ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year endedDecember 31, 2022
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-35561
IDEANOMICS, INC.
(Exact name of registrant as specified in its charter)
Nevada
20-1778374
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
1441 Broadway, Suite 5116,New York,NY10018
(Address of principal executive offices)
(212)206-1216
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, $0.001 par value per share
IDEX
The Nasdaq Capital Market
Securities registered pursuant to Section 12(g) of Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes☐No☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes☐No☒
Auditor PCAOB ID Number: 606 Auditor Name: Grassi & Co., CPAs, P.C. Auditor Location: Jericho, NY
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
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Accelerated Filer
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Non-Accelerated Filer
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Smaller Reporting Company
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Emerging growth company
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes☐ No ☒
The aggregate market value of the common stock held by non-affiliates as of June 30, 2022, the last business day of the registrant’s most recently completed second fiscal quarter, was $0.3 billion based upon the per share closing price as of such dated reported on the Nasdaq Capital Market for the registrant’s common stock, which was $0.66.
There were a total of 787,022,216 shares of the registrant’s common stock outstanding as of March 28, 2023.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for its 2023 Annual Meeting of Stockholders (the “Proxy Statement”), to be filed within 120 days of the registrant’s fiscal year ended December 31, 2022, are incorporated by reference in Part III of this Annual Report on Form 10-K. Except with respect to information specifically incorporated by reference in this Annual Report on Form 10-K, the Proxy Statement is not deemed to be filed as part of this Annual Report on Form 10-K.
This Amendment No. 1 to the Annual Report on Form 10-K of Ideanomics Inc. (the "Company") is being filed solely to correct certain typographical errors in the reports of the Company's independent registered public accounting firm, Grassi & Co., CPAs, P.C., on the Company's financial statements as of and for the years ended December 2022 and 2021, and on the Company's internal control over financial reporting as of December 31, 2022, in Item 8 of the Form 10-K. No change is being made in the opinions expressed by Grassi & Co., CPAs, P.C., in those reports, and no other change is being made in Item 8 of the Form 10-K.
In addition, corrected consents of BF Borgers CPA PC and Grassi & Co., CPAs, P.C., are being filed as Exhibits 23.1 and 23.2, respectively, in Item 15 of the Form 10-K.
No change is being made in any other Item of the Form 10-K.
In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act (as defined below), and Section 21E of the Exchange Act (as defined below). We use words such as “believe,” “expect,” “anticipate,” “project,” “target,” “plan,” “optimistic,” “intend,” “aim,” “will” or similar expressions which are intended to identify forward-looking statements. Such statements include, among others, those concerning our transition to become a next-generation Fintech company; our expectations regarding the market for our new and existing products and industry segment growth; our expectations regarding demand for and acceptance of our new and existing products or services; our expectations regarding our partnerships and joint ventures, acquisitions, investments; our business strategies and goals; any projections of sales, earnings, revenue, margins or other financial items; any statements regarding the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; uncertainties related to conducting business in the PRC; and all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including, and without limitation, those identified in Item 1A—“Risk Factors” included herein, as well as assumptions, which, if they were to ever materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance, or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. The forward-looking statements included herein are made as of the date of this report. We undertake no obligation to update any of these forward-looking statements, whether written or oral, that may be made, from time to time, after the date of this report to conform our prior statements to actual results or revised expectations.
Use of Terms
Except as otherwise indicated by the context, references in this report to “we,” “us,” “our,” “our Company,” “the Company,” “IDEX,” or “Ideanomics,” are to the business of Ideanomics, Inc. (formerly known as “Seven Star Cloud Group, Inc.,” “SSC” and “Wecast Network, Inc.,”) a Nevada corporation.
The following is a glossary of certain terms used in this report:
$
refers to the legal currency of the United States.
2020 Financial Subsidies Circular
refers to the Circular on Improving Subsidy Policies on Promotion and Application of New Energy Vehicles issued by the MOF, the MOST, the MIIT and the NDRC.
2021 Financial Subsidies Circular
refers to the Circular on Further Improving the Financial Subsidy Policy for the Wider Application of New-energy Vehicles issued by the MOF, the MOST, the MIIT and the NDRC.
2010 Plan
refers to the 2010 Stock Incentive Plan.
2022 Financial Subsidies Circular
refers to the Circular on Financial Subsidy Policy for Application and Promotion of New-energy Vehicles in the year of 2022 issued by the MOF, the MOST, the MIIT and the NDRC.
401(k) Plan
refers to 401(k) defined contribution plan.
Acuitas
refers to Acuitas Capital, LLC.
AHFCA Act
refers to the Accelerating Holding Foreign Companies Accountable Act, passed by the U.S. Senate.
AI
refers to artificial intelligence.
Amer
refers to Amer Global Technology Limited.
ASC 205
refers to Accounting Standards Codification Topic 205, Presentation of Financial Statements.
ASC 260
refers to Accounting Standards Codification Topic 260, Earnings Per Share.
ASC 350
refers to Accounting Standards Codification Topic 350, Intangibles-Goodwill and Other.
ASC 410
refers to Accounting Standards Codification Topic 410, Asset Retirement and Environmental Obligations.
ASC 470
refers to Accounting Standards Codification Topic 470, Debt.
ASC 606
refers to Accounting Standards Codification Topic 606, Revenue From Contracts With Customers.
refers to Accounting Standards Update 2018-07, Stock Compensation (Topic 718).
ASU 2019-12
refers to Accounting Standards Update 2019-12, Income Taxes (Topic 740).
ASU 2020-06
refers to Accounting Standards Update 2020-06, Debt (Topic 470).
ASU 2021-04
refers to Accounting Standards Update 2021-04, Earning Per Share.
ATS
refers to Alternative Trading System.
BCF
refers to beneficial conversion feature.
BEAT
refers to the Base Erosion and Anti-Abuse Tax.
BEV
refers to battery electric vehicles.
Board
refers to the Company's Board of Directors.
BSSGCD
refers to Beijing Seven Stars Global Culture Development Inc.
CAA
refers to State Certification and Accreditation Administration Committee.
CaaS
refers to Charging as a Service.
CAC
refers to the Cyberspace Administration of China.
Cantor
refers to Cantor Fitzgerald & Co.
CapEx
refers to funds used by a company to acquire, upgrade, and maintain physical assets.
Catalogue
refers to Catalogue of Industries for Encouraged Foreign Investment ("Encouraged Foreign Investment Catalogue,") together with the Negative List.
CB Cayman
refers to our wholly-owned subsidiary Mobile Energy Global Limited (formerly China Broadband, Ltd.).
CCPA
refers to the new California Consumer Protection Act.
Certified B Corp
refers to B Corporation certification is granted by B Lab, a non-profit [organization], and indicates that a business [meets certain standards of transparency, accountability, sustainability, and performance].
CFPB
refers to Consumer Financial Protection Bureau.
China
refers to the People’s Republic of China.
Chinese
refers to the People’s Republic of China.
CIT
refers to Corporate Income Tax.
CIT Law
refers to Corporate Income Tax Law of the PRC.
Commitment Shares
refers to Ideanomics issuing 1.0 million shares of the Company's common stock as a commitment fee to YA II PN.
COVID-19
refers to Novel Coronavirus 2019.
CSRC
refers to the China Securities Regulatory Commission.
DBOT
refers to the Delaware Board of Trade Holdings, Inc. which is holding company for the Company’s FINRA Registered Broker Dealer. The Company owns 99% of the share capital of DBOT. On September 20, 2021 the name was changed to Justly Holdings Inc. (JUSTLY).
Dodd-Frank
refers to Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
Dr. Wu
refers to Dr. Bruno Wu., the former Chairman of the Company as of December 31, 2020.
Exchange Act
refers to Securities Exchange Act of 1934, as amended.
refers to Energica Motor Company, S.P.A., manufacturer of high-performance electric motorcycles.
Energy Sales
refers to Qingdao Chengyang Medici Zhixing New Energy Vehicle Co., Ltd. (formerly Qingdao Chenyang Ainengju New Energy Sales and Service Company Limited).
EPA
refers to Environmental Protection Agency.
EQUITABLE
refers to Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges.
ESG
refers to Environmental, Social and Governance.
EV
refers to electric vehicles, particularly battery operated electric vehicles.
Exchange Act
refers to the Securities Exchange Act of 1934, as amended.
FASB
refers to the Financial Accounting Standards Board.
FCEV
refers to fuel cell electric vehicles.
FCPA
refers to the Foreign Corrupt Practice Act.
FMVSS
refers to Federal Motor Vehicle Safety Standards.
FIE
refers to foreign invested enterprise.
FINRA
refers to the Financial Industry Regulatory Authority.
Fintech
refers to financial technology.
Fintech Village
refers to the Global Headquarters for Technology and Innovation in Connecticut.
FMVSS
refers to Federal Motor Vehicle Safety Standards.
FNL
refers to FNL Technologies, Inc., the owner and operator of the social media platform Hoo.be.
Founder Space
refers to Seven Stars Founder Space Industrial Pte. Ltd.
GAAP
refers to generally accepted accounting principles in the United States of America.
GDPR
refers to General Data Protection Regulation.
GILTI
refers to the Global Intangible Low-Taxed Income.
Glory
refers to Glory Connection Sdn. Bhd.
Grapevine
refers to Grapevine Logic, Inc. a previously wholly-owned subsidiary of Ideanomics focused on influencer marketing.
HFCA Act
refers to the Holding Foreign Companies Accountable Act.
Hong Kong
refers to the Hong Kong Special Administrative Region of the People’s Republic of China.
HKD
refers to Hong Kong dollars.
Ideanomics China
refers to Mobile Energy Global (MEG) the subsidiary that holds all of the Company’s EV.
ICE
refers to internal combustion engine.
Ideanomics/Company
refers to Ideanomics Inc.
Intelligenta
refers to the BDCG investment which was rebranded as Intelligenta.
IP
refers to intellectual property.
JUSTLY
refers to the company formerly known as DBOT - Delaware Board of Trade Holdings, Inc. which is holding company for the Company’s FINRA Registered Broker Dealer. The Company owns 99% of the share capital Delaware Board of Trade Holdings, Inc. On September 20, 2021 the name was changed to Justly Holdings Inc. (JUSTLY).
KYC
refers to Know Your Customer requirements.
MaaS
refers to Mobility as a Service.
MDI Fund
refers to the Minority Depository Institution Keepers Fund.
MHTL
refers to Merry Heart Technology Limited.
MIIT
refers to the PRC Ministry of Industry and Information Technology.
MOF
refers to the PRC Ministry of Finance.
MOFCOM
refers to the PRC Ministry of Commerce.
MOST
refers to the PRC Ministry of Science and Technology.
refers to National Development and Reform Commission.
Negative List
refers to the Special Administrative Measures for Access of Foreign Investment.
New Energy
refers to Qingdao Chengyang Medici Zhixing New Energy Vehicle Co., Ltd., formerly known as Qingdao Chengyang Mobo New Energy Vehicle Sales Service Company Limited.
New Energy Vehicle Catalogue
refers to Catalogue of New Energy Vehicle Models Exempted from Vehicle Purchase Tax.
NHTSA
refers to the National Highway Traffic Safety Administration.
NOLs
refers to net operating losses.
Notice 112
refers to the Notice of the State Taxation Administration on Negotiated Reduction of Dividends and Interest Rates.
OEM
refers to original equipment manufacturer.
Ocasia
refers to Ocasia Group Holding Ltd.
OpEx
refers to the day-to-day operating expenses of a business.
Orangegrid
refers to Orangegrid LLC.
PEA
refers to Prettl Electronics Automotive.
Qianxi
refers to Guizhou Qianxi Green Environmentally Friendly Taxi Service Co.
Qingdao Medici
refers to Qingdao Medici New Energy Vehicle Co., Ltd.
Qingdao Xingyang Investment
refers to Qingdao Chengyang Xinyang Development and Investment Company Limited.
QSIQ
refers to General Administration of Quality Supervision, Inspection and Quarantine.
PBOC
refers to the People’s Bank of China.
PCAOB
refers to the Public Company Accounting Oversight Board.
PHMSA
Pipeline and Hazardous Materials Safety Administration.
PRC
refers to the People’s Republic of China.
PSE
refers to Pt Pasifik Sakti Eniniring, a company incorporated in in Indonesia and party to an Agent Agreement to distribute Tree Technologies motorcycles in Indonesia.
Red Rock
refers to Red Rock Global Capital LTD.
Renminbi
refers to the legal currency of the PRC.
REO
refers to real-estate-owned.
RESPA
refers to Real Estate Settlement Procedures Act.
RMB
refers to the legal currency of the PRC.
SAFE
refers to Simple Agreement for Future Equity.
SAFE PRC
refers to the State Administration of Foreign Exchange (the PRC regulator that oversees matters regarding foreign exchange).
SAMR
refers to State Administration for Market Supervision.
Sarbanes-Oxley Act
refers to Section 404 of the Sarbanes-Oxley Act of 2002, as amended.
SCNPC
refers to Standing Committee of the National People’s Congress.
SEC
refers to the United States Securities and Exchange Commission.
SEDA
refers to standby equity distribution agreement.
Securities Act
refers to the Securities Act of 1933, as amended.
SEPA
refers to Standby Equity Purchase Agreement.
Shandong
refers to Ideanomics Shengtong New Energy Co., Ltd.
Shenma
refers to Sichuan Shenma Zhixing Technology Co.
Silk
refers to Silk EV Cayman LP, is an Italian engineering and design services company.
Silk-FAW
refers to Silk, 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.
Silk EV Note
refers to the convertible promissory note Ideanomics entered into with Silk EV Cayman LP.
Solectrac
refers to Solectrac, Inc., which was acquired on June 11, 2021.
refers to Sun Seven Stars Investment Group Limited, a British Virgin Islands corporation, an affiliate of Dr. Wu, the former Chairman of the Company.
TCJA
refers to the Tax Cuts and Jobs Act, enacted by the United States of America on December 22, 2017.
TFR
refers to Trattamento di Fine Rapporto.
TILA
refers to Truth-in-Lending Act.
Timios
refers to Timios Holdings Corp. and its affiliates which was acquired on January 8, 2021.
TM2
refers to Technology Metals Market Limited, a London based digital commodities issuance and trading platform for technology metals.
Tree Technologies
refers to Tree Technologies Sdn. Bhd., headquartered in Kuala Lumpur, Malaysia and through its Treeletrik brand sells EV bikes, scooters, and batteries throughout the ASEAN region.
U.S. dollars
refers to the legal currency of the United States.
U.S. GAAP
refers to accounting principles generally accepted in the United States of America.
US Hybrid
refers to US Hybrid Corporation, which was acquired on June 20, 2021.
USD
refers to the legal currency of the United States.
VaaS
refers to Vehicle as a Service.
VIA
refers to VIA Motors International, Inc. a business that produces commercial battery electric vehicles using a skateboard architecture.
VIEs
refers to variable interest entities.
VWAP
refers to volume weighted average price.
WAVE
refers to Wireless Advanced Vehicle Electrification, Inc. which was acquired on January 15, 2021.
WAVE Agreement
refers to the agreement and plan of merger the Company entered into to acquire 100.0% of Wireless Advanced Vehicle Electrification, Inc.
YA II PN
refers to YA II PN, Ltd.
YOD
refers to You-on-Demand, this business was closed during 2019.
Zhengtong
refers to Fuzhou Zhengtong Hongxin Investment Management Company Limited.
Ideanomics is an American multinational company, headquartered in New York. Ideanomics has a clear mission – to accelerate the commercial adoption of electric vehicles.
The company is targeting the fast-growing and high value last and mid mile delivery sector as the main driver for future growth. Through its subsidiaries VIA Motors and WAVE Charging, Ideanomics offers a cost-efficient, integrated EV and charging solution for commercial fleets, which has been sorely lacking in the market. Ideanomics Capital enables faster deployment with “as a Service” financing models, which yield consistent and long-term revenue. The Company's strategic investments in subsidiaries targeting off-road, two-wheelers, and power trains and retrofits continue to generate immediate revenue with clear room to grow. Across all our subsidiaries, teams are collaborating to bring to market a better zero emission solution.
Ideanomics conducts its operations globally in one segment with three business units – Ideanomics Mobility, Ideanomics Energy, and Ideanomics Capital. Ideanomics Mobility’s focus is electric vehicles, including mid- and last -mile delivery trucks and vans, tractors, and two-wheelers. Ideanomics Energy’s focus is charging and energy-related products and services. Ideanomics Capital’s focus is providing financing support for the Company’s Mobility and Energy business units.
Principal Products or Services and Their Markets
Ideanomics Mobility
The Ideanomics Mobility business unit contains the Company’s vehicle-related operations, selling differentiated electric vehicles across several categories, and providing technology and components to other OEMs. Ideanomics Mobility’s innovative vehicle offering across the categories of vans and trucks, motorcycles and scooters, tractors, and specialist vehicles are further differentiated by the company’s ability to offer charging infrastructure and financing support to its customers.
Subsidiaries
There are five operating companies within the Ideanomics Mobility business unit: (1) VIA, (2) Energica, (3) Solectrac, (4) US Hybrid, and (5) Tree Technologies.
1.VIA
VIA is an all-electric commercial vehicle company with innovative advanced electric drive technology, delivering sustainable mobility solutions for the marketplace. VIA possesses over a decade of electric drive experience from its previous generation vehicles, with over 7 million miles of on-road customer experience contributing to its design and development of its current generation of vehicles. 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. VIA’s value is rooted in its VDRIVE™ electric skateboard and VTRUX® modular vehicle portfolio, which has been designed from the ground up to meet the needs of commercial fleet operators and drivers. VIA will offer a comprehensive range of fit-for-purpose configurations with its chassis cab including last-mile delivery vans, box and stake trucks, school buses and shuttles and more.
VIA has developed a proprietary commercial battery electric skateboard architecture designed to serve the high-growth Class 2 to 5 local and last mile delivery market segment. The skateboard architecture provides opportunities to customize the vehicle configuration in a number of configurations to meet specific customer needs. VIA anticipates starting commercial production in late 2024 with Ideanomics’ support in the development and validation of the product in accordance with the current business plan.
VIA’s scalable VDRIVE™ skateboard platform is designed for use across Class 2 to 5 vehicles, supporting multiple battery sizes (to provide 125-250 miles of range). The skateboard architecture allows use of a wide range of body styles. The VIA skateboard is designed in a customer-centric approach that addressed many of the common challenges customers have with last-mile delivery vehicles, such as a low load floor and step-in height, and a flat floor from the cab through the rear of the vehicle to make it fast and easy for drivers to enter and exit the vehicles, increasing efficiency. Additionally, the VIA architecture is designed to enhance maneuverability, improve driver visibility, and provide greater cargo volume with its ‘cab forward’ design
(also known as cab-over, COE (Cab Over Engine), or forward control),which has the driver cab sitting above rather than behind the front axle.
VIA’s flexible VTRUX® vehicle architecture permits VIA to offer a full portfolio of vehicle bodies, including trucks, vans, and buses.
While VIA has not yet commenced sales, it has developed demo vehicles that have been used for sales purposes and in testing and use with its customers for further customer feedback. VIA has secured an initial order for 2,000 VIA chassis with Pegasus Specialty Vehicles , which intends to use them to build Type A school buses, electric shuttles, and paratransit buses, has a memorandum of understanding with AUSEV Pty Ltd to provide 6,600 vans and chassis cabs for conversion to right-hand drive for the Australian market, and has a strategic partnership with EAVX, LLC, a business unit of J.B. Poindexter & Co, as part of a strategic partnership to develop a Class 2b electric van.
2.Energica
Energica is an Italian company recognized in 2023 by the World Future Awards, for producing the best electric motorcycles.
Energica is building its reputation as a leading electric motorcycle provider to police fleets, and its motorcycles are being piloted by several police departments around the world. Energica captured the attention of global police fleets in 2022 when it provided 88 electric motorcycles to the Indonesian Police Department for use during the G20 Summit.
Energica’s Energica Inside business unit is helping OEMs quickly and affordably bring to market a new generation of electric tractors, watercraft, aircraft, passenger and urban mobility vehicles - all built around Energica’s EV engineering and technology. Energica Inside has several collaborations underway, including partnering with Solectrac on a new generation of electric tractors.
Energica plans to continue expanding its global distribution network, accelerate production and sales and introduce new models and new EV technology.
Ideanomics owns a majority stake in Energica with 72.4% ownership, with the founders and Energica's management owning 27.6% of the company’s equity.
3.Solectrac
Solectrac is a California-based assembler and distributor of electric powered tractors and is a certified B Corp. As a first mover, Solectrac has built a leadership position in the North American electric tractor market and we believe that it is ahead of direct competitors who are just now beginning to develop or introduce their own EV solutions.
Ideanomics has enabled Solectrac to establish a nationwide dealer/distributor network that continues to grow, more than triple Solectrac’s assembly capacity, and accelerate the development of new products.
Solectrac’s primary market is the United States, but the company plans to enter the Canadian market and eventually expand into other countries. Solectrac’s e25 is currently on sale at more than 75 dealer locations across the United States. Solectrac continues to enhance the e25 with new features and add-ons.
Additionally, Solectrac is developing new electric tractor models across different size and power levels to better address customer and dealer demand. It anticipates introducing these new models in 2023.
4.US Hybrid
US Hybrid is a California-based zero-emission engineering and vehicle integration business that manufactures electric and hybrid electric propulsion kits, and also performs retrofits to convert diesel powered specialty vehicles such as port equipment and buses to reduced emissions.
Since acquiring US Hybrid in 2021, Ideanomics has strengthened US Hybrid’s management team and provided resources to enable US Hybrid to keep pace with growing demand for its industry-leading electric powertrains and fuel cell systems.
As a result, US Hybrid has formed a strategic partnership with Toyota Tsusho North America to convert port equipment to zero emission, Global Environmental Products to develop zero emission street sweepers, and with other OEMs to develop zero emission, hydrogen powered buses.
US Hybrid’s R&D, engineering, manufacturing, assembly, and integration work is conducted in California and Connecticut for customers throughout the United States, assembly and integration work is conducted in California and Connecticut for customers throughout the United States.
5.Tree Technologies
Tree Technologies is headquartered in Kuala Lumpur, Malaysia and through its Treeletrik brand sells EV bikes, scooters, and batteries. Tree Technologies has received product and technical training from Energica and has begun providing after-sales support to Energica for the ASEAN region. Additionally, Tree Technologies will begin collaborating with Energica on joint sales and marketing strategies for the region.
Ideanomics Energy
Ideanomics Energy is the Company's business unit focused on charging and energy products and services. Ideanomics Energy has as its mission to provide fleet operators with a turn-key charging solution as part of their electrification initiatives. It does this with a team of trusted experts to analyze impacts of electrification on operations and to plan and deploy the right hardware, including robust, user-friendly charging technologies, supported by an intuitive Energy Management platform that Ideanomics Energy is developing. This is supported through collaboration with Ideanomics Capital to introduce a CaaS model to package upfront costs as a recurring monthly operating expense. Ideanomics Energy’s subsidiary is WAVE Charging, which offers WAVE wireless charging, PEA’s containerized DC fast charging system, the Mahle chargeBIG level-2 charging solution, and more.
WAVE Charging
In 2023, Ideanomics Energy began consolidating its EV charging operations under a single brand, WAVE Charging, capitalizing on the brand recognition of the WAVE wireless charging product.
WAVE Charging products include:
a.WAVE wireless charging: a high-power inductive (wireless) charging solution for medium and heavy-duty EVs. A proven solution, WAVE wireless charging is powering America’s first all-electric bus fleet in California, the electric Tram System at Universal Studios Hollywood, and is being deployed as part of a pilot project by a leading e-commerce company. The company continues to expand its high-powered induction capabilities beyond 250kW, successfully delivering systems at 125kW and conducting test deployments at 500kW, and is conducting research and development on a 1-Megawatt system for heavy trucking applications.
b.PEA Containerized Charging: A new way to think about charging for commercial fleets, containerized charging is fast, easy, and affordable. Importantly, it is scalable with fleet needs. The size of a standard 20-foot shipping container, each system can charge up to 20 vehicles with 400 kilowatts per vehicle, with the potential to deliver up to 700kW of power with select cables. WAVE Charging has exclusive sales and distribution rights for this product in North America until mid 2029.
c.ChargeBIG: The chargeBIG 18-36 AC system's centralized control unit is easy to install, and provides dynamic load management for up to 36 individual charging points with a charging power of either 7 kW, 11 kW or 19 kW. This allows for the most efficient charge across multiple EVs, and can charge twice as many vehicles compared to competing products. Ideanomics has exclusive rights until early 2028 to distribute the chargeBIG 18-36 AC charging system under the WAVE Charging brand in North America.
Additionally, WAVE Charging provides white-glove service to help fleet operators electrify, partnering with customers to identify the best fitting charging solution for their fleet. This includes analyzing a customer’s current and future electric vehicle fleet and operations to offer a future-proof charging solution.
Wave Charging is the preferred charging solutions provider for VIA's electric work trucks. Together, WAVE Charging and VIA plan to offer a cost-efficient, integrated EV and charging solution for commercial fleets, which has been sorely lacking in the market. The WAVE Charging and VIA team will work together to engage customers collaboratively.
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 received exclusive sales and distribution rights for PEA charging infrastructure products and solutions in North America and CEO Alf Poor joined PEA's Board of Directors.
Ideanomics Capital
Ideanomics Capital provides financing support for the Company’s Charging-as-a-Service and Vehicle-as-a-Service business models, as well as businesses focused on leveraging technology and innovation to improve efficiency, transparency, and profitability for the financial services industry.
The Company’s Ideanomics Capital business unit provides capital market expertise to enable the sale of its subsidiaries’ products and services. It aligns financing resources and develops funding structures that enable growth and revenue generation for the Ideanomics Mobility business unit. Financing structures will include service and products for payment such as CaaS and VaaS. These options will form part of Ideanomics offering to commercial fleet operators. Over time, it is Ideanomics intention to focus Ideanomics Capital as the financial services arm of Ideanomics Mobility and Ideanomics Energy, and to divest its non-EV assets accordingly.
Centers of Excellence in Design and Digital Technologies
To support the Company’s EV operations, Ideanomics has created internal centers of excellence in automotive design and software.
Ideanomics Design provides vehicle and industrial design services across Ideanomics (including to VIA, Solectrac, and Ideanomics Energy) and is developing a slate of external customers to offset its costs and generate external revenue.
Ideanomics Digital provides IT and software development services across the entirety of Ideanomics, including management of the Company’s strategic relationship with Google Cloud, and the development of the Company’s cloud-based vehicle, charging, and energy management software platform, a central component to Ideanomics’ unified fleet electrification offering. With its centralized telematics, charging, and energy management software, Ideanomics will have the ability to monitor and optimize its clients’ usage of vehicles and energy, particularly VaaS and CaaS clients, where the client is relying on Ideanomics for its turnkey EV fleet rollout and management. These products and services are still in development.
Other Businesses
The Company has identified and informed the market of its desire to restructure and divest certain businesses deemed outside of its core focus.
Ideanomics China (formerly known as Mobile Energy Global)
The Company is continuing to restructure its operations in China as it shifts more focus toward the US market opportunity. Ideanomics China is continuing to support supply chain operations for the rest of the companies within Ideanomics.
Timios & JUSTLY
In 2022, Ideanomics announced that it has begun the process to spin out its fintech businesses JUSTLY as well as title company Timios. This divestiture is part of Ideanomics' strategy to exit from non-core market segments, further honing its portfolio and enabling better, faster delivery of its growth ambitions in the EV market. JUSTLY and Timios have talented management and staff each with a strong track record of delivery in their respective markets. We believe that the divestiture will enable the two companies to grow faster and capture new market opportunities, while delivering value to Ideanomics shareholders.
Competitive Business Conditions, Competitive Position in the Industry and Methods of Competition
The markets in which we participate are dynamic and highly competitive, requiring companies to react quickly to capitalize on opportunity. We retain skilled and experienced personnel and deploy substantial resources to meet the changing demands of the
industry and to capitalize on change. The market for our products is highly competitive and subject to rapid technological development. We encounter domestic and international competition across all units of our business, which we anticipate will increase as the commercial EV vehicle and associated charging markets mature.
Ideanomics Mobility and Ideanomics Energy
The company’s EV business operates in the market for fleet commercial vehicles, which is still in the development stage. The company could face competition from other companies that develop and operate a similar integrated platform for the procurement, purchase, financing, charging, and energy management needs of fleet EV operators. The company could also face competition from companies that only operate in one part of the vehicle purchase and operation cycle, for example, an EV vehicle or charging manufacturer may sell directly to EV fleet operators.
Purchasers of commercial vehicles in the U.S. currently have the choice between traditional ICE vehicles and EVs. According to BloombergNEF, in 2022, battery electric vehicles accounted for less than 1.0% of U.S. commercial vehicle sales (light-duty, medium-duty, and heavy-duty commercial vehicles). BloombergNEF expect this to rise to 11.0% of all commercial vehicles sold in 2027. The most important drivers for the development of the commercial fleet EV market are federal and state mandates relating to clean air and electric vehicles including subsidies and incentives to help owners of fleets of commercial vehicles convert from combustion engines to EV. The speed at which fleet operators convert to EV is highly correlated with government regulations, targets and related subsidies and incentives. If the governments, or municipalities, change the regulations, targets, incentives or subsidies then the rate at which fleet operators convert their vehicles to EV could slow down which in turn may lead to lower revenues for the Company. Additionally, the rate and form in which the commercial fleet EV market develops is dependent upon technological developments in battery and charging systems; and the deployment of the charging infrastructure and electric grid infrastructure to support widespread commercial EV use. Considering all of these factors, commercial fleet operators are likely to continue to purchase primarily ICE vehicles for at least the next five years, and possibly longer.
Ideanomics Capital
The Company’s Ideanomics Capital business unit operates in sectors that are undergoing rapid change. The Company’s legacy fintech business operates in several markets, with Timios providing title and escrow services throughout the U.S. Timios has many competitors, some of whom may have a broader geographic reach within this market, and may be more well-capitalized and therefore more able to weather a downturn in business volume resulting from an increase in interest rates.
JUSTLY is a FINRA registered broker-dealer, which operates a platform focused on private equity and debt. Among other business endeavors, JUSTLY operates a crowdfunding equity platform of private impact investments to advisors, registered investment advisors, family offices, angels, and accredited and non-accredited investors from all income levels. JUSTLY is engaged in business in a highly competitive, constantly evolving marketplace, requiring continually advancing pricing sophistication and technological capabilities relative to its competitors and necessitating the differentiation of their product offerings.
Sources and Availability of Raw Materials
The Company’s businesses depend on a ready supply of components and parts that are sourced domestically and internationally and any interruption to the supply of these could have an adverse impact on the Company’s results. The Company’s suppliers that manufacture components and parts, which includes EV motors and batteries, depend on a ready supply of raw materials and components. Consequently a shortage of raw materials or components could adversely impact their manufacturing process and, potentially, impact the Company’s revenues as it may not be able to complete orders that it has received. The Company may also be adversely impacted if global logistics and supply chains are interrupted.
Our products are manufactured or assembled from both standard components and parts that are unique to our specifications. Our internal manufacturing operations are largely process-oriented and we use significant quantities of various raw materials, including aluminum, copper, steel, bimetals, optical fiber and plastics and other polymers, among others. Other parts are produced using processes such as stamping, machining, molding and pressing from metals or plastics. Portions of the requirements for these materials are purchased under supply arrangements where some portion of the unit pricing may be indexed to commodity market prices for these metals. We may occasionally enter forward purchase commitments or otherwise secure availability for specific commodities to mitigate our exposure to price changes for a portion of our anticipated purchases. Certain of the raw materials utilized in our products may only be available from a few suppliers, and we may enter into longer term agreements to secure access to certain key inputs. We may, therefore, encounter significant price increases and/or availability issues for the materials we obtain from these suppliers, such as those that we saw in 2021, due to the continuing
effects of Covid-19 pandemic. These supply chain constraints have limited our ability to manufacture and deliver products to our customers in 2022 and we expect this to continue into 2023
Our profitability has been and may continue to be materially affected by changes in the market price of our raw materials and components, most of which are linked to the commodity markets. Prices for, and for certain materials, availability of, lithium, aluminum, copper, plastics, silicon and certain other polymers derived from oil and natural gas have fluctuated substantially during the past several years. We have adjusted our prices for certain products and may have to adjust prices again. Delays in implementing price increases, failure to achieve market acceptance of price increases, or price reductions in response to a rapid decline in raw material costs, could have a material adverse impact on the results of our operations.
