the Italian Civil Code, rather than U.S. GAAP. Energica’s financial statements will either be prepared in or reconciled to U. S. GAAP prior to the Company recording its share of Energica’s earnings or losses, and the one quarter lag will be utilized to accomplish this, as well as related disclosure matters.
As of December 31, 2021, the excess of the Company’s investment over its proportionate share of Energica’s net assets was $11.0 million. The difference represents goodwill.
Certain shareholders of Energica have rights such that they may convert their ordinary shares into ordinary shares with supervoting rights under certain conditions. If some or all of these ordinary shares were converted into ordinary shares with supervoting rights, the Company’s ownership in Energica would be diluted, perhaps significantly.
The aggregate market value of the Energica common shares owned by the Company was $21.8 million as of December 31, 2021.
(c)FNL
On April 20, 2021, Ideanomics entered into a stock purchase agreement with FNL, pursuant to which Ideanomics made an investment into FNL, which included the investment of $2.9 million cash into FNL, the issuance of 0.1 million shares of Ideanomics common stock, and 100.0% of the common stock outstanding of Grapevine. Ideanomics received 0.6 million shares of common stock of FNL at a subscription price of $8.09 per share of common stock, and Ideanomics also converted a $250,000 SAFE into 30,902 shares of common stock. The Company determined that the basis in the FNL investment is the aggregate of the cash invested, including the SAFE, the fair value of the Ideanomics common stock issued, and the fair value of Grapevine. As a result of this transaction, Ideanomics owns 29.0% of the common stock outstanding of FNL, and FNL appointed Alfred Poor, Ideanomics’ Chief Executive Officer, to be a member of its board of directors.
The Company has decided to account for FNL on a one quarter lag, as FNL is in the development stage and will require the additional time to prepare financial statements in accordance with U.S. GAAP.
(d)MDI Fund
On July 26, 2021, the Company entered into a subscription agreement to invest $25.0 million in the MDI Fund. The MDI Fund an organization of minority-owned banks that aim to increase inclusivity in the financial services industry, is sponsored by the National Bankers’ Association. The MDI Fund will provide capital resources primarily in low and moderate income areas to grow a more skilled workforce, increase employment opportunities, and support businesses’ growth among minority and underserved communities. The initial investment of $0.6 million was made on July 26, 2021.
The Company has decided to account for the MDI Fund on a one quarter lag since the MDI Fund's reporting requirements differ from the Company's quarterly reporting schedule.
(e)TM2
On January 28, 2021, the Company entered into a SAFE with TM2. As of August 13, 2021, the SAFE was amended to which Ideanomics would invest €5.0 million ($5.9 million), an increase in the investment of €3.5 million ($4.1 million), from the original contracted investment of €1.5 million ($1.8 million.) If there is an equity financing (of above €5.0 million ($6.8 million)) during the twelve months immediately following execution of the SAFE, on the initial closing of such equity financing the SAFE will automatically convert into the number of ordinary shares equal to the purchase amount divided by the lowest price per share of the ordinary shares paid during such equity financing. If no equity financing has taken place during the twelve-month period immediately following the date of the SAFE, the parties shall in good faith attempt for one month to agree to a fair value per ordinary share represented by the SAFE, following which the SAFE shall convert into the number of ordinary shares equal to the purchase amount divided by such fair value. If the parties are unable to establish a fair value per ordinary share within such one-month period, the Company shall be entitled to convert the purchase amount into ordinary shares based on the pre-investment valuation of the Company of €10.0 million ($11.1 million) on December 20, 2019, plus the value of any investment into the SAFE since the original investment resulting in a current valuation of the Company of €11.0 million ($12.5 million), but subject to increase by the amount of any further debt, equity, convertible investment prior to January 28, 2022. In the event of a non-qualifying financing, TM2 shall provide the Company with sufficient information to verify such funding and increase in valuation. The Company accounts for TM2 as an equity method investment, as it holds a 10.0% equity ownership interest and has one of four seats on the board of directors.
(f)PEA
On August 2, 2021, the Company announced a strategic investment in PEA, a business unit within the Prettl Group, a large German industrial company that manufactures and distributes components and systems for the automotive, energy, and electronics industries. The terms include a strategic investment of €7.5 million ($9.1 million) for 11,175 preferred shares. Ideanomics will receive exclusive sales and distribution rights for PEA charging infrastructure products and solutions in North America and CEO Alf Poor will join PEA's Board of Directors. The Company received legal ownership as of October 19, 2021, after payment of €7.5 million ($9.1 million) representing a 30% equity ownership.
(g)Intelligenta
In 2018, the Company signed an investment agreement with two unrelated parties to establish BDCG, subsequently renamed Intelligenta, for providing block chain services for financial or energy industries by utilizing artificial intelligence and big data technology in the United States. On April 24, 2018, the Company acquired 20.0% equity ownership in BDCG from one noncontrolling party for total consideration of $9.8 million which consisted of $2.0 million in cash and $7.8 million paid in the form of the Company’s capital stock (valued at $2.60 per share and equal to 3.0 million shares of the Company’s common stock), increasing the Company’s ownership to 60.0%. The remaining 40.0% of Intelligenta are held by Seasail. The accounting treatment for the investment is based on the equity method due to variable substantive participating rights (in accordance with ASC 810) granted to Seasail.
Intelligenta’s target customer base is financial institutions and large energy companies in the U. S.; however, due to the political relations between the U.S. and China, Intelligenta has been unable to commercialize its product as such companies are hesitant to engage a company with China-based ownership to perform AI and block chain services. The Company evaluated the business prospects of Intelligenta, and determined the investment was impaired and the impairment was other-than-temporary. Accordingly, the Company recorded an impairment loss of $9.8 million in “Impairment of and equity in loss of equity method investees” in the consolidated statements of operations in the year ended December 31, 2020.
Intelligenta has yet to record revenue or earnings or losses, and therefore its statement of operations and balance sheet data are not material.
As of December 31, 2019, the excess of the Company’s investment over its proportionate share of Intelligenta’s net assets was $9.8 million. The difference represented goodwill and was not amortized.
(h)Glory
On July 18, 2019, the Company entered into an acquisition agreement to purchase a 34.0% interest in Glory, a Malaysian company, from its shareholder Beijing Financial Holding Limited, a Hong Kong registered company, for the consideration of 12.2 million restricted common shares of the Company, initially representing $24.4 million at $2.00 per share, the contract price, and subsequently revised to $20.0 million at $1.64 per share, the closing price on the date of acquisition. As part of this
transaction, the Company was also granted an option to purchase a 40.0% interest in Bigfair from its shareholder Beijing Financial Holding Limited for an exercise price of $13.2 million in the form of common shares of the Company. Bigfair holds a 51.0% ownership stake in Glory. The option was exercisable from July 18, 2020 to July 19, 2021.
Upon the initial investment, the Company performed a valuation analysis and allocated $23.0 million and $1.4 million of the consideration transferred to the equity method investment and the call option, respectively, which was subsequently revised to $20.0 million and $0, respectively.
As initially contemplated, Glory, through its subsidiary Tree Manufacturing, would hold a domestic EV manufacturing license in Malaysia, a marketing and distribution agreement for EVs in the ASEAN region, as well as the land use rights for 250 acres of vacant land zoned for industrial development in the Gebeng Industrial Area adjacent to Kuantan Port. Kuantan is the capital city of the state of Pahang on the east coast of Peninsular Malaysia, which was to be the site of the manufacturing operations.
In December 2019, the Company acquired a 51.0% ownership interest in Tree Technologies. Tree Technologies had previously been granted the land use rights to the 250 acres of vacant land mentioned above, which was previously anticipated would be owned by Glory. As Glory would no longer receive the land use rights to the 250 acres of vacant land, the Company evaluated its investment in Glory for impairment, and recorded an impairment loss of $13.1 million in “Impairment of and equity in loss of equity method investees” in the consolidated statements of operations in the year ended December 31, 2019.
Tree Technologies had also entered into a product supply arrangement and a product distribution arrangement with a subsidiary of Glory. The Company performed an assessment of these arrangements, and determined that Glory is a variable interest entity, but that the Company is not the prime beneficiary. As of December 31, 2020, the Company accounted for Glory as an equity method investment. Refer to Note 8 for additional information on the acquisition of Tree Technologies.
In the three months ended December 31, 2020, Tree Technologies obtained a domestic EV manufacturing license in Malaysia; and therefore determined it would not purchase vehicles from Glory's subsidiary, Tree Manufacturing. As Glory's value was predicated on the underlying manufacturing agreement between Tree Technologies and Tree Manufacturing, the Company evaluated the business prospects of Glory, and determined that its investment was impaired and the impairment was other-than-temporary. Accordingly, the Company recorded an impairment loss of $6.9 million in "Impairment of and equity in loss of equity method investees" in the consolidated statements of operations in the year ended December 31, 2020. Refer to Note 11 for information on the impairment loss recorded with respect to the manufacturing agreement with Tree Manufacturing.
Note 13. Leases
As of December 31, 2021 and 2020, the Company’s operating lease right of use assets were $12.8 million and $0.2 million, respectively. As of December 31, 2021 and 2020, the Company’s operating lease liabilities were $12.7 million and $0.1 million, respectively. The weighted-average remaining lease term is 4.2 years and the weighted-average discount rate is 5.2%.
The following table summarizes the components of lease expense (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31, 2021 | | December 31, 2020 | | December 31, 2019 |
| Operating lease cost | $ | 1,764 | | | $ | 1,600 | | | $ | 1,708 | |
| Short-term lease cost | 720 | | | 349 | | | 317 | |
| Sublease income | — | | | (74) | | | (42) | |
| Total | $ | 2,484 | | | $ | 1,875 | | | $ | 1,983 | |
The following table summarizes supplemental information related to leases (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31, 2021 | | December 31, 2020 | | December 31, 2019 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | |
| Operating cash flows from operating leases | $ | 1,856 | | | $ | 991 | | | $ | 1,407 | |
| Right-of-use assets obtained in exchange for new operating lease liabilities | 14,293 | | | 486 | | | 935 | |
The additional right of use assets were primarily acquired in the Timios, WAVE, US Hybrid and Solectrac acquisitions. The facilities acquired are primarily office buildings and warehouses in U.S. locations where they conduct business. Additionally, the Company leased a showroom in New Jersey in November, 2021.
The following table summarizes the maturity of operating lease liabilities (in thousands):
| | | | | | | | |
| Years ending December 31 | | Leased Property
Costs |
| 2022 | | $ | 3,629 | |
| 2023 | | 3,647 | |
| 2024 | | 2,728 | |
| 2025 | | 2,281 | |
| 2026 | | 1,685 | |
| 2027 and thereafter | | 222 | |
| Total lease payments | | 14,192 | |
| Less: Interest | | (1,459) | |
| Total | | $ | 12,733 | |
In the year ended December 31, 2021, the Company vacated two leases and recorded an impairment loss related to the right of use asset of $0.1 million.
In the three months ended March 31, 2020 the Company ceased to use the premises underlying one lease and vacated the real estate. As a result, the Company recorded an impairment loss related to the right of use asset of $0.9 million. In the three months ended June 30, 2020, the Company completed negotiations with the landlord to settle the remaining operating lease liability of $0.9 million by issuing a promissory note for $0.1 million, bearing an annual interest rate of 4.0%, and which was due on December 31, 2021 and was paid in the year ended December 31, 2021. The Company recorded a gain of $0.8 million in “Other income (expense), net” in the consolidated statements of operations for the settlement of the operating lease liability.
In the three months ended June 30, 2020 the Company ceased to use its New York City headquarters at 55 Broadway, which were subject to two leases, and vacated the real estate. As a result, the Company recorded an impairment loss related to the right of use asset of $5.3 million. The Company had an operating use liability of $5.8 million with respect to these leases, excluding $0.6 million in accounts payable. In the three months ended September 30, 2020, the Company completed negotiations with the landlord to settle the remaining amounts due of $6.4 million for a cash payment of $1.5 million. The Company recorded a gain of $4.9 million in “Other income (expense), net” in the consolidated statements of operations for the settlement of the operating lease.
Note 14. Supplementary Information
Other Current Assets
“Other current assets” were $4.5 million and $3.7 million as of December 31, 2021 and 2020, respectively. Components of “Other current assets” as of December 31, 2021 and 2020 include a receivable of $1.9 million from a third-party and a deposit of $3.4 million to a third-party supplier for EV purchases, respectively. In the year ended December 31, 2021, the Company collected the $3.4 million deposit that was made to the third-party supplier in 2020. There were no components of "Other current assets" as of December 31, 2021 and 2020, which were more than 5% of total current assets.
Other Current Liabilities
“Other current liabilities” were $7.1 million and $2.2 million as of December 31, 2021 and 2020, respectively. There were no components of "Other current liabilities" as of December 31, 2021, which were more than 5% of total current liabilities. Components of "Other current liabilities" as of December 31, 2020 that were more than 5% of total current liabilities were other payables to third-parties in the amount of $0.8 million.
Current Liabilities, Other Non-current Assets and Other Long-term Liabilities
On December 31, 2021 the Company terminated a legal agreement previously entered into whereby the Company took possession of a property in Qingdao, China for no consideration. The termination resulted in the derecognition of an asset of
$6.6 million recorded in “Other non-current assets,” and a liability of $6.7 million, of which $0.3 million was recorded in “Other current liabilities” and $6.4 million was recorded in “Other long-term liabilities.” This resulted in a gain of $0.2 million recorded in “Other income (expense), net.”
Note 15. Promissory Notes
The following is the summary of outstanding promissory notes as of December 31, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31,
2021 | | December 31,
2020 |
| Interest rate | | Principal Amount | | Carrying Amount* | | Principal Amount | | Carrying Amount* |
| Convertible Debenture (a) | 4.0% | | $ | 57,500 | | | $ | 57,809 | | | $ | — | | | $ | — | |
| Vendor Note Payable (b) | 0.25%-4% | | — | | | — | | | 105 | | | 105 | |
| Small Business Association Paycheck Protection Program (c) | 1.0% | | 311 | | | 312 | | | 460 | | | 463 | |
| Total | | | $ | 57,811 | | | 58,121 | | | $ | 565 | | | 568 | |
| Less: Current portion | | | | | (58,121) | | | | | (568) | |
| Long-term Note, less current portion | | | | | $ | — | | | | | $ | — | |
| | | | | | | | | |
Ties to*Carrying amount includes the accrued interest and approximates the fair value because of the short-term nature of these instruments.
The weighted average interest rate for these borrowings is 4.0% and 1.4% as of December 31, 2021 and December 31, 2020, respectively.
As of December 31, 2021 and 2020, the Company was in compliance with all ratios and covenants.
The following table summarizes the impact to the consolidated statements of operations associated with outstanding promissory notes (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31 2021 | | December 31 2020 | | December 31 2019 |
| Interest expense excluding amortization of debt discount | $ | 2,139 | | | $ | 1,593 | | | $ | 1,449 | |
| Interest expense related to amortization of debt discount | — | | | 14,485 | | | 4,235 | |
| Total interest expense | $ | 2,139 | | | $ | 16,078 | | | $ | 5,684 | |
| Expense due to conversion of notes | $ | — | | | $ | 2,266 | | | $ | — | |
| (Gain)loss on extinguishment of debt | $ | (300) | | | $ | (8,891) | | | $ | 3,940 | |
(a) $75.0 million Convertible Debenture due October 24, 2022 – YA II PN
On October 25, 2021, the Company executed a security purchase agreement with YA II PN, whereby the Company issued a convertible note of $75.0 million, and received aggregate gross proceeds of $75.0 million. The note is scheduled to mature on October 24, 2022 and bears interest at an annual rate of 4.0%, which would increase to 18.0% in the event of default. The note has a fixed conversion price of $1.88. The conversion price is not subject to adjustment except for subdivisions or combinations of common stock. The Company has the right, but not the obligation, to redeem a portion or all amounts outstanding under this note prior to the maturity date at a cash redemption price equal to the principal to be redeemed, plus accrued and unpaid interest. The note contained customary events of default, indemnification obligations of the Company and other obligations and rights of the parties. Commencing February 1, 2022, the Company has the obligation to redeem $8.3 million per month, against the unpaid principal. This amount may be reduced by any conversions by YA II PN or optional redemptions made by the Company.
During the year ended December 31, 2021, the principal and accrued and unpaid interest in the amount of $17.6 million was converted into 9.4 million shares of common stock of the Company. Total interest expense recognized was $0.6 million for the year ended December 31, 2021.
(b) Vendor Notes Payable
On May 13, 2020, DBOT entered into a settlement agreement with a vendor whereby the existing agreement with the vendor was terminated, the vendor ceased to provide services, and all outstanding amounts were settled. In connection with this agreement, DBOT paid an initial $30,000 and executed an unsecured promissory note in the amount of $60,000, bearing interest at 0.25% per annum, and payable in two installments of $30,000. The first installment was due on December 31, 2020 and was repaid, the remaining payment was due on August 31, 2021 and was repaid.
In the three months ended March 31, 2020 the Company ceased to use the premises underlying one lease and vacated the real estate. In the three months ended June 30, 2020, the Company completed negotiations with the landlord to settle the remaining operating lease liability of $0.9 million by issuing a promissory note for $0.1 million, bearing an annual interest rate of 4.0%, and which was due and repaid as of December 31, 2021.
(c) Small Business Association Paycheck Protection Program
On April 10, 2020, the Company borrowed $0.3 million at an annual rate of 1.0% from a commercial bank through the Small Business Association Paycheck Protection Program. The loan was originally payable in 18 installments of $18,993 commencing on November 10, 2020, with a final payment due on April 10, 2022. With several amendments, the loan is currently payable monthly commencing on September 10, 2021, with a final payment due on April 10, 2025. The forgiveness application of the loan was submitted in August 2021 and the Company has made payments totaling $31,674 of principal and interest during the year ended December 31, 2021 while the forgiveness application is under review.
On May 1, 2020 Grapevine borrowed $0.1 million at an annual rate of 1.0% from a commercial bank through the Small Business Association Paycheck Protection Program. The loan was originally payable in 18 installments of approximately $7,000 commencing on December 1, 2020, with a final payment due on May 1, 2022. With several amendments, the loan was payable commencing on October 1, 2021, with a final payment due on April 10, 2025. On April 20, 2021, the Company completed the disposal of Grapevine and the loan balance was deconsolidated from consolidated balance sheet.
On May 3, 2020 WAVE borrowed $0.3 million at an annual rate of 1.0% from a commercial bank through the Small Business Association Paycheck Protection Program. The loan was originally payable in 18 installments of $12,630 commencing on November 1, 2020, with a final payment due on May 3, 2022. After the issuance of an additional grace period, payments were to commence on September 21, 2021 until the original maturity date of May 3, 2022. The loan and the accrued interest were forgiven and paid by the U.S. Small Business Administration according to the notice received from the bank on September 16, 2021. The Company recorded the forgiveness as "Gain (loss) on extinguishment of debt" on the consolidated statement of operations.
On February 24, 2021 US Hybrid borrowed $0.5 million at an annual rate of 1.0% from a commercial bank through the Small Business Association Paycheck Protection Program. The loan had a maturity date of February 24, 2026. After the issuance there was a 2 month loan forgiveness covered period followed by a 10 month deferment period, and payments were to commence on March 10, 2022 and continue until the maturity date. US Hybrid used the loan for qualifying expenses. The loan was forgiven in June 2021 and was accounted for in conjunction with the acquisition accounting in Note 8.
Promissory Notes Issued and Repaid in the Year Ended December 31, 2021
During the year ended December 31, 2021, the Company issued several convertible debt instruments to YA II PN, the terms of which are summarized in the following table (principal and gross proceeds in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| YA II PN Note 1 | | YA II PN Note 2 | | YA II PN Note 3 | | YA II PN Note 4 |
| Principal | $ | 37,500 | | | $ | 37,500 | | | $ | 65,000 | | | $ | 80,000 | |
| Gross proceeds | $ | 37,500 | | | $ | 37,500 | | | $ | 65,000 | | | $ | 80,000 | |
| Interest rate | 4.0 | % | | 4.0 | % | | 4.0 | % | | 4.0 | % |
| Conversion price | $ | 2.00 | | | $ | 3.31 | | | $ | 4.12 | | | $ | 4.95 | |
| Maturity dates | July 4, 2021 | | July 15, 2021 | | July 28, 2021 | | August 8, 2021 |
The conversion prices on the notes above were fixed, and were not subject to adjustment except for subdivisions or combinations of common stock. The Company had the right, but not the obligation, to redeem a portion or all amounts
outstanding under these notes prior to their maturity date at a cash redemption price equal to the principal to be redeemed, plus accrued and unpaid interest. The notes contained customary events of default, indemnification obligations of the Company and other obligations and rights of the parties. In the event of default, the interest rate would increase to 18.0%.
During the year ended December 31, 2021, the notes, plus accrued and unpaid interest, were converted into 45.9 million shares of common stock of the Company, and one note of $80.0 million was repaid.
Promissory Notes Outstanding Prior to December 31, 2020
The Company had various debt instruments outstanding prior to December 31, 2020. Certain of these instruments contained beneficial conversion features and/or down round provisions, which were triggered by the subsequent issuance of common stock at a price lower than the down round provisions in the instruments. Certain of these instruments were modified, amended or extinguished, resulting in additional expenses or gains. These debt instruments were either converted into common stock of the Company or repaid on or prior to their scheduled maturity dates in the year ended December 31, 2020.
Note 16. Stockholders’ Equity, Redeemable Convertible Preferred Stock and Redeemable Non-controlling Interest
Convertible Preferred Stock
Our Board has authorized 50.0 million shares of convertible preferred stock, $0.001 par value, issuable in series. As of December 31, 2021 and 2020, 7.0 million shares of Series A preferred stock were issued and outstanding. The Series A preferred stock shall be entitled to one vote per common stock on an as-converted basis and is only entitled to receive dividends when and if declared by the Board.
Each share of Series A Preferred Stock shall be convertible, at the option of the holder thereof, at any time, at the office of the Company or any transfer agent for such stock, into ten fully paid and nonassessable shares of Common Stock, and redeemable at a stated dollar amount upon a merger/consolidation/change in control.
Upon the occurrence of a liquidation event, the holders of shares of Series A Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Company available for distribution to its stockholders, whether from capital, surplus or earnings, an amount per share equal to $0.50, as may be adjusted from time to time plus all accrued, but unpaid dividends, whether declared or not.