In addition, some of our products are assembled from specialized components and subassemblies manufactured by third-party suppliers. We depend upon sole suppliers for certain of these components, including capacitors, memory devices and silicon chips. Our results of operations have been and may continue to be materially affected if these suppliers cannot provide these components in sufficient quantity and quality on a timely and cost-efficient basis. We believe that our supply contracts and our supplier contingency plans mitigate some of this risk, however there is no way to fully remove said risk. For example, political, economic, or other actions by the PRC in Taiwan may adversely affect our ability to source microchips from suppliers in Taiwan. Any political, economic, or other actions may also adversely affect our customers and the technology industry supply chain, for which Taiwan is a central hub, and as a result, could have a material adverse impact on us.
Our supply agreements include technology licensing and component purchase contracts, and several of our competitors have similar supply agreements for these components. There can be no guarantee that the Company will be able to extend or renew these supply agreements on similar terms, or at all. In addition, we license software for operating network and security systems or sub-systems and a variety of routing protocols from different suppliers.
Seasonality
The Company expects that orders and sales will be influenced by the amount and timing of budgeted expenditure by its customers. Typically, the Company would expect to see higher sales at the start of the year when companies start executing on their capital programs and at the end of the year when companies are spending any surplus or uncommitted budget before the new budget cycle commences, though certain of the company’s operating companies which such as Solectrac and Energica operate in industries typically affected by reduced sales during the winter months at the end and beginning of each year. The Company’s other EV operating businesses are in the early stage of their development and consequently do not have sufficient trading histories to project seasonal buying patterns with any degree of confidence.
Orders and sales in our Ideanomics Capital business unit will principally be influenced by changes in interest rates and the resulting impact on in the U.S. housing market particularly as it relates to purchases of homes and the refinancing of existing mortgages which are central to our Timios business.
Working Capital Requirements
As the Company expands its business the need for working capital will continue to grow. The Company acquired one company in 2022 and, along with its existing operations, most of its subsidiaries are considered growth companies at various stages of maturity. For these reasons it will require working capital for both organic growth of those business plus for the purchase of components for the manufacture and assembly of the Company’s respective EV and wired and wireless charging systems. The Company will continue to raise both debt and equity capital to support the working capital needs of these businesses and its U.S. headquarters functions.
Trademarks, Patents and Licenses
We hold various patents and trade names and rely on a combination of patent, copyright, trademark, service mark and trade secret laws to establish and protect our intellectual property rights. We have a number of pending patent applications relating to new products and technology. We will continue to file additional patent applications on new inventions, as appropriate, demonstrating our commitment to technology and innovation. For technology that is not owned by us, we look to establish strategic partnerships and licensing arrangements, as we have successfully demonstrated with AC charging partner Mable for obtaining appropriate licenses and/or distribution rights to help ensure that we have the necessary coverage for our products. In addition, we have formed strategic relationships with leading technology companies to provide us with early access to technology that we believe will help keep us at the forefront of our industry. Although we believe our intellectual property rights play a role in maintaining our competitive position in a number of the markets that we serve, we do not believe we would
be materially adversely affected by the expiration or termination of our trademarks or trade names or the loss of any of our other intellectual property rights.
Business and Customer Concentration
The Company is in the process of building out its Ideanomics Mobility and Energy units and has not yet reached a stage of development where the loss of any single customer would have a material adverse effect on the Company.
Timios’ title and escrow service depends upon a network of referring financial institutions. The loss of referrals from the larger referring financial institutions would have a material adverse effect on the Company.
Reliance on Government Contracts
In its operations the Company does not typically contract directly with national governments, however it may contract with federal or state agencies, and local municipalities.
Corporate Structure
Ideanomics is a Nevada corporation existing as an operating company that conducts a substantial majority of its operations through thirty-four (34) of its operating subsidiaries established in various jurisdictions including the United States, Italy, Spain, the People’s Republic of China, Hong Kong, Malaysia, and England and Wales, and eleven (11) subsidiaries with no operations acting solely as holding companies. As the year ended December 31, 2022, there are twenty two (22) operating subsidiaries of Ideanomics in the United States and five (5) PRC subsidiaries. In addition, fourteen (14) of the subsidiaries of the Company are referred to as dormant subsidiaries that ceased their operations, remain not liquidated solely for the purpose of compliance with administrative formalities, and are expected to be liquidated within 12 months. No contractual agreements exist between the Company and its subsidiaries including its PRC subsidiaries because the Company believes that direct ownership is a more effective approach to the corporate structure. The organizational structure of the Company is comprised of a total of fifty-nine (59) subsidiaries.
Other than intercompany loans, no contractual agreements exist between the Company and its subsidiaries including its PRC subsidiaries because the Company believes that direct ownership is a more effective approach to the corporate structure.
Government Regulations
Rules and Regulations Material to our Business
Vehicle Safety and Testing
In the U.S., some of our vehicles are subject to regulation by the NHTSA, including all applicable FMVSS and the NHTSA bumper standard. While our current vehicles fully comply with applicable regulations and we expect that our vehicles in the future will fully comply with all applicable FMVSS with limited or no exemptions, FMVSS are subject to change from time to time and while we anticipate being in compliance with the proposed changes, there is no assurance until final regulation changes are enacted. As a manufacturer, we must self-certify that our vehicles meet all applicable FMVSS and the NHTSA bumper standard, or otherwise are exempt, before the vehicles may be imported or sold in the U.S.
We are also required to comply with other federal laws administered by NHTSA including labeling requirements and other information provided to customers in writing, Early Warning Reporting requirements regarding warranty claims, field reports, death and injury reports and foreign recalls and additional requirements for cooperating with compliance and safety investigations and recall reporting. In addition, federal law requires inclusion of fuel economy ratings, as determined by the U.S. Department of Transportation and the EPA, and New Car Assessment Program ratings as determined by NHTSA, if available.
Our vehicles sold outside of the U.S. are subject to similar foreign compliance, safety, environmental and other regulations. Many of those regulations are different from those applicable in the U.S. and may require redesign and/or retesting. Some of those regulations impact or prevent the rollout of new vehicle features. Additionally, the European Union established new rules regarding additional compliance oversight that commenced in 2020. There is also regulatory uncertainty regarding how these rules will impact sales in the United Kingdom given its withdrawal from the E.U.
In the U.S., state laws regulate the manufacture, distribution, sale and service of motor vehicles, and generally require motor vehicle manufacturers and dealers to be licensed in order to sell vehicles directly to residents. Certain states have asserted that the laws in such states do not permit manufacturers to be licensed as dealers or to act in the capacity of a dealer, or that they otherwise restrict a manufacturer’s ability to deliver or service vehicles.
Battery Safety and Testing
Our battery packs are subject to various U.S. and international regulations that govern transport of “dangerous goods,” defined to include lithium-ion batteries, which may present a risk in transportation. The governing regulations, which are issued by the Pipeline and Hazardous Materials Safety Administration, are based on the UN Recommendations on the Safe Transport of Dangerous Goods Model Regulations and related UN Manual Tests and Criteria. The regulations vary by mode of shipping transportation, such as by ocean vessel, rail, truck or air. We conduct testing to demonstrate our compliance with such regulations.
As indicated above, we primarily use lithium-ion cells in the high voltage battery packs of our vehicles and energy storage products. The use, storage and disposal of our battery packs are regulated under existing laws and are the subject of ongoing regulatory changes that may add additional requirements in the future.
Solar Energy—General
We are subject to certain state and federal regulations applicable to solar and battery storage providers and sellers of electricity. To operate our systems, we enter into standard interconnection agreements with applicable utilities. Sales of electricity and non-sale equipment leases by third parties, such as our leases and PPAs, are likely to face regulatory challenges in some states and jurisdictions.
Environmental Regulations
We operate in an industry that is subject to extensive environmental regulation, which has become more stringent over time. The laws and regulations to which we are subject govern, among others, vehicle emissions and the storage, handling, treatment, transportation and disposal of hazardous materials and the remediation of environmental contamination. Compliance with such laws and regulations at an international, regional, national, and local level is an important aspect of our ability to continue our operations.
Environmental standards applicable to us are established by the laws and regulations of the countries in which we operate, standards adopted by regulatory agencies and the permits and licenses issued to us. Each of these sources is subject to periodic modifications and what we anticipate will be increasingly stringent requirements. Violations of these laws, regulations or permits and licenses may result in substantial administrative, civil or even criminal fines, penalties and possibly orders to cease any violating operations or to conduct or pay for corrective works. In some instances, violations may also result in the suspension or revocation of permits or licenses.
EPA Emissions and Certificate of Conformity
The U.S. Clean Air Act requires that we obtain a Certificate of Conformity issued by the EPA and a California Executive Order issued by CARB certifying that certain of our vehicles comply with all applicable emissions and related certification requirements. A Certificate of Conformity is required for vehicles sold in states covered by the Clean Air Act’s standards and a CARB Executive Order is required for vehicles sold in California and states that have adopted California’s stricter standards for emissions controls related to new vehicles and engines sold in such states. States that have adopted the California standards as approved by EPA also recognize the CARB Executive Order for sales of vehicles.
In addition to California, there are a growing number of states that have either adopted or are in the process of adopting the stricter California standards, including New York, Massachusetts, Vermont, Maine, Pennsylvania, Connecticut, Rhode Island, Washington, Oregon, New Jersey, Maryland, Delaware and Colorado.
We are required to seek an EPA Certificate of Conformity for certain of our vehicles sold in states covered by the Clean Air Act’s standards and a CARB Executive Order for vehicles sold in California or any of the other 13 states identified above that have adopted the stricter California standards.
Our title companies and related subsidiaries are subject to extensive regulation under applicable state laws. The laws of most states in which we transact business establish supervisory agencies with broad administrative powers relating to issuing and revoking licenses to transact business, regulating trade practices, licensing agents, accounting practices, and financial practices.
In addition to state-level regulation, our title business is subject to regulation by federal agencies, including the CFPB. The CFPB was established under the Dodd-Frank which also included regulation over financial services and other lending related businesses. The CFPB has broad authority to regulate, among other areas, the mortgage and real estate markets in matters pertaining to consumers. This authority includes the enforcement of the TILA, the RESPA and the rules related to the TRID formerly placed with the Department of Housing and Urban Development. Our underwritten title companies, primarily those domiciled in California, are also subject to certain regulation by insurance regulatory or other governing authorities relating to their net worth and working capital.
From time to time, we receive inquiries and requests for information from attorneys general, insurance commissioners and other regulatory agencies about various matters relating to our business. Sometimes these take the form of civil investigative demands or subpoenas. We cooperate with all such inquiries. From time to time, we are assessed fines for violations of regulations or other matters or enter into settlements with such authorities which may require us to pay fines or claims or take other actions.
Regulations Regarding our Fintech Businesses
Securities and Commodities Laws
In order for a securities exchange to operate, it must register as a broker-dealer with the SEC and become a member of FINRA. Depending on a securities exchange’s activities, it may be required to also register as a broker dealer on the state level. JUSTLY is a registered broker dealer with an alternative trading system. Depending upon the jurisdiction, we may also be required to comply with laws applicable to securities exchanges.
Financial Crimes and Sanctions Compliance
The jurisdictions in which we operate and intend to operate generally have adopted laws to prevent money laundering, terrorist financing, fraud and other financial crime, as well as to ensure compliance with applicable sanctions regimes. Various aspects of our business require us to develop and implement policies and procedures that confirm the identity of customers, detect suspicious activities and ensure we do not do business with blocked persons.
Rules and Regulations of PRC Material to our Business
General Regulation of Businesses in the PRC
We are required to obtain government approval from or filing with the SAMR and/or other government agencies in the PRC for transactions, such as our acquisition or disposition of business entities in the PRC. Additionally, foreign ownership of certain business and assets in the PRC is not permitted without specific government approval.
Regulations Relating to Foreign Investment
Investment activities in the PRC by foreign investors are principally governed by the Negative List and the Encouraged Foreign Investment Catalogue, which was promulgated and is amended from time to time by the MOFCOM and the NDRC. The Catalogue sets forth the industries in which foreign investments are encouraged, while the Negative List sets forth the industries in which foreign investment are restricted, or prohibited. Industries that are not listed in the restricted or prohibited categories are permitted areas for foreign investments and are generally open to foreign investment unless specifically restricted by other PRC regulations. Establishment of wholly foreign owned enterprises is generally allowed in encouraged and permitted industries. Foreign investors are not allowed to invest in industries in the prohibited category.
The establishment of a wholly foreign owned enterprise must register with the competent administration for market regulation. Our significant PRC subsidiaries have duly obtained all material approvals required for their business operations. The SCNPC enacted the Foreign Investment Law of the PRC on March 15, 2019 and the State Council promulgated the Implementation Regulations of Foreign Investment Law of the PRC on December 26, 2019, both of which came into force on January 1, 2020. On December 30, 2019, the MOFCOM and the SAMR jointly promulgated the Measures on Reporting of Foreign Investment Information, which also became effective on January 1, 2020. Under these laws and regulations, foreign investors or foreign-invested enterprises are required to report and update certain investment information to the MOFCOM through the Enterprise
Registration System and the National Enterprise Credit Information Publicity System. Any foreign investor or foreign-invested company found to be non-compliant with these reporting obligations may potentially be subject to fines and legal sanctions.
The PRC government may issue from time to time new laws or new interpretations on existing laws, some of which are not published on a timely basis or may have retroactive effect. Administrative and court proceedings in the PRC may also be protracted, resulting in substantial costs and diversion of resources and management attention. Regulatory risk also encompasses the interpretation by the tax authorities of current tax laws, and our legal structure and scope of operations in the PRC, which could be subject to further restrictions resulting in limitations on our ability to conduct business in the PRC.
PRC Regulations on Automobile Sales
On April 5, 2017, the MOFCOM promulgated the Administrative Measures on Automobile Sales, which became effective on July 1, 2017, pursuant to which automobile suppliers and dealers are required to file with relevant authorities (via an information system for national automobile circulation operated by competent commerce departments) within 90 days after receiving a business license. Where there is any change to a party’s underlying information, automobile suppliers and dealers must update such information within 30 days after such change. Failure to satisfy such filing requirement will be subject to a warning or a fine up to RMB 30,000.
PRC Regulations on the Recall of Defective Automobiles
On October 22, 2012, the State Council promulgated the Administrative Provisions on Defective Automotive Product Recalls, which became effective on January 1, 2013, and which were amended on March 3, 2019. According to this legislation, the product quality supervision department of the State Council is responsible for the supervision and administration of recalls of defective automotive products in China. Manufacturers of automobile products are required to take measures to eliminate defects in products they sell. A manufacturer must recall all defective automobile products. If any operator conducting sales, leasing, or repair of vehicles discovers any defect in automobile products, it must cease to sell, lease or use the defective products and must assist manufacturers in the recall of those products.
PRC Regulation Relating to Compulsory Product Certification
According to the Administrative Regulations on Compulsory Product Certification promulgated by the QSIQ (which was subsequently merged into the SAMR) on July 3, 2009 which became effective on September 1, 2009, and was most recently amended on November 1, 2022 by the SAMR, together with the List of the First Batch of Products Subject to Compulsory Product Certification promulgated by the QSIQ in association with the CAA on December 3, 2001, which became effective on the same day and the Compulsory Product Certification Catalogue Description and Definition Form, which was promulgated on April 17, 2007 and was most recently amended on October 10, 2022, the SAMR is responsible for the quality certification of automobiles. Automobiles and relevant accessories must not be sold, exported or used in operating activities until they are certified by relevant certification authorities designated by the CAA as qualified products and granted certification marks.
PRC Regulations on Consumer Rights Protection
The Consumer Rights and Interests Protection Law, as promulgated on October 31, 1993 and most recently amended in 2013 by the SCNPC, imposes stringent requirements and obligations on business operators in China. Failure to comply with consumer protection requirements under this legislation could subject business operators to administrative penalties including warnings, confiscation of unlawful income, imposition of fines, an order to cease business operations, revocation of business licenses, as well as potential civil or criminal liabilities.
PRC Regulation on Employment
The Labor Contract Law of the PRC, which was promulgated by the SCNPC on June 29, 2007 and most recently amended as of July 1, 2013, is primarily aimed at regulating rights and obligations of employer and employee relationships, including the establishment, performance and termination of labor contracts. Pursuant to the Labor Contract Law, labor contracts must be concluded in writing if labor relationships are to be or have been established between employers and their employees. Employee wages shall be no lower than local standards on minimum wages and must be paid to employees in a timely manner. Employers are prohibited from forcing employees to work above certain time limits and employers shall pay employees for overtime work in accordance with national regulations. The Labor Contract Law in effect prohibits employers from terminating employees without severance except in a few enumerated circumstances (e.g., serious violation of company rules and regulations). In some permitted circumstances of termination (such as where an employee is incompetent and remains
incompetent after training or assignment to another post), a 30 days’ prior notice (or pay in lieu) and severance payments are required.
The Social Insurance Law of the PRC, promulgated by the SCNPC on October 28, 2010 and most recently amended on December 29, 2018, provides that each employer within the PRC must register with the State’s social insurance system upon its establishment and make contributions to the social insurance system for the benefit of each of its employees, including foreign nationals who are employed in the PRC. Specifically, an employer must make monthly deposits to a designated fund for its contribution to each of its employees’ pension insurance, medical insurance, work injury insurance, unemployment insurance, and maternity insurance. Failure to make such deposits according to the amounts and times provided by law can lead to a court order for seizure, freezing, or an auction of the employer’s property equivalent to the value of any unpaid social insurance payables.
In accordance with the Regulations on the Management of Housing Fund which was promulgated by the State Council on April 3, 1999 and revised on March 24, 2019, employers must register at designated administrative centers and open bank accounts in order to deposit mandatory employee housing fund contributions. Employers are required to pay and deposit housing fund contributions (in an amount no less than 5% of the monthly average salary of the employee in the preceding year) in full and on time.
PRC Regulation on Government Subsidies
On April 22, 2015, the MOF, the MOST, the MIIT and the NDRC jointly promulgated the Financial Support Circular, which took effect on the same day. The Financial Support Circular provides that those who purchase new energy vehicles specified in the Catalogue of Recommended New Energy Vehicle Models for Promotion and Application issued by the MIIT may enjoy government subsidies. A purchaser may purchase a new energy vehicle from a manufacturer by paying the price deducted by the subsidy amount, and the manufacturer may obtain the subsidy amount from the PRC central government after such new energy vehicle is sold to the purchaser.
On April 23, 2020, the MOF, the MOST, the MIIT and the NDRC jointly issued the 2020 Financial Subsidies Circular, which took effect on the same day, and which extended the implementation period of financial subsidies for new energy vehicles to the end of 2022. The 2020 Financial Subsidies Circular further specifies that the subsidy criteria for new energy vehicles during the period from year 2020 to 2022 will generally be reduced by 10%, 20% and 30% compared to the subsidy standard of the previous year respectively, and the number of vehicles eligible for the subsidies will not exceed approximately two million each year.
On December 31, 2020, the above mentioned authorities further promulgated the 2021 Financial Subsidies Circular, a Circular on Further Improving the Financial Subsidy Policy for the Wider Application of New-energy Vehicles, which became effective on January 1, 2021, and was another similar circular to reiterate the principles including among others, the subsidy criteria reduction rate as stipulated in the 2020 Financial Subsidies Circular. This 2021 Financial Subsidies Circular emphasizes that the effective period for financial subsidy policies applicable to new energy vehicles will be extended to the end of 2022, given levels of technical progress, scale effect and other factors. The reduction of these subsidy standards will be gradual. The 2021 subsidy standard reduces the base subsidy amount by 20% for each new energy vehicle on the basis of that for the previous year.
On December 31, 2021, the above mentioned authorities promulgated the 2022 Financial Subsidies Circular, a Circular on Financial Subsidy Policy for Application and Promotion of New-energy Vehicles in the year of 2022, which became effective on January 1, 2022. The 2022 Financial Subsidies Circular specifies that the subsidy standard of 2022 will be reduced by 30% compared to the subsidy standard of the previous year, and the financial subsidy policies applicable to new energy vehicles will expire on December 31, 2022.
On September 18, 2022, the MOF, MIIT and the State Taxation Administration jointly issued the Circular on Extending the Exemption of Vehicle Purchase Tax for New-energy Vehicles, which has extended vehicle purchase tax exemptions applicable to new energy vehicles until the end of 2023. Any new energy vehicles listed in the New Energy Vehicle Catalogue released by the MIIT and the State Taxation Administration and are purchased from the issuance date of such New Energy Vehicle Catalogue, are exempted from vehicle purchase taxes.
Taxation
On March 16, 2007, the National People’s Congress of the PRC originally passed the EIT Law, which was most recently amended on December 29, 2018, and on November 28, 2007, the State Council of China originally passed implementing rules
to the EIT Law, which were most recently amended on April 23, 2019. The EIT Law and its implementing rules impose a unified EIT rate of 25.0% on all domestic-invested enterprises and FIE unless they qualify under certain limited exceptions. In addition, under the EIT Law, an enterprise established outside of the PRC with “de facto management bodies” within the PRC is considered a resident enterprise and will be subject to an EIT of 25% on its global income. The implementing rules define the term “de facto management bodies” as “an establishment that exercises, in substance, overall management and control over the production, business, personnel, accounting, etc., of a Chinese enterprise.” If the PRC tax authorities subsequently determine that we should be classified as a resident enterprise, then our organization’s global income will be subject to PRC income tax of 25%.
In April 2009, the State Taxation Administration originally issued a circular, commonly known as “Circular 82,” which was most recently amended on December 29, 2017. Circular 82 provides specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is actually located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups (not those controlled by PRC individuals or foreigners,) the criteria set forth in the circular may reflect the State Taxation Administration’s general position on how the “de facto management body” test should be applied in determining the tax resident status of all offshore enterprises. According to Circular 82, an enterprise incorporated offshore but controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China if all of the following conditions are met: (i) the primary location of the day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions, are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC.
For detailed discussion of PRC tax issues related to resident enterprise status, see Part I-Item 1A-“Risk Factors—Risks Related to Doing Business in the PRC- Under the EIT Law, we may be classified as a “resident enterprise” of China. Such classification will likely result in dividends payable to our foreign investor and gains on sale of our common stock by our foreign investors may become subject to PRC taxation.”
Foreign Currency Exchange
Under the PRC foreign currency exchange regulations applicable to us, RMB is convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions. Currently, our PRC operating entities may purchase foreign currencies for settlement of current account transactions, including payments of dividends to us, without the approval of the SAFE PRC, by complying with certain procedural requirements. Conversion of RMB for capital account items, such as direct investment, loan, security investment and repatriation of investment, however, is still subject to the approval of the SAFE PRC. In particular, if our PRC operating entities borrow foreign currency through loans from us or other foreign lenders, these loans must be registered with the SAFE PRC, and if we finance the subsidiaries by means of additional capital contributions, these capital contributions must be registered or filed with by certain government authorities. These limitations could affect our PRC operating entities’ ability to obtain foreign exchange through debt or equity financing.
Dividend Distributions
PRC regulations restrict the ability of our PRC entities to make dividends and other payments to their offshore parent company. PRC legal restrictions permit payments of dividends by our PRC entities only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Each of our PRC subsidiaries is also required under PRC laws and regulations to allocate at least 10% of our annual after-tax profits determined in accordance with generally accepted accounting principles in the PRC to a statutory general reserve fund until the amounts in such fund reaches 50% of its registered capital. These reserves are not distributable as cash dividends. Our PRC subsidiaries have the discretion to allocate a portion of their after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation.
In addition, under the EIT Law, the Notice 112 which was originally issued on January 29, 2008 and most recently amended on February 29, 2008, any dividends from our PRC operating subsidiaries paid to us through our entities are (since January 1, 2008) subject to a withholding tax at a rate of 10%. Furthermore, the ultimate tax rate will be determined by treaty between the PRC and the tax residence nation of the holder of the PRC subsidiary. Dividends historically declared and paid before January 1, 2008 on distributable profits were grandfathered in under the EIT Law and were not subject to withholding tax.
We intend to reinvest profits, if any, and do not intend on making cash distributions of dividends in the near future.
The Company is subject to a variety of U.S. and international laws, rules, policies and other obligations regarding data protection.
We are subject to federal, state and international laws relating to the collection, use, retention, security and transfer of various types of personal information. In many cases, these laws apply not only to third-party transactions, but also restrict transfers of personal information among the Company and its international subsidiaries and vice versa. Many jurisdictions have passed laws regarding data privacy and personal data, and additional jurisdictions are considering imposing additional restrictions or have laws that are pending. These laws continue to develop and may be inconsistent from jurisdiction to jurisdiction. Complying with emerging and changing requirements causes the Company to incur substantial costs and has required and may in the future require the Company to change its business practices. Noncompliance could result in significant penalties or legal liability.
The Company makes statements about its use and disclosure of personal and business information through its privacy policy, information provided on its website, press statements and other privacy notices. Any failure by the Company to comply with these public statements or with other federal, state or international privacy or data protection laws and regulations could result in inquiries or proceedings against the Company by governmental entities or others. In addition to reputational impacts, penalties could include ongoing audit requirements and significant legal liability. In addition to the risks generally relating to the collection, use, retention, security and transfer of personal information, the Company is also subject to specific obligations relating to information considered sensitive under applicable laws, such as vehicle telematics data and financial data. Vehicle telematics are subject to specific regulation by the PRC, and if the Company fails to adequately comply with these rules and requirements, the Company can be subject to litigation or government investigations in the PRC or elsewhere, and can be liable for associated investigatory expenses, and can also incur significant fees or fines.
Human Capital Management
Human Capital Resources
Our experienced employees and management team are our most valuable resources. Attracting, training, and retaining key personnel has been and will remain critical to our success. We are committed to attracting, motivating, and retaining top professionals. To achieve our human capital goals, we intend to stay focused on providing our personnel with entrepreneurial opportunities to expand our business within their areas of expertise. We will also continue to provide our personnel with personal and professional growth opportunities, including additional training, performance-based incentives such as opportunities for stock ownership, and other competitive benefits.
We work to ensure that the Company provides a safe, inclusive, and positive employee environment for all its employees. As of December 31, 2022, we had a total of 565 employees, of which 384 were located in the United States, 112 in Italy, 43 in Malaysia, 19 in China and 7 in the United Kingdom. None of our employees are represented by a union or covered by a collective bargaining agreement. We have not experienced any work stoppages, and we consider our relationship with our employees to be good.
Our success is directly related to the satisfaction, growth, and development of our employees. We strive to offer a work environment where employee opinions are valued and allow our employees to use and augment their professional skills. To achieve our human capital goals, we intend to remain focused on providing our personnel with entrepreneurial opportunities to expand our business within their areas of expertise and continue to provide our personnel with personal and professional growth. Ideanomics emphasizes several measures and objectives in managing our human capital assets, including, among others, employee safety and wellness, talent acquisition and retention, employee engagement, development and training, diversity and inclusion, and compensation and pay equity.
COVID-19 and Employee Safety and Wellness
In response to the COVID-19 pandemic, we implemented significant changes that we determined were in the best interest of our employees as well as the communities in which we operate. These measures include allowing most employees to work from home. We believe in supporting our employees’ health and well-being. Our goal is to help employees make informed decisions about their health by providing the tools and resources necessary to achieve a healthier lifestyle. We offer our employees a wide array of benefits such as life and health (medical, dental, and vision) insurance, paid time off and retirement benefits, as well as emotional well-being services through our health insurance program.
Diversity and Inclusion and Ethical Business Practices
We believe that a company culture focused on diversity and inclusion is a crucial driver of creativity and innovation. We also believe that diverse and inclusive teams make better business decisions, ultimately driving better business outcomes. We are committed to recruiting, retaining, and developing high-performing, innovative and engaged employees with diverse backgrounds and experiences. This commitment includes providing equal access to, and participation in, equal employment opportunities, programs, and services without regard to race, religion, color, national origin, disability, sex, sexual orientation, gender identity, stereotypes, or assumptions based thereon. We welcome and celebrate our teams’ differences, experiences, and beliefs, and we are investing in a more engaged, diverse, and inclusive workforce.
Ideanomics also fosters a strong corporate culture that promotes high standards of ethics and compliance for our business, including policies that set forth principles to guide employee, officer, director, and vendor conduct, such as our Code of Business Conduct and Ethics. We also maintain a whistleblower policy and anonymous hotline for the confidential reporting of any suspected policy violations or unethical business conduct on the part of our businesses, employees, officers, directors, or vendors.
To learn more about policies and practices and our continuing efforts related to human capital matters, please refer to our website at www.ideanomics.com for further information. You may also find our Code of Business Conduct and Ethics, and the charters of the committees of our Board of Directors on our website. The information contained on, or that may be accessed through, our website, is not part of, and not incorporated into, this Annual Report on Form 10-K.
Environmental, Social and Corporate Governance
Ideanomics published its first ESG Report in 2021. The report serves as a step in fulfilling our commitment to our employees, our shareholders, our subsidiaries, and our partners. Our dynamic process of incorporating social and environmental challenges into our operations as well as creating actionable plans to improve areas of weakness will enable us to grow a stronger, cleaner, and more resilient business. Some ESG highlights this year include:
•Signed the United Nations Global Compact on human rights, labor, environment, and anti-corruption in May 2022.
•We maintained our optional remote work policy initiated in March 2020. We’ve also expanded our human resource function to expand programs and benefits to ensure our team’s continued well-being, diversity, and professional growth.
•Began partnership with Fill It Forward, a Certified B Corporation, to encourage employees to utilize reusable bottles and bags rather than single-use plastics. As part of this partnership, our employees saved the equivalent of nearly 1,800 kWh of power.
•Continued our program of allocating all employees one paid day to volunteer with an organization of their choice, which this year, included the Galveston Bay Foundation in Galveston, Texas, among others.
•The 3 “R’s” have never been more important, and we strive to implement Reduce, Reuse, and Recycle wherever possible, including water filters and reusable cups and company supplied water bottles to all employees to encourage minimizing of our footprint.
As Ideanomics grows and we implement our ESG platform across our subsidiaries, we will apply best practices to ensure that our partners and suppliers meet both environmental and human rights standards.
To learn more about policies and practices and our continuing efforts related to ESG, refer to our website at www.ideanomics.com for further information. You may also find our ESG Report on our website. The information contained on, or that may be accessed through, our website, is not part of, and not incorporated into, this Annual Report on Form 10-K.
ITEM 1A. RISK FACTORS
The business, financial condition and operating results of the Company may be affected by a number of factors, whether currently known or unknown, including but not limited to those described below. Any one or more of such factors could directly or indirectly cause the Company’s actual results of operations and financial condition to vary materially from past or anticipated future results of operations and financial condition. Any of these factors, in whole or in part, could materially and adversely affect the Company’s business, financial condition, results of operations and stock price. The following information should be read in conjunction with Part II—Item 7—“Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and the consolidated financial statements and related notes in Part II—Item 8—“Financial Statements and Supplementary Data” of this Annual Report.
Risk Factors Summary
We are an operating company that conducts a substantial majority of our operations through our operating subsidiaries established in various jurisdictions. Accordingly, we are subject to the risk factors affecting particular industries, businesses, and geographical locations of our subsidiaries. Further, our structure involves certain risks with regard to our international operations.
As a result of the foregoing, our business is subject to numerous risks and uncertainties, including those described in “Part I, Item 1A, Risk Factors” of this Annual Report. These risks are arranged by groups and include, but are not limited to, the following:
Risks Related to Industries in Which We Operate
In connection with the operations of Ideanomics Mobility, the Company:
•faces extreme competitive pressure associated with its lack of experience in participation in the relatively new global commercial EV market;
•is challenged by a wide array of intellectual property-related risks;
•may become subject to the product liability risks that are particularly high in the automotive industry;
•in collaboration with financial institutions, needs to introduce and promote new financial models allowing the market participants to cost effectively transition their commercial vehicle fleets to EVs;
•relies on the current governmental initiatives promoting and prioritizing fuel efficiency and alternative energy in various jurisdictions; and
•may experience the consequences of the supply-chain crisis and chip shortage.
In connection with the operations of Ideanomics Capital, the Company:
•is sensitive to numerous economic factors influencing the real estate market of the U.S. in general and the real estate market of the State of California in particular;
•is dependent on the reliability of the financial institutions it uses in connection with its services;
•is subject to severe competition; and
•can be negatively affected by regulatory changes.
Risks Related to Our Business and Strategy
In connection with its strategy and development risks, the Company:
•requires additional financing necessary for its development;
•faces significant financial, managerial, and administrative burdens in connection with its strategic approach of acquiring new businesses and business segments;
•is dependent on its ability to hire and retain key employees with the specialists' skills in various areas;
•may be negatively affected by current and potential litigation, or regulatory proceedings; and
•presents a doubt about its financial viability and as to whether it will be able to continue as a going concern.
In connection with its information technology systems and cyber-security the Company:
•must keep pace with the latest technological changes in order to remain competitive;
•may have defect or disruptions in its technological products;
•was and will remain subject to malicious cyber-attacks and other security incidents; and
•is subject to complex and evolving U.S. and foreign privacy, data use and data protection content, consumer competition and other similar laws and regulations.
In connection with its internal controls and compliance with applicable securities laws, the Company:
•faces the consequences of restatements of its Quarterly Reports for the periods ended March 31, 2021, June 30, 2021 and September 30, 2021;
•identified material weaknesses in its internal control over financial reporting and concluded that its disclosure controls and procedures were not effective;
•lost its Form S-3 eligibility; and
•may have inadvertently violated Section 402 of the Sarbanes-Oxley Act and Section 13(k) of the Exchange Act.
Risks Related to Ownership of our Securities
In connection with ownership of securities risks:
•certain provisions of our charter documents and applicable law may have an anti-takeover effect;
•we do not intend to pay dividends for the foreseeable future; and
•our common stock may be delisted.
Financial Market and Economic Risks
•A disruption in our funding sources and access to the capital markets would have an adverse effect on our liquidity.
Risks Related to all of our International Operations
The Company is subject to general geopolitical and economic risks in connection with our global operations.
Specifically in connection with our business in the PRC, it is subject to numerous risks that are severely exacerbated by the recent actions and statements of the Chinese government including but not limited to:
•the ability of the Chinese government to exercise its discretionary powers with regard to any business on its territory at any time;
•uncertainties in connection with the tensions between the United States and China;
•the inability of the U.S.-triggered investigations on the territory of China and limited law-enforcement opportunities against our Chinese subsidiaries;
•restrictions on currency exchange and limitations in transferring money from our subsidiaries domiciled in China in the form of dividends;
•restrictions under PRC law on our PRC subsidiaries’ ability to make dividends; PRC government’s significant oversight over the conduct of our business in PRC and may intervene or influence our operations at any time which could result in a material adverse change in our operation and/or the value of our Common Stock;
•PRC government’s significant oversight over the conduct of our business in PRC and may intervene or influence our operations at any time which could result in a material adverse change in our operation and/or the value of our Common Stock;
•No guarantee that our PRC subsidiaries will always obtain and maintain the requisite licenses and approvals required for their business in China;
•Our decision to discontinue our operations in China may impact the value of our securities and render them worthless.
•no guarantee that future audit reports in connection with Chinese operations will be prepared by auditors that are subject to inspections by the PCAOB; and
•China-specific economic and regulatory processes transforming the Chinese labor market and renewable energy sectors.
Risks Related to Industries in Which We Operate
Risks Related to the Industries of Ideanomics Mobility
We experience significant competitive pressure in the Ideanomics Mobility business unit, which may negatively impact our business, financial condition, and results of operations.
The Company’s Ideanomics Mobility business unit is operating in the commercial EV market globally. The commercial EV market is still in its development stage and the rate at which the operators of fleets of commercial vehicles replace their ICE vehicles with EV is very dependent upon (i) environmental and clean air regulations that mandate conversion to EV, (ii) the subsidies that government bodies make available to cover the cost of conversion, (iii) the availability of financing to cover some or all of the cost of conversion, (iv) regulations governing the amount of locally manufactured content required in vehicles sold in a particular market, (v) the availability of charging and battery swap infrastructure, and (vi) the rate at which EV technologies evolve.
Environmental and clean air regulations drive the timing and rate at which fleet operators convert to EV and by extension the size of the market and the type of vehicles that are in demand at any time. The Company’s revenues and profits may be adversely impacted if demand for EVs is lower than expected due to a change in regulation or regulations favor the conversion of vehicle types that have lower profit margins.
Converting fleets to EV is very capital intensive and most operators require substantial amounts of funding in the form of government and municipal subsidies and bank financing. The amount and form of subsidies are subject to change from time to time as government bodies adjust subsidies to influence consumer behavior. The mechanisms for financing of EVs are still being developed and large-scale conversion from ICE engines to EV is highly dependent upon the amount and terms of financing available for the conversion to EV.
We currently have limited intellectual property rights related to our Ideanomics Mobility business unit, and primarily rely on third parties through agreements with them to conduct research and development activities and protect proprietary information.
Although we believe our success will depend in part on our ability to acquire, invest in or develop proprietary technology to effectively compete with our competitors, we currently have, and for the foreseeable future will have, limited direct intellectual property rights related to our new Ideanomics Mobility business unit. The intellectual property relevant to the products and services we plan to provide is held primarily by third parties, including our strategic partners. Accordingly, we will rely on these third parties for research and development activities, which will present certain risks. For example, we will have limited control over the research and development activities of the business of our partners, and may require licenses from these third parties if we wish to develop products directly. If these businesses are unable to effectively maintain a competitive edge relative to the market with their technologies and intellectual property, it may adversely affect our business and financial position.
Our reliance on third parties also presents risks related to ownership, use, and protection of proprietary information. We are required to rely on the terms of the related agreements, including the partnership agreements to protect our interests, as well as our investments and partners’ trade secret protections, non-disclosure agreements, and invention assignment agreements to protect confidential and proprietary information. If the intellectual property and other confidential information of our
investments and strategic partners are not adequately protected, competitors may be able to use their proprietary technologies and information, thereby eroding any competitive advantages that intellectual property provides to us.
We may become subject to product liability claims, which could harm our financial condition and liquidity if we are not able to successfully defend against such claims.
If we become liable for product liability claims, our business, operating results, and financial condition may be harmed. The automotive industry experiences significant product liability claims, and we face an inherent risk of exposure to claims in the event the electric vehicles that we sell do not meet applicable standards or requirements, resulting in property damage, personal injury, or death. Our risks in this area are particularly pronounced given we have limited experience of selling electric vehicles. Although we ensured that we have thorough quality protection and testing measures, we cannot assure you that our quality protection and testing measures will be as effective as we expect. Any failure in any of our quality assurance steps or contractual clauses with our partners would cause a defect in electric vehicles sold by us, and in turn, could harm our customers. A successful product liability claim against us could require us to pay a substantial monetary award as we may undertake joint and several liability with the manufacturer. Moreover, a product liability claim could generate substantial negative publicity about our business, which would have a material adverse effect on our brand, business, prospects, financial condition, and results of operations.
The success of the Company’s efforts to develop its Ideanomics Mobility business unit is highly dependent upon suitable financing structures being developed.
The market for commercial fleets of EVs is in the early stage of development and provides unique challenges to fleet owners trying to finance the purchase of fleets of EVs and the related charging, storage, and battery infrastructure. Unlike vehicles powered by ICEs, the power source in an EV, the battery, can be separated from the vehicle which creates unique challenges for lenders in valuing the collateral for any loan. Additionally, the market for commercial EVs is very new and consequently, there is no reliable history of resale values to support lending decisions. Large-scale adoption of EVs will require a range of borrowing options and loan types to be available to fund purchases and leasing of EVs similar to those that currently exist to finance the purchasing and leasing of traditional ICE vehicles. Additionally, in some of the Company’s target markets, there is no well-developed market for lending to private enterprises and this may further slow down the adoption of EVs. The Company is working with banks and insurance companies to create lending structures and pools of capital that can be used to finance fleet purchases of commercial EVs. Even if the Company can create the necessary pools of capital and lending structures there is no guarantee that any regulatory approvals required for these new structures will be obtained. If the Company is not able to develop a solution for the funding of fleet purchases of EVs and related charging and battery infrastructure, then the Company’s Ideanomics Mobility business may not be successful and generate minimal revenues, and incur substantial losses.
We may be affected by the supply chain issues of the automotive industry.
We are aware that some domestic and foreign EV manufacturers have their operations negatively affected as a result of general economic conditions. Recently, as a result of the COVID-19 pandemic, many car manufacturers including EV manufacturers were required to temporarily shut down their manufacturing facilities or operate at a reduced capacity, and supply chain issues in sourcing computer chips necessary for manufacturing new vehicles and certain automotive products have resulted in a global chip shortage, which could further delay or stall new vehicle production. There is no guarantee that our business will not face the same problems in the future, which could have a material adverse effect on our EV business.
The success of our business depends in large part on our ability to protect our proprietary information and technology and enforce our intellectual property rights against third parties.
We rely on a combination of patent, copyright, service mark, trademark, and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish and protect our proprietary rights, all of which provide only limited protection. We cannot assure you that any patents will be issued with respect to our currently pending patent applications, in a manner that gives us the protection that we seek, if at all, or that any future patents issued to us will not be challenged, invalidated, or circumvented. Our currently issued patents and any patents that may be issued in the future with respect to pending or future patent applications may not provide sufficiently broad protection, or they may not prove to be enforceable in actions against alleged infringers. Also, we cannot assure you that any future service mark registrations will be issued with respect to pending or future applications or that any registered service marks will be enforceable or provide adequate protection of our proprietary rights.
We endeavor to enter into agreements with our employees and contractors and agreements with parties with whom we do business to limit access to and disclosure of our proprietary information. We cannot be certain that the steps we have taken will prevent unauthorized use of our technology or the reverse engineering of our technology. Moreover, others may independently develop technologies that are competitive to ours or infringe our intellectual property. The enforcement of our intellectual property also depends on our legal actions against these infringers being successful, but we cannot be sure these actions will be successful, even when our rights have been infringed.
Further, effective patent, trademark, service mark, copyright, and trade secret protection may not be available in every country in which our services are available over the internet. In addition, the legal standards relating to the validity, enforceability, and scope of protection of intellectual property rights in EV-related industries are uncertain and still evolving.
Changes to existing federal, state, or international laws or regulations applicable to us could cause an erosion of our current competitive strengths.
Our business is subject to a variety of federal, state, and international laws and regulations, including those with respect to government incentives promoting fuel efficiency and alternate forms of energy, electric vehicles, and others. These laws and regulations, and the interpretation or application of these laws and regulations, could change. Any reduction, elimination, or discriminatory application of government subsidies and economic incentives because of policy changes, fiscal tightening, or other reasons may result in diminished revenues from government sources and diminished demand for our products. In addition, new laws or regulations affecting our business could be enacted. These laws and regulations are frequently costly to comply with and may divert a significant portion of management’s attention. If we fail to comply with these applicable laws or regulations, we could be subject to significant liabilities which could adversely affect our business.
There are many federal, state, and international laws that may affect our business, including measures to regulate EVs and charging systems. If we fail to comply with these applicable laws or regulations, we could be subject to significant liabilities which could adversely affect our business.
There are a number of significant matters under review and discussion with respect to government regulations that may affect business and/or harm our customers, and thereby adversely affect our business, financial condition, and results of operations.
Risks Related to the Industries of Ideanomics Capital
If adverse changes in the levels of real estate market activity occur, the revenues of our Timios subsidiaries may decline.
Title insurance, settlement services, and appraisal revenue are closely related to the level of real estate activity, which includes, among other things, sales, mortgage financing, and mortgage refinancing. The levels of real estate activity are primarily affected by the average price of real estate sales, the availability of funds to finance purchases, and mortgage interest rates. Both the volume and the average price of residential real estate transactions have increased substantially in many parts of the country over the past year. Due to the unprecedented nature of activity, these trends are unlikely to continue at the same level in the long- term.
We have found that residential real estate activity generally decreases in the following situations:
•Mortgage interest rates are high or increasing;
•Mortgage funding supply is limited; and
•The United States economy is weak, including high unemployment levels.
If there is a decline in the level of real estate market activity or the average price of real estate sales, such decline may adversely affect our title insurance, settlement services, and appraisal management revenues. In 2021, the mortgage interest rate has increased, which may negatively impact the amount of mortgage refinancing activity in comparison to 2020. In addition, uncertain or fluctuating real estate valuations and the inability for third-party purchasers to obtain capital, inflation, and concomitant economic consequences thereof are among the factors that may significantly decrease the number of real estate operations. Our revenues in future periods will continue to be subject to these and other factors which are beyond our control and, as a result, are likely to fluctuate.
If financial institutions at which we hold escrow funds fail, it could have a material adverse impact on our Timios subsidiary.
We hold customers’ assets in escrow at various financial institutions, pending completion of real estate transactions. These assets are maintained in segregated bank accounts. Failure of one or more of these financial institutions may lead us to become liable for the funds owed to third parties and there is no guarantee that we would recover all of the funds deposited, whether through Federal Deposit Insurance Corporation coverage or otherwise.
If we experience changes in the rate or severity of title insurance claims, it may adversely impact our ability to conduct business through our Timios subsidiary.
By their nature, claims are often complex, vary greatly in dollar amounts, and are affected by economic and market conditions and the legal environment existing at the time of settlement of the claims. Some of our subsidiaries are underwritten title companies, and if the title claims exceed the threshold established by the title companies that underwrite the insurance our subsidiaries offer, it may cause our subsidiaries’ appointments to be revoked and negatively impact our subsidiaries’ ability to conduct business.
Because our Timios subsidiary is dependent upon California for a substantial portion of our title insurance premiums, our business may be adversely affected by regulatory conditions in California.
California is the largest source of revenue for the title insurance industry and, in 2021, California-based premiums accounted for a substantial portion of the premiums earned by our Timios subsidiary. A significant part of our revenues and profitability are therefore subject to our operations in California and to the prevailing regulatory conditions in California. Adverse regulatory developments in California, which could include reductions in the maximum rates permitted to be charged, cost of employment regulations, inadequate rate increases, or more fundamental changes in the design or implementation of the California title insurance regulatory framework, could have a material adverse effect on our results of operations and financial condition.
The title insurance business is highly competitive.
Competition in the title insurance and appraisal management industry is intense, particularly with respect to price, service, and expertise. Business comes primarily by referral from real estate agents, lenders, developers, and other settlement providers. The sources of business lead to a great deal of competition among title agents and appraisal management companies. There are numerous national companies and smaller companies at the regional and local levels. The smaller companies are an ever-present competitive risk in the regional and local markets where their business connections can give them a competitive edge. Although we are not aware of any current initiatives to reduce regulatory barriers to entering our industry, any such reduction could result in new competitors, including financial institutions, entering the title insurance business. From time to time, new entrants enter the marketplace with alternative products to traditional title insurance, although many of these alternative products have been disallowed by title insurance regulators. These alternative products, if permitted by regulators, could adversely affect our revenues and earnings. Competition among the major title insurance companies and any new entrants could lower our premium and fee revenues.
Industry regulatory changes and scrutiny could adversely affect our ability to compete for or retain business or increase our cost of doing business.
The title insurance industry has recently been, and continues to be, under regulatory scrutiny in a number of states with respect to pricing practices, alleged Real Estate Settlement Procedures Act violations, and unlawful rebating practices. The regulatory environment could lead to industry-wide reductions in premium rates and escrow fees, the inability to get rate increases when necessary, as well as to changes that could adversely affect the Company’s ability to compete for or retain business or raise the costs of additional regulatory compliance. Further, if regulatory decrees delaying foreclosures are extended, it will continue to impact our ability to recognize revenue and profitability from our default title and settlement services department.
Rapid technological changes in our industry require timely and cost-effective responses. Our earnings may be adversely affected if we are unable to effectively use technology to increase productivity.
Technological advances occur rapidly in the title insurance industry as industry standards evolve and title insurers introduce new products and services. We believe that our future success depends on our ability to anticipate technological changes and to offer products and services that meet evolving standards on a timely and cost-effective basis. Successful implementation and customer acceptance of our technology-based services will be crucial to our future profitability. There is a risk that the
introduction of new products and services, or advances in technology, could reduce the usefulness of our products and render them obsolete.
Risks Related to Our Business and Strategy
Strategy and Development Risks
We expect to require additional financing in the future to meet our business requirements. Such capital raising may be costly, difficult, or not possible to obtain and, if obtained, could significantly dilute current stockholders’ equity interests.
We must continue to rely on proceeds from debt and equity issuances to pay for ongoing operating expenses and repay existing debt in order to execute our business plan. Our Mobility and Energy businesses are capital intensive. Although we may attempt to raise funds by issuing debt or equity instruments, additional financing may not be available to us on terms acceptable to us or at all, or such resources may not be received in a timely manner. If we are unable to raise additional capital when required or on acceptable terms, we may be required to scale back or to discontinue certain operations, scale back or discontinue the development of new business lines, reduce headcount, sell assets, file for bankruptcy, reorganize, merge with another entity, or cease operations. If the combined company issues additional capital stock in the future in connection with financing activities, stockholders will experience dilution of their ownership interests and the per share value of the combined company’s common stock may decline.
As we acquire, dispose of, or restructure our businesses, product lines, and technologies, we may encounter unforeseen costs and difficulties that could impair our financial performance.
An important element of our management strategy is to review acquisition prospects that would complement our existing products, augment our market coverage and distribution ability, or enhance our capabilities. As a result, we may seek to make acquisitions of companies, products, or technologies, or we may reduce or dispose of certain product lines or technologies that no longer fit our business strategies. For regulatory or other reasons, we may not be successful in our attempts to acquire or dispose of businesses, products, or technologies, resulting in significant financial costs, reduced or lost opportunities, and diversion of management’s attention. Managing an acquired business, disposing of product technologies, or reducing personnel entails numerous operational and financial risks, including, among other things, (i) difficulties in assimilating acquired operations and new personnel or separating existing business or product groups, (ii) diversion of management’s attention away from other business concerns, (iii) amortization of acquired intangible assets, (iv) adverse customer reaction to our decision to cease support for a product, and (v) potential loss of key employees or customers of acquired or disposed operations. There can be no assurance that we will be able to achieve and manage successfully any such integration of potential acquisitions, disposition of product lines or technologies, or reduction in personnel or that our management, personnel, or systems will be adequate to support continued operations. Any such inabilities or inadequacies could have a material adverse effect on our business, operating results, financial condition, and/or cash flows.
In addition, any acquisition could result in changes, such as potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities, the amortization of related intangible assets, and goodwill impairment charges, any of which could materially adversely affect our business, financial condition, results of operations, cash flows, and/or the price of our common stock.
The success of our business is dependent on our ability to hire and retain our senior management team and key employees with the specialists’ skills that we need for our business.
We depend on the services of our key employees. Our success will largely depend on our ability to hire and retain these key employees and to attract and retain qualified senior and middle-level managers to our management team.
We have recruited executives and management both in the United States and in our operations outside of the United States to assist in our ability to manage the business and to recruit and oversee employees. While we believe we offer compensation packages that are consistent with market practice, we cannot be certain that we will be able to hire and retain sufficient personnel to support our business. The loss of any of our key employees, or failure to find a suitable successor, would significantly harm our business. Our future success will also depend on our ability to identify, hire, develop and retain skilled key employees. We do not maintain key person life insurance on any of our employees. Future sales or acquisitions by us may also cause uncertainty among our current employees and employees of an acquired entity, which could lead to the departure of key employees. Such departures could have an adverse impact on our business and the anticipated benefits of a sale or acquisition.
Intellectual-property litigation could cause us to spend substantial resources and could distract our personnel from their normal responsibilities.
Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses, and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions, or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development, sales, marketing, or distribution activities. We may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources. Uncertainties resulting from the initiation and continuation of intellectual property litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace.
We are currently, and may in the future be, subject to substantial litigation, investigations, and proceedings that could cause us to incur significant legal expenses and result in harm to our business.
We are actively involved in a variety of litigations and other legal matters and may be subject to additional litigations, investigations, arbitration proceedings, audits, regulatory inquiries, and similar actions, including matters related to commercial disputes, intellectual property, employment, securities laws, disclosures, environmental, tax, accounting, class action, and product liability, as well as trade, regulatory and other claims related to our business and our industry, which we refer to collectively as legal proceedings. For example, we are subject to an ongoing securities class action and shareholder derivative actions as well as an SEC investigation. Refer to Note 19 to our Consolidated Financial Statements of this Annual Report for additional information regarding these specific matters.
As reported previously, the Company is subject to an investigation by the SEC and has responded to various information requests and subpoenas from the SEC. The Company is fully cooperating with the SEC’s requests, and cannot predict the outcome of this investigation.
We are unable to predict the outcome, duration, scope, result, or related costs of the investigations and related litigation and, therefore, any of these risks could impact us significantly beyond expectations. Moreover, we are unable to predict the potential for any additional investigations or litigation, any of which could exacerbate these risks or expose us to potential criminal or civil liabilities, sanctions, or other remedial measures, and could have a material adverse effect on our reputation, business, financial condition, results of operations, liquidity or cash flows. Regardless of the merits of the claims and the outcome, legal proceedings have resulted in, and may continue to result in, significant legal fees and expenses, diversion of management’s time and other resources, and adverse publicity. Such proceedings could also adversely affect our business, results of operations, and financial condition.
We may have inadvertently violated Section 13(k) of the Exchange Act (implementing Section 402 of the Sarbanes-Oxley Act of 2002) and may be subject to sanctions as a result.
Section 13(k) of the Exchange Act provides that it is unlawful for a company that has a class of securities registered under Section 12 of the Exchange Act to, directly or indirectly, including through any subsidiary, extend or maintain credit in the form of a personal loan to or for any director or executive officer of the Company. As of July 31, 2021, there was a loan (in the form of a personal travel expense paid by the Company) from the Company to Shane McMahon, the Company’s Executive Chairman of the Board, which could be considered to be a personal loan made by the Company to a director or officer of the Company and may have violated Section 13(k) of the Exchange Act. The amount was repaid to us in December 2021. Issuers that are found to have violated Section 13(k) of the Exchange Act may be subject to civil sanctions, including injunctive remedies and monetary penalties, as well as criminal sanctions. The imposition of any of such sanctions on us could have a material adverse effect on our business, financial position, results of operations or cash flows.
We have incurred significant losses since our inception and anticipate that we will continue to incur losses for the foreseeable future, which together with our limited working capital raises substantial doubt about our financial viability and as to whether we will be able to continue as a going concern.
Our auditor’s report on our financial statements for the year ended December 31, 2022, includes an explanatory paragraph related to the existence of substantial doubt about our ability to continue as a going concern. We are an operating company with a limited operating history that encompasses a large number of industries and businesses.
We are not profitable and have incurred losses in each year since our inception in October 2004. For the years ended December 31, 2022, 2021, and 2020, we had net losses of approximately $282.1 million, $256.7 million, and $111.6 million, respectively. As of December 31, 2022, we had an accumulated deficit of $866.5 million.
The industries of Ideanomics Mobility and Ideanomics Capital are highly speculative, involve a high degree of risk, and require substantial capital investment. We continue to incur significant research and development and other expenses related to our ongoing operations. We have limited working capital and cannot guarantee that we will achieve market acceptance and be commercially successful in the long term.
Although we generate revenues from product sales, these revenues have not been sufficient, and may never be sufficient, to support our operations. We expect to continue to incur losses and negative cash flows for the foreseeable future. We require significant cash resources to execute our business plans and we will need to raise additional cash to continue to fund our operating plan. We expect to finance our operating plan through a combination of public or private equity or debt offerings, collaborations, strategic alliances, and other similar licensing arrangements in both the short term and the long term. We cannot be certain that additional funding will be available on acceptable terms, or at all, for a number of reasons, including market conditions, our ability to generate positive data from our clinical studies, and the need for our stockholders to approve an amendment to our certificate of incorporation to increase the number of shares of common stock that we are authorized to issue.
The aforementioned factors, which are largely outside of our control, raise substantial doubt about our ability to continue as a going concern within one year from the date of filing of this Annual Report. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should we be unable to continue as a going concern within one year after the date of filing of this annual report. If we are forced to scale down, restructure, limit or cease operations, our stockholders could lose all of their investment in our Company.
Risks Related to Our Information Technology Systems and Cyber-Security
Our business depends upon our ability to keep pace with the latest technological changes, and our failure to do so could make us less competitive in our industry.
The market for our products and services is characterized by rapid change and technological change, frequent new product innovations, changes in customer requirements and expectations, and evolving industry standards. Products using new technologies or emerging industry standards could make our products and services less attractive. Failure to respond in a timely and cost-effective way to these technological developments may result in serious harm to our business and operating results. As a result, our success will depend, in part, on our ability to develop and market product and service offerings that respond in a timely manner to the technological advances available to our customers, evolving industry standards, and changing preferences.
Defects or disruptions in our technology or services could diminish demand for our products and services and subject us to liability.
Because our technology, products, and services are complex and use or incorporate a variety of computer hardware, software, and databases, both developed in-house and acquired from third-party vendors, our technology, products, and services may have errors or defects. Errors and defects could result in unanticipated downtime or failure and could cause financial loss and harm to our reputation and our business. We have from time to time found defects and errors in our technology, products, and services, and defects and errors in our technology, products, or services may be detected in the future. In addition, our customers may use our technology, products, and services in unanticipated ways that may cause a disruption for other customers. As we acquire companies, we may encounter difficulty in incorporating the acquired technologies, products, and services, and maintaining the quality standards that are consistent with our technology, products, and services. Since our customers use our technology, products, and services for important aspects of their businesses and for financial transactions, any errors, defects, or disruptions in such technology, products, and services or other performance problems with our technology, products, and services could subject our customers to financial loss and hurt our reputation. As we deploy more product lines and provide a wider array of services, such risks will exponentially increase.
Our internally developed platform for Timios' business functions on software that is highly technical and complex and may now or in the future contain undetected errors, bugs, or vulnerabilities. Some errors in our software code may only be discovered after the code has been deployed. Any errors, bugs, or vulnerabilities discovered in our code after deployment, inability to identify the cause or causes of performance problems within an acceptable period of time, or difficulty maintaining and
improving the performance of our platform, particularly during peak usage times, could result in damage to our reputation or brand, loss of revenues, or liability for damages, any of which could adversely affect our business and financial results.
We expect to continue to make significant investments to maintain and improve the availability of our existing software platform and new platforms as needed, and to enable rapid releases of new features and products. To the extent that we do not effectively address capacity constraints, upgrade our systems as needed, and continually develop our technology and network architecture to accommodate actual and anticipated changes in technology, our business, and operating results may be harmed.
We have previously experienced, and may in the future experience, service disruptions, outages, and other performance problems due to a variety of factors, including infrastructure changes, third-party service providers, human or software errors, and capacity constraints. If our application is unavailable when customers attempt to access it or it does not load as quickly as they expect, customers may seek other services.
Malicious cyber-attacks and other adverse events affecting our operational systems or infrastructure, or those of third parties, could disrupt our businesses, result in the disclosure of confidential information, damage our reputation, and cause losses or regulatory penalties.
Developing and maintaining our operational systems and infrastructure are challenging, particularly as a result of us and our clients entering into new businesses, jurisdictions, and regulatory regimes, rapidly evolving legal and regulatory requirements, and technological shifts. Our financial, accounting, data processing, or other operating and compliance systems and facilities may fail to operate properly or become disabled as a result of events that are wholly or partially beyond our control, including malicious cyber-attack or other adverse events, which may adversely affect our ability to process these transactions or provide services or products.
In addition, our operations rely on the secure processing, storage, and transmission of confidential and other information on our computer systems and networks. Although we take protective measures, such as software programs, firewalls, and similar technology, to maintain the confidentiality, integrity, and availability of our and our customers’ information, and endeavor to modify these protective measures as circumstances warrant, the nature of cyber threats continues to evolve. As a result, our computer systems, software, and networks may be vulnerable to unauthorized access, loss, or destruction of data (including confidential customer information), account takeovers, unavailability or disruption of service, computer viruses, acts of vandalism, or other malicious code, ransomware, hacking, phishing, and other cyber-attacks and other adverse events that could have an adverse security impact. Despite the defensive measures we have taken, these threats may come from external forces, such as governments, nation-state actors, organized crime, hackers, and other third parties, including outsource or infrastructure-support providers and application developers, or may originate internally from within us. Given the high volume of transactions, certain errors may be repeated or compounded before they are discovered and rectified.
We also face the risk of operational disruption, failure, termination, or capacity constraints of any of the third parties that facilitate our business activities, including vendors, customers, counterparties, exchanges, clearing agents, clearinghouses, or other financial intermediaries. Such parties could also be the source of a cyber-attack on our breach of our operational systems, network, data, or infrastructure.
There have been an increasing number of ransomware, hacking, phishing, and other cyber-attacks in recent years in various industries, including ours, and cyber-security risk management has been the subject of increasing focus by our regulators. Like other companies, we have on occasion experienced, and may continue to experience, threats to our systems, including viruses, phishing, and other cyber-attacks. The number and complexity of these threats continue to increase over time. The techniques used in these attacks are increasingly sophisticated, change frequently, and are often not recognized until launched. If one or more cyber-attacks occur, it could potentially jeopardize the confidential, proprietary, and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our, as well as our customers’ or other third parties’ operations, which could result in reputational damage, financial losses, customer dissatisfaction and/or regulatory penalties, which may not in all cases by covered by insurance. If an actual, threatened, or perceived cyber-attack or breach of our security occurs, our clients could lose confidence in our platforms and solutions, security measures, and reliability, which would materially harm our ability to retain existing clients and gain new clients. As a result of any such attack or breach, we may be required to expend significant resources to repair system, network, or infrastructure damage and to protect against the threat of future cyber-attacks or security breaches. We could also face litigation or other claims from impacted individuals as well as substantial regulatory sanctions or fines. Our Timios business previously experienced such cyber-attacks and may face other security incidents of varying degrees from time to time. We incur significant costs in protecting against or remediating such incidents.
The extent of a particular cyber-attack and the steps that we may need to take to investigate the attack may not be immediately clear, and it may take a significant amount of time before such an investigation can be completed and full and reliable information about the attack is known. While such an investigation is ongoing, we may not necessarily know the full extent of the harm caused by the cyber-attack, and any resulting damage may continue to spread. Furthermore, it may not be clear how best to contain and remediate the harm caused by the cyber-attack, and certain errors or actions could be repeated or compounded before they are discovered and remediated. Any or all of these factors could further increase the costs and consequences of a cyber-attack.
Our regulators in recent years have increased their examination and enforcement focus on all matters of our businesses, especially matters relating to cyber-security threats, including the assessment of firms’ vulnerability to cyber-attacks. In particular, regulatory concerns have been raised about firms establishing effective cyber-security governance and risk management policies, practices, and procedures that enable the identification of risks, testing and monitoring of the effectiveness of such procedures and adaptation to address any weaknesses; protecting firm networks and information; data loss prevention, identifying and addressing the risk associated with remote access to client information and fund transfer requests; identifying and addressing risks associated with customers business partners, counterparties, vendors, and other third parties, including exchanges and clearing organizations; preventing and detecting unauthorized access or activities; adopting effective mitigation and business continuity plans to timely and effectively address the impact of cyber-security breaches; and establishing protocols for reporting cyber-security incidents. As we enter new jurisdictions or different product area verticals, we may be subject to new areas of risk or to cyber-attacks in areas in which we have less familiarity and tools. A technological breakdown could also interfere with our ability to comply with financial reporting requirements. The SEC has issued guidance stating that, as a public company, we are expected to have controls and procedures that relate to cybersecurity disclosure, and are required to disclose information relating to certain cyber-attacks or other information security breaches in disclosures required to be made under the federal securities laws. While any insurance that we may have that covers a specific cyber-security incident may help to prevent our realizing a significant loss from the incident, it would not protect us from the effects of adverse regulatory actions that may result from the incident or a finding that we had inadequate cyber-security controls, including the reputational harm that could result from such regulatory actions.
We are subject to stringent and changing privacy laws, regulations and standards, information security policies and contractual obligations related to data privacy and security. Our actual or perceived failure to comply with such obligations could harm its business.
We are subject to or affected by a number of federal, state, local and international laws and regulations, as well as contractual obligations and industry standards, that impose certain obligations and restrictions with respect to data privacy and security. The regulatory framework for privacy and security issues worldwide is rapidly evolving and, as a result, implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future. VIA may not be able to monitor and react to all developments in a timely manner as laws in this area are also complex and developing rapidly. For example, the European Union adopted the GDPR, which became effective on May 25, 2018, and California adopted the CCPA, which became effective in January 2020. Both the GDPR and the CCPA impose additional obligations on companies regarding the handling of personal data and provides certain individual privacy rights to persons whose data is collected. Other states have begun to propose similar laws. These laws, regulations and standards may be interpreted and applied differently over time and from jurisdiction to jurisdiction, and it is possible that they will be interpreted and applied in ways that are inconsistent without existing data management practices or the features of its products and product capabilities, and may have a material and adverse impact on our business, financial condition and results of operations.
Compliance with applicable privacy and data security laws and regulations is a rigorous and time-intensive process, and we may be required to put in place additional mechanisms to comply with such laws and regulations, which could cause it to incur substantial costs or require it to change its business practices, including its data practices, in a manner adverse to its business. Additionally, any inability to adequately address privacy and security concerns, even if unfounded, or comply with applicable privacy and data security laws, regulations and policies, could result in additional cost and liability to us, damage its reputation, inhibit sales and adversely affect its business. Privacy and data security concerns, whether valid or not valid, may inhibit market adoption of its products, particularly in certain industries and foreign countries. If we are not able to adjust to changing laws, regulations and standards related to the internet, its business may be harmed.