Common Stock
Our Board has authorized 1,500 million shares of common stock, $0.001 par value.
Redeemable Non-controlling Interest
The Company and Qingdao formed an entity named New Energy. Qingdao entered into a capital subscription agreement for a total of RMB 200.0 million ($28.0 million), and made the first capital contribution of RMB 50.0 million ($7.0 million) in the three months ended March 31, 2020. The remaining RMB 150.0 million ($21.0 million) was payable in three installments of RMB 50.0 million ($7.0 million) upon New Energy attaining certain revenue or market value benchmarks.
The investment agreement stipulated that New Energy must pay Qingdao dividends at the rate of 6.0%. After one year, Qingdao may sell its investment to an institutional investor, and after three years may redeem its investment for the face amount plus 6.0% interest less dividends paid. The redemption feature was neither mandatory nor certain. Due to the redemption feature, the Company had classified the investment outside of permanent equity. Redeemable non-controlling interest is recorded as
the greater of (i) the redemption amount or (ii) the cumulative amount that would result from applying the measurement guidance in ASC 810.
In the year ended December 31, 2021, Qingdao officially requested redemption of the invested funds and dividend, RMB 56.0 million ($7.9 million) in total prior to December 31, 2021. The Company designated Qingdao Medici to pay the redemption price. After the payment, Qingdao Medici owns 100% of New Energy. Because Qingdao Medici cannot complete its foreign exchange settlement prior to December 31, 2021, New Energy made the payment on behalf of Qingdao Medici. Qingdao, Qingdao Medici and New Energy agreed that Qingdao Medici will make the payment to Qingdao directly when it completes the foreign exchange settlement and Qingdao will return the money previously paid by New Energy to New Energy immediately after it receives the fund from Qingdao Medici.
The following table summarizes activity for the redeemable non-controlling interest for the years ended December 31, 2021 and 2020 (in thousands):
| | | | | |
| January 1, 2020 | |
| Initial investment | $ | 7,047 | |
| Accretion of dividend | 438 | |
| Loss attributable to non-controlling interest | (135) | |
| Adjustment to redemption value | 135 | |
| December 31, 2020 | 7,485 | |
| Accretion of dividend | 464 | |
| Loss attributable to non-controlling interest | (206) | |
| Adjustment to redemption value | 206 | |
| Settlement | (7,949) | |
| December 31, 2021 | $ | — | |
2021 Equity Transactions
On February 26, 2021, the Company entered into a sales agreement with Roth Capital. In accordance with the terms of the sales agreement, the Company may offer and sell from time to time through Roth Capital the Company’s common stock having an aggregate offering price of up to $150.0 million. The Company shall pay to Roth Capital in cash, upon each sale of such shares pursuant to the sales agreement, an amount equal to 3.0% of the gross proceeds from each sale of such shares. During the year ended December 31, 2021, the Company issued 50.4 million shares of common stock and received net proceeds of $145.5 million after deducting $4.5 million commission and transaction fees.
On June 11, 2021, the Company entered into a SEDA with YA II PN. The Company will be able to sell up to $80.4 million shares of its common stock at the Company’s request any time during the 36 months following the date of the SEDA’s entrance into force. The shares would be purchased at (1) 95% of the Market Price if the applicable pricing period is two consecutive trading days or (2) 96% of the Market Price if the applicable pricing period is five consecutive trading days, and, in each case, would be subject to certain limitations, including that YA II PN could not purchase any shares that would result in it owning more than 4.99% of the Company’s common stock. “Market Price” shall mean the lowest daily volume weighted average price of the Company’s common stock during the two or five consecutive trading days, as applicable, commencing on the trading day following the date the Company submits an advance notice to YA II PN. Pursuant to the SEDA, the Company is required to register all shares which YA II PN may acquire. The SEDA contains customary representations, warranties and agreements of the Company and YA II PN, indemnification rights and other obligations of the parties. YA II PN has covenanted not to cause or engage in any direct or indirect short selling or hedging of the Company’s shares of common stock. During the year ended December 31, 2021, the Company issued 10.0 million shares of common stock for a total of $27.3 million.
On August 12, 2021, the Company entered into a controlled equity offering sales agreement with Cantor. In accordance with the terms of the agreement, the Company may offer and sell from time to time through or to Cantor, as sales agent or principal, the Company’s common stock having an aggregate offering price of up to $350.0 million. The shares will be offered and sold pursuant to the Company’s shelf registration statement on Form S-3 (Registration No. 333- 252230.) The Company shall pay to Cantor in cash, upon each sale of shares pursuant to this agreement, an amount equal to up to 3.0% of the aggregate gross proceeds from each sale of shares. During the year ended December 31, 2021, the Company issued 7.9 million shares of common stock and received net proceeds of $15.7 million after deducting $0.4 million commission and transaction fees.
Refer to Note 8 for information related to the issuance to common stock for acquisitions, Note 15 for information related to issuance of common stock with convertible notes, Note 18 for information related to the issuance to common stock for option exercise.
2020 Equity Transactions
The Company entered into a SEDA with YA II PN on April 3, 2020 and amended the SEDA to reduce the aggregate amount of facility from $50.0 million to $45.0 million on June 9, 2020, and terminated the SEDA on September 10, 2020. The Company had the right to issue and sell to YA II PN up to $45.0 million of the Company’s common stock over 36 months following the date of the SEDA's entrance into force, the maximum amount of each of which is limited to $1.0 million. In connection with the SEDA, the Company issued commitment shares to a subsidiary of YA II PN on April 3, 2020 The Company recognized such
commitment shares as deferred offering costs and additional paid-in capital for a total of $0.9 million and, subsequently fully charged these costs against the gross proceeds received from SEDA for the year ended December 31, 2020.
The Company entered into the second SEDA with YA II PN on September 4, 2020. The Company was able to sell up to $150.0 million of its common stock at the Company's request any time during the 36 months following the date of the SEDA's entrance into force.
For each share of common stock purchased under the SEDA, YA II PN was to pay 90% of the lowest VWAP of the Company’s shares during the five trading days following the Company’s advance notice to YA II PN. In general, the VWAP represents the sum of the value of all the sales of the Company’s common stock for a given day (the total shares sold in each trade times the sales price per share of the common stock for that trade), divided by the total number of shares sold on that day.
YA II PN’s obligation under the SEDA was subject to certain conditions, including the Company maintaining the effectiveness of a registration statement for the securities sold under the SEDA. In addition, the Company could not request advances if the common shares to be issued would result in YA II PN owning more than 4.99% of the Company’s outstanding common stock, with any such request being automatically modified to reduce the advance amount.
The SEDA contained customary representations, warranties and agreements of the Company and YA II PN, indemnification rights and other obligations of the parties. YA II PN had covenanted not to cause or engage in any direct or indirect short selling or hedging of the Company’s shares of common stock.
During the year ended December 31, 2020, the Company issued 122.9 million shares of common stock for a total of $182.5 million under the SEDA.
Refer to Note 15 for information related to issuance of common stock resulting from the conversion of convertible notes, Note 17 for information related to the issuance of common stock resulting from the conversion of convertible notes with related parties, Note 18 for information related to the issuance to common stock for warrant and option exercise, and Note 8 for the information related to the issuance of common stock for DBOT contingent consideration.
2019 Equity Transactions
Refer to Note 15 for information related to issuance of common stock resulting from the conversion of convertible notes, Note 8 for information related to the issuance of common stock resulting from the business acquisitions and Note 12 for the information related to the issuance of common stock for long-term investment. The Company also issued 7.4 million shares of common stock related to asset acquisitions.
Note 17. Related Party Transactions
(a)Convertible Notes
$3.0 million Convertible Note with Mr. McMahon
On May 10, 2012, Mr. McMahon, our Executive Chairman, made a loan to the Company in the amount of $3.0 million. In consideration for the loan, the Company issued the note at a 4.0% interest rate computed on the basis of a 365-day year. The Company entered several amendments with respect to the effective conversion price (changed from $1.75 to $1.50), convertible stocks (changed from Common Stock to Series E Preferred Stock then back to Common Stock). The last amendment was made on May 9, 2020, and extended the maturity date to December 31, 2022.
On June 5, 2020, the Audit Committee and the Board approved the reduction of conversion price to $0.59, contingent upon the immediate conversion of the note. On June 5, 2020, the note was converted into 5.1 million shares of common stock. The Company recorded $1.5 million expense due to conversion in "Expense due to conversion of notes" in the consolidated statement of operation for the year ended December 31, 2020. The Company paid the accumulated interest of $0.3 million in cash prior to the conversion.
For the years ended December 31, 2021, 2020 and 2019, the Company recorded interest expense of $0, $0.1 million and $0.1 million, respectively, related to the note.
$2.5 million Convertible Promissory Note with SSSIG
On February 8, 2019, the Company entered into a convertible promissory note agreement with SSSIG, an affiliate of Dr. Wu, the former Chairman of the Company, in the aggregate principal amount of $2.5 million. The convertible promissory note bore interest at a rate of 4.0%, was scheduled to mature on February 8, 2020, and was convertible into shares of the Company’s common stock at a conversion price of $1.83 per share anytime at the option of SSSIG.
The Company received $1.3 million from SSSIG, and did not receive the remaining $1.2 million. On June 5, 2020, the Audit Committee and the Board approved the reduction of the conversion price to $0.59, contingent upon the immediate conversion of the convertible promissory note. On June 5, 2020, the convertible promissory note, including accumulated interest, was converted into 2.2 million shares of common stock. The Company recorded $0.7 million expense due to conversion in "Expense due to conversion of notes" in the consolidated statement of operation for the year ended December 31, 2020.
For the years ended December 31, 2021, 2020 and 2019, the Company recorded interest expense of $0, $21,546 and $48,357, related to the convertible promissory note, respectively. The Company did not pay the interest in cash on this note.
$1.0 million Convertible Promissory Note with SSSIG
On November 25, 2019, the Company entered into a convertible promissory note agreement with SSSIG, an affiliate of Dr. Wu, the former Chairman of the Company, in the aggregate principal amount of $1.0 million. The convertible promissory note bore interest at a rate of 4.0%, was initially scheduled to mature on November 25, 2021, and was convertible into the shares of the Company’s common stock at a conversion price of $1.25 per share anytime at the option of SSSIG.
The Company received $0.3 million from SSSIG and did not receive the remaining $0.8 million. On June 5, 2020, the Audit Committee and the Board of Directors approved the reduction of conversion price to $0.59, contingent upon the immediate conversion of the convertible promissory note. On June 5, 2020, the convertible promissory note, including accumulated interest, was converted into 0.4 million shares of common stock. The Company recorded $0.1 million expense due to conversion "Expense due to conversion of notes" in the consolidated statement of operation for the year ended December 31, 2020.
For the years ended December 31, 2021, 2020 and 2019, the Company recorded interest expense of $0, $4,301 and $1,000, respectively. The Company did not pay the interest in cash on this note.
(b)Transactions with GTD
Disposal of Assets in exchange of GTB
In March 2019, the Company completed the sale of the following assets (with total carrying amount of $20.4 million) to GTD, a minority shareholder based in Singapore, in exchange for 1.3 million GTB. The Company considered the arrangement as a nonmonetary transaction and that fair values of GTB were not reasonably determinable due to the reasons described below. Therefore, the GTB received were recorded at the carrying amount of the assets exchanged and the Company did not recognize any gain or loss based on the provisions of ASC 845.
•License content (net carrying amount $17.0 million.)
•13% ownership interest in Topsgame (carrying amount of $3.2 million which was included in long-term investment as a non-marketable equity investment.)
•Animation copy right (net carrying amount $0.2 million which was included in intangible assets.)
Digital asset management services
The Company recognized revenue for the master plan development services over the contract period based on the progress of the services provided towards completed satisfaction. Based on ASC 606, at contract inception, the Company considered the following factors to estimate the value of GTB (noncash consideration): 1) it only trades in one exchange, which had operated for less than one year; 2) its historical volatility was high; and 3) the Company’s intention at the time to hold the majority of GTB, as part of its digital asset management services; and 4) associated risks related to holding GTB. Therefore, the value of 7.1 million GTB using Level 2 measurement was $40.7 million with a 76.0% discount to the fixed contract price agreed upon by both parties when signing the contract. The Company considered similar assets exchanges in Singapore and considered the volatility of the quoted prices and determined a discount of 76.0% The estimated value of GTB was calculated using the Black-Scholes Merton valuation model using the following assumptions: expected terms 3.0 years; volatility 155%; dividend yield:
zero and risk-free interest rate of 2.25%. As of December 31, 2019, all performance obligations associated with the development of the master plan for GTD’s assets had been satisfied. Accordingly, the Company recognized revenue of $40.7 million in the year ended December 31, 2019.
Refer to Note 11 for information concerning the impairment loss of $61.1 million recorded related to GTB in the year ended December 31, 2019.
(c)Long-Term Investment to Qianxi
In November 2019, the Company entered into a share transfer agreement with Shenma to acquire its 1.72% ownership in Qianxi for consideration of $4.9 million, which was to be paid in six installments. Shenma was required to complete the share transfer registration prior to May 31, 2020, otherwise it would be required to return the consideration to the Company. The Company had paid $0.5 million as of December 31, 2021 and 2020, and recorded it on the “Other Non-Current Assets” since the share transfer registration was not yet completed. The Company is currently taking actions to resolve these matters. The Company has requested that Shenma return the consideration provided and currently has full allowance against this receivable.
(d)Borrowing from DBOT
During the three months ended June 30, 2019, the Company obtained several borrowings, $0.6 million in total, from DBOT, These borrowings bore no interest. The Company paid $0.3 million in July, 2019. DBOT became a subsidiary in July 2019.
(e)Acquisition of Fintalk Assets
In 2018, the Company entered into an agreement to purchase Fintalk Assets from Sun Seven Star International Limited, a Hong Kong company and an affiliate of Dr. Wu. FinTalk Assets include the rights, titles and interest in a secure mobile financial information, social, and messaging platform that has been designed for streamlining financial-based communication for professional and retail users. The initial purchase price for the Fintalk Assets was $7.0 million payable with $1.0 million in cash and shares of the Company’s common stock with a fair market value of $6.0 million. The Company paid $1.0 million in October 2018. The purchase price was later amended to $6.4 million, payable with $1.0 million in cash and shares of the Company’s common stock with a value of $5.4 million. The Company issued 2.9 million common shares in June 2019 and completed the transaction. In the three months ended December 31, 2019, management determined these assets had no future use and recorded an impairment loss of $5.7 million.
(f)Sale of Red Rock
Refer to Note 8 for additional information.
(g)Acquisition of Grapevine
Refer to Note 8 for additional information.
(h)Sale of Amer
Refer to Note 8 for additional information.
(i)Taxis commission revenue from Qianxi
During the three months ended June 30, 2019, the Company signed an agreement with iUnicorn (also known as Shenma Zhuanche) to form a strategic entity that would focus on green finance and integrated marketing services for new energy taxi vehicles as part of Ideanomics China. The Company agreed to contribute advisory and sales resources which include arranging ABS-based auto financing with its bank partners, and have 50.1% ownership interest in the investment and will have control of the board. iUnicorn, which own 49.9% of the of the joint venture, agreed to contribute its vehicles sales orders in Sichuan province. The entity will generate revenues from commissions on vehicle sales order and ABS fees related to the financing, which will vary accordingly to manufacturer and vehicle model.
During the three months ended September 30, 2019, the joint venture took over an order of 4,172 EV taxis from a third-party and helped facilitate the completion of the order. As part of the transaction, Qianxi agreed to pay a commission of $2.7 million to the joint venture for facilitating the completion of this order. There is no other remaining performance obligation relating to
this commission. In addition, the commission revenue is considered revenue from a related party as the minority shareholder of the joint venture is an affiliate of our customer, Qianxi. The Company has provided the full allowance against this receivable.
(j)Fuzhou Note Receivable
In May 2020, Energy Sales provided a note receivable to Zhengtong in the amount of 3.0 million RMB ($0.4 million). The note receivable was not collateralized. Zhengtong agreed to repay 3.3 million RMB ($0.5 million) within three months of the disbursement date. The Company has recorded a reserve of $0.5 million against this note receivable as of December 31, 2020. In September 2021, Zhengtong, BSSGCD, an affiliate of Bruno Wu, the former Chairman of the Company, and the Company reached an assignment agreement pursuant to which BSSGCD accepted from Zhengtong all the rights and claims arising from this note receivable. The Company received the payment in full of 3.3 million RMB (approximately $0.5 million at such time,) from BSSGCD subsequently and recorded this recovery in "Selling, general and administrative expenses."
(k)Zhu Note Receivable
In May 2020, a subsidiary of the Company, Energy Sales provided a note receivable to Mr. Zhu in the amount of 10.0 million RMB ($1.4 million). Mr. Zhu, through his wholly-owned entity Prime Capital Enterprise Pte. Ltd., provided collateral in the form of its 50.0% ownership of Founder Space. Founder Space is also 50.0% owned by a related party, Seven Stars Innovative Industries Group Limited, an affiliate of Dr. Wu, the former Chairman of the Company. Mr. Zhu agreed to repay 10.5 million RMB ($1.5 million) one month from the disbursement date. In September 2020, a third-party satisfied the note receivable and accrued interest in the amount of 10.5 million RMB ($1.5 million) on behalf of Mr. Zhu, and the Company terminated the note and collateral agreement.
(l)Research and development contract with a related party
The Company has entered a research and development contract with an entity with the total amount of $2.8 million for EV design and technology development. The Company paid $1.6 million for the year ended December 31, 2020 and recorded this amount in "Research and development expense." No service is currently being provided under this contract. One of the shareholders of this entity held a senior position in several of Dr. Wu’s affiliated entities.
(m)Transaction with Dr. Wu and his affiliates
On June 5, 2020, the Audit Committee and the Board approved the conversion of some borrowings at a conversion price of $0.59 per common share, contingent upon the immediate conversion of these amounts. On June 5, 2020, the borrowings of $1.5 million, including the $0.4 million transferred from Beijing Financial Holding Limited, were converted into 2.6 million shares of common stock.
As of December 31, 2021 and 2020, the Company has receivables of $0.2 million and $0.2 million, respectively, due from Dr. Wu, the former Chairman of the Company, and his affiliates and recorded in “Amounts due from related parties” in the consolidated balance sheets.
As of December 31, 2021 and 2020, the Company has payables of $0.7 million and $0.6 million, respectively, due to Dr. Wu, the former Chairman of the Company, and his affiliates and recorded in “Amounts due to related parties” in the consolidated balance sheets.
Service agreement with SSSIG
The Company entered a service agreement with SSSIG for the period from July 1, 2020 through June 30, 2021 for $1.4 million in exchange for consulting services from SSSIG, the services include but are not limited to human resources, finance and legal advice. The Company recorded the service charges of $0.4 million and $0.7 million in “Professional fees” for the years ended December 31, 2021 and 2020, respectively. The agreement was terminated in May 2021 and both parties agree that the service agreement has been completely performed and no payment is outstanding, and the termination shall not be regarded as a breach by either party. As a result, the Company recorded the reversal of the unpaid $0.6 million in "Other income (expense), net" in the consolidated statement of operations for the year ended December 31, 2021.
The Company entered a new consulting service agreement with SSSIG on April, 20, 2021 for the period from April 1, 2021 through June 30, 2021 for $0.4 million. The service agreement includes employment transfer, financial transition, corporate documents handover, legal representative and board member change for the Company's subsidiaries and affiliates. The
Company recorded $0.4 million in the “Amount due to related parties” in the consolidated balance sheets as of December 31, 2021.
(n)Borrowing from Beijing Financial Holdings Limited
In the three months ended June 30 2020, the borrowing of $0.4 million from Beijing Financial Holding Limited was transferred to Dr. Wu, the former Chairman of the Company, and was subsequently converted to shares at a conversion price of $0.59 per common share on June 5, 2020. Effective January 1, 2020, Beijing Financials Holding limited is considered a related party because MHTL, was, at a point in time, intended to act as a trustee over 10,000 common shares of Ideanomics China to affect a share-based compensation plan and has the same owner of Beijing Financial Holdings Limited.
(o)Amounts due from and due to Glory
Glory has made partial payment of $0.5 million on behalf of the Company to acquire the land use rights and the Company has made payments on behalf of Glory for some of its operational expenses during the year ended December 31, 2021 and December 31, 2020. The net balance of $0.2 million and $0.3 million due to Glory as result of these payments is recorded in “Amount due to related parties” in the consolidated balance sheets as of December 31, 2021 and December 31, 2020, respectively.
(p)Receivable due from Ocasia
In the year ended December 31, 2021, SSE, one of Ideanomics' subsidiaries, remitted $0.2 million to Ocasia for the purpose of a business cooperation project. Ocasia returned $0.2 million subsequently because the project was put on hold.
(q)Receivable due from Mr. McMahon
In the year ended December 31, 2021, the Company paid $0.1 million on behalf of Mr. McMahon and subsequently reduced his compensation payment by the same amount.
(r)Stock purchase consideration payable due to FNL
On April 20, 2021, Ideanomics entered into a stock purchase agreement with FNL, pursuant to which Ideanomics made an investment into FNL. The unpaid consideration of $0.1 million is recorded in the “Amount due to related parties” in the consolidated balance sheets as of December 31, 2021. Refer to Note 8 for additional information.
(s)Energica Note Receivable
In October 2021, the Company extended a revolving line of credit to Energica Motor Company in the amount of $4.5 million. The parent company of Energica Motor Company is Energica, of which the Company has 20% ownership. The revolving loan commitment termination date is December 31, 2022. The revolving loan due date is 210 days from the date an individual revolving loan is made. Interest rate is the prime rate, as defined. All accrued and unpaid interest on each revolving loan shall be payable commencing on the nineteenth day after the making of such revolving loan, and then again thirty days thereafter until the principal balance of such revolving loan is repaid in full. Overdue principal shall bear interest at the Interest Rate plus four percentage points. Each revolving loan is solely for the purpose of purchasing financed vehicles in order to resell such financed vehicles to an approved dealer, or delivered to an approved dealer for later sale to a customer of such approved dealer. The loan is secured by a series of assets, including financed vehicles, all accounts receivable, all goods and inventory.