Risks Related to the Internal Controls and Compliance with Applicable Securities Laws.
We have restated our consolidated financial statements for several prior periods, which has affected and may continue to affect investor confidence, our stock price, our ability to raise capital in the future, and our reputation with our customers, which may result in stockholder litigation and may reduce customer confidence in our ability to complete new opportunities.
The Company filed amended Quarterly Reports on Form 10-Q for the periods ended March 31, 2021, June 30, 2021 and September 30,2021 to restate the unaudited quarterly financial data for said periods. The restatement of our prior consolidated
financial statements primarily reflects the correction of certain errors, which resulted from an incorrect application of U.S. GAAP, as described in more detail in the Quarterly Reports on Form 10-Q/A for the periods ended March 31, 2021 and June 30, 2021 filed with the SEC on November 22, 2021. Such restatement may have the effect of eroding investor confidence in the Company and our financial reporting and accounting practices and processes and may negatively impact the trading price of our common stock, may result in stockholder litigation, may make it more difficult for us to raise capital on acceptable terms, if at all, and may negatively impact our reputation with our customers and cause customers to place new orders with other companies.
We have identified material weaknesses in our internal control over financial reporting, which, did and could continue to, if not remediated, adversely affect our ability to report our financial condition and results of operations in a timely and accurate manner.
We have concluded that our internal control over financial reporting was not effective as of December 31, 2022, due to the existence of material weaknesses in such controls. We have also concluded that our disclosure controls and procedures were not effective as of December 31, 2021, due to material weaknesses in our internal control over financial reporting, all as described in Part II, Item 9A of this Annual Report. Although we have initiated remediation measures to address the identified weaknesses, we cannot provide assurance that our remediation efforts will be adequate to allow us to conclude that such controls will be effective in the future. Moreover, we project that the aforesaid material weakness may exist over years before being remediated. We also cannot assure you that additional material weaknesses in our internal control over financial reporting will not arise or be identified in the future.
We intend to continue our remediation activities and to continue to improve our overall control environment and our operational and financial systems and infrastructure, as well as to continue to train, retain and manage our personnel who are essential to effective internal control. In doing so, we will continue to incur expenses and expend management’s time on compliance-related issues. However, we cannot ensure that the steps that we have taken or will take will successfully remediate the errors. If we are unable to successfully complete our remediation efforts or favorably assess the effectiveness of our internal control over financial reporting, our operating results, financial position, ability to accurately report our financial results and timely file our SEC reports, and our stock price could be adversely affected.
Moreover, because of the inherent limitations of any control system, material misstatements due to error or fraud may not be prevented or detected and corrected on a timely basis, or at all. If we are unable to provide reliable and timely financial reports in the future, our business and reputation may be further harmed. Restated financial statements and failures in internal control may also cause us to fail to meet reporting obligations, negatively affect investor and customer confidence in our management and the accuracy of our financial statements and disclosures, result in events of default under our banking agreements, or result in adverse publicity and concerns from investors and customers, any of which could have a negative effect on the price of our common stock, subject us to regulatory investigations and penalties or additional stockholder litigation, and have a material adverse impact on our business and financial condition.
We may have inadvertently violated Section 402 of the Sarbanes-Oxley Act, codified as Section 13(k) of the Exchange Act in connection with a certain one-time advance we made to our director; as a result, we may be subject to civil and criminal sanctions which, if imposed, could have a material adverse effect upon us.
During the fiscal year ended December 31, 2021, we paid the personal private jet expense in the amount of approximately $60,000 for one of our directors due to a personal emergency reported by the director and no availability of commercial flights at the time. Subsequently, we concluded that such expense, being inconsistent with our customary directors’ reimbursement practice, had to be repaid by the director. Accordingly, such repayment was completed by means of an offset against the compensation owed to the director, to which the director did not object. Hence, the aforementioned arrangement may be interpreted as a “personal loan” to our director, although the intent of the Company and the director was to avoid granting a perquisite inconsistent with the Company’s practice.
Section 13(k) of the Exchange Act provides that it is unlawful for a company, which has a class of securities registered under Section 12(g) of the Exchange Act, to directly or indirectly, including through any subsidiary, extend or maintain credit in the form of a personal loan to or for any director or executive officer of the company. Issuers violating Section 13(k) of the Exchange Act may be subject to civil sanctions, including injunctive remedies and monetary penalties, as well as criminal sanctions. The imposition of any of such sanctions on us may have a material adverse effect on our financial position, results of operations or cash flows.
We have not concluded that the advance made to our director under the above-described arrangement was a “personal loan” within the meaning of Section 13(k) of the Exchange Act or that any violations of the Exchange Act have occurred relating to
such matter. Although we submitted a form to the SEC Staff on a no-name basis to inquire whether the aforementioned arrangement with our director should be prohibited by Section 13(k) of the Exchange Act, we have not received interpretive guidance from the SEC Staff. Further, we have not received any notice that the matters discussed herein are under investigation by any governmental authority or that any proceeding relating to such matters has been initiated by any person.
Based on our current strategies, we need to raise additional capital to execute on those strategies, and such capital may not be available to us or may only be available on unfavorable terms due to the fact that the Company lost its S-3 eligibility.
To allow us to timely respond to opportunities to raise capital, we may need to file various registration statements and not rely on exemptions from registration. Use of a shelf registration statement on Form S-3, which would be the optimal form of the registration statement under most circumstances, requires, among other things, that an issuer has timely filed all of its reports under the Exchange Act for at least twelve months, subject only to exceptions for certain Form 8-K filings. We had untimely filed our Quarterly Report on Form 10-Q for the period ended September 30, 2021. In addition, this Annual Report on Form 10-K for the fiscal year ended December 31, 2022, and the Quarterly Reports on Form 10-Q for the first and second fiscal quarter of the year 2022 are not filed. If we timely file all reports required under the Exchange Act in the future, we will regain eligibility for use of Form S-3 not earlier than August 9, 2023. While the Company continues to have access to capital markets, our ineligibility to use Form S-3 means that it may be more difficult for us to effect public offering transactions and our range of available financing alternatives could be narrowed.
Risks Related to Ownership of our Securities
Provisions in our articles of incorporation, as amended, and bylaws, as amended, or Nevada law might discourage, delay, or prevent a change of control of us or changes in our management and, therefore, depress the trading price of our common stock.
Our articles of incorporation, as amended, authorize our Board to issue up to 50,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by our Board without further action by our stockholders. These terms may include preferences as to dividends and liquidation, conversion rights, redemption rights, and sinking fund provisions. The issuance of any preferred stock could diminish the rights of holders of our common stock, and therefore could reduce the value of such common stock. In addition, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of our Board to issue preferred stock could make it more difficult, delay, discourage, prevent, or make it costlier to acquire or effect a change-in-control, which in turn could prevent our stockholders from recognizing a gain in the event that a favorable offer is extended and could materially and negatively affect the market price of our common stock.
Furthermore, Section 78.438 of the Nevada Revised Statutes prohibits a publicly-held Nevada corporation from engaging in a business combination with an interested stockholder (generally defined as a person which together with its affiliates owns, or within the last three years has owned, 10% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder) unless the business combination is approved in a prescribed manner. The existence of the foregoing provisions and other potential anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our Company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.
We do not intend to pay dividends for the foreseeable future.
For the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and we do not anticipate paying any cash dividends on our common stock or Series A preferred stock. Accordingly, investors must be prepared to rely on sales of their common stock after price appreciation to earn an investment return, which may never occur. Investors seeking cash dividends should not purchase our common stock. Any determination to pay dividends in the future will be made at the discretion of our Board and will depend on our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our Board deems relevant. In addition, our ability to declare and pay dividends is dependent on our ability to declare dividends and profits in our subsidiaries domiciled outside of the United States. Rules in other jurisdictions may greatly restrict and limit the ability of our subsidiaries to declare dividends to us which, in addition to restricting our cash flow, limits our ability to pay dividends to our stockholders.
We previously received notices of failure to satisfy continued listing rules from the Nasdaq which may ultimately result in delisting of our common stock.
Our common stock is listed on the Nasdaq Capital Market. If we fail to satisfy the continued listing requirements of Nasdaq, our common stock may be delisted.
On May 17, 2022, we received a notice (the “Periodic Filings Notice”) from Nasdaq stating that because of the Company’s failure to file its quarterly report timely, the Company was no longer in compliance with Nasdaq Listing Rule 5250(c)(1). In accordance with Nasdaq Listing Rules, we submitted a plan to regain compliance and on or about May 17, 2022, Nasdaq has granted the Company’s request for the extension, subject to certain conditions.
On May 20, 2022, the Company received a deficiency notice (the “Bid Price Notice”) from Nasdaq indicating that the bid price for the Company’s common stock for the preceding 30 consecutive business days had closed below the minimum $1.00 per share required for continued listing under Nasdaq Listing Rule 5550(a)(2). The Company has been granted a 180 calendar day grace period, to regain compliance with the minimum bid price requirement. The continued listing standard will be met if the Company evidences a closing bid price of at least $1.00 per share for a minimum of 10 consecutive business days during the 180 calendar day grace period. In order for Nasdaq to consider granting the Company additional time, the Company would be required, among other things, to meet the continued listing requirement for market value of publicly held shares as well as all other standards for initial listing on Nasdaq, with the exception of the minimum bid price requirement.
There can be no assurance that the Company cures the Periodic Filing Notice and the Bid Price Notice. Delisting could adversely affect our ability to raise additional capital through the public or private sale of equity securities, would significantly affect the ability of investors to trade our securities, and would negatively affect the value and liquidity of our common stock. Delisting could also have other negative results, including the potential loss of confidence by employees, the loss of institutional investor interest, and fewer business development opportunities.
Financial Market and Economic Risks
A disruption in our funding sources and access to the capital markets would have an adverse effect on our liquidity.
Liquidity risk is the risk arising from our ability to meet obligations in a timely manner when they come due. Our liquidity strategy is to maintain the capacity to fund assets and repay liabilities in a timely and cost-effective manner even in adverse market conditions. A disruption in our funding sources may adversely affect our ability to meet our obligations as they become due. An inability to meet obligations in a timely manner would have a negative impact on our ability to refinance maturing debt and fund new asset growth and would have an adverse effect on our results of operations and financial condition. We currently do not have adequate cash to meet our short or long-term anticipated needs. In the event additional capital is raised, it may have a dilutive effect on our existing stockholders.
Risks Related to our International Operations including Operations in the PRC
Risks Related to all of our International Operations
Our international operations expose us to a number of risks.
Our international activities are significant to our revenues and profits, and we plan to further expand our operations internationally. In certain international market segments, we have relatively little operating experience and may not benefit from any first-to-market advantages or otherwise succeed. It is costly to establish, develop, and maintain international operations and platforms, and promote our brand internationally.
Our international sales and operations are subject to a number of risks, including:
•local economic and political conditions, including sanctions and other regulatory actions that prohibit sales to, or purchases from, countries and legal entities that are within the scope of the sanction. Government regulations, both federal and municipal, that may restrict the available market for our products and services through the requirement for a minimum value of local produced content, or restrict the availability of subsidies for products that do not meet designated value for local produced content, e.g., the Buy America program;
•uncertain economic, legal, and political conditions in China, Europe and other regions where we do business, including, for example, changes in China-Taiwan relations, the military conflict between Russia and Ukraine and the related sanctions and other penalties imposed on Russia by the United States, the European Union, the United Kingdom and other countries as well as retaliatory actions of Russia against the companies that comply with the aforementioned sanctions;
•government regulation and restrictive governmental actions (such as trade protection measures, including export duties and quotas and customs duties and tariffs), nationalization, and restrictions on foreign ownership;
•restrictions on sales or distribution of certain products or services and uncertainty regarding liability for products, services, and content, including uncertainty as a result of less Internet-friendly legal systems, local laws, lack of legal precedent, and varying rules, regulations, and practices regarding the physical and digital distribution of media products and enforcement of intellectual property rights;
•limitations on the repatriation and investment of funds and foreign currency exchange restrictions;
•limited technology infrastructure;
•environmental and health and safety liabilities and expenditures relating to the disposal and remediation of hazardous substances into the air, water, and ground;
•shorter payable and longer receivable cycles and the resultant negative impact on cash flow;
•increased risk over the ability to collect accounts receivable and other amounts owed to the Company due to the limited credit checking information available in some of the countries we operate in and possible difficulties to pursue legal action to collect amounts owed to us;
•laws and regulations regarding consumer and data protection, privacy, network security, encryption, payments, and restrictions on pricing or discounts; and
•geopolitical events and instability, including international conflicts, war and terrorism.
We may face challenges in expanding our international and cross-border businesses and operations.
As we expand our international and cross-border businesses into an increasing number of international markets, we will face risks associated with expanding into markets in which we have limited or no experience and in which we may be less well-known. We may be unable to attract a sufficient number of customers and other participants, fail to anticipate competitive conditions, or face difficulties in operating effectively in these new markets. The expansion of our international and cross-border businesses will also expose us to risks inherent in operating businesses globally, including:
•inability to recruit international and local talent and challenges in replicating or adapting our Company policies and procedures to different local and regional operating environments;
•lack of acceptance of our product and service offerings;
•challenges and increased expenses associated with staffing and managing international and cross-border operations and managing an organization spread over multiple jurisdictions;
•trade barriers, such as import and export restrictions, customs duties and other taxes, competition law regimes and other trade restrictions, as well as other protectionist policies;
•differing and potentially adverse tax consequences;
•increased and conflicting regulatory compliance requirements;
•challenges caused by distance, language, and cultural differences;
•increased costs to protect the security and stability of our information technology systems, intellectual property, and personal data, including compliance costs related to data localization laws;
•availability and reliability of international and cross-border payment systems and logistics infrastructure;
•exchange rate fluctuations; and
•political instability and general economic or political conditions in particular countries or regions.
U.S. financial regulatory and law enforcement agencies, including without limitation the SEC, U.S. Department of Justice, and U.S. national securities exchanges have limited ability, and in fact may have no ability, to conduct investigations within the PRC concerning our Company, our PRC-based officers, directors, market research services or other professional services or experts.
A material part of our assets and our current operations are conducted in the PRC, and some professional service providers are nationals and residents of the PRC. U.S. financial regulatory and law enforcement agencies, including without limitation the SEC, U.S. Department of Justice, and U.S. national securities exchanges have limited ability, and in fact may have no ability, to conduct investigations within the PRC concerning our Company, and the PRC may have limited or no agreements in place to facilitate cooperation with the SEC’s Division of Enforcement for investigations within its jurisdiction.
Adverse changes in political, economic, and other policies of the Chinese government could have a material adverse effect on the overall economic growth of the PRC, which could materially and adversely affect the growth of our business and our competitive position.
Our business operations have a material dependency on the PRC for both revenues generated with the PRC and as a source of finished products and components for our global operations. Accordingly, our business, financial condition, results of operations, and prospects are affected significantly by economic, political, and legal developments in the PRC. The Chinese economy differs from the economies of most developed countries in many respects, including:
•the degree of government involvement;
•the level of development;
•the growth rate;
•the control of foreign exchange;
•the allocation of resources;
•an evolving and rapidly changing regulatory system; and
•a lack of sufficient transparency in the regulatory process.
While the Chinese economy has experienced significant growth in the past 30 years, growth has been uneven, both geographically and across various sectors of the economy. The Chinese economy has also experienced certain adverse effects due to the global financial crisis. In addition, the growth rate of the PRC’s gross domestic product has materially slowed in recent years, according to the National Bureau of Statistics of China. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall Chinese economy, but may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments, foreign currency exchange restrictions, or changes in tax regulations that are applicable to us.
The continued control of these assets and other aspects of the national economy by the Chinese government could materially and adversely affect our business. The Chinese government also exercises significant control over Chinese economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or companies.
Any adverse change in the economic conditions or government policies in the PRC could have a material adverse effect on overall economic growth, which in turn could lead to a reduction in demand for our products and consequently have a material adverse effect on our businesses.
Several PRC regulatory authorities, such as the CAC and the MOFCOM, oversee different aspects of our operations, and we are required to obtain governmental approvals, licenses, permits, and registrations in connection with our operations. For example, certain filings must be made by automobile dealers in China through an information system used for purposes of the national automobile circulation, which is operated by relevant commerce departments, within 90 days after receiving a business license. Furthermore, if our subsidiaries in China were to engage in any activities that could be deemed as providing blockchain
information services, we would need to complete certain filing procedures with the CAC and obtain relevant filing numbers. In addition, the PRC government may enact new laws and regulations that require additional licenses, permits, approvals and/or registrations for the operation of any of our existing or future business. As a result, we cannot assure you that we have all the permits, licenses, registrations, approvals and/or business license items covering the sufficient scope of business required for our business, or that we will be able to obtain, maintain or renew any permits, licenses, registrations, approvals and/or business license items covering the sufficient scope of our business in a timely manner or at all.
Uncertainties with respect to the PRC legal system could limit the legal protections available to you and to us, which could cause material adverse effects to our business operations.
We conduct part of our business through our subsidiaries in the PRC. Our subsidiaries are generally subject to laws and regulations applicable to foreign investments in the PRC and, in particular, laws applicable to FIEs. The PRC legal system is based on written statutes, and prior court decisions may be cited for reference but have limited precedential value. Since 1979, a series of new PRC laws and regulations have significantly enhanced the protections afforded to various forms of foreign investments in the PRC. However, there could be a change of law and it is uncertain whether business industries in which our China subsidiaries operate will be subject to the foreign investment restrictions or prohibitions.
Since the PRC legal system continues to evolve rapidly, the interpretations of many laws, regulations, and rules are not always uniform, and enforcement of these laws, regulations, and rules involve uncertainties, which may limit legal protections available to you and to us. In addition, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all, and which may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until after the occurrence of the violation.
In addition, any litigation in the PRC may be protracted and result in substantial costs and diversion of resources and management’s attention. It could be difficult for investors to affect service of process in the United States or to enforce a judgment obtained in the United States against our Chinese operations and entities.
You may have difficulty enforcing judgments against us.
A significant part of our operations is outside of the United States including the operations in PRC. As a result, it may be difficult for you to effect service of process within the United States upon these persons. It may also be difficult for you to enforce in U.S. courts judgments on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, that are not residents in the United States and the substantial majority of whose assets are located outside of the United States. In addition, there is uncertainty as to whether the courts of the PRC would recognize or enforce judgments of U.S. courts. Courts in the PRC may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based on treaties between the PRC and the country where the judgment is made or on reciprocity between jurisdictions. The PRC does not have any treaties or other arrangements that provide for the reciprocal recognition and enforcement of foreign judgments with the United States. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates basic principles of PRC law or national sovereignty, security, or the public interest.
Our results could be adversely affected by the trade tensions between the United States and the PRC.
With the increasing interconnectedness of global economic and financial systems and our business related to the PRC, trade tensions between the United States and the PRC can have an immediate and material adverse impact on our business. Changes to trade policies, treaties, and tariffs in the jurisdictions in which we operate, or the perception that these changes could occur, could adversely affect our international and cross-border operations, our financial condition, and results of operations. For example, the U.S. administration has advocated greater restrictions on trade generally and significant increases on tariffs on goods imported into the United States, particularly from the PRC. Such trade restrictions or tariffs could cause U.S. companies to respond by minimizing their use of Chinese suppliers, thereby moving the supply chain away from China and limiting our competitive advantage in developing our logistics management and financing business. Further, the U.S. or the PRC could impose additional sanctions that could restrict us from doing business directly or indirectly in either country. Such actions could have material adverse impact on our profitability and operations. Government regulations, both federal and municipal, that may restrict the available market for our products and services through the requirement for a minimum value of locally produced content, or restrict the availability of subsidies for products that do not meet designated value for locally produced content, e.g., the Buy America program.
Restrictions on currency exchange may limit our ability to use cash generated from sales in the PRC to fund our business activities outside of the PRC.
For our sales in the PRC, at present, a substantial part of our sales are settled in RMB, and any future restrictions on currency exchanges may limit our ability to use revenue generated in RMB to fund any future business activities outside the PRC or to make dividends or other payments in U.S. dollars. Although the Chinese government introduced regulations in 1996 to allow greater convertibility of the RMB for current account transactions, significant restrictions still remain, including primarily the restriction that FIEs may only buy, sell, or remit foreign currencies after providing valid commercial documents, at those banks in the PRC authorized to conduct foreign exchange business. In addition, foreign exchange transactions under the capital account remain subject to limitations and require approvals from, or registration with, SAFE PRC and other relevant PRC governmental authorities and companies are required to open and maintain separate foreign exchange accounts for capital account items. This could affect our ability to obtain foreign currency through debt or equity financing for our subsidiaries. Recent volatility in the RMB foreign exchange rate as well as capital flight out of the PRC may lead to further foreign exchange restrictions and policies or practices which adversely affect our operations and ability to convert RMB. We cannot be certain that the Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the RMB.
Restrictions under PRC law on our PRC subsidiaries’ ability to make dividends and other distributions could materially and adversely affect our ability to grow, make investments or acquisitions that could benefit our business, pay dividends to you, and otherwise fund and conduct our business.
At present, part of our sales is earned by our PRC operating entities. However, PRC regulations restrict the ability of our PRC subsidiaries to make dividends and other payments to their offshore parent companies. PRC legal restrictions permit payments of dividends by our PRC subsidiaries only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Our PRC subsidiaries are also required under PRC laws and regulations to allocate at least 10% of their annual after-tax profits determined in accordance with PRC GAAP to a statutory general reserve fund until the amounts in said fund reach 50% of their registered capital. Allocations to these statutory reserve funds can only be used for specific purposes and are not transferable to us in the form of loans, advances, or cash dividends. Any limitations on the ability of our PRC subsidiaries to transfer funds to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.
We may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption laws, and any determination that we violated these laws could have a material adverse effect on our business.
We are subject to the FCPA and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute, for the purpose of obtaining or retaining business. We have operations and agreements with third parties and make most of our sales in the PRC. The PRC also strictly prohibits bribery of government officials. Our activities in the PRC create the risk of unauthorized payments or offers of payments by the employees, consultants, sales agents, or distributors of our Company, which may not always be subject to our control. It is our policy to implement safeguards to discourage these practices by our employees. However, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants, sales agents, or distributors of our company may engage in conduct for which we might be held responsible. Violations of the FCPA or Chinese anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results, and financial condition. In addition, the U.S. government may seek to hold our Company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.
Our operations in foreign countries are subject to risks that could adversely impact our financial results, such as economic or political volatility, foreign legal and regulatory requirements, international trade factors (export controls, trade sanctions, duties, tariff barriers, and other restrictions), protection of our proprietary technology in certain countries, potentially burdensome taxes, crime, employee turnover, staffing, managing personnel in diverse culture, labor instability, transportation delays, and foreign currency fluctuations.
If we become directly subject to the recent scrutiny, criticism, and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve the matter which could harm our business operations, stock price, and reputation and could result in a loss of your investment in our stock, especially if such matter cannot be addressed and resolved favorably.
Over the past several years, U.S. public companies that have substantially all of their operations in the PRC, particularly companies like ours which have completed so-called reverse merger transactions, have been the subject of intense scrutiny, criticism, and negative publicity by investors, financial commentators, and regulatory agencies, such as the SEC. Much of the scrutiny, criticism, and negative publicity is in connection with financial and accounting irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate governance policies, or a lack of adherence thereto
and, in many cases, allegations of fraud. As a result of the scrutiny, criticism, and negative publicity, the publicly traded stock of many U.S.-listed Chinese companies has sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism, and negative publicity will have on our Company, our business, and our stock price. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or not, we will have to expend significant resources to investigate such allegations and/or defend our Company. This situation will be costly and time-consuming and distract our management from growing our Company.
The disclosures in our reports and other filings with the SEC and our other public announcements are not subject to the scrutiny of any regulatory bodies in the PRC. Accordingly, our public disclosure should be reviewed in light of the fact that no governmental agency that is located in the PRC, where part of our operations and business are located, has conducted any due diligence on our operations or reviewed or cleared any of our disclosure.
We are regulated by the SEC and our reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the SEC under the Securities Act and the Exchange Act. A material portion of our operations is located in the PRC. Since such operations and business take place outside of the United States, it may be more difficult for the staff of the SEC to overcome the geographic and cultural obstacles that are present when reviewing our disclosure. Furthermore, our SEC reports and other disclosure and public announcements are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings is not subject to the review of the CSRC or CAC. Accordingly, you should review our SEC reports, filings, and our other public announcements with the understanding that no local regulator has done any due diligence on our Company and with the understanding that none of our SEC reports, other filings, or any of our other public announcements has been reviewed or otherwise been scrutinized by any local regulator.
The unavailability, reduction, or elimination of government and economic incentives or government policies that are favorable for new energy vehicles could materially and adversely affect our business, financial condition, and results of operations.
Our business has benefited from the PRC government subsidies, economic incentives, and government policies that support the growth of new EVs. For example, each qualified purchaser of our new energy vehicles enjoys subsidies from China’s central government and certain local governments. Furthermore, in certain cities, quotas that limit the purchase of ICE vehicles do not apply to EVs, thereby incentivizing customers to purchase EVs. In April 2020, the MOF, together with several other PRC government departments, issued the Announcement on Exemption of Vehicle Purchase Tax, and the 2020 Financial Subsidies Circular, which extended certain subsidies and tax exemptions on EV purchases to the end of 2022. On December 31, 2021, the above mentioned authorities promulgated the 2022 Financial Subsidies Circular, which became effective on January 1, 2022.
These policies are subject to certain limits as well as changes that are beyond our control, and we cannot assure you that future changes, if any, would be favorable to our business.
Any reduction or elimination of government subsidies and economic incentives because of policy changes, fiscal tightening, or other factors may result in the diminished competitiveness of the EV industry generally or our Ideanomics China business unit in particular. In addition, as we seek to increase our revenues from vehicle sales, we may also experience an increase in accounts receivable relating to government subsidies. Any uncertainty or delay in collection of the government subsidies may also have an adverse impact on our financial condition. Any of the foregoing could materially and adversely affect our business, financial condition, and results of operations.
We might be subject to the National Security Law in the future, in light of the PRC government’s current and rapidly changing policies regarding PRC and Hong Kong businesses operations.
On June 30, 2020, the PRC government’s National People’s Congress Standing Committee passed the National Security Law for the Hong Kong Special Administrative Region. The National Security Law criminalizes, and otherwise gives the PRC government broad powers to find unlawful, a broad variety of political crimes, including separatism and collusion with a foreign country or with external elements to endanger national security in relation to Hong Kong. Under the National Security Law, the PRC government can, at its own discretion or the Hong Kong government’s discretion, exercise jurisdiction over alleged violations of the law and prosecute and adjudicate cases in mainland China. The law can apply to alleged violations committed by anyone, anywhere in the world, including in the United States.
In light of the PRC government’s current and rapidly changing policies regarding PRC and Hong Kong businesses operations, Ideanomics’ business operations could be subject to the National Security Law in the future, if the PRC or Hong Kong government desires this outcome.
Increases in labor costs and enforcement of stricter labor laws and regulations in the PRC may adversely affect our business and our profitability.
China’s overall economy and the average wage in China have increased in recent years and are expected to continue to grow. The average wage level for our employees has also increased in recent years. We expect that our labor costs, including wages and employee benefits, will increase. Unless we are able to pass on these increased labor costs to those who pay for our services, our profitability and results of operations may be materially and adversely affected.
In addition, we have been subject to stricter regulatory requirements in terms of entering into labor contracts with our employees, the utilization of labor dispatching, applying for foreigner work permits, labor protection and labor condition requirements, and the payment of various statutory employee benefits, including pensions, housing fund contributions, medical insurance, work-related injury insurance, unemployment insurance, and maternity insurance to designated government agencies for the benefit of our employees. Pursuant to the Labor Contract Law and its implementation rules, employers are also now generally subject to stricter requirements in terms of signing labor contracts, minimum wages, paying remuneration, determining the term of employee’s probation, and unilaterally terminating labor contracts. In the event that we decide to terminate some of our employees or otherwise change our employment or labor practices, the Labor Contract Law and its implementation rules may limit our ability to effect those changes in a desirable or cost-effective manner, which could adversely affect our business and results of operations.
As the interpretation and implementation of labor-related laws and regulations are still evolving, our employment practices may violate labor-related laws and regulations in China, which may subject us to labor disputes or government investigations. We cannot assure you that we have complied or will be able to comply with all labor-related laws and regulations including those relating to obligations to make social insurance payments and contribute to the housing provident funds. If we are deemed to have violated relevant labor laws and regulations, we could be required to provide additional compensation to our employees, and our business, financial condition, and results of operations will be adversely affected.
In light of recent events indicating greater oversight by PRC regulators for some companies seeking to list on a foreign exchange, we may be subject to a variety of PRC laws and other obligations regarding data protection and other rules, and any failure to comply with applicable laws and obligations could have a material and adverse effect on our business, financial condition, and results of operations.
Even though we and our PRC subsidiaries are not currently subject to PRC laws relating to approvals or permissions for our listing, PRC regulators have generally increased their oversight applicable to companies seeking to list on a foreign exchange in recent years. These laws and regulations continue to develop, and PRC government authorities may adopt other rules and restrictions in the future. Any non-compliance with existing or future requirements could result in penalties or other significant legal liabilities.
The CAC and other twelve Governmental Agencies issued the Measures for Cybersecurity Review on December 28, 2021, which became effective on February 15, 2022 (“Cybersecurity Review Measures”). Pursuant to the Cybersecurity Review Measures, if any of the following circumstances exist, operators of networks are required to apply with the Office of Cybersecurity Review to conduct a cybersecurity review: (a) the operators possess over one million individuals’ personal information and seek to list securities overseas; (b) the operators are deemed as critical information infrastructure operators and intend to purchase internet products and services that will or may affect national security; and (c) the operators carry out any data processing activities which affect or may affect PRC national security. As of the date of this report, none of the aforesaid circumstances are applicable in the case of any of our PRC subsidiaries, and therefore our PRC subsidiaries are not required to conduct a cybersecurity review with the CAC. However, the Cybersecurity Review Measures are relatively new and there remains some uncertainty as to how the Cybersecurity Review Measures may be interpreted or implemented, as well as uncertainty as to whether any PRC government authorities may adopt new laws, regulations, rules, or detailed implementation and interpretation measures related to the Cybersecurity Review Measures. Accordingly, at this time, there is ultimately no way to assure that PRC government authorities will take the same view as we do with respect to whether our PRC subsidiaries may be required to complete cybersecurity review procedures.
As of the date of this report, we have not received any notice from any authorities identifying us or our PRC subsidiaries as a critical information infrastructure or requiring us to undertake a cybersecurity review by the CAC or the cybersecurity review office. Further, we have not been subject to any penalties, fines, suspensions, investigations from any competent authorities for
violation of the regulations or policies that have been issued by the CAC to date. We believe that neither we nor our PRC subsidiaries are subject to cybersecurity review requirements, given that none of our PRC subsidiaries engaged in any operation of information infrastructure or any data processing activities which affect or may affect PRC national security, nor possesses personal information related to over one million individuals. However, there remains uncertainty as to how relevant regulations will be interpreted or implemented and whether the PRC regulatory agencies, including the CAC, may adopt new laws, regulations, rules, or detailed implementation and interpretation measures. If any such new laws, regulations, rules, or implementation and interpretation measures come into effect, we expect to take all reasonable measures and actions to comply but any such future laws, regulations or review could be time consuming and costly to comply with, and could have a material impact on our operations and financial results, as well as those of PRC subsidiaries.
If our PRC subsidiaries fail to obtain and maintain the requisite licenses and approvals required for their business in China, or if our PRC subsidiaries are required to take actions that are time-consuming or costly, their business, financial condition, and results of operations may be materially and adversely affected.
We have determined that our PRC subsidiaries have obtained all material licenses, approvals, and filings covering their operations in the PRC, including business licenses from the relevant local branches of the SAMR, filings with relevant local branches of MOFCOM, registrations with PRC tax authorities, filings with PRC customs for carrying out export and import business activities and registrations with relevant branches of the SAFE PRC for the ability to receive funds from offshore entities and transfer funds to offshore entities. These approvals and filings are essential to the operation of the business of our PRC subsidiaries. However, because local regulations may change from time to time, our PRC subsidiaries cannot ensure they will be able to obtain or maintain all necessary licenses, approvals, or filings, or successfully renew these permits, approvals, or licenses in a timely manner. If our PRC subsidiaries fail to complete, obtain or maintain any of the required licenses or approvals or make their necessary filings, or inadvertently conclude that any permissions or approvals are not required, then our PRC subsidiaries could be subject to various administrative penalties, governmental investigations, or enforcement actions, fines, suspension of operations, or be prohibited from engaging in relevant business. As a result, the business and operations of our PRC subsidiaries and financial condition would be materially and adversely affected, which could significantly limit our ability to offer or continue to offer securities to investors, or cause such securities to significantly decline in value or become worthless.
Our decision to restructure our operations in China may impact the value of our securities or render them worthless.
On September 12, 2022, our Board authorized the Company’s management to pursue a plan to restructure the Company’s operations in China. Although our Board believes that such a decision will benefit the Company in the long run, the restructuring and potential curtailing of the entirety or a portion of our PRC operations generating significant revenue, and sacrificing potential business opportunities, may negatively impact the Company. As a result, our revenue, net losses, and cash flow may differ materially from previous years and the market price of our common stock may significantly decrease or become worthless.
Failure to complete the proposed restructuring could negatively impact our business, financial condition, results of operations, or the price of our common stock.
On September 12, 2022, the Board authorized the Company’s management to pursue a plan to restructure operations in China. The restructuring is anticipated to be complete no later than the fourth quarter of 2023. If the proposed restructuring is not consummated as anticipated, we may be subject to a number of adverse effects, including that the value of our common stock may be materially and adversely affected to the extent that the current market price reflects a market assumption that the proposed restructuring will be completed by the anticipated deadline; our operations may incur losses; and certain costs related to the restructuring (such as legal, accounting, financial advisory and printing fees) will need to be paid even if the restructuring is not completed. Even if this restructuring is implemented successfully and on schedule, there might also be other issues and negative consequences arising from this restructuring such as a loss of continuity, a loss of customer base, internal control issues, changes in employee structure as well as other unexpected consequences, any of which may have a material adverse effect on our competitive position, business, financial condition and results of operations.
Although our audited financial statements are prepared by auditors that are currently subject to inspections by the PCAOB, there is no guarantee that future audit reports will be prepared by auditors that are subject to inspections by the PCAOB and, as such, future investors may be deprived of such inspections, which could result in limitations or restrictions to our access of the U.S. capital markets. Furthermore, trading in our securities may be prohibited under the HFCA Act or the Accelerating HFCA Act if the SEC subsequently determines our audit work is performed by auditors that the PCAOB is
unable to inspect or investigate completely, and as a result, U.S. national securities exchanges, such as the Nasdaq, may determine to delist our securities.
As an auditor of companies that are registered with the SEC and publicly traded in the United States and a firm registered with the PCAOB, our auditor is required under the laws of the United States to undergo regular inspections by the PCAOB to assess their compliance with the laws of the United States and professional standards. Although we have substantial operations within China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese government authorities, our auditor is currently inspected fully by the PCAOB.
Inspections of other auditors conducted by the PCAOB outside China have at times identified deficiencies in those auditors’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The lack of PCAOB inspections of audit work undertaken in China prevents the PCAOB from regularly evaluating auditors’ audits and their quality control procedures. As a result, to the extent that any component of our auditor’s work papers is or becomes located in China, such work papers will not be subject to inspection by the PCAOB. As a result, investors would be deprived of such PCAOB inspections, which could result in limitations or restrictions to our access to the U.S. capital markets.
As part of a continued regulatory focus in the United States on access to audit and other information currently protected by national law, in particular, China’s, in June 2019, a bipartisan group of lawmakers introduced bills in both houses of the U.S. Congress which, if passed, would require the SEC to maintain a list of issuers for which PCAOB is not able to inspect or investigate the audit work performed by a foreign public accounting firm completely. The proposed EQUITABLE Act prescribes increased disclosure requirements for these issuers and, beginning in 2025, the delisting from U.S. national securities exchanges such as the Nasdaq of issuers included on the SEC’s list for three consecutive years. It is unclear if this proposed legislation will be enacted. On May 20, 2020, the U.S. Senate passed the HFCA Act, which includes requirements for the SEC to identify issuers whose audit work is performed by auditors that the PCAOB is unable to inspect or investigate completely because of a restriction imposed by a non-U.S. authority in the auditor’s local jurisdiction. The U.S. House of Representatives passed the HFCA Act on December 2, 2020, and the HFCA Act was signed into law on December 18, 2020. Furthermore, on June 22, 2021, the U.S. Senate passed the AHFCA Act, which, if enacted, would amend the HFCA Act and require the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive years instead of three. On September 22, 2021, the PCAOB adopted a final rule implementing the HFCA Act, which provides a framework for the PCAOB to use when determining, as contemplated under the HFCA Act, whether the PCAOB is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a position taken by one or more authorities in that jurisdiction. The SEC adopted rules to implement the AHFCA Act and, pursuant to the AHFCA Act, the PCAOB has issued its report notifying the SEC of its determination that it is unable to inspect or investigate completely accounting firms headquartered in mainland China or Hong Kong. On November 5, 2021, the SEC approved the PCAOB’s Rule 6100, Board Determinations Under the HFCA ACT. Rule 6100 provides a framework for the PCAOB to use to determine whether it is unable to inspect or investigate registered public accounting firms located in a foreign jurisdiction because of a position taken by one or more authorities in that jurisdiction. On December 2, 2021, the SEC adopted amendments to finalize rules implementing the submission and disclosure requirements in the HFCA ACT. The rules apply to registrants the SEC identifies as having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the PCAOB is unable to inspect or investigate. On December 16, 2021, the PCAOB issued a report on its determinations that the Board is unable to inspect or investigate completely PCAOB-registered public accounting firms headquartered in mainland China and in Hong Kong because of positions taken by PRC authorities in those jurisdictions. The Board made these determinations pursuant to PCAOB Rule 6100, which provides a framework for how the PCAOB fulfills its responsibilities under the HFCA ACT.
On August 26, 2022, the CSRC, MOF, and the PCAOB signed a protocol, governing inspections and investigations of audit firms based in China and Hong Kong, taking the first step toward opening access for the PCAOB to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong. On December 15, 2022, the PCAOB determined that it was able to secure complete access to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong. The PCAOB vacated its previous 2021 determinations that the PCAOB was unable to inspect or investigate completely registered public accounting firms headquartered in China mainland and Hong Kong. However, should PRC authorities obstruct or otherwise fail to facilitate the PCAOB’s access in the future, the PCAOB may consider the need to issue a new determination.
Under the HFCA Act, our securities may be prohibited from trading on the Nasdaq or other U.S. stock exchanges if our auditor is not inspected by the PCAOB for three consecutive years, and this ultimately could result in our shares of common stock being delisted. While we understand that there has been dialogue among the CSRC, the SEC, and the PCAOB regarding the inspection of PCAOB-registered accounting firms in China, there can be no assurance that we will be able to comply with the
requirements imposed by U.S. regulators. Delisting of our common stock would force holders of our shares of common stock to sell their shares. The market price of our shares of common stock could be adversely affected as a result of anticipated negative impacts of these executive or legislative actions upon, as well as negative investor sentiment towards, companies with operations in China that are listed in the United States, regardless of whether these executive or legislative actions are implemented and regardless of our actual operating performance.
Uncertainties with respect to the PRC legal system could adversely affect our liquidity.
The PRC legal system is based on statutes. Prior court decisions may be cited for reference but have limited precedential value. Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. Because these laws and regulations are relatively new, and because of the limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.
PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.
Governmental control of currency conversion may limit the Company’s ability to utilize its cash balance effectively and affect the results of operations of our PRC subsidiaries.
The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. Ideanomics receives a substantial amount of their revenues in Renminbi or, alternatively, to finance their PRC subsidiaries in Renminbi. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments, and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval of SAFE PRC by complying with certain procedural requirements. Specifically, under the existing exchange restrictions, without prior approval of SAFE PRC, cash generated from the operations of its PRC subsidiaries in China may be used to pay dividends to its company. However, approval from or registration with appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. As a result, Ideanomics will need to obtain SAFE PRC approval to use the cash generated from the operations of their PRC subsidiaries to pay off their respective debt in a currency other than Renminbi owed to entities outside China, or to make other capital expenditure payments outside China in a currency other than Renminbi. The PRC government may at its discretion restrict access to foreign currencies for current account transactions in the future. If the foreign exchange control system prevents Ideanomics from obtaining such approval or otherwise hinders efficient financial management of the PRC subsidiaries, it may substantially curtail our operations and cause the value of our securities significantly decline or become worthless.
The Chinese government may intervene or influence the operations of Ideanomics’ business or the business of the combined company in the territory of PRC at any time, which could result in a material change in our operations and/or the value of our securities.
More than twenty percent (20%) of our revenues result from our operations in the PRC. The Chinese government may intervene or influence the operations of Ideanomics’ business or the business of the combined company in the territory of PRC at any time, which could result in a material change in our operations and/or the value of our securities. Also, recent statements by the Chinese government have indicated an intent to exert more oversight and control over offerings that are conducted overseas and/or over foreign investment in China-based and Hong Kong-based issuers. Any such action could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless.
Ideanomics expects to incur substantial expenses related integrating VIA subsequent to the merger.
Ideanomics expects to incur substantial expenses in connection with integrating the business, operations, networks, systems, technologies, policies and procedures of VIA with those of Ideanomics. While Ideanomics has assumed that a certain level of transaction and integration expenses would be incurred, there are a number of factors beyond its control that could affect the
total amount or the timing of its integration expenses. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately at the present time. Due to these factors, the transaction and integration expenses could be greater or could be incurred over a longer period of time than Ideanomics currently expects.
Following the merger, Ideanomics and VIA may be unable to successfully integrate their businesses and realize the anticipated benefits of the merger.
The proposed transaction involves the merger of two companies which currently operate as independent companies. The combined company will be required to devote significant management attention and resources to integrating the business practices and operations of Ideanomics and VIA in order to effectively realize synergies as a combined company, including opportunities to reduce combined costs, and reduce combined capital expenditures compared to both companies’ standalone plans. Potential difficulties the combined company may encounter in the integration process include the following:
•the inability to successfully combine the businesses of Ideanomics and VIA in a manner that permits the combined company to realize the growth, operations and cost synergies anticipated to result from the merger, which would result in the anticipated benefits of the merger, including projected financial targets, not being realized in the time frames currently anticipated or previously disclosed or at all;
•the additional complexities of combining two companies with different histories, regulatory restrictions, operating structures and markets
•the failure to retain key employees of either of the two companies;
•potential unknown liabilities and unforeseen increased expenses, delays or regulatory conditions associated with the merger; and
•performance shortfalls at one or both of the two companies as a result of the diversion of management’s attention caused by completing the merger and integrating the companies’ operations.
For all these reasons, you should be aware that it is possible that the integration process could result in the distraction of the combined company’s management, the disruption of the combined company’s ongoing business or inconsistencies in the combined company’s services, standards, controls, procedures and policies, any of which could adversely affect the ability of the combined company to achieve the anticipated benefits of the merger, or could otherwise adversely affect the business and financial results of the combined company.
The market price of Ideanomics common stock may decline as a result of the VIA Merger, and the issuance of shares of Ideanomics stock to VIA stockholders in the merger may have a negative impact on Ideanomics’ financial results, including earnings per share.
The market price of Ideanomics common stock may decline as a result of the VIA Merger, and holders of Ideanomics common stock (including holders of VIA common stock who received Ideanomics common stock and preferred stock in the Merger) could see a decrease in the value of their investment in Ideanomics stock, if, among other things, Ideanomics and the surviving company are unable to achieve the expected growth in earnings, or if the anticipated benefits, including synergies, cost savings, innovation and operational efficiencies, from the merger are not realized, or if the Merger and integration-related costs related to the merger are greater than expected. The market price of Ideanomics common stock may also decline if Ideanomics does not achieve the anticipated benefits of the Merger as rapidly or to the extent expected by financial or industry analysts or if the effects of the merger on Ideanomics’ financial position, results of operations or cash flows are not otherwise consistent with the expectations of financial or industry analysts. The issuance of shares of Ideanomics common stock in the merger could on its own have the effect of depressing the market price for Ideanomics common stock. In addition, some VIA stockholders may decide not to continue to hold the shares of Ideanomics common stock they receive as a result of the merger, and any such sales of Ideanomics common stock could have the effect of depressing the market price for Ideanomics common stock. Moreover, general fluctuations in stock markets could have a material adverse effect on the market for, or liquidity of, Ideanomics common stock, regardless of the actual operating performance of Ideanomics or the surviving company following the completion of the merger.
The combined company operates in a highly competitive market against a large number of both established competitors and new market entrants, and many market participants have substantially greater resources than the combined company.
Both the automobile industry generally, and the EV segment in particular, are highly competitive, and the combined company will be competing for sales with both ICE vehicles and EVs. Many of the combined company’s current and potential competitors have significantly greater financial, technical, manufacturing, marketing and other resources than the combined
company does and may be able to devote greater resources to the design, development, manufacturing, distribution, promotion, sale and support of their products. The combined company expects competition for EVs to intensify due to increased demand and a regulatory push for alternative fuel vehicles, continuing globalization, and consolidation in the worldwide automotive industry. Factors affecting competition include product quality and features, innovation and development time, pricing, reliability, safety, fuel economy, customer service, and financing terms. Increased competition may lead to lower vehicle unit sales and increased inventory, which may result in downward price pressure and adversely affect the combined company’s business, financial condition, operating results, and prospects.
The combined company’s EV products will compete for market share with vehicles powered by other vehicle technologies that may prove to be more attractive than that of the combined company’s. Such competition may ultimately impair the combined company’s business and revenue.
The combined company’s target market for EV products is serviced by manufacturers with existing customers and suppliers using proven and widely accepted fuel technologies. Additionally, its competitors are working on developing technologies that may be introduced in its target market. If any of these alternative technology vehicles can provide lower fuel costs, greater efficiencies, greater reliability or otherwise benefit from other factors resulting in an overall lower total cost of ownership, this may negatively affect the commercial success of the combined company’s products or make its products uncompetitive or obsolete.
The combined company may not be able to compete successfully in the market as a result of rapid changes in EV technology and the entrance of new and existing, larger manufacturers into the EV space.
The combined company’s products will be designed for use with, and depend upon, existing vehicle technology. As new companies and larger, existing vehicle manufacturers enter the EV space, the combined company may lose any technological advantage it may have had in the marketplace and suffer a decline in its position in the market. As technologies change, the combined company plans to upgrade or adapt its products to continue to provide products with the latest technology. However, the combined company’s products may become obsolete or the combined company’s research and development efforts may not be sufficient to adapt to changes in or to create the necessary technology to effectively compete. As a result, the combined company’s potential inability to adapt and develop the necessary technology may harm the combined company’s competitive position.
The combined company intends to target potential customers that are large corporations with substantial negotiating power, exacting product, quality and warranty standards and potentially competitive internal solutions.
Many of the combined company’s potential customers are large, multinational corporations with substantial negotiating power relative to it and, in some instances, that may have internal solutions that are competitive to the combined company’s products. These large, multinational corporations also have significant development resources, which may allow them to acquire or develop independently, or in partnership with others, competitive technologies. Meeting the technical requirements and securing design wins with any of these companies will require a substantial investment of the combined company’s time and resources. The combined company cannot assure you that its products will secure design wins from these or other companies or that it will generate meaningful revenue from the sales of its products to these key potential customers. If the combined company’s products are not selected by these large corporations or if these corporations develop or acquire competitive technology, it will have an adverse effect on the combined company’s business. In addition, if the combined company is unable to sell its products to such potential customers on certain terms, its prospects and results of operations may be adversely affected.
The automotive industry and the combined company’s technology are rapidly evolving and may be subject to unforeseen changes which could adversely affect the demand for our EVs.
The combined company may be unable to keep up with changes in EV technology or alternatives to electricity as a fuel source and, as a result, our competitiveness may suffer. Developments in alternative technologies, such as advanced diesel, ethanol, hybrids, fuel cells, including liquid hydrogen, or compressed natural gas, improvements in battery technologies utilized by its competitors or improvements in the fuel economy of the internal combustion engine, may materially and adversely affect our business and prospects in ways it does not currently anticipate. Any failure by the combined company to successfully react to changes in existing technologies could materially harm our competitive position and growth prospects.
VIA is an early-stage company with a history of losses, and expects to incur significant expenses and continuing losses for the foreseeable future.
VIA has incurred losses in the operation of its business related to research and development activities since its inception. VIA anticipates that its expenses will increase and that it will continue to incur losses in the future until at least the time it begins significant deliveries of its vehicles, which is not expected to occur before late 2023. Even if VIA is able to successfully develop and sell or lease its vehicles, there can be no assurance that they will be commercially successful and achieve or sustain profitability.
VIA expects the rate at which it will incur losses to be significantly higher in future periods as it, among other things, designs, develops and manufactures its vehicles; builds up inventories of parts and components for its vehicles; increases its sales and marketing activities, develops its distribution infrastructure; and increases its general and administrative functions to support its growing operations. VIA may find that these efforts are more expensive than it currently anticipates or that these efforts may not result in revenue, which would further increase VIA’s losses.
VIA has a limited operating history and has manufactured and sold a minimal number of lighter duty production vehicles to customers and may never develop or manufacture any future vehicles.
VIA was incorporated in 2014 and has a limited operating history in the automobile industry, which is continuously evolving, and has generated minimal revenue to date. VIA’s vehicles are in the development stage and VIA does not expect to begin significant deliveries of its vehicles until at least late 2023, if at all. VIA has no experience as an organization in high-volume manufacturing of the planned electric commercial vehicles. In addition, as a result of our limited operating history, as well as the limited financing we have received, our management concluded that there was substantial doubt about our ability to continue as a going concern.
As VIA attempts to transition from research and development activities to commercial production and sales, it is difficult, if not impossible, to forecast VIA’s future results, and VIA has limited insight into trends that may emerge and affect VIA’s business. The estimated costs and timelines that VIA has developed to reach full-scale commercial production are subject to inherent risks and uncertainties involved in the transition from a start-up company focused on research and development activities to the large-scale manufacture and sale of vehicles. There can be no assurance that VIA’s estimates related to the costs and timing necessary to complete design and engineering of its electric commercial vehicles and to tool its factories will prove accurate. These are complex processes that may be subject to delays, cost overruns and other unforeseen issues. For example, VIA may experience higher raw material waste in the composite process than it expects, resulting in higher operating costs and hampering its ability to be profitable.
We cannot assure you that VIA or its partners will be able to develop efficient, automated, cost-efficient manufacturing capability and processes, and reliable sources of component supplies that will enable VIA to meet the quality, price, engineering, design and production standards, as well as the production volumes, required to successfully mass market its electric commercial vehicles. Until such time as, and if, we obtain rights to a manufacturing site with sufficient manufacturing capability and process to meet our current business plan, we are unable to manufacture vehicles in sufficient quantities required for entrance into the marketplace. You should consider VIA’s business and prospects in light of the risks and significant challenges it faces as a new entrant into its industry, including, among other things, with respect to its ability to:
•design and produce safe, reliable and quality vehicles on an ongoing basis;
•obtain the necessary regulatory approvals in a timely manner;
•build a well-recognized and respected brand;
•establish and expand its customer base;
•successfully market not just VIA’s vehicles but also the other services it intends to or may provide;
•successfully service its vehicles after sales and maintain a good flow of spare parts and customer goodwill;
•improve and maintain its operational efficiency;
•execute and maintain a reliable, secure, high-performance and scalable technology infrastructure;
•predict its future revenues and appropriately budget for its expenses;
•attract, retain and motivate talented employees;
•anticipate trends that may emerge and affect its business;
•anticipate and adapt to changing market conditions, including technological developments and changes in competitive landscape; and
•navigate an evolving and complex regulatory environment.
If VIA fails to adequately address any or all of these risks and challenges, its business may be materially and adversely affected.
In addition, VIA has engaged in limited marketing activities to date, so even if VIA is able to bring its electric commercial vehicles to market on time and on budget, there can be no assurance that fleet customers will embrace VIA’s products in significant numbers. Market conditions, many of which are outside of VIA’s control and subject to change, including general economic conditions, the availability and terms of financing, the impacts and ongoing uncertainties created by the COVID-19 pandemic, fuel and energy prices, regulatory requirements and incentives, competition and the pace and extent of vehicle electrification generally, will impact demand for VIA’s electric commercial vehicles, and ultimately VIA’s success.
VIA does not currently have any binding orders, and there is no assurance that its non-binding pre-orders will be converted into binding orders or sales.
VIA’s business model is focused on building relationships with fleet customers, fleet management companies and dealers. To date, VIA has engaged in limited marketing activities and does not have any binding contracts with customers. The non-binding pre-orders may not be converted into binding orders or sales. Until such time that the design and development of VIA’s vehicles are complete, VIA’s vehicles are commercially available for purchase and VIA is able to scale up its marketing function to support sales, there will be uncertainty as to customer demand for VIA’s vehicles. A long wait time from the time a pre-order is made until the delivery of VIA’s vehicles is possible, and any delays beyond expected wait times could adversely impact user decisions on whether to ultimately make a purchase. Even if VIA is able to obtain binding orders, customers may limit their volume of purchases initially as they assess VIA’s vehicles and whether to make a broader transition to electric vehicles. This may be a long process and will depend on the safety, reliability, efficiency and quality of VIA’s vehicles. It will also depend on factors outside of VIA’s control, such as general market conditions and broader trends in fleet management and vehicle electrification that could impact customer buying decisions. As a result, there is significant uncertainty regarding demand for VIA’s vehicles and the sales that it will be able to achieve.
Certain of VIA’s strategic, development and deployment arrangements could be terminated or may not materialize into long-term contract arrangements and may restrict or limit VIA from developing electric commercial vehicles with other strategic partners.
VIA has arrangements with strategic, development and deployment partners and collaborators. Some of these arrangements are evidenced by memorandums of understanding, non-binding letters of intent, early stage agreements that are used for design and development purposes but will require renegotiation at later stages of development or production or master agreements that have yet to be implemented under separately negotiated statements of work, each of which could be terminated or may not materialize into next-stage or binding contracts or long-term contract arrangements. In addition, VIA does not currently have arrangements in place that will allow it to fully execute its business plan, including, without limitation, final supply and manufacturing agreements and fleet service and management agreements. Moreover, existing or future arrangements may contain limitations on VIA’s ability to enter into strategic, development and deployment arrangements with other partners. If VIA is unable to maintain such arrangements and agreements, or if such agreements or arrangements contain other restrictions from or limitations on developing electric commercial vehicles with other strategic partners, its business, prospects, financial condition and operating results may be materially and adversely affected.
VIA may encounter obstacles outside of its control that slow market adoption of electric commercial vehicles, such as regulatory requirements or infrastructure limitations.
VIA’s growth is highly dependent upon the adoption of electric commercial vehicles by the commercial and municipal fleet industry. The target demographics for VIA’s electric commercial vehicles are highly competitive. If the market for electric commercial vehicles does not develop at the rate or in the manner or to the extent that VIA expects, or if critical assumptions VIA has made regarding the efficiency of its electric commercial vehicles are incorrect or incomplete, VIA’s business, prospects, financial condition and operating results could be harmed. The fleet market for electric commercial vehicles is new and untested and is characterized by rapidly changing technologies, price competition, numerous competitors, evolving government regulation and industry standards and uncertain customer demands and behaviors.
VIA’s growth depends upon its ability to maintain its relationships with existing suppliers and to source new suppliers for its supply chain, while effectively managing the risks stemming from such relationships.
VIA’s growth is partially dependent upon its ability to enter into supplier agreements and maintain its relationships with suppliers who are critical and necessary to the output and production of VIA’s vehicles.
The supply agreements VIA has or may enter into with key suppliers in the future may have provisions where such agreements can be terminated in various circumstances, including potentially without cause. If these suppliers become unable to provide or experience delays in providing components or the supply agreements are terminated, it may be difficult to find replacement components. Changes in business conditions, pandemics, governmental changes, and other factors beyond VIA’s control or that VIA does not presently anticipate could affect VIA’s ability to receive components from VIA’s suppliers.
VIA also relies on a small group of suppliers to provide VIA with the components for VIA’s vehicles. While VIA seeks to obtain raw materials and components from multiple sources whenever possible, some of the raw materials and components used in its vehicles will be purchased by VIA from a single or limited source. VIA may be unable to obtain or engineer replacement raw materials and components for its single or limited source raw materials and components in the short term, or at all, at prices or quality levels that are acceptable to it, leaving VIA susceptible to supply shortages, long lead times for components and cancellations and supply changes. In addition, VIA could experience delays if its suppliers do not meet agreed upon timelines or experience capacity constraints.
VIA has not secured supply agreements for its components. VIA may be at a disadvantage in negotiating supply agreements for the production of its vehicles due to its limited operating history. In addition, there is the possibility that finalizing the supply agreements for the parts and components of VIA’s vehicles will cause significant disruption to VIA’s operations, or such supply agreements could be at costs that make it difficult for VIA to operate profitably.
If VIA does not enter into long-term supply agreements with guaranteed pricing for critical parts or components, VIA may be exposed to fluctuations in components, materials and equipment prices. Substantial increases in the prices for such components, materials and equipment would increase VIA’s operating costs and could reduce VIA’s margins if VIA cannot recoup the increased costs. Any attempts to increase the announced or expected prices of VIA’s vehicles in response to increased costs could be viewed negatively by VIA’s potential customers and could adversely affect VIA’s business, prospects, financial condition or operating results.
We will rely on complex machinery for our operations, and production of the VIA Vehicles will involve a significant degree of risk and uncertainty in terms of operational performance and costs.
We will rely on complex machinery for our operations, and any production of the VIA vehicles will involve a significant degree of risk and uncertainty in terms of operational performance and costs. Any manufacturing facility will consist of large-scale machinery combining many components. These components are likely to suffer unexpected malfunctions from time to time and will require repairs and spare parts to resume operations, which may not be available when needed. Unexpected malfunctions of these components may significantly affect the intended operational efficiency. Operational performance and costs can be difficult to predict and will be influenced by factors outside of our control, such as, but not limited to, the scarcity of natural resources, environmental hazards and remediation, costs associated with the decommissioning of machines, labor disputes and strikes, difficulty or delays in obtaining governmental permits, damages or defects in electronic systems, industrial accidents, pandemics, fire, and seismic activity and natural disasters. Should operational risks materialize, they may result in personal injury to or death of workers, the loss of production equipment, damage to manufacturing facilities, monetary losses, delays and unanticipated fluctuations in production, environmental damage, administrative fines, increased insurance costs and potential legal liabilities, all which could have a material adverse effect on our business, prospects, financial condition, and results of operations.
We may experience delays in realizing our projected timelines and cost and volume targets for the production, launch and ramp up of production of the VIA Vehicles and the modification of any manufacturing facility, which could adversely impact our business, prospects, financial condition, and results of operations.
We have no experience in the mass manufacturing the VIA vehicles. Our business depends on our ability to develop, manufacture, market and sell the VIA vehicles. Any delay in the financing, design, manufacture and launch of the VIA vehicles, including the obtaining of rights to a manufacturing facility, could materially damage our business, prospects, financial condition, and results of operations. Vehicle manufacturers often experience delays in the design, manufacture and commercial release of new products. To the extent we experience delays in the modification of the any facility or delays in the launch of the vehicles, our growth prospects could be adversely affected. We expect to rely on third party suppliers to develop and provide many of the key components and materials used in the VIA vehicles. To the extent our suppliers experience any
delays in providing us with or developing necessary components for a number of reasons, we could experience delays in meeting our projected timelines.
Increases in costs, disruption of supply or shortage of materials, in particular for lithium-ion battery cells, could harm Ideanomics Mobility's business.
Ideanomics Mobility and its suppliers may experience increases in the cost of or a sustained interruption in the supply or shortage of materials. Any such increase, supply interruption or shortage could materially and negatively impact Ideanomics Mobility’s business, prospects, financial condition and operating results. Ideanomics Mobility and its suppliers use various materials in their businesses and products, including for example lithium-ion battery cells and steel, and the prices for these materials fluctuate. The available supply of these materials may be unstable, depending on market conditions and global demand, including as a result of increased production of electric commercial vehicles by Ideanomics Mobility’s competitors, and could adversely affect Ideanomics Mobility’s business and operating results. For instance, Ideanomics Mobility is exposed to multiple risks relating to lithium-ion battery cells. These risks include:
•an increase in the cost, or decrease in the available supply, of materials used in the cells;
•disruption in the supply of cells due to quality issues or recalls by battery cell manufacturers; and
•fluctuations in the value of any foreign currencies in which battery cell and related raw material purchases are or may be denominated against the purchasing entity’s operating currency.
Ideanomics Mobility’s business is dependent on the continued supply of battery cells for the battery packs used in Ideanomics Mobility’s electric vehicles. We may have limited flexibility in changing its supplier in the event of any disruption in the supply of battery cells which could disrupt production of our electric vehicles. Furthermore, fluctuations or shortages in petroleum and other economic conditions may cause us to experience significant increases in freight charges and material costs. Substantial increases in the prices for our materials or prices charged to Ideanomics Mobility, such as those charged by battery cell suppliers, would increase our operating costs, and could reduce its margins if the increased costs cannot be recouped through increased commercial vehicle sales prices. Any attempts to increase product prices in response to increased material costs could result in cancellations of orders and therefore materially and adversely affect our brands, image, business, prospects and operating results.
VIA currently targets many customers, suppliers and partners that are large corporations with substantial negotiating power, exacting product, quality and warranty standards and potentially competitive internal solutions. If VIA is unable to sell its products to these customers or is unable to enter into agreements with suppliers and partners on satisfactory terms, its prospects and results of operations may be adversely affected.
Many of VIA’s current and potential customers, suppliers and partners are large, multinational corporations with substantial negotiating power relative to it and, in some instances, may have internal solutions that are competitive to VIA’s products. These large, multinational corporations also have significant development resources, which may allow them to acquire or develop independently, or in partnership with others, competitive technologies. Meeting the technical requirements and securing design wins with any of these companies could require a substantial investment of VIA’s time and resources. VIA cannot assure you that its products will secure design wins from these or other companies or that it will generate meaningful revenue from the sales of its products to these key potential customers. If VIA’s products are not selected by these large corporations or if these corporations develop or acquire competitive technology, it may have an adverse effect on VIA’s business.
As VIA expands into new territories, it may encounter stronger market resistance than it currently expects, including from incumbent competitors in those territories.
VIA will face risks associated with any potential expansion of its operations into new territories, including possible unfavorable regulatory, political, tax and labor conditions, which could harm its business. In addition, in certain of these markets, VIA may encounter incumbent competitors with established technologies and customer bases, lower prices or costs, and greater brand recognition. VIA anticipates having international operations and subsidiaries that are subject to the legal, political, regulatory and social requirements and economic conditions in these jurisdictions. However, VIA has no experience to date selling or leasing and servicing its vehicles internationally, and such expansion would require VIA to make significant expenditures, including the hiring of local employees and establishing facilities, in advance of generating any revenue. These risks include:
•conforming VIA’s electric commercial vehicles to various international regulatory requirements where its electric commercial vehicles are sold, which requirements may change over time;
•difficulties in obtaining or complying with various licenses, approvals, certifications and other governmental authorizations necessary to manufacture, sell or service its electric commercial vehicles in any of these jurisdictions;
•difficulty in staffing and managing foreign operations;
•difficulties attracting customers in new jurisdictions;
•foreign government taxes, regulations and permit requirements, including foreign taxes that VIA may not be able to offset against taxes imposed upon VIA in the U.S.;
•a heightened risk of failure to comply with corporation and employment tax laws
•fluctuations in foreign currency exchange rates and interest rates, including risks related to any interest rate swap or other hedging activities VIA undertakes;
•U.S. and foreign government trade restrictions, tariffs and price or exchange controls;
•foreign labor laws, regulations and restrictions;
•changes in diplomatic and trade relationships;
•political instability, natural disasters, global health concerns, including health pandemics such as the COVID-19 pandemic, war or events of terrorism; and
•the strength of international economies.
If VIA fails to successfully address these risks, VIA’s business, prospects, financial condition and operating results could be materially harmed.
VIA has grown its business rapidly, and expects to continue to expand its operations significantly. Any failure to manage its growth effectively could adversely affect its business, prospects, operating results and financial condition.
Any failure to manage our growth effectively could materially and adversely affect our business, prospects, financial condition, and results of operations. Our future operating results depend to a large extent on our ability to manage our expansion and growth successfully. However, we have no experience in manufacturing the VIA vehicles. There can be no assurance that we will be able to develop efficient, automated, low-cost manufacturing capabilities and processes or reliable sources of component supply that will enable us to meet the quality, price, engineering, design and production standards, as well as the production volumes, required to successfully market the VIA vehicles. Any failure to develop such manufacturing capabilities and processes within our projected costs and timelines could stunt our growth and impair our ability to produce, market, service and sell the VIA vehicles successfully. Further, we will need to hire and train sufficient personnel and develop management, financial, accounting, information and operating systems to support our current operations and our expected growth in accordance with our business plan.