The Company has provided a loan of $0.7 million to Energica Motor Company as of December 31, 2021, and recorded in “Notes receivable from related party” in the consolidated balance sheets at cost, The interest income recognized is $6,476 for the year ended December 31, 2021 and is recorded as earned based on the outstanding balance for the time period at the rate per the agreement.
Note 18. Share-Based Compensation
As of December 31, 2021, the Company had 21.8 million options and 1.1 million warrants outstanding.
The Company awards common stock and stock options to employees, consultants, and directors as compensation for their services, and accounts for its stock option awards to employees, consultants, and directors pursuant to the provisions of ASC 718. For the options with market conditions, the fair value of each award is estimated on the date of grant using a Monte-Carlo
valuation model and the fair value of each option recognized as compensation expense over the derived service period. For the options with performance conditions, the fair value of each award is estimated on the date of grant using the Black-Scholes Merton valuation model and the fair value of each option recognized as compensation expense over the implicit service period. For restricted stock and option awards only with service conditions, the fair value of each option award is estimated on the date of grant using the Black-Scholes Merton valuation model. The Company recognizes the fair value of each option as compensation expense ratably using the straight-line attribution method over the service period, which is generally the vesting period.
Effective as of December 3, 2010 and amended on August 3, 2018, the Company’s Board approved the 2010 Plan pursuant to which options or other similar securities may be granted. On October 22, 2020, the Company's shareholders approved the amendment and restatement of the 2010 Plan. The maximum aggregate number of shares of common stock that may be issued under the 2010 Plan increased from 31.5 million shares to 56.8 million shares. As of December 31, 2021, options available for issuance are 17.4 million shares.
For the years ended December 31, 2021, 2020 and 2019, total share-based payments expense was $22.0 million, $12.0 million and $9.1 million, respectively.
(a)Stock Options
The following table summarizes stock option activity for the years ended December 31, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| Options
Outstanding | | Weighted
Average
Exercise
Price | | Weighted
Average
Remaining
Contractual
Life (Years) | | Aggregated
Intrinsic
Value |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Outstanding at December 31, 2019 | 14,936,726 | | | $ | 2.13 | | | — | | $ | — | |
| Granted | 15,854,166 | | | 0.60 | | | — | | — | |
| Exercised | (2,421,657) | | | 0.78 | | | — | | 2,421,499 | |
| Expired | (1,682,658) | | | 2.72 | | | — | | — | |
| Forfeited | (1,599,161) | | | 1.58 | | | — | | — | |
| Outstanding at December 31, 2020 | 25,087,416 | | | 1.29 | | | 7.92 | | 18,554,241 | |
| Granted | 9,562,000 | | | 2.49 | | | — | | — | |
| Exercised | (5,589,084) | | | 1.50 | | | — | | 7,731,175 | |
| Expired | (2,966,509) | | | 1.69 | | | — | | — | |
| Forfeited | (4,250,042) | | | 1.10 | | | — | | — | |
| Outstanding at December 31, 2021 | 21,843,781 | | | 1.74 | | | 8.06 | | 4,596,393 | |
| Vested as of December 31, 2021 | 14,264,369 | | | 1.53 | | | 7.71 | | 3,927,341 | |
| Expected to vest as of December 31, 2021 | 7,579,412 | | | 2.15 | | | 9.37 | | 669,052 | |
As of December 31, 2021, $12.9 million of total unrecognized compensation expense related to non-vested share options is expected to be recognized over a weighted average period of 1.40 years. The total intrinsic value of shares exercised in the years ended December 31, 2021, 2020 and 2019, was $7.7 million, $2.4 million and $0.0 million, respectively. The total fair value of shares vested in the years ended December 31, 2021, 2020 and 2019, was $8.4 million, $11.8 million and $8.5 million, respectively. Cash received from options exercised in the years ended December 31, 2021, 2020 and 2019, was $8.4 million, $1.7 million and $0.0 million, respectively.
For the options with performance and service conditions, the assumptions used to estimate the fair values of the stock options
granted in the year ended December 31, 2021, 2020 and 2019 are as follows:
| | | | | | | | | | | | | | | | | |
| Year ended |
| December 31, 2021 | | December 31, 2020 | | December 31, 2019 |
| Expected term (in years) | 4.79-7.17 | | 5.15-5.52 | | 5.52 |
| Expected volatility | 112%-130% | | 101%-122% | | 98 | % |
| Expected dividend yield | — | % | | — | % | | — | % |
| Risk free interest rate | 0.51%-1.29% | | 0.39%-0.44% | | 2.51 | % |
For the options with market conditions, the assumptions used to estimate the fair values of the stock options granted in the year ended December 31, 2021 as follows:
| | | | | |
| Expected term (in years) | 1.88 |
| Expected volatility | 106.92 | % |
| Expected dividend yield | — | % |
| Risk free interest rate | 1.31 | % |
(b)Warrants
In connection with certain of the Company’s service agreements, the Company issued warrants to service providers to purchase common stock of the Company. As of December 31, 2021, the weighted average exercise price was $4.00, and the weighted average remaining life was 0.61 years.
A summary of the warrants is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | | | |
| Warrants Outstanding | | Number of
Warrants
Outstanding and
Exercisable | | Number of
Warrants
Outstanding and
Exercisable | | Exercise
Price | | Expiration
Date |
| Service providers | | 200,000 | | | 200,000 | | | $ | 5.00 | | | July 1, 2022 |
| Service providers | | 700,000 | | | 700,000 | | | 2.50 | | | February 28, 2022-October 1, 2022 |
| Service providers | | 100,000 | | | — | | | 7.50 | | | January 1, 2023 |
| Service providers | | 100,000 | | | — | | | 9.00 | | | January 1, 2023 |
| | 1,100,000 | | | 900,000 | | | | | |
(c)Restricted Shares
In July 2021, the Company granted 5.0 million restricted shares to seven employees and directors under the 2010 Plan which was approved by the Board. The restricted shares were vested immediately on the grant date. The aggregated grant date fair value of all those restricted shares was $12.4 million.
In November 2020, the Company granted 0.1 million restricted shares to one employee under the 2010 Plan which was approved by the Board of Directors. The restricted shares were vested immediately on the commencement date. The aggregated grant date fair value of all those restricted shares was $0.1 million.
A summary of the unvested restricted shares is as follows:
| | | | | | | | | | | |
| Shares | | Weighted-average fair value |
| | | |
| | | |
| | | |
| | | |
| Non-vested restricted shares outstanding at December 31, 2020 | — | | | |
| Granted | 5,025,000 | | | 2.46 | |
| Forfeited | — | | | — | |
| Vested | (5,025,000) | | | 2.46 | |
| Non-vested restricted shares outstanding at December 31, 2021 | — | | | — |
As of December 31, 2021, there was $0 of unrecognized compensation cost related to unvested restricted shares.
Note 19. Loss Per Common Share
The following table summarizes the Company's earnings (loss) per share (USD in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | |
| For the year ended |
| December 31, 2021 | | December 31, 2020 | | December 31, 2019 |
| Net loss attributable to Ideanomics, Inc. common stockholders | $ | (256,011) | | | $ | (101,264) | | | $ | (98,508) | |
| Basic | | | | | |
| Basic weighted average common shares outstanding | 447,829,204 | | | 213,490,535 | | | 119,766,859 | |
| Diluted | | | | | |
| Diluted weighted average common shares outstanding | 447,829,204 | | | 213,490,535 | | | 119,766,859 | |
| Net loss per share: | | | | | |
| Basic | $ | (0.57) | | | $ | (0.47) | | | $ | (0.82) | |
| Diluted | $ | (0.57) | | | $ | (0.47) | | | $ | (0.82) | |
Basic loss per common share attributable to our shareholders is calculated by dividing the net loss attributable to our shareholders by the weighted average number of outstanding common shares during the period.
Diluted loss per share is calculated by taking net loss, divided by the diluted weighted average common shares outstanding. Diluted net loss per share equals basic net loss per share because the effect of securities convertible into common shares is anti-dilutive.
The following table includes the number of shares that may be dilutive potential common shares in the future. The holders of these shares do not have a contractual obligation to share in our losses and thus these shares were not included in the computation of diluted loss per share because the effect was antidilutive (in thousands.)
| | | | | | | | | | | | | | | | | |
| December 31,
2021 | | December 31,
2020 | | December 31,
2019 |
| Warrants | 1,100 | | | 900 | | | 8,996 | |
| Options and RSUs | 21,859 | | | 25,172 | | | 14,937 | |
| Series A Preferred Stock | 933 | | | 933 | | | 933 | |
| Contingent shares | 1,491 | | | 1,013 | | | 8,501 | |
| Convertible promissory note and interest | 30,585 | | | — | | 21,678 | |
| Total | 55,968 | | | 28,018 | | | 55,045 | |
Note 20. Income Taxes
(a)CIT
Ideanomics, Inc., and its US subsidiaries are subject to U.S. federal and state income tax.
Taxes that are based on gross revenue, rather than net income, are not CIT. In the year ended December 31, 2021, Timios incurred $0.1 million of such taxes that are included in selling, general and administrative expense in the statement of operations.
CB Cayman was incorporated in the Cayman Islands as an exempted company and is not subject to income tax under the current laws of the Cayman Islands.
Mobile Energy Operation Group Limited, M.Y. Products Global Limited and M.Y. Products Global Holdings Limited were incorporated in the British Virgin Islands (BVI) and are not subject to income tax under the current laws of the British Virgin Islands.
Medici Operation Limited and MEG Technology Services Group Limited were incorporated in HK SAR their activities relate to support and ownership of businesses outside of Hong Kong, and consequently their expenses do not create operating loss carryovers.
Tree Technologies is subject to Malaysian federal income tax. At the acquisition of Tree Technologies at the end of 2019, the Company recognized approximately $8.2 million of deferred tax liabilities related to land-use rights and a distribution and marketing agreement with carrying values well in excess of their tax basis. During the year ended December 31, 2020, Tree Technologies recorded a $3.3 million income tax benefit. This resulted principally from a $3.1 million benefit from amortization and eventual impairment, of the distribution and marketing agreement which resulted in the reversal of the deferred tax liabilities related to the agreement. The remaining $0.2 million benefit resulted from the operating losses creating carryovers that could offset part of the remaining deferred tax liabilities.
During the year ended December 31, 2021, Tree Technologies recorded a $0.4 million deferred tax benefit. This benefit resulted from a net operating loss carryover for the period, part of which was able to offset previously recorded deferred tax liabilities and part of which were offset by a valuation allowance.
With the exception of the two HK SAR companies, the three BVI companies, SSE, incorporated in Singapore, and M.Y. Products LLC, all subsidiaries of Ideanomics China are PRC entities. The income tax provision of these entities is calculated at the applicable tax rates on the taxable income for the periods based on existing legislation, interpretations and practices in the PRC.
In accordance with the CIT Law, effective beginning on January 1, 2008, enterprises established under the laws of foreign countries or regions and whose “place of effective management” is located within the PRC territory are considered PRC resident enterprises and subject to the PRC income tax at the rate of 25.0% on worldwide income. The definition of “place of effective management” refers to an establishment that exercises, in substance, and among other items, overall management and control over the production and business, personnel, accounting, and properties of an enterprise. If the Company’s non-PRC incorporated entities are deemed PRC tax residents, such entities would be subject to PRC tax under the CIT Law. Since our non-PRC entities have accumulated losses, the application of this tax rule will not result in any PRC tax liability, if our non-PRC incorporated entities are deemed PRC tax residents.