Any failure to manage VIA’s growth effectively could materially and adversely affect VIA’s business, prospects, operating results and financial condition. VIA intends to expand its operations significantly. VIA expects its future expansion to include:
• expanding the management team;
• hiring and training new personnel;
• leveraging consultants to assist with company growth and development;
• forecasting production and revenue;
• controlling expenses and investments in anticipation of expanded operations;
• establishing or expanding design, production, sales and service facilities;
• implementing and enhancing administrative infrastructure, systems and processes; and
• expanding into new markets.
VIA intends to continue to hire a significant number of additional personnel, including software engineers, design and production personnel and service technicians for its electric commercial vehicles. Because VIA’s electric commercial vehicles
are based on a different technology platform than traditional internal combustion engines, individuals with sufficient training in electric commercial vehicles may not be available to hire, and as a result, VIA will need to expend significant time and expense training any newly hired employees. Competition for individuals with experience designing, producing and servicing electric commercial vehicles and their software is intense, and VIA may not be able to attract, integrate, train, motivate or retain additional highly qualified personnel. The failure to attract, integrate, train, motivate and retain these additional employees could seriously harm VIA’s business, prospects, financial condition and operating results.
We may not be able to accurately estimate the supply and demand for the VIA vehicles, which could result in inefficiencies in our business and hinder our ability to generate revenue. If we fail to accurately predict our manufacturing requirements, we could incur additional costs or experience delays.
It is difficult to predict our future revenues and appropriately budget for our expenses, and we may have limited insight into trends that may emerge and affect our business. We will be required to provide forecasts of our demand to certain of our suppliers in advance of the scheduled delivery of the VIA vehicles to our prospective customers. Currently, there is no historical basis for estimating the demand for the VIA vehicles, or our ability to develop, manufacture and deliver the VIA vehicles. If we overestimate our requirements, we may have excess inventory, which would increase our costs. If we underestimate our requirements, our suppliers may have inadequate inventory, which could interrupt the manufacture of the VIA vehicles and result in delays in shipments and revenues. In addition, lead times for materials and components that our suppliers order may vary significantly and depend on factors such as the specific supplier, contract terms and demand for each component at a given time. If we fail to order sufficient quantities of components in a timely manner, the delivery of VIA vehicles to customers could be delayed, which would harm our business, prospects, financial condition, and results of operations.
Our business may be adversely affected by labor and union activities.
Although none of our employees are currently represented by a labor union, it is common throughout the automobile industry and other industries in which we compete generally for many employees to belong to a union, which can result in higher employee costs and increased risk of work stoppages. We may also directly and indirectly depend upon other companies with unionized work forces, such as parts suppliers and trucking and freight companies, and work stoppages or strikes organized by such unions could have a material adverse impact on our business, financial condition or operating results.
If we are unable to address the service requirements of our future customers, our business will be materially and adversely affected.
Demand for the VIA vehicles will depend, in part, on the availability of service support options. Servicing electric vehicles is different than servicing internal combustion engine or hybrid vehicles and requires specialized skills, including high voltage training and servicing techniques. As the VIA vehicles are not yet in production, we do not have experience servicing the VIA vehicles. We plan to provide service for the VIA vehicles in various ways, including through third-party service providers. Some potential customers may choose not to purchase the VIA vehicles because of the lack of a more widespread service network. If we are unable to satisfactorily service our future customers, our ability to generate customer loyalty, grow our business and sell the VIA vehicles could be impaired.
There are complex software and technology systems that need to be developed in coordination with vendors and suppliers in order to reach production for VIA’s electric commercial vehicles, and there can be no assurance such systems will be successfully developed.
VIA’s vehicles will use a substantial amount of third-party and in-house software codes and complex hardware to operate. The development of such advanced technologies is inherently complex, and VIA will need to coordinate with its vendors and suppliers in order to reach production for its electric commercial vehicles. Defects and errors may be revealed over time and VIA’s control over the performance of third-party services and systems may be limited. Thus, VIA’s potential inability to develop the necessary software and technology systems may harm its competitive position.
VIA relies on third-party suppliers to develop a number of emerging technologies for use in its products, including lithium-ion battery technology. These technologies are not currently, and may not ever be, commercially viable. There can be no assurances that VIA’s suppliers will be able to meet the technological requirements, production timing, and volume requirements to support its business plan. In addition, the technology may not comply with the cost, performance useful life and warranty characteristics VIA anticipates in its business plan. As a result, VIA’s business plan could be significantly impacted, and VIA may incur significant liabilities under warranty claims which could adversely affect its business, prospects and results of operations.
The discovery of defects in VIA’s vehicles may result in delays in new model launches, recall campaigns or increased warranty costs. Additionally, discovery of such defects may result in a decrease in the residual value of its vehicles, which may materially harm its business.
VIA’s electric commercial vehicles may contain defects in design and production that may cause them not to perform as expected or may require repair. Vehicle manufacturers are required to remedy defects related to vehicle safety and emissions through recall campaigns, and must recall vehicles if they determines that they do not comply with any applicable FMVSS. In addition, if a vehicle manufacturer determines that a safety or emissions defect or a non-compliance exists with respect to certain of its vehicles prior to the start of production, the launch of such vehicle could be delayed until the manufacturer remedies the defect or non-compliance. The costs associated with any protracted delay in new model launches necessary to remedy such defect, and the cost of providing a free remedy for such defects or non-compliance in vehicles that have been sold, could be substantial. VIA will also be obligated under the terms of its vehicle warranty to make repairs or replace parts in its vehicles at its expense for a specified period of time. Therefore, any failure rate that exceeds VIA’s assumptions may result in unanticipated losses.
VIA’s products (including vehicles and components) have not completed testing and VIA currently has a limited frame of reference by which to evaluate the performance of its electric commercial vehicles upon which its business prospects depend. There can be no assurance that VIA will be able to detect and fix any defects in its electric commercial vehicles. VIA may experience recalls in the future, which could adversely affect VIA’s brand and could adversely affect its business, prospects, financial condition and operating results. VIA’s electric commercial vehicles may not perform consistent with customers’ expectations or consistent with other vehicles which may become available. Any product defects or any other failure of VIA’s electric commercial vehicles and software to perform as expected could harm VIA’s reputation and result in a significant cost due to warranty replacement and other expenses, a loss of customer goodwill due to failing to meet maintenance targets in VIA’s total cost of ownership calculations, adverse publicity, lost revenue, delivery delays, product recalls and product liability claims and could have a material adverse impact on VIA’s business, prospects, financial condition and operating results. Additionally, discovery of such defects may result in a decrease in the residual value of VIA’s vehicles, which may materially harm its business. Moreover, problems and defects experienced by other electric vehicle companies could by association have a negative impact on perception and customer demand for VIA’s electric commercial vehicles.
Insufficient warranty reserves to cover future warranty claims could adversely affect our business, prospects, financial condition, and results of operations.
Once the VIA vehicles are in production, we will need to maintain warranty reserves to cover any warranty-related claims. If our warranty reserves are inadequate to cover such future warranty claims, our business, prospects, financial condition, and results of operations could be materially and adversely affected. We may become subject to significant and unexpected warranty expenses. There can be no assurances that then existing warranty reserves will be sufficient to cover all claims.
VIA may become subject to product liability claims, which could harm its financial condition and liquidity if it is not able to successfully defend or insure against such claims.
Product liability claims, even those without merit or those that do not involve VIA’s products, could harm VIA’s business, prospects, financial condition and operating results. The automobile industry in particular experiences significant product liability claims, and VIA faces inherent risk of exposure to claims in the event VIA’s electric commercial vehicles do not perform or are claimed to not have performed as expected. As is true for other commercial vehicle suppliers, VIA expects in the future that its electric commercial vehicles may be involved in crashes resulting in death or personal injury. Additionally, product liability claims that affect VIA’s competitors may cause indirect adverse publicity for VIA and its products. A successful product liability claim against VIA could require VIA to pay a substantial monetary award. VIA’s risks in this area are particularly pronounced given the stage of development. Moreover, a product liability claim against VIA or its competitors could generate substantial negative publicity about VIA’s products and business and could have a material adverse effect on VIA’s brand, business, prospects, financial condition and operating results.
VIA may incur significant costs and expenses in connection with protecting and enforcing its intellectual property rights, including through litigation. Additionally, even if VIA is able to take measures to protect its intellectual property, third parties may independently develop technologies that are the same or similar to VIA.
VIA may not be able to prevent others from unauthorized use of its intellectual property, which could harm its business and competitive position. VIA relies on a combination of trade secrets (including know-how), employee and third-party nondisclosure agreements, copyrights, trademarks, intellectual property licenses, and other contractual rights to establish and
protect its rights in its technology. Despite VIA’s efforts to protect its proprietary rights, third parties may attempt to copy or otherwise obtain and use VIA’s intellectual property or seek court declarations that they do not infringe upon its intellectual property rights. Monitoring unauthorized use of VIA’s intellectual property is difficult and costly, and the steps VIA has taken or will take may not prevent misappropriation. From time to time, VIA may have to resort to litigation to enforce its intellectual property rights, which could result in substantial costs and diversion of its resources.
Patent, trademark and trade secret laws vary significantly throughout the world. A number of foreign countries do not protect intellectual property rights to the same extent as do the laws of the United States. Therefore, VIA’s intellectual property rights may not be as strong or as easily enforced outside of the United States. Failure to adequately protect VIA’s intellectual property rights could result in its competitors offering similar products, potentially resulting in the loss of some of VIA’s competitive advantage and a decrease in its revenue which, would adversely affect its business, prospects, financial condition and operating results.
VIA’s vehicles will make use of lithium-ion battery cells, which can be dangerous under certain circumstances, including the possibility that such cells catch fire or vent smoke and flame.
The battery packs within VIA’s electric commercial vehicles will make use of lithium-ion cells. On rare occasions, lithium-ion cells can rapidly release the energy they contain by venting smoke and flames in a manner that can ignite nearby materials as well as other lithium-ion cells. While the battery pack is designed to contain any single cell’s release of energy without spreading to neighboring cells, a field or testing failure of VIA’s vehicles or other battery packs that it produces could occur, which could subject VIA to lawsuits, product recalls, or redesign efforts, all of which would be time consuming and expensive. Also, negative public perceptions regarding the suitability of lithium-ion cells for automotive applications or any future incident involving lithium-ion cells, such as a vehicle or other fire, even if such incident does not involve VIA’s vehicles, could seriously harm its business and reputation.
In addition, VIA intends to store its battery packs in its factories prior to installation in its electric commercial vehicles. Any mishandling of battery cells may cause disruption to the operation of VIA’s factories. While VIA has implemented safety procedures related to the handling of the cells, a safety issue or fire related to the cells could disrupt its operations. Such damage or injury could lead to adverse publicity and potentially a safety recall. Moreover, any failure of a competitor’s electric vehicle or energy storage product may cause indirect adverse publicity for VIA and its products. Such adverse publicity could negatively affect VIA’s brand and harm its business, prospects, financial condition and operating results.
We are highly dependent upon the global transportation infrastructure to receive components and parts and/or to ship our products; delays in these shipments could adversely affect our business, prospects, financial condition, and results of operations.
We are highly dependent upon the global transportation systems we use to receive components and parts and to ship our products, including surface, ocean and air freight. Our attempts to closely match our inventory levels to our product demand intensify the need for our transportation systems to function effectively and without delay. The transportation network is subject to disruption or congestion from a variety of causes, including labor disputes or port strikes, acts of war or terrorism, natural disasters and congestion resulting from higher shipping volumes. If surface, ocean, and/or air freight transit times or delivery times increase unexpectedly for any reason, our ability to deliver products and/or receive components and parts on time would be materially adversely affected and result in delayed or lost revenue. In addition, if increases in fuel prices occur, our transportation costs would likely increase. A prolonged transportation disruption or a significant increase in the cost of freight could materially adversely affect our business, prospects, financial condition, and results of operations.
VIA may not succeed in establishing, maintaining and strengthening its brand, which would materially and adversely affect customer acceptance of its vehicles and components and its business, revenues and prospects.
VIA’s business and prospects heavily depend on its ability to develop, maintain and strengthen the VIA brand. If VIA is not able to establish, maintain and strengthen its brand, it may lose the opportunity to build a critical mass of customers. VIA’s ability to develop, maintain and strengthen the VIA brand will depend heavily on the success of its marketing efforts. The electric vehicle industry is intensely competitive, and VIA may not be successful in building, maintaining and strengthening its brand. VIA’s current and potential competitors, particularly electric vehicle manufacturers headquartered in the United States, Japan, the European Union and China, have greater name recognition, broader customer relationships and substantially greater marketing resources than VIA does. If VIA does not develop and maintain a strong brand, its business, prospects, financial condition and operating results will be materially and adversely impacted.
VIA is likely to face competition from a number of sources, which may impair its revenues, increase its costs to acquire new customers, and hinder its ability to acquire new customers.
The vehicle electrification market has expanded significantly since VIA was founded. The commercial vehicle electrification market in which VIA operates features direct competition which includes traditional vehicle manufacturers producing electric commercial vehicles that have historically focused on the consumer market, including but not limited to Daimler AG, Volkswagen, Fiat, Ford and General Motors and electrification solution providers such as Rivian, Hyliion, Workhorse Group Inc., Nikola, Proterra, Arrival and Evobus, possibly expanding into the commercial markets. If these companies or other vehicle manufacturers or providers of electrification solutions expand into the commercial markets, VIA will face increased direct competition, which may impair VIA’s revenue, increase its costs to acquire new customers, hinder its ability to acquire new customers, have a material adverse effect on VIA’s product prices, market share, revenue and profitability.
VIA may not be able to accurately estimate the supply and demand for its vehicles, which could result in a variety of inefficiencies in its business and hinder its ability to generate revenue. If it does fail to accurately predict its manufacturing requirements, it could incur additional costs or experience delays.
It is difficult to predict VIA’s future revenues and appropriately budget for its expenses, and VIA may have limited insight into trends that may emerge and affect its business. VIA will be required to provide forecasts of its demand to its suppliers several months prior to the scheduled delivery of products to its prospective customers. Currently, there is no historical basis for making judgments on the demand for VIA’s vehicles or its ability to develop, manufacture, and deliver vehicles, or VIA’s profitability in the future. If VIA overestimates its requirements, its suppliers may have excess inventory, which indirectly would increase VIA’s costs. If VIA underestimates its requirements, its suppliers may have inadequate inventory, which could interrupt manufacturing of its products and result in delays in shipments and revenues. In addition, lead times for materials and components that VIA’s suppliers order may vary significantly and depend on factors such as the specific supplier, contract terms and demand for each component at a given time. If VIA fails to order sufficient quantities of product components in a timely manner, the delivery of vehicles to its customers could be delayed, which would harm VIA’s business, financial condition and operating results.
VIA’s electric commercial vehicles will compete for market share with vehicles powered by other vehicle technologies that may prove to be more attractive than VIA’s vehicle technologies.
VIA’s target market currently is serviced by manufacturers with existing customers and suppliers using proven and widely accepted fuel technologies. Additionally, VIA’s competitors are working on developing technologies that may be introduced in VIA’s target market. Similarly, improvement in competitor performance or technology may result in the infrastructure required to operate VIA vehicles, such as for charging, becoming comparatively expensive and reducing the economic attractiveness of its vehicles. If any of these alternative technology vehicles can provide lower fuel costs, greater efficiencies, greater reliability or otherwise benefit from other factors resulting in an overall lower total cost of ownership, this may negatively affect the commercial success of VIA’s vehicles or make VIA’s vehicles uncompetitive or obsolete.
If any of VIA’s suppliers become economically distressed or go bankrupt, VIA may be required to provide substantial financial support or take other measures to ensure supplies of components or materials, which could increase its costs, affect its liquidity or cause production disruptions.
VIA expects to purchase various types of equipment, raw materials and manufactured component parts from its suppliers. If these suppliers experience substantial financial difficulties, cease operations, or otherwise face business disruptions, VIA may be required to provide substantial financial support to ensure supply continuity or would have to take other measures to ensure components and materials remain available. Any disruption could affect VIA’s ability to deliver vehicles and could increase VIA’s costs and negatively affect its liquidity and financial performance.
VIA is subject to governmental export and import control laws and regulations. VIA’s failure to comply with these laws and regulations could have an adverse effect on its business, prospects, financial condition and operating results.
VIA’s products and solutions are subject to export control and import laws and regulations, including the U.S. Export Administration Regulations, U.S. Customs regulations and various economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Control. U.S. export control laws and regulations and economic sanctions prohibit the shipment of certain products and services to U.S. embargoed or sanctioned countries, governments and persons. In addition, complying with export control and sanctions regulations for a particular sale may be time-consuming and result in the delay or loss of sales opportunities.
Exports of VIA’s products and technology must be made in compliance with these laws and regulations. For example, VIA may require one or more licenses to import or export certain vehicles, components or technologies to its research and development teams in various countries and may experience delays in obtaining the requisite licenses to do so. Audits in connection with the application for licenses may increase areas of noncompliance that could result in delays or additional costs. If VIA fails to comply with these laws and regulations, VIA and certain of its employees could be subject to additional audits, substantial civil or criminal penalties, including the possible loss of export or import privileges, fines, which may be imposed on VIA and responsible employees or managers and, in extreme cases, the incarceration of responsible employees or managers.
As VIA expands, it may encounter unforeseen import/export charges, which could increase its costs and hamper its profitability. In addition, changes in VIA’s products or solutions or changes in applicable export or import laws and regulations may create delays in the introduction and sale of VIA’s products and solutions in new territories, increase costs due to changes in import and export duties and taxes, prevent VIA’s customers from deploying VIA’s products and solutions or, in some cases, prevent the export or import of VIA’s products and solutions to certain countries, governments or persons altogether. Any change in export or import laws and regulations, shift in the enforcement or scope of existing laws and regulations, or change in the countries, governments, persons or technologies targeted by such laws and regulations, could also result in decreased use of VIA’s products and solutions or in VIA’s decreased ability to export or sell its products and solutions to customers.
Any decreased use of VIA’s products and solutions or limitation on its ability to export or sell its products and solutions would likely adversely affect VIA’s business, prospects, financial condition and operating results.
We may be subject to damages resulting from claims that it or its employees have wrongfully used or disclosed alleged trade secrets of its employees’ former employers.
Many of our employees were previously employed by competitors or by suppliers to competitors. We may be subject to claims that it or these employees have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. A loss of key personnel or their work product could hamper or prevent our ability to commercialize our products, which could severely harm its business. Even if we are successful in defending against these claims, litigation could result in substantial costs and demand on management resources.
Increased safety, emissions, fuel economy or other regulations may result in higher costs, cash expenditures and/or sales restrictions.
The motorized vehicle industry is governed by a substantial amount of government regulation, which often differs by state and region. Government regulation has arisen, and proposals for additional regulation are advanced, primarily out of concern for the environment, vehicle safety and energy independence. In addition, many governments regulate local product content and/or impose import requirements as a means of creating jobs, protecting domestic producers and influencing the balance of payments. The cost to comply with existing government regulations is substantial, and future, additional regulations could have a substantial adverse impact on VIA’s financial condition. For example, VIA is, and will be, subject to extensive vehicle safety and testing and environmental regulations in the United States, Canada, Mexico and other jurisdictions in which it may sell its vehicles.
Any unauthorized control or manipulation of the information technology systems in our electric vehicles could result in loss of confidence in us and our electric vehicles and harm our business.
Our electric vehicles contain complex information technology systems and built-in data connectivity to accept and install periodic remote updates to improve or update functionality. We have designed, implemented and tested security measures intended to prevent unauthorized access to our information technology networks, our electric vehicles and related systems. However, hackers may attempt to gain unauthorized access to modify, alter and use such networks, trucks and systems to gain control of or to change our electric vehicles’ functionality, user interface and performance characteristics, or to gain access to data stored in generated by the vehicles. Future vulnerabilities could be identified and our efforts to remediate such vulnerabilities may not be successful. Any unauthorized access to or control of our electric vehicles, or any loss of customer data, could result in legal claims or proceedings and remediation of such problems could result in significant, unplanned capital expenditures. In addition, regardless of their veracity, reports of unauthorized access to our electric vehicles or data, as well as other factors that may result in the perception that our electric vehicles or data are capable of being “hacked,” could negatively affect our brand and harm our business, prospects, financial condition and operating results.
VIA does not currently have a third-party retail product distribution network.
Third-party dealer networks are the traditional method of vehicle sales distribution. However, VIA does not currently have a traditional third-party retail product distribution network and may sell directly to commercial fleet operators and fleet management companies. If VIA does not engage a traditional third-party retail product distribution network, it will have to build an in-house sales and marketing function at VIA, which may be expensive and time consuming. In addition, if VIA does not engage a traditional third-party retail product distribution network, the lack of such network may result in lost opportunities to generate sales and could limit VIA’s ability to grow. If VIA uses only an in-house sales and marketing team and such team is not effective, VIA’s results of operations and financial conditions could be adversely affected.
Our insurance strategy may not be adequate to protect itself from all business risks.
In the ordinary course of business, we may be subject to losses resulting from product liability, accidents, acts of God and other claims against us, for which we may have limited or no insurance coverage. We may not maintain as much insurance coverage as other OEMs do, and in some cases, we may not maintain any at all. Additionally, the policies that we do have may include significant deductibles, and we cannot be certain that its insurance coverage will be sufficient to cover all future claims against us. A loss that is uninsured or exceeds policy limits may require us to pay substantial amounts, which could adversely affect our business, prospects, financial condition and operating results.
VIA does not currently offer leasing and financing options for its vehicles, and it may be unable to offer attractive leasing and financing options in the future, which would adversely affect consumer demand for its vehicles. In addition, offering leasing and financing options to customers in the future could expose VIA to credit risk.
VIA currently does not have any arrangements in place to provide leasing and financing options for the purchases of its vehicles and cannot provide any assurance that may have leasing and financing options available for its potential customers in the future. VIA believes that the ability to offer attractive leasing and financing options is particularly relevant to customers in the vehicle market in which it competes, and if it is unable to offer its customers an attractive option to finance the purchase of or lease its future vehicles, such failure could substantially reduce the population of potential customers and decrease demand for its vehicles and adversely affect its results of operation and financial condition.
If there is inadequate access to charging stations, VIA’s business could be materially and adversely affected.
Demand for VIA’s vehicles will depend in part on the availability of charging infrastructure as its vehicles will require the use of charging stations to recharge its batteries. VIA has not built, and currently does not plan to build, any commercial charging infrastructure, and VIA’s customers will have to rely on self-owned and publicly accessible charging infrastructure. While the prevalence of public charging stations has been increasing, they are significantly less widespread than gas stations. In addition, many of VIA’s potential customers do not currently have a sufficient self-owned charging infrastructure in place to meet their individual needs or expectations. As a result, some potential customers may choose not to purchase VIA’s vehicles because of the lack of a more widespread public charging infrastructure at the time of sale or the cost of installing a sufficient self-owned charging infrastructure, adversely affecting VIA’s growth, results of operation and financial condition.
Regulatory requirements may have a negative effect upon our business.
All vehicles sold must comply with international, federal and state motor vehicle safety standards. In the United States, vehicles that meet or exceed all federally mandated safety standards are certified under the federal regulations. Rigorous testing and the use of approved materials and equipment are among the requirements for achieving federal certification. The VIA vehicles will be subject to substantial regulation under federal, state and local laws and standards. These regulations include those promulgated by the U.S. EPA, the NHTSA, the PHMSA and various state boards, and compliance certification is required for each new model year. These laws and standards are subject to change from time to time, and we could become subject to additional regulations in the future. In addition, federal, state and local laws and industrial standards for electric vehicles are still developing. Compliance with these regulations and standards could be challenging, burdensome, time consuming and expensive. If compliance results in delays or substantial expenses, our business, prospects, financial condition, and results of operations could be adversely affected.
We are headquartered in New York, New York. Our principal facilities include properties in North America, Europe and Asia for manufacturing and assembly, warehousing, engineering, retail and service locations and administrative and sales offices. Our facilities are suitable and adequate for the conduct of our business. We primarily lease all facilities. The following table sets forth our primary facilities:
Subsidiary
Facility
Location
Ideanomics Mobility - Multi-use facility
Retail
Harrison, NJ
Energica US
Distributor and service
San Francisco, CA
Solectrac
HQ and manufacturing
Windsor, CA
US Hybrid
Manufacturing
Torrance, CA
WAVE
HQ and manufacturing
Salt Lake City, Utah
Energica Italy
Manufacturing
Soliera, Italy
ITEM 3. LEGAL PROCEEDINGS
Refer to Note 19 of the Notes to Consolidated Financial Statements included in Part 4, Item 8 of this Annual Report on Form 10-K, which is incorporated herein by reference.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Approximate Number of Holders of Our Common Stock
As of March 28, 2023, there were approximately 386 holders of record of the Company’s common stock. This number excludes the shares of the Company’s common stock beneficially owned by shareholders holding stock in securities trading accounts through DTC, or under nominee security position listings.
Dividend Policy
The Company has never declared or paid a cash dividend. Any future decisions regarding dividends will be made by the Company’s Board. The Company currently intends to retain and use any future earnings for the development and expansion of the business and does not anticipate paying any cash dividends in the foreseeable future. The Company’s Board has complete discretion on whether to pay dividends, subject to the approval of the Company’s shareholders. Even if the Company’s Board decides to pay dividends, the form, frequency and amount will depend upon future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the Board may deem relevant. In addition, the Company’s ability to declare and pay dividends is dependent on the Company’s ability to declare dividends and profits in the PRC subsidiaries. PRC rules may greatly restrict and limit the ability of the Company’s subsidiaries to declare dividends which, in addition to restricting the Company’s cash flow, limits its ability to pay dividends to its shareholders.
Securities Authorized for Issuance Under Equity Compensation Plans
See Part III—Item 12—Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters—“Securities Authorized for Issuance Under Equity Compensation Plans.”
Recent Sales of Unregistered Securities
The Company did not sell any equity securities during the fiscal year ended December 31, 2022 that were not previously disclosed in a quarterly report on Form 10-Q or a current report on Form 8-K that was filed during the 2022 fiscal year.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management’s discussion and analysis is presented in five sections as below and should be read in conjunction with our consolidated financial statements and the notes thereto and the other financial information appearing elsewhere in this report on Form 10-K. In addition to historical information, the following discussion contains certain forward-looking information. See “Special Note Regarding Forward Looking Statements” above for certain information concerning those forward-looking statements.
•Overview
•Results of Operations
•Liquidity and Capital Resources
•Outlook
•Critical Accounting Policies and Estimates
OVERVIEW
Ideanomics is an American multinational company, headquartered in New York. Ideanomics has a clear mission – to accelerate the commercial adoption of electric vehicles.
The company is targeting the fast-growing and high value last and mid mile delivery sector as the main driver for future growth. Through its subsidiaries VIA, acquired January 31, 2023, and WAVE Charging, Ideanomics offers a cost-efficient, integrated EV and charging solution for commercial fleets, which has been sorely lacking in the market. Ideanomics Capital enables faster deployment with “as a Service” financing models, which yield consistent and long-term revenue. The company's strategic investments in subsidiaries targeting off-road, two-wheelers, and power trains and retrofits continue to generate immediate revenue with clear room to grow. Across all its subsidiaries, teams are collaborating to bring to market a better zero emission solution.
Ideanomics conducts its operations globally in one segment with three business units – Ideanomics Mobility, Ideanomics Energy, and Ideanomics Capital. Ideanomics Mobility’s focus is electric vehicles, including mid and last mile delivery trucks and vans, tractors, and two-wheelers. Ideanomics Energy’s focus is charging and energy-related products and services. Ideanomics Capital’s focus is providing financing support for the Company’s Mobility and Energy business units.
Principal Products or Services and Their Markets
Ideanomics Mobility
The Ideanomics Mobility business unit contains the Company’s vehicle-related operations, selling differentiated electric vehicles across several categories, and providing technology and components to other OEMs. Ideanomics Mobility’s innovative vehicle offering across the categories of vans and trucks, motorcycles and scooters, tractors, and specialist vehicles are further differentiated by the company’s ability to offer charging infrastructure and financing support to its customers.
Ideanomics Energy
Ideanomics Energy is the Company's business unit focused on charging and energy products and services. Ideanomics Energy has as its mission to provide fleet operators with a turn-key charging solution as part of their electrification initiatives. It does this with a team of trusted experts to analyze impacts of electrification on operations and to plan and deploy the right hardware, including robust, user-friendly charging technologies, supported by an intuitive Energy Management platform that Ideanomics Energy is developing. This is supported through collaboration with Ideanomics Capital to introduce a Charging-as-a-Service model to package upfront costs as a recurring monthly operating expense. Ideanomics Energy’s subsidiary is WAVE Charging, which offers WAVE wireless charging, PEA’s containerized DC fast charging system, the Mahle ChargBIG level-2 charging solution, and more.
Ideanomics Capital provides financing support for the Company’s CaaS and VaaS business models, as well as businesses focused on leveraging technology and innovation to improve efficiency, transparency, and profitability for the financial services industry.
The Company’s Ideanomics Capital business unit provides capital market expertise to enable the sale of its subsidiaries’ products and services. It aligns financing resources and develops funding structures that enable growth and revenue generation for the Ideanomics Mobility business unit. Financing structures would include service and products for payment such as CaaS and VaaS. These options are part of the Ideanomics offering to commercial fleet operators. Over time, it is Ideanomics intention to focus Ideanomics Capital as the financial services arm of Ideanomics Mobility and Ideanomics Energy, and to divest its non-EV assets accordingly.
Information about segments
The Company’s chief operating decision maker has been identified as the chief executive officer, who reviews consolidated results when making decisions about allocating resources and assessing performance of the Company. Therefore, the Company operates in one segment with three business units: Ideanomics Mobility, Ideanomics Energy and Ideanomics Capital.
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 GAAP. 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.
As of December 31, 2022, the Company had cash and cash equivalents of approximately $21.9 million, of which $15.5 million is held in China and is subject to local foreign exchange regulations in that country and additionally two subsidiaries have required capital or liquidity requirements of $2.2 million. The company has initiated a formal process to repatriate approximately $7.0 million in cash funds located in China. This process is not subject to local foreign exchange regulations rather is subject to the other administrative regulatory applications and approvals. The Company also had accounts payable and accrued expenses of $39.5 million, other current liabilities of $13.7 million, current contingent consideration of $0.9 million, lease payments due within the next twelve months of $4.4 million, and payments of short-term and long-term debt due within the next twelve months of $13.2 million. The Company had a net loss of $282.1 million for the year ended December 31, 2022, and an accumulated deficit of $866.5 million.
The Company’s ability to raise capital is critical. The company has raised approximately $43 million, since the beginning of the fourth quarter 2022. including the sale of preferred shares, issuance of a convertible note, the sale of financial assets and the sale of shares under the SEPA. In the next 90 days, we expect the collection of the outstanding balance of the Inobat note ($11 million) and will utilize the remainder of the 24.0 million available under the SEPA ($2.5 million). In addition, the company is working to close on multiple term sheets, which if successful, could bring in excess of $50 million in proceeds to the company.
The Company believes that its current level of cash and cash equivalents are not sufficient to fund continuing operations, including VIA Motors, which acquisition was closed by the company on January 31, 2023. 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. These factors individually and collectively raise doubt about the Company’s ability to continue as a going concern. In addition, our independent auditors have included in their report on our financial statements for the year ended December 31, 2022, a paragraph related to the existence of substantial doubt about our ability to continue as a going concern.
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 Reports on Form 10-Q for the quarters ended March 31 and June 30, 2022, was not filed timely, we will not be eligible to use Form S-3 for registration statements 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. 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.
Principal Factors Affecting Our Financial Performance
Our business is expected to be impacted by both macroeconomic and Ideanomics-specific factors. The following factors have been part of the transformation of the Company which affected the results of our operations in the years ended December 31, 2022, 2021, and 2020:
•Our ability to transform our business and to meet internal or external expectations of future performance. In connection with this transformation, we are in the process of considerable changes, which include assembling a new management team in the United States and overseas, reconfiguring our business structure, continuing to further enhance our controls, procedures, and oversight during this transformation, and expanding our mission and business lines for continued growth. It is uncertain whether these efforts will prove beneficial or whether we will be able to develop the necessary business models, infrastructure and systems to support our businesses. To succeed, among other things, we will need to have or hire the right talent to execute our business strategy. Market acceptance of new product and service offerings will be dependent in part on our ability to include functionality and usability that address customer requirements, and optimally price our products and services to meet customer demand and cover our costs.
•Our ability to remain competitive. We will continue to face intense competition: these new technologies are constantly evolving, and our competitors may introduce new platforms and solutions that are superior to ours. In addition, our competitors may be able to adapt more quickly to new technologies or may be able to devote greater resources to the development, marketing and sale of their products than we can. We may never establish and maintain a competitive position in the hybrid financing and logistics management businesses.
•The fluctuation in earnings resulting from acquisitions, strategic equity investments, the formation of joint ventures, and in-licenses of technology. Our results of operations may fluctuate from period to period based on our entry into new transactions to expand our business. In addition, while we intend to contribute cash and other assets to our investments, we do not intend for our holding company to conduct significant research and development activities. In general, we intend research and development activities to be conducted by our technology partners and licensors. These fluctuations in growth or costs and in our investments and partnerships may contribute to significant fluctuations in the results of our operations.
Update on the Impact of COVID-19
As of the period covered by this report, there has been a trend in many parts of the world of increasing availability and administration of vaccines against COVID-19, as well as an easing of restrictions on social, business, travel and government activities and functions. On the other hand, infection rates and regulations continue to fluctuate in various regions and there are ongoing global impacts resulting from the pandemic, including challenges and increases in costs for logistics and supply chains, such as increased port congestion, intermittent supplier delays, labor shortages, and a shortfall of semiconductor supply.
We have been experiencing varying levels of inflation resulting in part from various supply chain disruptions, increased shipping and transportation costs, increased raw material and labor costs and other disruptions caused by the COVID‐19 pandemic and general global economic conditions. The inflationary impact on our cost structure has contributed to adjustments in our product pricing, despite a continued focus on reducing our manufacturing costs where possible.
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, and supply chain shortages of various materials may have a negative effect on our EV sales or production capacity in the longer-term. The Company's Tree Technologies business, which focuses on the sale of motorbikes in
the ASEAN region, is experiencing disruption in its operations as a result the continued lockdowns in the region, which have adversely impacted its ability to fulfill committed orders.
The Company continues to monitor the overall situation with COVID-19 and its effects on local, regional and global economies.
Taxation
United States
Ideanomics, Inc. and its US subsidiaries are subject to the provisions of the Internal Revenue Code. Prior to 2021, with a limited exception prior to 2020, no provision for income taxes has been provided as none of the companies then part of the company had taxable profit since inception.
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 had previously been judged to be more likely than not to be unable to reduce the Company’s income tax liability and consequently 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 most of the newly acquired deferred tax liabilities, this resulted in a one-time income tax benefit of $10.1 million.
During the year ended December 31, 2021, there was an income tax benefit of $11.8 million, of which $11.4 million was from operations in the US. This consisted principally of the $10.1 million one-time benefit. In addition, Timios, US Hybrid and Solectrac have taxable income or loss reported on certain separate state tax returns and consequently have related state income tax expense or benefit. For the year ended December 31, 2021 the three companies have losses, which results in state income tax benefits consisting of those losses being used to reduce the state deferred tax liabilities recognized in the acquisitions. The net state income tax (benefit) for Timios, US Hybrid and Solectrac was $1.2 million for the year ended December 31, 2021. There was an additional $0.1 million federal income tax benefit, principally consisting of the reduction, through amortization or impairment of intangible assets, of federal deferred tax liabilities recognized in acquisitions that had not allowed for the release of Ideanomics’ valuation allowances.
TCJA includes provision for GILTI under which taxes on foreign income are imposed on the excess of a deemed return on tangible assets of certain foreign subsidiaries. TCJA also enacted the BEAT under which taxes are imposed on certain base eroding payments to related foreign companies, subject to certain requirements.
Based on 2022, 2021 and 2020 financial results, the company has determined that there is no GILTI or BEAT tax liability.
In addition, the TCJA now entitles U.S. companies that owns 10.0% or more of a foreign corporation a 100% dividends-received deduction for the foreign-source portion of dividends paid by such foreign corporation. Also, NOLs arising after December 31, 2017 are deductible only to the extent of 80.0% of the taxpayer’s taxable income, and may be carried forward indefinitely but generally not allowed to be carried back.
Cayman Islands and the British Virgin Islands
Under current laws of the Cayman Islands and the British Virgin Islands, the Company is not subject to tax on its income or capital gains. In addition, dividend payments are not subject to withholding tax in the Cayman Islands or British Virgin Islands.
Hong Kong
The Company’s subsidiaries incorporated in Hong Kong are subject to Profits Tax of 16.5%. All of the Hong Kong subsidiaries’ activities relate to support and ownership of businesses outside of Hong Kong, and consequently their expenses do not create operating loss carryovers.
Under the PRC’s EIT Law, the company’s Chinese subsidiaries are subject to an EIT of 25.0%.
The Company’s future effective income tax rate depends on various factors, such as tax legislation, geographic composition of its pre-tax income and non-tax deductible expenses incurred. The Company’s management regularly monitors these legislative developments to determine if there are changes in the statutory income tax rate.
During the years ended December 31, 2022, 2021 and 2020, all of the Company’s PRC subsidiaries incurred losses that created operating loss carryovers. Certain of the subsidiaries had previously established operating loss carryovers expire as PRC loss carryovers are generally allowed to be carried over five years. The deferred tax assets related to the operating loss carryovers have been fully offset by valuation allowances meaning that there was no income tax expense or benefit for the Company’s PRC subsidiaries these years.
Malaysia
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 operating loss carryovers, part of which were able to offset previously recorded deferred tax liabilities and part of which were offset by a valuation allowance. Because of the ten-year expiration period of net operating loss carryovers under Malaysian tax law, it is unlikely that additional net operating losses will further reduce the deferred tax liabilities.
During the year ended December 31, 2022 Tree Technologies recorded a $4.2 million deferred tax benefit, resulting from the full impairment of the land-use rights that are the source of Tree Technologies’ net deferred tax liabilities.
Italy
At the acquisition of Energica, with its US subsidiary, in 2022, intangible assets were recognized for financial reporting purposes that were not recognized for income tax purposes. This, in combination with some smaller temporary differences, resulted in the recognition of $6.4 million deferred tax liabilities.
As further explained below, during the year ended December 31, 2021, Energica provided an income tax benefit of $3.5 million, based on the reduction of the deferred tax liabilities due to amortization of the intangible assets and net operating loss carryovers that would offset the deferred tax liabilities.
Revenue for the year ended December 31, 2022 was $100.9 million as compared to $114.1 million for the year ended December 31, 2021, an decrease of $13.1 million. The decrease was mainly due to Timios, which generated revenue of $32.2 million for the year ended December 31, 2022, as compared to $72.7 million from the acquisition closing date through December 31, 2021. The financial services industry suffered a significant decline in transaction processing for services provided by Timios driven by continuous increases in lending rates and an industry sector decline. This resulted in an adverse impact on Timios’ revenues in that one significant customer was lost and other customers have reduced their volume. During the year ended December 31, 2022, the Company earned revenues of $51.2 million from sales of EV products as compared to $31.1 million for the year ended December 31, 2021, an increase of $20.1 million. The increase was primarily due to an increase in EV product sales in China and incremental revenue from acquisitions made in the year ended December 31, 2021. Revenues from the Electric Motorcycle Product, services, and sponsorship service lines were generated almost exclusively from revenues generated by the acquisitions made in the year ended December 31, 2022.
For the years ended December 31,
2021
2020
Amount Change
Title and escrow services
$
72,686
$
—
$
72,686
Electric vehicles products
31,123
19,462
11,661
Electric vehicles services
204
—
204
Combustion engine vehicles
—
5,160
(5,160)
Charging, battery and powertrain products
5,886
506
5,380
Digital advertising services
231
1,631
(1,400)
Total
$
114,080
$
26,759
$
87,321
Revenue for the year ended December 31, 2021 was $114.1 million as compared to $26.8 million for the year ended December 31, 2020, a decrease of $87.3 million. The increase was mainly due to the Company’s acquisition of Timios, which generated revenue of $32.2 million from the acquisition closing date through December 31, 2021. No revenue was generated related to title and escrow services for the year ended December 31, 2020. During the year ended December 31, 2021 the Company earned revenues of $31.1 million from sales of EV products as compared to $19.5 million for the year ended December 31, 2020, an increase of $11.7 million. The increase was primarily due to an increase in EV product sales in China and incremental revenue from acquisitions made in the year ended December 31, 2021. Revenues from the Charging, battery and powertrain products and services product lines were generated almost exclusively from revenues generated by the acquisitions made in the year ended December 31, 2021. No revenue was generated from the sale of Combustion engine vehicles for the year ended December 31, 2021.
Cost of revenues was$101.8 million for the year ended December 31, 2022, as compared to $90.9 million for the year ended December 31, 2021. The cost of revenues increased by $10.9 million. The increase was mainly due to Timios, which had recorded cost of revenues of $27.6 million in the year ended December 31, 2022, as compared to $48.7 million related to title and escrow service from the acquisition closing date through December 31, 2021. The financial services industry suffered a significant decline in transaction processing for services provided by Timios driven by continuous increases in lending rates and an industry sector decline. This resulted in an adverse impact on Timios’ revenues in that one significant customer was lost and other customers have reduced their volume. 2) the Company’s acquisition of Energica, which had recorded cost of revenues of $14.1 million from the acquisition closing date through December 31, 2022. There was no revenue recorded in the year ended December 31, 2021. 3) The $21.4 million increased in cost of Electric vehicles products was due to an increase in EV product sales in China and incremental revenue from acquisitions made in the year ended December 31, 2021. No revenue and associated cost was generated related Combustion engine vehicles for the year ended December 31, 2022.
For the years ended December 31,
2021
2020
Amount Change
Title and escrow services
$
48,684
$
—
$
48,684
Electric vehicles products
29,884
18,035
11,849
Electric vehicles services
183
—
183
Combustion engine vehicles
—
5,121
(5,121)
Charging, battery and powertrain products
7,961
488
7,473
Charging, battery and powertrain services
2,503
—
2,503
Digital advertising services
192
1,058
(866)
Other revenue
1,445
—
1,445
Total
$
90,852
$
24,702
$
66,150
Cost of revenues was $90.9 million for the year ended December 31, 2021, as compared to $24.7 million for the year ended December 31, 2020. The cost of revenues increased by $66.2 million. The increase was mainly due to the Company’s acquisition of Timios, which had recorded cost of revenues of $48.7 million related to title and escrow service from the acquisition closing date through December 31, 2021. No cost related to title and escrow services were incurred for the year ended December 31, 2020. The increase was due to an increase in EV product sales in China and incremental revenue from acquisitions made in the year ended December 31, 2021. Revenues from the Charging, battery and powertrain products and services product lines were generated almost exclusively from revenues generated by the acquisitions made in the year ended December 31, 2021. No revenue and associated cost was generated related Combustion engine vehicles for the year ended December 31, 2021.
Gross profit for the year ended December 31, 2022 was $(0.8) million, as compared to gross profit of $23.2 million for the year ended December 31, 2021. The gross profit ratio for the year ended December 31, 2022 was (0.8)%, as compared to gross profit of 20.4% for the year ended December 31, 2021. The decrease was mainly due to the decrease in the gross margin from sales of title and escrow services for the year ended December 31, 2022, as compared to the year ended December 31, 2021.
Gross profit for the year ended December 31, 2021 was $23.2 million, as compared to gross profit of $2.1 million for the year ended December 31, 2020. The gross profit ratio for the year ended December 31, 2021 was 20.4%, as compared to gross profit of 8.0% for the year ended December 31, 2020. The increase was mainly due to the high gross margin from sales of title and escrow services for the year ended December 31, 2021.
Selling, general and administrative expenses
Our selling, general and administrative expense for the year ended December 31, 2022 was $148.7 million as compared to $107.5 million for the year ended December 31, 2021, an increase of $41.1 million. The increase was mainly due to the increased compensation and benefits costs, professional fees and marketing and other costs. In addition we incurred a full year of costs associated with acquired businesses in 2022 and the foreign exchange loss, partially offset by the decrease of stock based compensation expense. The increase in compensation and benefits is mainly due to the hiring of additional staff in the corporate and those operating companies to support the continuing growth of the business. The increase in professional fees was due to an increase in audit and consulting fees related to regulatory filing fees, transaction fees related to the purchase of Energica and consulting expense incurred by the Company's operating entities as they continue to build out their sales and operating structure. The increased foreign exchange loss is mainly due to the loss resulting form the fluctuation of Euro exchange rate.
Our selling, general and administrative expense for the year ended December 31, 2021 was $107.5 million as compared to
$44.9 million for the year ended December 31, 2020, an increase of $62.6 million. The increase was principally due to costs related to the operations of the Timios, WAVE, Solectrac and US Hybrid acquisitions completed in the current year, stock based compensation expense related to RSU grants, increased compensation, payroll tax and benefit expense arising from the hiring undertaken to expand the business and built out the corporate infrastructure and associated recruitment expense, partially offset by lower operating expenses in China and lower rent expense due to the termination of the company’s lease on its headquarters property in New York City due to COVID-19.
Research and development expense
Research and development expense for the year ended December 31, 2022 was $3.9 million as compared to $0.8 million for the year ended December 31, 2021 an increase of $3.1 million. The increase is mainly due to higher research and development expense incurred in the entities acquired in 2021 and Energica acquisition in 2022.
Research and development expense for the year ended December 31, 2021 was $0.8 million as compared to $1.6 million for the year ended December 31, 2021 a decrease of $0.9 million. The expense for the prior year included costs related to technical development and design into EV trucks, there was no expense research related to EV trucks in the current year. Expense in the current period was primarily incurred in connection with EV motorbikes in Malaysia, and research and development activities in WAVE , Solectrac and US Hybrid.
The following table summarizes the impairment losses recorded in the years ended December 31, 2022, 2021 and 2020, (in thousands):
Asset Impaired
Note
Caption
Amount
2022
2021
2020
Equity method investments
Note 10. Long-term Investments
Impairment of and equity in loss of equity method investees
11,748
7,864
16,650
Intangible assets
Note 9. Goodwill and Intangible Assets
Asset Impairment
29,674
50,619
20,331
Goodwill
Note 9. Goodwill and Intangible Assets
Goodwill impairment
38,868
101,470
18,089
Right of use assets
Note 11. Leases
Asset impairment
458
99
6,424
Fintech buildings, land and capitalized fees
Note 8. Property and Equipment, net
Asset impairment
—
—
3,315
Fintech buildings asset retirement cost
Note 8. Property and Equipment, net
Asset Impairment
—
—
1,996
Available for sale securities
Note 4. Available for sale securities
Asset Impairment
69
15,833
—
Fixed assets and other
Asset impairment
—
—
923
Notes receivable from related parties
Note 5. Notes Receivable from Third Parties
Asset impairment
61,132
—
—
Cost method investments
Note 10. Long-term Investments
Asset Impairment
—
4,519
241
Total
$
141,949
$
180,404
$
67,969
Additional information related to the impairment losses recorded in the years ended December 31, 2022, 2021 and 2020 is as follows:
Year Ended December 31, 2022
•The Company recorded impairment loss of $16.2 million related to Timios goodwill and $22.7 million related to Energica.
•The Company recorded impairment loss of $25.0 million related to Tree Technology land use rights and $4.7 million of other intangible assets.
•The Company recorded impairment loss of $48.9 million related to via motors notes, $11.6 million related to Inobat notes and 0.7 million related to FNL notes.
•The Company recorded impairment loss of $1.9 million related to FNL investment, $6.7 million related to Prettl investment and $3.1 million related to MDI investment.
Year Ended December 31, 2021
•The Company recorded impairment loss of $13.7 million related to Timios lender relationship and trade name and $5.8 million related to Timios goodwill.
•The Company recorded impairment loss of $23.9 million related to WAVE patents and trademarks and $35.7 million related to WAVE goodwill.
•The Company recorded impairment loss of $7.0 million related to US Hybrid patents and trademarks and $42.2 million related to US Hybrid goodwill.
•The Company recorded impairment loss of $6.0 million related to Solectrac patents and trademarks and $17.7 million related to Solectrac goodwill.
•The Company recorded impairment loss of $4.5 million as the Company fully impaired the cost method investments in two entities.
•The Company recorded an impairment loss of $0.1 million related to ROU assets due to the closure of one Timios office and one China office.
•The Company recorded an impairment loss of $15.8 million related to an available for sale securities.
•The Company recorded an impairment loss of $7.9 million related to an equity investment.
Year Ended December 31, 2020
•The Company recorded impairment losses of $16.7 million related to its equity method investments, Glory and Intelligenta. In the fourth quarter of 2020, Tree Technologies obtained its own domestic manufacturing license, and determined that it would not purchase vehicles from Tree Manufacturing, Glory’s subsidiary, and that the investment in Glory was therefore impaired. The Company evaluated the business prospects of Intelligenta in light of the continued political tensions between China and the U.S., and determined that its business prospects had diminished.
•The Company recorded impairment losses of $20.3 million related to intangible assets:
•An impairment loss of $12.5 million related to Tree Technologies marketing and distribution agreement with Tree Manufacturing after Tree manufacturing obtained its own domestic manufacturing license, and determined that it would not purchase vehicles from Tree Manufacturing.
•Impairment losses of $7.1 million related to DBOT’s intangible assets, its continuing membership agreement and customer list.
•An impairment loss of $0.8 million related to Grapevine’s influencer network, after determining that the attrition rate of the influencer network was higher than expected.
•The Company recorded an impairment loss of $9.3 million related to the goodwill of its consolidated subsidiary, DBOT, and recorded an impairment loss of $8.8 million for Tree Technologies, after evaluating its business prospects.
•The Company recorded impairment losses of $6.4 million related to right of use assets after ceasing to use the related real estate premises.
•The Company recorded impairment losses of $3.3 million related to its investment in Fintech Village, and recorded an impairment loss of $2.0 million for the related asset retirement cost.
•The Company recorded an impairment loss of $0.2 million related to a cost method investment after its price per share declined in the fourth quarter of 2020.
Change in fair value of contingent consideration, net
For the year ended December 31, 2022, the change in fair value of contingent consideration, net was a decrease of $0.1 million. That represents the remeasurement of the contingent consideration payable to the Tree Technology shareholders.
For the year ended December 31, 2021, the change in fair value of contingent consideration, net was a loss of $9.6 million, this represents a remeasurement loss of $1.6 million of the contingent consideration payable to the former Solectrac shareholder and remeasurement gain of $8.0 million of the contingent consideration payable to the Tree Technology shareholders.
For the year ended December 31, 2020, the change in fair value of contingent consideration, net was a loss of $5.5 million, this represents a remeasurement loss of $1.5 million of the contingent consideration payable to the former DBOT shareholder and remeasurement gain of $7.0 million of the contingent consideration payable to the Tree Technology shareholders.
For the year ended December 31, 2022, the Company recorded an expense of $1.4 million related to settlement of litigation related to various legal cases in headquarters and Timios.
For the year ended December 31, 2021, the Company recorded an expense of $5.4 million related to settlement of litigation. The Rudani shareholder class action lawsuit was settled for $5.0 million. There were no such litigation settlements in the year ended December 31, 2020.
Depreciation and amortization
Depreciation and amortization for the year ended December 31, 2022 was $7.7 million as compared to $6.1 million for the year ended December 31, 2021, an increase of $1.6 million. The increase was mainly the increase in amortization and depreciation expense recorded by Energica, which was acquired at the end of the first quarter of 2022, partially offset by the decrease of the amortization expense of intangible assets recognized during the 2021 acquisitions because the intangible assets were impaired in 2021.
Depreciation and amortization for the year ended December 31, 2021 was $6.1 million as compared to $5.3 million for the year ended December 31, 2020, an increase of $0.8 million. The increase was mainly due to the increase in amortization expense recorded by Timios, WAVE, Solectrac and US Hybrid, which were acquired in 2021.
Loss from operations
Loss from operations for the year ended December 31, 2022 was $292.5 million as compared to loss of $259.6 million for the year ended December 31, 2021 an increase of $33.0 million. The increased loss from operations is mainly due to a decrease in impairment losses, which was partially offset by the increased selling, general and administrative expense.
Loss from operations for the year ended December 31, 2021 was $259.6 million as compared to loss of $95.6 million for the year ended December 31, 2020 an increase of $163.9 million. The increased loss from operations included the operating loss from Timios, WAVE, Solectrac and US Hybrid, which were acquired in 2021 partially offset by the gain resulting from a change in the fair value of contingent consideration.
Interest income
Interest income for the year ended December 31, 2022 was $3.5 million as compared to $1.5 million for the year ended December 31, 2021, an increase of $2.0 million. The increase was mainly due to the interest income from Inobat and Via motors during 2022.
Interest income for the year ended December 31, 2021 was $1.5 million as compared to $0.1 million for the year ended December 31, 2020, an increase of $1.4 million. The increase was mainly due to the income recognized from the investment in notes receivables, while earlier years interest income was generated primarily on deposits held in banks.
Interest expense
Interest expense for the year ended December 31, 2022 was $3.0 million as compared to $2.1 million for the year ended December 31, 2021, a increase of $0.9 million. The increase was mainly due to the amortization of debt discount $1.1 million.
Interest expense for the year ended December 31, 2021 was $2.1 million as compared to $16.1 million for the year ended December 31, 2020, a decrease of $13.9 million. The decrease was mainly due to the amortization of BCFs of $14.5 million associated with the convertible notes in the year ended December 31, 2020, which did not arise in the year ended December 31, 2021. The following table summarizes the breakdown of the interest expense (in thousands):
There were no such conversions for the years ended December 31, 2022 and 2021, respectively.
Conversion expense of $2.3 million for the year ended December 31, 2020 represents the expense recognized as a result of the reduction of conversion price to induce the conversion of the convertible notes from related parties.
Gain (loss) on extinguishment of debt
The were no gains or losses for the year ended December 31, 2022.
In the year ended December 31, 2021, the Company recorded a gain of $0.3 million, on WAVE Paycheck Protection Program loan forgiveness.
In the year ended December 31, 2020, the Company recorded a gain on the extinguishment of debt of $8.9 million, as it paid a promissory note prior to its scheduled maturity. The Company also settled several outstanding balances with vendors and recorded a gain of $0.5 million.
(Loss) gain on disposal of subsidiaries, net
The following table summarizes gains and (losses) recorded in “(Loss) Gain on disposal of subsidiaries, net” in the years ended December 31, 2022, 2021 and 2020 (in thousands):
Subsidiary
Year ended December 31, 2022
Year ended December 31, 2021
Year ended December 31, 2020
Seven Stars Energy PTD LTD.
$
(180)
$
—
$
—
Shandong
(53)
—
—
Grapevine
—
(1,234)
—
Guangmin
—
—
276
Other
—
(30)
—
Total
$
(233)
$
(1,264)
$
276
(Loss) gain on disposal of subsidiaries was a loss of $0.2 million for year ended December 31, 2022, mainly represents the disposal loss of SSE and Shandong.
(Loss) gain on disposal of subsidiaries was a loss of $1.3 million for year ended December 31, 2021, mainly represents the disposal loss of Grapevine.
(Loss) gain on disposal of subsidiaries was a gain of $0.3 million for year ended December 31, 2020, mainly represents the disposal loss of Guangmin.
Gain on remeasurement of investment
Gain on remeasurement of investment was $11.0 million for the year ended December 31, 2022 which resulted from the remeasurement of the Company's investment in Energica to its fair value as of the date the Company obtained the majority of the Energica shares outstanding and commenced consolidating Energica.
Gain on remeasurement of investment was $2.9 million for the year ended December 31, 2021 which resulted from the remeasurement of the Company's investment in Solectrac to its fair value as of the date the Company obtained the remainder of the Solectrac shares outstanding and commenced consolidating Solectrac.
There were no such remeasurements for the year ended December 31, 2020.
Other income (expense), net was $6.5 million for the year ended December 31, 2022 as compared to $1.3 million for year ended December 31, 2021, a increase of $4.8 million. The increase is mainly to the insurance claim received for Timios and the employee retention credit to be received by Timios.
Other income (expense), net was $1.3 million for the year ended December 31, 2021 as compared to $6.6 million for year ended December 31, 2020, a decrease of $5.3 million. The decrease was mainly due to 2020 income being unusually high from lease early termination settlements, which includes a gain of $4.9 million recognized from the settlement agreements to terminate leases early for the New York City headquarters at 55 Broadway and a gain of $0.8 million from the DBOT lease settlement with the landlord.
Income tax (expense) benefit
In the year ended December 31, 2022, the income tax benefit of $7.7 million is mainly due to a $3.5 million income tax benefit from Energica, including its U.S. subsidiary, and a $4.2 million income tax benefit from Tree Technologies. The Energica benefit consists of 1) a $1.0 million benefit from amortization of various intangible assets resulting in a reversal of deferred tax liabilities recognized when the intangible assets were first recorded in acquisition of Energica, and 2) a $2.5 million benefit from net operating losses creating carryovers that could offset part of Energica’s remaining deferred tax liabilities. The Tree Technologies benefit results almost entirely from the reduction of deferred tax liabilities that accompanied a reduction, through impairment charges, of land-use rights that did not have significant income tax basis.
In the year ended December 31, 2021, the income tax benefit of $11.8 million is mainly due to $10.1 million of one-time benefits relating to acquisitions, net state income benefit of $1.2 million for recently acquired entities, and a $0.1 million of other U.S. federal income tax benefit and a $0.4 million deferred tax benefit from our Tree Technologies, our Malaysian subsidiary.
In the year ended December 31, 2020, the income tax benefit of $3.3 million income tax benefit is from Tree Technologies. It consists of $3.1 million benefit from amortization and eventual impairment, of a distribution and marketing agreement which resulted in the reversal of the deferred tax liabilities related to the agreement, and $0.2 million benefit resulted from the operating losses creating carryovers that could offset part of Tree Technologies’ remaining deferred tax liabilities. For the year ended December 31, 2020, other than the $3.3 million Tree Technologies benefit, income tax expense is nil because of NOL and deferred tax assets related to the NOLs had been offset by a valuation allowance. The Company had established a 100.0% valuation allowance against its net deferred tax assets due to its history of pre-tax losses and the likelihood that the deferred tax assets will not be realized.
Impairment of and equity in loss of equity method investees
Impairment of and equity in loss of equity method investees was $15.0 million for the year ended December 31, 2022, as compared to $11.5 million in the year ended December 31, 2021, an increase of $6.3 million. The increase was mainly due to higher impairments losses of recorded in the year ended December 31, 2021.
Impairment of and equity in loss of equity method investments for the year ended December 31, 2021 was $11.5 million as compared to $16.8 million for the year ended December 31, 2020, an decrease of $5.3 million. The decrease was mainly due to impairments losses of $16.7 million recorded in the year ended December 31, 2020, as compared to an impairment loss of $7.9 million recorded in the year ended December 31, 2021.
Net (income)/loss attributable to non-controlling interest
Net (income)/loss attributable to non-controlling interests was a $21.4 million loss in the year ended December 31, 2022 as compared to a $0.7 million loss for the year ended December 31, 2021. The increase is due to the NCI from the Energica acquisition in March 2022 and Tree Technology which recorded land use right impairment loss in 2022.
Net (income)/loss attributable to non-controlling interests was a $0.7 million loss in the year ended December 31, 2021 as compared to a $10.5 million loss for the year ended December 31, 2020. The decrease is mainly due to there is significant loss in the year ended December 31, 2020 from Tree Technology.
On September 12, 2022, the Board authorized management to pursue a plan to restructure the current electric vehicle resale activities in China. While the current operational activities will decline in scale over the next year, the company will continue to source materials from Chinese suppliers through its procurement team in China and evaluate opportunities for the sale of current Ideanomics' subsidiaries technologies in China. We believe that this change in the scope of activities in China will result in a significant reduction in the number of operating entities, a simplification of the legal entity structure and a pivot to margin expansion opportunities.
In the year ended December 31, 2021, the company generated $29.7 million in revenues in the PRC, primarily from the sale of electric vehicle products. For the year ended December 31, 2022, the company generated $39.1 million in revenues in the PRC. The carrying value of long lived assets in the PRC for the year ended December 31, 2022, was $0.1 million and cash held in the PRC was approximately $15.5 million for the year ended December 31, 2022.
For the year ended December 31, 2022, the Company recorded charges of $1.2 million in connection with its restructuring actions and selling, general and administrative expenses. The restructuring charges consist of employee termination costs of $1.1 million. Employee termination benefits were recorded based on statutory requirements, completed negotiations and Company policy.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2022, the Company had cash and cash equivalents of $21.9 million. Approximately $17.6 million was held in accounts outside of the United States, primarily in Italy and the PRC.
Due to the strict regulations governing the transfer of funds held in the PRC to other jurisdictions, the Company does not consider funds held in its PRC entities to be available to fund operations and investment outside of the PRC and consequently does not include them when evaluating the liquidity needs of its businesses operating outside of the PRC.
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 $0.3 million as of December 31, 2022, which was necessary for JUSTLY to meet its minimum capital requirements.
As of December 31, 2022, the Company’s principal source of liquidity is its unrestricted cash balance in the amount of $21.9 million of which $15.5 million is held by the Company’s subsidiaries located in 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 $130.0 million for the year ended December 31, 2022. The Company has experienced greater net losses and negative cash flows from operating and investing activities in the fourth 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 continue to be insufficient 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.
We have short-term debt obligations of $13.2 million and lease obligations of $4.1 million which come due in the year ending December 31, 2022. We currently have long-term debt obligations of $2.0 million, and have lease obligations of $12.3 million which come due from the years ending December 31, 2023 through 2030.
The following table provides a summary of net cash flows from operating, investing and financing activities (in thousands):
Net increase/(decrease) in cash and cash equivalents
(247,934)
104,099
163,131
Total cash, cash equivalents and restricted cash at beginning of period
269,863
165,764
2,633
Cash and cash equivalents at end of period
$
21,929
$
269,863
$
165,764
Operating Activities
Cash used in operating activities was $130.0 million for the year ended December 31, 2022 as compared to cash used in operating activities of $75.5 million in the year ended December 31, 2021. This was primarily due to (1) an decrease in the net loss from $256.7 million in the year ended December 31, 2021 to $282.1 million in the year ended December 31, 2022. In addition, the financial services industry suffered a significant decline in transaction processing for services provided by Timios driven by continuous increases in lending rates and an industry sector decline. This resulted in an adverse impact on Timios’ revenues in that one significant customer was lost and other customers have reduced their volume. (2) total non-cash adjustments to net loss were $153.3 million and $190.8 million for the years ended December 31, 2022 and 2021, respectively; and (3) total changes in operating assets and liabilities, net of acquisitions resulted in a decrease of $1.2 million and $9.6 million in cash used in operating activities for the years ended December 31, 2022 and 2021, respectively.
Cash used in operating activities was $75.5 million for the year ended December 31, 2021 as compared to cash used in operating activities of $41.5 million in the year ended December 31, 2020. This was primarily due to (1) an increase in net loss from $111.6 million in the year ended December 31, 2020 to $256.7 million in the year ended December 31, 2021, (2) total non-cash adjustments to net loss were $190.8 million and $81.4 million for the years ended December 31, 2021 and 2020, respectively; and (3) total changes in operating assets and liabilities, net of acquisitions resulted in a decrease of $9.6 million and $11.3 million in cash used in operating activities for the years ended December 31, 2021 and 2020, respectively.
Investing Activities
Cash used in investing activities was $94.7 million for the year ended December 31, 2022, which was primarily due to expenditures incurred for the acquisitions of Energica and the acquisition of the convertible notes with VIA. Cash used in investing activities was $220.1 million for the year ended December 31, 2021 was primarily due to expenditures incurred for the acquisitions of Timios, WAVE, Solectrac and US Hybrid, the investments in Energica, TM2, VIA, the MDI Fund and FNL, the acquisition of the convertible notes with Silk EV, VIA and InoBat, and partially offset by the proceeds from the disposal of Fintech Village. Cash used in investing activities was $3.5 million for the year ended December 31, 2020 primarily due to the investment to Solectrac.
Financing Activities
In the year ended December 31, 2022, the Company repaid $21.0 million from financing activities versus receiving $399.3 million in the year ended December 31, 2021. For the year ended December 31, 2022, the Company received $0.6 million from the issuance of common stock and the exercise of stock options, $10.0 million from the issuance of series B preferred stock, $2.0 million from borrowing from a related party, $6.9 million from revolving line of credit, $4.9 million from the issuance of convertible notes and made repayments of $40.8 million to a convertible note and $4.7 million line of credit.
For the year ended December 31, 2021, the Company received $196.8 million from the issuance of common stock and the exercise of stock options, $295.0 million from the issuance of convertible notes and made repayments of $88.8 million including a $80.0 million convertible note payment and a $8.8 million redeemable non-controlling interest payment. For the year ended December 31, 2020, the Company received $191.4 million from the issuance of common stock and the exercise of warrants and options, $27.0 million from the issuance of convertible notes, $7.1 million from noncontrolling shareholders contribution and made repayments of $17.5 million, primarily of a $12.0 million convertible note and other borrowings.