The CIT Law imposes a 10.0% withholding income tax, subject to reduction based on tax treaty where applicable, for dividends distributed by a FIE to its immediate holding company outside China. Under the PRC-HK tax treaty, the withholding tax on dividends is 5.0% provided that a HK holding company qualifies as a HK tax resident as defined in the tax treaty. No provision was made for the withholding income tax liability as the Company’s foreign subsidiaries were in accumulated loss.
Loss before tax (after impairment of an equity in loss of equity method investees) and the provision for income tax benefit consists of the following components (in thousands):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Loss before tax, after impairment of and equity in loss of equity method investees | | | | | |
| United States | $ | (256,851) | | | $ | (82,999) | | | $ | (88,688) | |
| PRC/Hong Kong/Singapore/Malaysia | (11,660) | | | (31,890) | | | (7,724) | |
| $ | (268,511) | | | $ | (114,889) | | | $ | (96,412) | |
| Deferred tax expense (benefit) of net operating loss | | | | | |
| United States - Federal | $ | — | | | $ | — | | | $ | — | |
| United States - State | — | | | — | | | — | |
| PRC/Hong Kong/Singapore/Malaysia | (371) | | | (241) | | | (176) | |
| (371) | | | (241) | | | (176) | |
| Deferred tax (benefit) of a decrease in the beginning of the year | | | | | |
| Valuation allowance as a result of a change in circumstances | — | | | — | | | — | |
| United States - Federal | (8,873) | | | — | | | — | |
| United States - State | (1,261) | | | — | | | — | |
| PRC/Hong Kong/Singapore/Malaysia | — | | | — | | | — | |
| (10,134) | | | — | | | — | |
| Deferred tax expense (benefit) other than the above two categories | | | | | |
| United States - Federal | (89) | | | — | | | — | |
| United States - State | (1,359) | | | — | | | (514) | |
| PRC/Hong Kong/Singapore/Malaysia | (58) | | | (3,067) | | | — | |
| Total deferred income tax (expense) benefit | (1,506) | | | (3,067) | | | (514) | |
| | | | | |
| Current tax expense (benefit) other than benefit of net operating loss | | | | | |
| United States - Federal | — | | | — | | | — | |
| United States - State | 225 | | | — | | | — | |
| PRC/Hong Kong/Singapore/Malaysia | — | | | — | | | 1,107 | |
| Total current income tax (expense) benefit | 225 | | | — | | | 1,107 | |
| | | | | |
| Total income tax expense (benefit) | $ | (11,786) | | | $ | (3,308) | | | $ | 417 | |
At the acquisition of each of Timios, WAVE, US Hybrid and Solectrac in 2021, the companies immediately became includable in the consolidated federal tax return of Ideanomics. WAVE will be included in the state tax returns of Ideanomics. In the case of each acquisition, intangible assets were recognized for financial reporting purposes that were not recognized for income tax purposes. This, in combination with some smaller temporary differences of the four acquired businesses, resulted in the recognition of $12.2 million deferred tax liabilities. The federal deferred tax liabilities, and the WAVE state deferred tax liabilities created, resulted in the valuation allowance on Ideanomics’ deferred tax assets being reduced. by a similar amount. Ideanomics’ net deferred tax assets that had previously been judged to be more likely that not to be unable to reduce the Company’s income tax liability. As a result, the net deferred tax assets were completely offset by a valuation allowance. Once the acquisitions of four acquired businesses occurred, a portion of Ideanomics’ deferred tax assets could be utilized in offsetting the newly acquired deferred tax liabilities, this resulted in a one-time income tax benefit of $10.1 million.
The current CIT for 2021 all relates to Timios, which had taxable income since its acquisition in January 2021 resulting from the non-deductibility of amortization and impairment charges.
A reconciliation of the expected income tax derived by the application of the U.S. CIT rate to the Company’s loss before income tax benefit is as follows:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| U. S. statutory income tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
| Non-deductible expenses: | | | | | |
| Non-deductible stock awards | (0.6) | | | (0.6) | | | (1.9) | |
| Non-deductible impairment or disposal of goodwill | (10.5) | | | (3.7) | | | — | |
| Non-deductible acquisition costs | (0.7) | | | — | | | — | |
Non-deductible officers’ compensation
| (0.6) | | | — | | | — | |
| Non-deductible interest expenses | (0.2) | | | (2.0) | | | (1.2) | |
| Additional tax cost basis on disposal of subsidiary | 0.4 | | | — | | | — | |
| | | | | |
| Expiration of and disposal of subsidiary NOL carryovers | (0.5) | | | — | | | — | |
| Change in state tax rates due to change in state apportionment | 1.1 | | | 1.3 | | | — | |
| Increase in valuation allowance | (10.3) | | | (15.7) | | | (16.4) | |
| Tax rate differential(state and foreign) | 5.0 | | | 1.3 | | | (0.5) | |
| Non-taxable gain Non-deductible (loss) on contingent consideration | 0.9 | | | 1.1 | | | (1.1) | |
| Others | (0.6) | | | 0.2 | | | (0.3) | |
| Effective income tax rate | 4.4 | % | | 2.9 | % | | (0.4) | % |
The Company’s acquisition of WAVE in 2021, which will be included with Ideanomics in all state income tax filings, is expected to have a significant effect on the states to which Ideanomics’ income and loss is apportioned. This results in a higher income tax rate at which many of Ideanomics deductible temporary differences are expected to reverse. The increase in the expected rate consequently resulted in a significant increase in the relate deferred tax assets, which were then offset with a valuation allowance.
Deferred income taxes are recognized for future tax consequences attributable to temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and income tax purposes using enacted rates expected to be in effect when such amounts are realized or settled. Significant components of the Company’s deferred tax assets and liabilities at December 31, 2021 and 2020 are as follows (in thousands):
| | | | | | | | | | | |
| December 31,
2021 | | December 31,
2020 |
| U.S. NOL | $ | 46,693 | | | $ | 23,585 | |
| Foreign NOL | 6,554 | | | 5,967 | |
| U.S. capital loss carryover | 873 | | | 4,371 | |
| U. S. Section 1231 carryover | 2,360 | | | |
| Accrued payroll and expense | 1,012 | | | — | |
| Nonqualified options | 2,999 | | | 1,927 | |
| Convertible notes | — | | | 827 | |
| Inventory reserve | 563 | | | — | |
| Bad debt allowance | 281 | | | 281 | |
| Impaired assets | 10,728 | | | 7,996 | |
| Other | 126 | | | |
| Equity investment loss and others | 5,081 | | | 3,596 | |
| | | |
| Total deferred tax assets | 77,270 | | | 48,550 | |
| Less: valuation allowance | (74,972) | | | (46,732) | |
| Property and equipment | (357) | | | (81) | |
| Intangible assets | (5,954) | | | (6,782) | |
| Outside basis in domestic subsidiary and other | (1,060) | | | — | |
| Total deferred tax liabilities | (7,371) | | | (6,863) | |
| Net deferred tax assets (liabilities) | $ | (5,073) | | | $ | (5,045) | |
As of December 31, 2021, 2020 and 2019, the Company had U.S. domestic cumulative tax loss carryforwards of $191.4 million, $99.3 million and $83.1 million, respectively, and foreign cumulative tax loss carryforwards of $26.9 million, $24.0 million and $28.3 million, respectively, which may be available to reduce future income tax liabilities in certain jurisdictions. $28.2 million of the U.S. carryforwards expire in the years 2027 through 2037. The remaining U.S. tax loss is not subject to expiration. PRC tax loss carryforwards of $23.0 million will expire beginning year 2022 to year 2026. Malaysian tax loss carryforwards of $3.3 million will expire in the years 2030 and 2031. At December 31, 2021, The Company also has U.S. capital loss and section 1231 loss carryovers of $3.4 million and $9.1 million respectively. The capital loss carryover expires in 2027, while the 1231 loss carryover does not expire. Utilization of NOLs may be subject to an annual limitation due to ownership change limitations provided in the Internal Revenue Code and similar state and foreign provisions. This annual limitation may result in the expiration of NOLs before utilization. Management has however, excluded from the carryforward totals amounts shown on the tax returns but for which management has assessed cannot be used before expiration because of the annual limitations.
Realization of the Company’s net deferred tax assets is largely dependent upon the Company’s ability to generate future taxable income in the respective tax jurisdictions to obtain benefit from the reversal of temporary differences and NOL carryforwards. It is, however, reasonably possible that the Company could record an income tax benefit in 2022 or later years from the reduction of the valuation allowance resulting from acquisitions in which deferred tax liabilities are recorded. In such a case, as occurred in 2021, deferred tax assets could be utilized to offset the acquired deferred tax liabilities. The valuation allowance
increased by $28.2 million, $16.5 million and $14.8 million in the years ended December 31, 2021, 2020 and 2019, respectively.
The following table reflects the changes in the valuation allowance (in thousands):
| | | | | |
| Valuation allowance - January 1, 2019 | $ | 15,468 | |
| Increase - year ended December 31, 2019 | 14,807 | |
| Valuation allowance - December 31, 2019 | 30,275 | |
| Increase - year ended December 31, 2020 | 16,457 | |
| Valuation allowance - December 31, 2020 | 46,732 | |
| Increase - year ended December 31, 2021 | 28,240 | |
| Valuation allowance - December 31, 2021 | $ | 74,972 | |
(b)Uncertain Tax Positions
Accounting guidance for recognizing and measuring uncertain tax positions prescribes a threshold condition that a tax position must meet for any of the benefit of uncertain tax position to be recognized in the financial statements. The deferred tax assets listed above as of December 31, 2021, do not include $0.3 million of potential deferred tax assets, arising in the current year, not recognized because they do not meet the threshold for recognition. If these assets were to be recognized they would be fully offset by a valuation allowance. There were no identified uncertain tax positions December 31, 2020 and 2019.
The following table reflects changes in the gross unrecognized tax positions (in thousands):
| | | | | |
| Unrecognized tax benefits at beginning of year - January 1, 2019 | $ | — | |
| Gross changes - year ended December 31, 2019 | — | |
| Unrecognized tax benefits at end of year - December 31, 2019 | — | |
| Gross changes - year ended December 31, 2020 | — | |
| Unrecognized tax benefits at end of year - December 31, 2020 | — | |
| Gross increases - current year tax positions | 256 | |
| Unrecognized tax benefits at end of year - December 31, 2020 | $ | 256 | |
As of December 31, 2021, 2020 and 2019, the Company did not accrue any material interest and penalties. The Company’s United States federal and state income tax returns are generally subject to examination for potential assessment for 2018 and later years. The use of U.S. net operating loss carryovers from earlier years are subject to challenge in any future year utilized. Due to the uncertainty regarding the filing of tax returns for years before 2007, it is possible that the Company is subject to examination by the IRS for earlier years. All of the PRC tax returns for the PRC operating companies are subject to examination by the PRC tax authorities for all periods from the companies’ inceptions in 2009 through 2021 as applicable. All of Tree Technologies’ tax returns since inception in 2018 are subject to examination by the Malaysian tax authorities. All of Tree Technologies’ tax returns since inception in 2018 are subject to examination by the Malaysian tax authorities.
Note 21. Commitments and Contingencies
Lawsuits and Legal Proceedings
From time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm the business.