The Company expects to continue to raise both equity and debt finance to support the Company’s investment plans and operations.
Off-balance sheet arrangements are obligations the Company has with nonconsolidated entities related to transactions, agreements or other contractual arrangements. The Company holds interests in investments accounted for under the equity method of accounting. The Company does not control these investments and therefore does not consolidate them.
We do not have other off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity or capital expenditures or capital resources that is material to an investor in our securities.
Seasonality
The Company expects that EV orders and sales will be influenced by the amount and timing of budgeted expenditure by its customers. Typically, the Company would expect to see higher sales at the start of the year when companies start executing on their capital programs and at the end of the year when companies are spending any surplus or uncommitted budget before the new budget cycle commences. The Company’s EV businesses are in the early stage of their development and consequently do not have sufficient trading histories to project seasonal buying patterns with any degree of confidence. Revenues generated by the Company’s Timios Title Agency business are impacted by the volume and timing of orders, typically the first quarter of the year shows a decline in revenues reflecting the lower orders in fourth quarter of the year due to the impact of holidays.
OUTLOOK
The Company has three distinct business units, Ideanomics Mobility, Ideanomics Energy and Ideanomics Capital. Each is focused on the growth opportunity, fueled by technological and legislative disruption, taking place in the automotive, energy, and financial services industries. Ideanomics Mobility has as its mission the acceleration of commercial adoption of electric vehicles. Ideanomics Capital focuses on providing a range of financing programs in support of the sale of EVs and associated charging and energy storage systems by Ideanomics Mobility. The Company believes these two business units provide an opportunity for the Company to benefit from the value creation that can be achieved in the short, medium, and long-term through establishing competitive products and services which can enable the capture of market share sufficient to sustain profitable operations.
IDEANOMICS MOBILITY
The Ideanomics Mobility business unit seeks to accelerate the commercial adoption of electric vehicles. The Company’s EV and technology acquisitions during 2022 and 2021 completed the foundation for the development of four product-focused verticals comprised of off-highway, two-wheeler, on-highway, and energy and charging services. This integrated offering helps support business progress toward its mission of offering fleet operators a range of vehicles and associated charging systems through a single procurement partner.
By combining leading EV technologies, products, knowledge, and capabilities across the Company’s four product verticals, Ideanomics anticipates that it will be able to rapidly develop unique zero emission mobility solutions in both the off-highway and on-highway commercial vehicle markets. These are anticipated to include the provision of commercial electric vans, trucks, and buses, electric tractors, and two-wheeled transportation, supported by the provision of energy services and infrastructure for the EV market consisting of charging systems, energy storage, energy generation, including hydrogen and solar, and associated data and management applications. These will be supported by financing programs which have been developed to enable commercial fleet operators to migrate away from gasoline and diesel-powered vehicles with minimal disruption to their business models and balance sheet. Together, these products and services will provide the Company with the capability to assist commercial fleet operators to transition with confidence to BEV and FCEV and meet their zero-emission objectives.
By choosing the integrated platform approach from Ideanomics Mobility, the commercial fleet operator will benefit from a single source solution that supports all aspects of the transition to EV, from early-stage requirements analysis, charging infrastructure specification and installation, vehicle procurement and deployment, training, vehicle- and charging-derived data management, operationalization management services, and financing.
To support the cost of transition from fossil fuels to BEV and FCEV, Ideanomics will offer fleet operators the complete financial and management support to confidently migrate from traditional CapEx models to an OpEx model, releasing capital to support traditional business growth and have the simplicity, predictability, and certainty of a monthly subscription which covers all aspects of EV fleet operations. These programs will also have the added advantage of providing Ideanomics with predictable recurring revenues. These Mobility-as-a-Service solutions are comprised of financing programs we refer to as VaaS and CaaS.
The Company anticipates that the shift from combustion engine vehicles to zero-emission vehicles is a complex process that most fleet operators do not have the expertise to manage. The Company anticipates that vendors selling a single product will be at a disadvantage compared to the Company’s integrated offering. The Company believes this will create a unique opportunity for the Company to become a trusted partner, providing services to analyze and define a customer’s needs, specifying and installing charging infrastructure, procuring and deploying vehicles, administering training, and operationalizing management services. In addition, the Company anticipates that its as-a-Service financing models will make it possible for more customers to transition to zero-emission vehicles as an operating expense rather than a large upfront capital expenditure.
At the operating business level, further investment is planned to support continuous technology and product development and the associated manufacturing and assembly expansion to support increasing demand and revenue achievement.
Global supply chain slowdowns and shipping constraints continue to present challenges at each of the operating companies within the Ideanomics Mobility business unit.
IDEANOMICS CAPITAL
Ideanomics Capital provides a range of financing programs in support of the sale of EVs and associated charging and energy storage systems by Ideanomics Mobility. Some of these finance programs are disruptive, subscription-based, models which are new-to-market offerings designed to help commercial fleet operators absorb the cost of transitioning to EV by removing CapEx costs as a barrier to entry. The company anticipates continuing the provision of resources and expertise for the development of these financing programs, which will underpin sales and revenues of Ideanomics Mobility. We call these financing programs CaaS and VaaS, and MaaS when combined, and they form part of our Ideanomics Mobility offering to commercial fleet operators. Over time, it is Ideanomics intention to focus Ideanomics Capital as the financial services arm of Ideanomics Mobility and to divest its other fintech assets accordingly.
Environmental Matters
We are subject to various federal, state and local laws and regulations governing, among other things, hazardous materials, environmental contamination and the protection of the environment. We have made, and expect to make in the future, expenditures to comply with such laws and regulations, but cannot predict the full amount of such future expenditures. We may also incur fines and penalties from time to time associated with noncompliance with such laws and regulations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the Company’s management to make assumptions, estimates, and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. Company management has identified certain accounting policies that are significant to the preparation of its financial statements. These accounting policies are important for an understanding of the Company’s financial condition and results of operations. Critical accounting policies are those that are most important to the portrayal of its financial condition and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. Company management believes the following critical accounting policies involve the most significant estimates and judgments used in the preparation of its financial statements. Company management has reviewed the critical accounting policies and estimates with the Audit Committee of our Board of Directors.
Long-lived Assets
Long-lived assets, including property and equipment and intangible assets, excluding goodwill, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The evaluation is performed at the lowest level of identifiable cash flows independent of other assets. An impairment loss would be recognized when estimated undiscounted future cash flows generated from the assets are less than their carrying amount.
Factors which could result in the Company performing an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the assets or the strategy for our business, and significant negative industry or economic trends.
The assumptions and estimates used to determine future values and remaining useful lives of our intangible and other long-lived assets are complex and subjective. They can be affected by various factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our forecasts for future expansion development.
As a result of the impairment analyses performed in the year ended December 31, 2022, the Company recorded impairment losses related to intangible assets of $43.3 million.
As a result of the impairment analyses performed in the year ended December 31, 2021, the Company recorded impairment losses related to intangible assets of $21.6 million.
As a result of the impairment analyses performed in the year ended December 31, 2020, the Company recorded impairment losses related to land, asset retirement costs, influencer networks, a membership agreement, and a marketing and distribution agreement of $22.5 million.
As part of the impairment analyses discussed above in the year ended December 31, 2020, the Company also evaluated the remaining useful life of intangible assets, and determined that one intangible asset, IP, no longer had a useful life and recorded amortization expense of $2.1 million.
Accounting for Business Combinations
Our consolidated financial statements include the operations of acquired businesses subsequent to the closing of the transaction. We account for acquired businesses using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date. Transaction costs are expensed as incurred.
Accounting for business combinations requires our management to make significant estimates and assumptions, especially at the acquisition date including the identification of and our estimates for intangible assets, contractual obligations assumed, restructuring liabilities, pre-acquisition contingencies and contingent consideration, where applicable. Although we believe the assumptions and estimates we have made have been reasonable and appropriate, they are based in part on historical experience and information obtained from our management of the acquired companies and are inherently uncertain.
When estimating fair value, depending on the nature and complexity of the asset or liability, we may use one or all of the following techniques:
•Income approach, which is based on the present value of a future stream of net cash flows;
•Market approach, which is based on market prices and other information from market transactions involving identical or comparable assets or liabilities; and
•Cost approach, which is based on the cost to acquire or construct comparable assets, less an allowance for functional and/or economic obsolescence.
Fair value methodologies depend on the following types of inputs:
•Quoted prices for identical assets or liabilities in active markets (Level 1 inputs);
•Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are directly or indirectly observable, or inputs that are derived principally from, or corroborated by, observable market data by correlation or other means (Level 2 inputs); and
•Unobservable inputs that reflect estimates and assumptions (Level 3 inputs).
The determination of fair value is extremely subjective and complex, and requires judgements concerning future events, including future cash flows, the appropriate discount factors and weighted average cost of capital, and market comparability, among other factors. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
Goodwill represents the excess of cost over fair value of identifiable net assets acquired and liabilities assumed in a business combination. Application of goodwill impairment tests requires significant management judgment, including the identification of reporting units, assigning assets, liabilities and goodwill to reporting units and determination of fair value of each reporting unit. The Company performs goodwill impairment testing at the reporting unit level which is defined as the operating segment or one level below the operating segment. One level below the operating segment, or component, is a business for which discrete financial information is available and regularly reviewed by segment management. The Company tests goodwill for impairment annually, on October 1, or more frequently when events or changes in circumstances indicate it is more-likely-than-not that the fair value of a reporting unit has declined below its carrying amount. Goodwill is evaluated for impairment using qualitative and/or quantitative testing procedures.
The Company has the option to first perform qualitative testing to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. Judgment applied when performing the qualitative analysis includes consideration of macroeconomic, industry and market conditions, overall financial performance of the reporting unit, composition, personnel or strategy changes affecting the reporting unit and recoverability of asset groups within a reporting unit. If, after assessing the totality of events and circumstances, the Company determines it is not more-likely-than-not that the fair value of a reporting unit is greater than its carrying amount, then performing the quantitative impairment test is unnecessary. However, if the Company concludes otherwise, then it is required to perform the quantitative impairment test by calculating the fair value of the reporting unit and comparing the fair value of the reporting unit to its carrying amount.
The fair value of a reporting unit may be determined using externally quoted prices (if available), a discounted cash flow model, or a market approach. Judgments applied when performing the quantitative analysis includes estimating future cash flows, determining appropriate discount rates and making other assumptions. Changes in these judgments, estimates and assumptions could materially affect the determination of fair value for each reporting unit.
An impairment loss, if any, is recorded when the fair value of a reporting unit has declined below its carrying amount.
As a result of its goodwill impairment analyses performed in the year ended December 31, 2022, 2021 and 2020, the Company recorded goodwill impairment losses of $38.9 million, $101.5 million and $18.1 million, respectively.
Revenue Recognition
The Company recognizes revenue when its customer obtains control of the promised goods or services in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. To determine the amount and timing of revenue recognition for the arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: (1) identify the contract(s) with the customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the Company satisfies the respective performance obligations.
A performance obligation may be satisfied over time or at a point in time. Revenue from a performance obligation satisfied over time is generally evaluated by measuring our progress in satisfying the performance obligation as evidenced by the transfer of the goods or services to the customer. Revenue from a performance obligation satisfied at a point in time is recognized at the point in time when the customer obtains control over the promised good.
The amount of revenue recognized reflects the consideration we expect to be entitled to in exchange for the promised goods or services, or the transaction price. In determining the transaction price, we evaluate consideration promised in a contract that includes a variable amount, or variable consideration, and estimate the amount of consideration that is due to us. Variable consideration is included in the transaction price only to the extent that we believe it is probable that a significant reversal in the amount of revenue recognized will not occur.
Additionally, an analysis is performed in order to evaluate whether the Company is acting as a principal, in which case revenue is reported on a gross basis, or as an agent, in which case revenue is reported on a net basis. This analysis considers whether or not the Company obtains control of the specified goods or services before they are transferred to the customer, as well as other indicators such as the party primarily responsible for fulfillment, inventory risk, and discretion in establishing price.
The Company’s EV contracts are typically with large enterprises and consequently are heavily negotiated as to the product(s) or service(s) to be provided; consequently, the accounting treatment for the reporting of revenues may vary materially between contracts including whether the revenue is reported on a gross or net basis.
For certain EV contracts recognized over time, the Company uses the cost-to-total cost method to recognize the revenue over the life of the contract. For EV contracts with revenue recognized over time, the revenue recognized is determined based upon the costs incurred as compared to the estimate of the total costs incurred.
For EV 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.
Contracts entered into with governmental agencies for services and products 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 under 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.
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 the Company 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. 2016-01.
The Company utilizes the measurement alternative for equity investments that do not have readily determinable fair values and measures these investments at cost less impairment plus or minus observable price changes in orderly transactions for an identical or similar investment of the same issuer.
Management periodically reviews long-term investments for impairment whenever events or changes in business circumstances indicate that the carrying amount of the investment may not be fully recoverable. Management considers impairment indicators such as negative changes in industry and market conditions, financial performance, business prospects, and other relevant events and factors. If indicators exist, further analysis must be performed in order to determine if the impairment, if any, is other-than-temporary. If the impairment is deemed to be other-than-temporary, the fair value of the investment must be determined. In the absence of quoted market prices, management must use judgement to determine the fair value of the investment, considering such factors as current economic and market conditions, the operating performance of the entities, including current earnings trends and forecasted cash flows, and other company and industry specific information. If the fair value of the investment is below the carrying amount, an impairment loss is recorded to record the investment at fair value.
The Company recorded impairment losses of $0.0 million, $4.5 million and $0.2 million in the years ended December 31, 2022, 2021 and 2020, respectively, for equity investments accounted for under the measurement alternative, and recorded impairment losses of $11.8 million, $7.9 million and $16.6 million in the years ended December 31, 2022, 2021 and 2020, respectively, for investments accounted for as equity method investments.
Inventory
The valuation of inventory requires us to estimate obsolete or excess inventory. as well as inventory that is not of saleable quality. The determination of obsolete or excess inventory requires us to estimate the future demand for our products. The estimate of future demand is compared to work-in-process and finished goods inventory levels to determine the amount, if any, of obsolete or excess inventory. As of December 31, 2022, we had total work-in-process inventory of $10.9 million, raw
materials inventory of $12.0 million, total finished goods inventory of $11.0 million and an inventory reserve of $5.7 million. The demand forecast is included in the development of our short-term manufacturing plans to enable consistency between inventory valuation and inventory decisions. Product-specific facts and circumstances reviewed in the inventory valuation process include a review of the customer base, the stage of the product life cycle of our products, consumer confidence, and customer acceptance of our products, as well as an assessment of the selling price in relation to the product cost. If our demand forecast for specific products is greater than actual demand and we fail to reduce manufacturing output accordingly, we could be required to write off inventory, which would negatively impact our gross margin.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance on deferred tax assets is established when management considers it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Tax benefits from an uncertain tax position are only recognized if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Interest and penalties related to unrecognized tax benefits are recorded as incurred as a component of income tax expense. The Company has not recognized any tax benefits from uncertain tax positions for any of the reporting periods presented.
Taxes based on gross revenue rather than on net income are not considered CIT and are instead included in selling, general and administrative expense in the statement of operations.
The Company files federal and state income tax returns. These returns remain subject to examination by taxing authorities for all years after December 31, 2018.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company had $3.9 million of fixed rate 4.0% convertible debt outstanding as of December 31, 2022. These debt obligations are not currently subject to fluctuations in interest rates, although in the event of issuance of new debt, such debt could be subject to changes in interest rates.
Market Risk
We have had investments in debt securities classified as available-for-sale securities, and which were recorded at fair value. There were no such investments as of December 31, 2022. In the year ended December 31, 2021, we recorded impairment losses of $15.8 million related to these investments. There were no such investments as of December 31, 2020.
For the year ended December 31, 2022, the Company no longer has any investments in equity securities of which are publicly-traded. For the year ended December 31, 2021 the Company had investments in equity securities, certain of which are publicly-traded which had carrying amounts of $35.6 million. These include shares of common stock of Energica, which are publicly traded in Italy, and at December 31, 2021 had a carrying amount of $12.3 million and a fair value of $21.8 million. The remainder of the equity investments are not publicly traded.
Based on management’s analysis of certain investment’s performance, there were no impairment losses recorded in the year ended December 31, 2022, and impairment losses of $4.5 million and $0.2 million were recorded in the years ended December 31, 2021 and 2020, respectively. We have recorded impairment losses related to equity method investments of $11.8 million, $7.9 million, and $16.6 million in the years ended December 31, 2022, 2021 and 2020, respectively.
Our investments in debt and equity securities are generally not in companies which are publicly traded, and the market for these securities may be illiquid. Furthermore, many of the companies in which we invest may have a business model which is embryonic or developmental in nature and may not come to fruition.
Investments in debt and equity securities carry a degree of risk, as there can be no assurance that the securities will be collectible or otherwise recoverable, will not lose value and, in general, securities markets can be volatile and unpredictable. As a result of these different market risks, our holdings of these securities could be materially and adversely affected.
Foreign Currency Risk
We are exposed to risks associated with changes in foreign exchange rates. Changes in foreign exchange rates create volatility in the U.S. Dollar equivalent of our revenues and expenses. While results of our China operations, as measured in U.S. Dollars, are subject to foreign exchange fluctuations, we do not consider the related risk to be material to our results of operations. While our exposure to foreign exchange risk is not currently material to us, we expect to grow our international revenues in the future, and any future potential exposure to foreign exchange fluctuations may present a material risk to our business. We recorded foreign currency exchange (gains) losses of $4.3 million, $0.2 million, and $(0.1) million in the years ended December 31, 2022, 2021 and 2020, respectively.
Report of Independent Registered Public Accounting Firm
To the shareholders and the board of directors of Ideanomics, Inc.
Opinions on the Financial Statements
We have audited the accompanying consolidated balance sheet of Ideanomics, Inc. and Subsidiaries (the “Company”), as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021 and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company's internal control over financial reporting as of December 31, 2022, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013 and our report dated March 30, 2023, expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting because of the existence of material weaknesses.
Substantial Doubt Regarding the Company’s Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations, has an accumulated deficit and does not believe that its current level of cash and cash equivalents is sufficient to fund continuing operations. These factors raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and
we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Business Combinations
Critical Audit Matter Description
As described in Note 6 to the consolidated financial statements, the Company acquired a controlling interest in Energica increasing its investment from 20.0% in Energica to 72.4% in 2022, and it was accounted for as a step acquisition business
combination. We identified the evaluation of the acquisition date fair value of intangible assets acquired and goodwill as a critical audit matter.
The principal consideration for our determination that the evaluation of the acquisition date fair values of the intangible assets acquired and goodwill was a critical audit matter is the high degree of subjective auditor judgment associated with evaluating management’s determination of the fair values of the acquired intangible assets and goodwill, which is primarily due to the complexity of the valuation models used and the sensitivity of the underlying significant assumptions. The key assumptions used within the valuation models included prospective financial information, including future revenue growth and an applied discount rate. The calculated fair values are sensitive to changes in these key assumptions.
How the Critical Audit Matter was addressed in the Audit
Our audit procedures related to the evaluation of acquisition date fair values of the intangible assets acquired and goodwill included the following, among others:
a.We evaluated the design and operating effectiveness of certain controls over the acquisition-date valuation process, including controls over the development of the key assumptions such as the revenue growth and the applied discount rate. We considered the material weaknesses relating to management’s internal controls in determining the nature, timing and extent of audit tests applied in our audit.
b.We read and reviewed the relevant agreements to assess the reasonableness and completeness of assets identified in the purchase price allocation.
c.We vouched cash amounts paid and stock tendered to source documentation to validate purchase price.
d.We obtained the purchase price allocation analyses from management and the third-party specialists engaged by management.
e.We assessed the qualifications and competence of management and the qualifications, competence and objectivity of third-party specialist.
f.We evaluated the methodologies used to determine the fair values of the intangible assets and goodwill.
g.We tested the assumptions used within the discounted cash flow models to estimate the fair values of the intangible assets, which included key assumptions such as the future revenue growth and the applied discount rate.
h.We assessed the reasonableness of management’s forecast by inquiring with management to understand how the forecasts were developed and comparing the projections to historical results and economic conditions.
i.We involved an internal valuation specialist who assisted in the evaluation and testing performed of the reasonableness of significant methods and assumptions to the models, including the applied discount rate.
j.We assessed the sufficiency of Company’s disclosure of its accounting for these acquisitions included in Note 6.
Impairment assessment of intangible assets and goodwill
Critical Audit Matter Description
As described in Notes 2 and 9 to the consolidated financial statements, the Company performs an annual impairment assessment of its indefinite-lived intangible assets and goodwill, or more frequently if events or circumstances indicate that the carrying values exceeds its fair value. The Company reviews other intangible assets with estimable lives for impairment whenever indicators are present that the carrying value may not be recoverable. During 2022, the Company recorded impairments of $38.9 million and $43.3 million of goodwill and intangible assets, respectively. The carrying value, after impairment, of goodwill and intangibles was $37.8 million and $52.8 million, respectively, as of December 31, 2022.
The principal consideration for our determination that this was a critical audit matter is that auditing the valuation of intangible assets and goodwill involved complex judgment due to subjective evaluation of indicators and significant estimation required in determining the recoverability or fair value of the intangible assets and goodwill. Specifically, the cash flow forecasts were sensitive to significant assumptions about future market and economic conditions. Significant assumptions used in the Company’s estimates included sales volume, growth rates, gross profits, operating expenditures, and discount rate, as applicable.
How the Critical Audit Matter was addressed in the Audit
Our audit procedures related to the evaluation of the intangible assets and goodwill for impairment included the following, among others:
a.We evaluated the design and operating effectiveness of certain controls over the Company’s annual impairment assessments of intangible assets and goodwill. We considered the material weaknesses relating to management’s internal controls in determining the nature, timing and extent of audit tests applied in our audit.
b.We evaluated management’s assessment in qualitive factors relating to the intangible assets and goodwill valuation, by searching online for information including economic growth forecast, industry outlook, and business environment, as well as accumulating our understanding of the Company’s reporting units’ performance.
c.With respect to the Company’s valuation of intangible assets and goodwill as a result of impairment indicators identified:
1.We tested the estimated future cash flows, including but not limited to, comparing significant inputs to observable third party and industrial sources. We also assessed the reasonableness of management’s forecast by inquiring with management to understand how the forecasts were developed and comparing the projections to historical results. and evaluating the reasonableness of management’s projected financial information by comparing to observable economic conditions and other internal and external data.
2.We assessed the qualifications and competence of management and the qualifications, competence and objectivity of third-party specialist whom prepared the valuation analyses.
3.We evaluated the methodologies used to determine the fair values of the impaired intangible assets and goodwill.
4.We involved an internal valuation specialist who assisted in the evaluation and testing performed of the reasonableness of significant methods and assumptions to the models, including the applied discount rate.
d.We reviewed the Company’s reconciliation of net book value of its reporting units as compared to market capitalization.
e.We assessed the Company’s disclosure of its impairment assessments included in Note 1 as well as the sufficiency of footnote disclosure of impairment assessment of intangible assets and goodwill in Note 9.
Valuation of Inventory
Critical Audit Matter Description
As described in Note 2, the Company’s inventory at December 31, 2022 is $28.2 million, and inventory is 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 principal consideration for our determination that this was a critical audit matter is that the valuation of inventories, specific to write downs, requires management to make significant assumptions and especially complex judgments about the future salability of the inventory and its net realizable value. These assumptions include the assessment of net realizable value by inventory category considering economic trends, future usage and market demand for their products. Additionally, management makes qualitative judgments related to slow moving and obsolete inventories. Given the significant judgments made by management, auditing the reasonableness of management’s estimates and assumptions required a high degree of auditor judgment and an increased extent of effort.
How the Critical Audit Matter was addressed in the Audit
The most relevant procedures we performed to address this critical audit matter included the following:
We evaluated the design and operating effectiveness of certain controls over the Company’s valuation of inventory. We considered the material weakness relating to management’s internal controls in determining the nature, timing and extent of audit tests applied in our audit.
We evaluated the Company’s estimate for excess and obsolete inventory including the following:
a.Evaluating the methodology used by management to develop its estimate for reasonableness;
b.Testing the completeness, accuracy, and relevance of the underlying data used by management to develop the estimate;
c.Evaluating the reasonableness of specified inputs supporting management's estimate, including the age of inventory items, historic inventory trends, and historic write-off activity;
d.Utilizing data obtained from physical inventory observation, analytical procedures and other procedures to evaluate the reasonableness of qualitative adjustments, including those related to forecasted demand and usage;
e.Performing inquiries with appropriate financial personnel, regarding obsolete or discontinued inventory models and other factors to corroborate management’s assertions regarding qualitative judgments about slow moving and obsolete inventories; and
f.Testing the mathematical accuracy of the calculations related to the application of the Company’s methodology to specific inventory categories.
g.Evaluating inventory levels and relative obsolescence reserves analytically
/S/ Grassi & Co., CPAs, P.C.
We have served as the Company’s auditor since 2022.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Shareholders and Board of Directors of Ideanomics, Inc.
Adverse Opinion on Internal Control over Financial Reporting
We have audited Ideanomics, Inc. and Subsidiaries (the "Company") internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, because of the effect of the material weaknesses described in the following paragraph on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
A material weakness is a control deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in “Management's Annual Report on Internal Control Over Financial Reporting”:
a.The design and implementation of internal controls over the review of management’s inputs into valuation models and associated valuation outputs from third party valuation specialists.
b.The design and implementation of internal controls over the revenue recognition process, specifically the failure to properly evaluate whether the Company was to be considered the principal or the agent in contracts with customers.
c.There is a lack of sufficient personnel in accounting and financial reporting functions with sufficient experience and expertise with respect to the application of U.S. GAAP and SEC disclosure requirements.
d.Operating effectiveness of internal controls to identify and evaluate the accounting implications of non-routine transactions.
e.There is a lack of controls designed to address risk of material misstatement for various financial statement areas and related assertions.
f.There is a lack of validation of completeness and accuracy of internally prepared data, including key reports generated from systems, utilized in the operations of controls.
g.There is a lack of evidence to support the effective review in the operations of controls.
h.There is a lack of controls at the entity level, particularly over the review of subsidiary financial information, including analysis of balance sheet data, operating results, non-routine transactions, litigation accruals and income tax matters.
i.Controls are not designed with a sufficient level of precision to prevent or detect a material misstatement.
j.An inventory of service organizations utilized to process transactions was not maintained throughout the reporting period. There is a lack of review over service organization reports. In instances in which service organization reports are not available, the Company does not have adequate complementary controls.
k.There is a lack of segregation of duties that exists in the information technology environments and payroll and procure to pay cycles at the Company.
l.There is a lack of documented compliance related to controls to evaluate potential risk of dealing with inappropriate vendors and/or customers.
m.The Company’s information technology general controls over certain information technology systems were not designed properly and therefore did not operate effectively.
n.There is ineffective oversight from the Company’s Audit Committee.
o.There is a lack of documented compliance -related controls to evaluate transactions in accordance with the Foreign Corrupt Practices Act (“FCPA”).
These material weaknesses were considered in determining the nature, timing and extent of audit tests applied in our audit of the 2022 consolidated financial statements, and this report does not affect our report dated March 30, 2023 on those financial statements.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheet as of December 31, 2022 and the related consolidated statements of operations, comprehensive loss, changes in shareholders’ equity, and cash flows for the year then ended of the Company and our report dated March 30, 2023 expressed an unqualified opinion on those financial statements.
Explanatory Paragraph – Excluded Subsidiaries
As described in “Management Annual Report on Internal Control Over Financial Reporting,” management has excluded its subsidiary, Energica, from its assessment of internal control over financial reporting as of December 31, 2022 because this entity was acquired by the Company in a purchase business combinations during 2022. We have also excluded Energica from our audit of internal control over financial reporting. As of and for the year ended December 31, 2022, Energica represented 11% of total assets and 11% of revenue.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying "Management Annual Report on Internal Control Over Financial Reporting." Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that degree of compliance with the policies or procedures may deteriorate.
Report of Independent Registered Public Accounting Firm
To the shareholders and the board of directors of Ideanomics, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Ideanomics Inc. (the "Company") as of December 31, 2020, and the related consolidated statement of operations, comprehensive loss, equity, and cash flows for the year ended December 31, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and the results of its operations and its cash flows for the year ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting as of December 31, 2020. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion as of December 31, 2020.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit of internal control over financial reporting also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging,
subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of Accounts Receivable
As described in Note 2 to the financial statements, 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. The Company has $7.4 million of accounts receivable carrying value as of December 31, 2020.
The principal considerations for our determination that auditing management’s assessment of allowance for doubtful accounts is a critical audit matter are there was significant judgment made by management when considering factors in management’s assessment on collectability of the accounts receivables as described above, as well as the likelihood of the occurrence of these factors impacting the collectability. In turn, such management’s assessment led to challenging and subjective auditor judgment in performing our audit procedures.
Our audit procedures included, among others, understanding of controls relating to management assessment of accounts receivable allowance, interviewing client account managers, examining transaction-related documents, testing historical collections for estimation accuracy, and reviewing collections subsequent to the balance sheet date. Our procedures also included confirming balances with clients, searching public information for the operating and financial conditions of the clients, and interviewing the business contacts of the Company. Our audit procedures also included testing their adequacy of footnote disclosures.
Impairment assessment of intangible assets and goodwill
As described in Note 2 to the financial statements, the Company performs an annual impairment assessment of its indefinite-lived intangible assets and goodwill, or more frequently if events or circumstances indicate that the carrying values exceeds its fair value. The Company reviews other intangible assets with estimable lives for impairment whenever indicators are present that the carrying value may not recoverable. These intangible assets and goodwill have carrying value of $29.7 million and $1.2 million as of December 31, 2020, respectively.
Auditing the valuation of intangible assets and goodwill involved complex judgment due to subjective evaluation of indicators and significant estimation required in determining the recoverability or fair value of the intangible assets and goodwill. Specifically, the cash flow forecasts were sensitive to significant assumptions about future market and economic conditions. Significant assumptions used in the Company’s estimates included sales volume, growth rates, gross profits, operating expenditures, tax rates, and discount rate, as applicable.
We obtained an understanding of the controls over the Company’s annual impairment assessments of intangible assets and goodwill. We compared, by searching online information, management’s assessment in qualitative factors, to public information including economic growth forecast, industry outlook, and business environment, relating to the intangible assets and goodwill. We also tested the estimated future cash flows, including but not limited to, comparing significant inputs to observable third party and industrial sources, comparing to the historical performance of the Company, and evaluating the reasonableness of management’s projected financial information by comparing to observable average industry historical trends and projections, and other internal and external data. For certain intangible asset with comparable current market value such of land use rights, we looked for nearby areas for their market value and price trending of similar lands. We performed sensitivity analyses of significant assumptions to evaluate the reasonableness of the Company’s cash flow forecasts. We assessed the Company’s disclosure of its impairment assessments included in Note 2 as well as the sufficiency of footnote disclosure of impairment assessment of intangible assets and goodwill in Note 9.
Fair value measurement of acquisition contingent consideration
As described in the Note 2 to the financial statements, accounting for business combinations requires management to make significant estimates and assumptions, especially at the acquisition date including the identification of and estimates for intangible assets, contractual obligations assumed, restructuring liabilities, pre-acquisition contingencies and contingent consideration, where applicable. The Company recognized $5.5 million of remeasurement gain for the year ended December 31, 2020.
Auditing the fair value of contingent liabilities, or earn-out liabilities, relating to business combination involved complex judgment due to subjective evaluation of indicators and significant estimation required in determining the fair value of the liabilities. Specifically, the discounted cash flow forecasts commonly used in the valuation were sensitive to significant assumptions about future market and economic conditions. Significant assumptions used in the Company’s estimates included sales volume, growth rates, gross profits, operating expenditures, tax rates, and discount rate, as applicable.
We obtained an understanding of the controls over the Company’s financial reporting process for business acquisitions. We tested the estimated future cash flows, including but not limited to, comparing significant inputs to observable third party and industrial sources, and evaluating the reasonableness of management’s projected financial information by comparing to observable average industry historical trends and projections, and other internal and external data. We performed sensitivity analyses of significant assumptions to evaluate the reasonableness of management’s cash flow analyses of the fair value of the liabilities. We then agreed the Company’s conclusion to the relevant terms of contingent consideration in the business acquisition agreements. We assessed the Company’s disclosure of its business combination accounting policies and fair value measurement included in Note 2 as well as the sufficiency of footnote disclosures to the changes in contingent consideration in Note 23.
/S/