Vendor Settlement
In the year ended December 31, 2020, Ideanomics preliminarily settled a payable of $1.7 million with one vendor for $1.3 million. The settlement were conditioned upon factors which did not expire until three months from the date of the settlement; therefore, the Company recognized the gain of $0.4 million in the year ended December 31, 2020.
Shareholder Class Actions and Derivative Litigations
On July 19, 2019, a purported class action, now captioned Rudani v. Ideanomics, Inc. et al., was filed in the United States District Court for the Southern District of New York against the Company and certain of its then current and former officers and directors. The Amended Complaint alleged violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934. Among other things, the Amended Complaint alleged purported misstatements made by the Company in 2017 and 2018, seeking damages. As part of a mediation, the parties reached a settlement for $5.0 million. The Court granted final approval of the settlement on January 25, 2022.
On June 28, 2020, a purported securities class action, captioned Lundy v. Ideanomics Inc. et al., was filed in the United States District Court for the Southern District of New York against the Company and certain current officers and directors of the Company. Additionally, on July 7, 2020, a purported securities class action captioned Kim v. Ideanomics Inc. et al, was filed in the Southern District of New York against the Company and certain current officers and directors of the Company. Both cases alleged violations of Section 10(b) and 20(a) of the Exchange Act arising from certain purported misstatements by the Company beginning in September 2020 regarding its Ideanomics China division. On November 4, 2020, the Lundy and Kim actions were consolidated and the litigation is now titled “In re Ideanomics, Inc. Securities Litigation.” In December 2020, the Court appointed Rene Aghajanian as lead plaintiff and an amended complaint was filed in February 2021, alleging violations of Section 10(b) and 20(a) of the Exchange Act arising from certain purported misstatements by the Company beginning in March 2020 regarding its Ideanomics China division and seeking damages. The defendants filed a motion to dismiss on May 6, 2021. On March 15, 2022, the Court granted Defendants’ motions to dismiss in full and dismissed Plaintiff’s complaint. On April 14, 2022, Plaintiff sought leave to amend its complaint and Defendants opposed that request. The Court has not yet ruled on Plaintiff’s request to amend the complaint. While the Company believes that this action is without merit, there can be no assurance that the Company will prevail. We cannot predict the outcome of the pending request seeking leave to amend the complaint. The Company cannot currently estimate the possible loss or range of losses, if any, that it may experience in connection with this litigation.
On July 10, 2020, the Company was named as a nominal defendant, and certain of its former officers and directors were named as defendants, in a shareholder derivative action filed in the United States District Court for the Southern District of New York, captioned Toorani v. Ideanomics, et al. The Complaint alleges violations of Section 14(a) of the Exchange Act 1934, breach of fiduciary duties, unjust enrichment, abuse of control, gross mismanagement, and corporate waste and seeks monetary damages and other relief on behalf of the Company. Additionally, on September 11, 2020, the Company was named as a nominal defendant, and certain of its former officers and directors were named as defendants, in a shareholder derivative action filed in the United States District Court for the Southern District of New York, captioned Elleisy, Jr. v. Ideanomics, et al, alleging violations and allegations similar to the Toorani litigation. On October 10, 2020, the Court in the Elleisy and Toorani, consolidated these two actions. Additionally, on October 27, 2020, the Company was named as a nominal defendant, and certain of its former officers and directors were named as defendants, in a shareholder derivative action filed in the United States District Court for the District of Nevada, captioned Zare v. Ideanomics, et al, alleging violations and allegations similar to the Toorani and Elleisy litigation. The Company and certain of the defendants have reached a settlement in which the Company has agreed to certain corporate governance and internal procedure reforms. The Court granted final approval on March 1, 2022.
Merger-related Litigation and Demand Letters
Following the announcement of the Company’s agreement to acquire VIA, the Company has received several demand letters on behalf of purported stockholders of the Company and the Company and certain of its officers and directors have been named as defendants in complaints filed and consolidated in the United States District Court for the Southern District of New York demanding the issuance of additional disclosures in connection with the merger. The specific complaints, all of which have been consolidated, have the following filing dates: Macmillan v. Ideanomics, Inc.et al.¸ December 2, 2021; Saee v. Ideanomics, et al., December 7, 2021; and Foran v. Ideanomics, Inc., et al., January 11, 2022. In those complaints, Plaintiffs allege that the Company’s Registration Statement on Form S-4 initially filed with the SEC on November 5, 2021, is false and misleading and purportedly omits material information regarding the Company’s acquisition of VIA. The Company believes that its disclosures comply fully with applicable law and that the demand letters and complaints are without merit. Nevertheless, in order to moot the purported deficiencies alleged in the demand letters and the complaints, avoid the risk of delaying the consummation of the merger, and minimize the costs, risks, and uncertainties inherent in litigation, the Company, without admitting any liability or wrongdoing, voluntarily provided certain supplemental disclosures. Nothing in those supplemental disclosures should be considered an admission of the legal necessity or materiality under applicable laws of any of the disclosures included. To the contrary, the Company denies all of the allegations in the demand letters and the complaints that any additional disclosures are required.
SEC Investigation
As previously reported, the Company is subject to an investigation by the Division of Enforcement of the United States Securities and Exchange Commission. The Company is cooperating with the investigation and has responded to requests for documents, testimony and information regarding various transactions and disclosures going back to 2017. At this point, we are unable to predict what the timing or the outcome of the SEC investigation may be or what, if any, consequences the SEC investigation may have with respect to the Company. However, the SEC investigation could result in additional legal expenses and divert management’s attention from other business concerns and harm our business. If the SEC were to determine that legal violations occurred, we could be required to pay civil penalties or other amounts, and remedies or conditions could be imposed as part of any resolution.
Ideanomics Audit Committee Investigation
On March 14, 2022, BDO informed the company that information related to the company’s operations in China indicated that an illegal act may have occurred. In response, the company’s Audit Committee engaged an Am Law 100 law firm and a nationally recognized forensics accounting firm to conduct a complete and thorough investigation and such investigation was completed by such parties to the Audit Committee’s satisfaction on July 17, 2022. The investigation concluded with no findings of improper or fraudulent actions or practices by the Company or any of its officers or employees with respect to any matters, including those raised by BDO.
Ideanomics, Inc. v. Silk EV Cayman LP
Silk executed a convertible promissory note in favor of Ideanomics on January 28, 2021, in the amount of $15.0 million plus interest. Payment of the original principal amount plus interest was due on January 28, 2022. Silk did not pay on the convertible promissory note when it became due. On April 27, 2022, Ideanomics filed suit against Silk in the Supreme Court of the State of New York, New York County, Index No 51668/2022 for non-payment of the convertible promissory note. Silk was timely served with the Summons and Notice of Motion for Summary Judgment in Lieu of Complaint.
On June 1, 2022, Ideanomics agreed to dismiss the lawsuit without prejudice in exchange for Silk’s execution of a Confession of Judgment wherein Silk, through its Chairman, acknowledged its debt obligation under the convertible promissory note and agreed to a payment schedule, with interest continuing to run until payment in full at the rate of 6.0% per annum.
Following this agreement, Silk did not remit payment according to the payment schedule. On August 16, 2022, Ideanomics obtained a judgment against Silk for $16.4 million including prejudgment interest of 6.0%, which will accrue post-judgment interest of 9% until paid. It has not been paid.
Note 22. Concentration, Credit and Other Risks
a.Major Customers and Referring Financial Institutions
For the year ended December 31, 2021, no customer individually accounted for more than 10.0% of the Company’s revenue. Two customers individually accounted for more than 10.0% of the Company’s net accounts receivable as of December 31, 2021 (37.9% of accounts receivable).
Timios generates much of its revenue through referring financial institutions. For the year ended December 31, 2021, no individual referring financial institution accounted for more than 10.0% of the Company’s revenue.
For the year ended December 31, 2020, three customers individually accounted for more than 10.0% of the Company’s revenue (77.0% of revenue.) Three customers individually accounted for more than 10.0% of the Company’s net accounts receivable as of December 31, 2020 (98.2% of accounts receivable.)
For the year ended December 31, 2019, one customer individually accounted for more than 10.0% of the Company's revenue (91.3% of revenue.)
Major Suppliers
For the year ended December 31, 2021, no suppliers individually accounted for more than 10.0% of the Company’s cost of revenues. No suppliers individually accounted for more than 10.0% of the Company’s accounts payable as of December 31,
2021.
For the year ended December 31, 2020, four suppliers individually accounted for more than 10.0% of the Company's cost of revenues (73.70% of cost of revenue.) Two suppliers individually accounted for more than 10.0% of the Company's accounts payable as of December 31, 2020 (61.10% of accounts payable.)
For the year ended December 31, 2019, no suppliers individually accounted for more than 10.0% of the Company's cost of revenues.
Concentration of Credit Risks
Financial instruments that potentially subject the Company to significant concentration of credit risk primarily consist of cash, cash equivalents, and accounts receivable. As of December 31, 2021 and 2020, the Company’s cash and cash equivalents were held by financial institutions (located in the PRC, Hong Kong, Malaysia, the U.S. and Singapore) that management believes have acceptable credit. Accounts receivable are typically unsecured. The risk with respect to accounts receivable is mitigated by regular credit evaluations that the Company performs on its distribution partners and its ongoing monitoring of outstanding balances.
b.Foreign Currency Risks, Currency Concentrations, and Capital Requirements
A portion of the Company’s operating transactions are denominated in RMB. RMB is not freely convertible into foreign currencies. The value of the RMB is subject to changes in the central government policies and to international economic and political developments. In the PRC, certain foreign exchange transactions are required by laws to be transacted only by authorized financial institutions at exchange rates set by the PBOC. Remittances in currencies other than RMB by the Company in China must be processed through PBOC or other China foreign exchange regulatory bodies which require certain supporting documentation in order to complete the remittance.
As of December 31, 2021, the Company had cash and cash equivalents of $269.9 million. Approximately $241.9 million was held in U.S. entities and $27.9 million was held in Hong Kong, Singapore, Malaysia, and the PRC entities.
Timios holds various regulatory licenses related to its business as a title insurance agency and is required to hold a minimum cash balance of $2.0 million. As a broker-dealer, JUSTLY has minimum capital requirements. JUSTLY had cash of $0.2 million as of December 31, 2021, which was necessary for JUSTLY to meet its minimum capital requirements.
As of December 31, 2021 and 2020, deposits of $4.7 million and $1.3 million were insured, respectively. To limit exposure to credit risk relating to bank deposits, the Company primarily places bank deposits only with large financial institutions in the PRC, HK, U.S., Singapore and Cayman with acceptable credit ratings.
c.Cybersecurity Incident
The Company’s real estate services subsidiary, Timios, experienced a systems outage that was caused by a cybersecurity incident. Timios has engaged leading forensic information technology firms and legal counsel to assist its investigation into the incident. The systems outage caused a delay or disruption to parts of Timios’ business, including its ability to perform its mortgage title, closing and escrow services offerings during the year ended December 31, 2021. The cybersecurity incident had a material adverse impact on Timios’ revenues. Timios promptly notified third-parties who may have been affected by this incident, and its insurer has offered a one year credit monitoring service to those who may have been affected.
Timios has since recovered their operational capabilities, and has implemented multiple safeguards against future incidents, including but not limited to the establishment of a Chief Information Security Officer and a Security Operations Center that monitors the system against cyber threats twenty four hours a day. Timios still has yet to recover a significant portion of business lost as a result of the incident. Timios is uncertain to what degree any further revenue will be recovered. A class action lawsuit was filed against Timios as a result of the systems outage, which was settled within the limits of its insurance coverage. Timios has filed a claim with its insurer to recover a portion of the lost revenues and profits for the period from July 26, 2021 through January 27, 2022. The amount of the insurance recovery, if any, is not yet known.
Note 23. Defined Contribution Plans
For U.S. employees, the Company began sponsoring a 401(k) plan that provides for a 100.0% employer matching contribution of the first 4.0% of eligible pay that the employee contributed to the plan. Employees are immediately 100.0% vested in the Company’s non-discretionary contribution to the 401(k) plan.
Timios sponsors a 401(k) plan that provides for discretionary non-matching employer contributions. Employees of Timios are immediately 100.0% vested in Timios’s discretionary contribution to the 401(k) plan so long as they are employed on the last day of the plan year. Exceptions to the last day requirement are made for those who leave employment due to retirement, disability, authorized leave of absence, or death.
The Company paid total matching and discretionary 401(k) contributions of $0.1 million, $0.1 million and $0.0 million in the years ended December 31, 2021, 2020 and 2019, respectively.
Full time employees in the PRC and Malaysia participate in government-mandated defined contribution plans pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. PRC labor regulations require the Company to make contributions based on certain percentages of the employees’ basic salaries. Other than such contributions, there is no further obligation under these plans. The total contributions for such PRC and Malaysia employee benefits were $0.7 million, $0.4 million and $0.4 million in the years ended December 31, 2021, 2020 and 2019, respectively.
Note 24. Geographic Areas
The following table summarizes geographic information for long-lived assets (in thousands):
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| United States | $ | 1,997 | | | $ | 8,965 | |
| Malaysia | 26,870 | | | 28,185 | |
| | | |
| Other | 728 | | | 135 | |
| Total | $ | 29,595 | | | $ | 37,285 | |
Note 25. Contingent Consideration
The following table summarizes information about the Company’s contingent consideration arrangements measured at fair value on a recurring basis, grouped into Level 1 to 3 based on the degree to which the input to fair value is observable (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total |
DBOT - Contingent Considerationa | $ | — | | | $ | — | | | $ | 649 | | | $ | 649 | |
Tree Technology - Contingent Considerationb | — | | | — | | | 250 | | | 250 | |
Solectrac - Contingent Considerationc | — | | | — | | | 100 | | | 100 | |
| Total | $ | — | | | $ | — | | | $ | 999 | | | $ | 999 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Level 1 | | Level 2 | | Level 3 | | Total |
DBOT - Contingent Considerationa | $ | — | | | $ | — | | | $ | 649 | | | $ | 649 | |
Tree Technology - Contingent Considerationb | — | | | — | | | 250 | | | 250 | |
| Total | $ | — | | | $ | — | | | $ | 899 | | | $ | 899 | |
Note
a.This represents the liability incurred in connection with the acquisition of DBOT shares during the three months ended September 30, 2019 and as remeasured as of April 17, 2020. The contractual period which required periodic remeasurement has expired, and therefore the Company will not remeasure this liability in the future. The fair value of DBOT contingent consideration was valued using the Black-Scholes Merton method. The Company issued 13.1 million
shares during the year ended December 31, 2020 and partially satisfied this liability. No shares have been issued in the year ended December 31, 2021.
b.This represents the liability incurred in connection with the acquisition of Tree Technologies during the three months ended December 31, 2019 and as subsequently remeasured as of December 31, 2021 and 2020. The fair value of the Tree Technology contingent consideration was valued using a probability-weighted discounted cash flow approach.
c.This represents the liability incurred in connection with the acquisition of Solectrac. The liability represents the fair value of the three contingent considerations that were entered into at closing. The fair value was determined using Monte-Carlo simulations.
DBOT Contingent Consideration
The fair value of the DBOT contingent consideration as of March 31, 2020 and December 31, 2019, was valued using the Black-Scholes Merton model.
The significant unobservable inputs used in the fair value measurement of the contingent consideration includes the risk-free interest rate, expected volatility, expected term and expected dividend yield. The following table summarizes the significant inputs and assumptions used in the model:
| | | | | | | | | | | | | | | | | |
| | | March 31, 2020 | | December 31, 2019 |
| Risk-free interest rate | | | 0.1% | | 1.6 | % |
| Expected volatility | | | 30% | | 30 | % |
| Expected term (years) | | | 0.08 | | 0.25 |
| Expected dividend yield | | | — | % | | — | % |
Tree Technologies Contingent Consideration
The fair value of the Tree Technologies contingent consideration as of December 31, 2021 and 2020, was valued using a probability-weighted discounted cash flow approach which incorporates various estimates, including projected gross revenue for the periods, probability estimates, discount rates and other factors. Significant increases or decreases in any of those inputs in isolation would result in a significantly different fair value measurement.
The following table summarizes the significant inputs and assumptions used in the probability-weighted discounted cash flow approach:
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Weighted-average cost of capital | 15.0% | | 15.0% |
| Probability | 5%-10% | | 20%-55% |
Solectrac Contingent Consideration
The fair value of the Solectrac contingent consideration as of December 31, 2021, was valued using a Monte-Carlo simulation model. The significant unobservable inputs include volatility, discount rate and the risk free rate. Significant increases or decreases in any of those inputs in isolation would result in a significantly different fair value measurement. The following table summarizes the significant inputs and assumptions used in the model:
| | | | | | | | | | | |
| | | December 31, 2021 |
| Risk-free interest rate | | | 3.4 | % |
| Expected volatility | | | 25.0 | % |
| Expected discount rate | | | 13.1 | % |
The following table summarizes the reconciliation of contingent consideration measured using Level 3 inputs (in thousands):
| | | | | |
| Contingent
Consideration |
| January 1, 2019 | $ | — | |
| Addition | 19,562 | |
| Measurement period adjustment | 5,094 | |
| December 31, 2020 | 24,656 | |
| Measurement period adjustment | (1,990) | |
| Settlement | (8,203) | |
| Remeasurement loss/(gain) recognized in the income statement | (5,503) | |
| December 31, 2020 | 8,960 | |
| Addition | 1,639 | |
| Net remeasurement loss/(gain) recognized in the income statement | (9,600) | |
| December 31, 2021 | $ | 999 | |
Note 26. Subsequent Events
VIA Promissory Notes
As of December 31, 2021, the company had invested $42.5 million in VIA, in the form of convertible promissory note. As of August 31, 2022, the company has invested an additional $24.6 million in VIA, in the form of the 2021 convertible promissory note ($12.9 million) and a new promissory note issued in May 2022 ($11.7 million). Both promissory notes bear interest at an annual rate of 4.0% and the new promissory note is due and payable in the event of the termination of the merger agreement on the twelve month anniversary date of such termination.
Energica Loan Agreement
On January 7, 2022, the Company entered into a loan agreement with Energica. Pursuant to this loan agreement, the Company may advance up to €5.0 million ($5.7 million), in installments of €250,000 ($284,075), at an annual interest rate of Euribor plus 2.0%. The purpose of the loan is to provide working capital during the motorcycle manufacturing and purchasing season. The loan is unsecured, with interest payable semi-annually, on June 30 and December 31 of each year. The outstanding principal is due and payable in two installments, on June 30, 2024 and December 31, 2024.
Disposition of Seven Stars Energy Pte. Ltd.
On February 9, 2022, the Company transferred its 51.0% interest in Seven Stars Energy Pte. Ltd. for a nominal amount. The Company expects to record a loss resulting from the disposition of $0.5 million.
Energica Tender Offer
On September 15, 2021, the Company announced it had entered into an agreement to launch a voluntary conditional tender offer in concert with the founders of Energica for shares of Energica, pursuant to which Ideanomics plans to increase its investment from 20.0% in Energica to approximately 70.0%. The Energica founders shall continue to own 29.0% of Energica.
On February 9, 2022, the Company wired €52.5 million (approximately $60.3 million) to an escrow account in order to facilitate and fund the conditional tender offer. On March, 7, 2022 the Company announced that it had achieved the 90.0% threshold for the conditional tender offer. The transaction received final approval from Italian regulatory authorities and closed on March 14, 2022.
Timios Investment in Orangegrid
On May 20, 2022, Timios purchased 6.6 million Series A-1 preferred share units in Orangegrid for a total investment of $3 million. Orangegrid is a developer and vendor of software technologies which improve the operational efficiency and effectiveness of financial institutions and their service providers. Timios and Orangegrid also entered into a strategic
partnership making Timios the preferred provider of title, escrow, valuation and asset management services within OrangeGrid's GridReady default management ecosystem.
US Hybrid Escrow Shares
On July 12, 2022, the Company received 6.6 million shares of common stock back from the escrow agent pursuant to the triggering of a legal condition that permitted the Company to reclaim 100% of the shares held in escrow. The Company has concluded that the return of these shares do not constitute a change in the purchase consideration of US Hybrid and will account for this transaction as a Treasury Stock transaction in the third quarter is 2022.
Convertible Debenture Amendment
On August 30, 2022, the Company and YA II PN agreed to amend the terms of the outstanding convertible note and entered into an amendment agreement dated August 29, 2022. As of August 29, 2022, the outstanding principal balance of the Original Debenture was $16.7 million. The amendments to the Original Debenture amended the principal amount to reflect the outstanding balance as of August 29, 2022, change the maturity date to January 29, 2023 and adjust the conversion price to the lower of $1.50 or 85.0% of the lowest daily VWAP during the 7 consecutive Trading Days immediately preceding the Conversion Date or other date of determination, but not lower than $0.20 per share of common stock. The Company shall not have the right to prepay any amounts due under the Amended Debenture prior to the Maturity Date without the Investor’s prior written consent.
Standby Equity Purchase Agreement
On September 1, 2022, the company entered into a SEPA with YA II PN. The Company will be able to sell up to sixty million of the Company’s shares of common stock, par value $0.001 per share (the at the Company’s request any time during the 36 months following the date of the SEPA’s entrance into force. The shares would be purchased at 95.0% of the Market Price (as defined below) and would be subject to certain limitations, including that YA could not purchase any shares that would result in it owning more than 5.0% of the Company’s common stock. Market Price is the lowest daily VWAP of the Common Shares during the three consecutive trading days commencing on the advance notice date, other than the daily VWAP on any excluded days. VWAP means, for any trading day, the daily volume weighted average price of the Common Shares for such trading day on the principal market during regular trading hours as reported by Bloomberg L.P.
Pursuant to the SEPA, the Company is required to register all shares which YA may acquire. The Company agreed to file with the SEC a Registration Statement (as defined in the SEPA) registering all of the shares of common stock that are to be offered and sold to YA pursuant to the SEPA. The Company is required to have a Registration Statement declared effective by the SEC before it can raise any funds using the SEPA.
Unless earlier terminated as provided under the SEPA, the SEPA shall terminate automatically on the earliest of (i) the first day of the month next following the 36-month anniversary of the Effective Date or (ii) the date on which the YA shall have made payment of Advances (as defined in the SEPA) pursuant to the SEPA for the Common Shares equal to the Commitment Amount (as defined in the SEPA).
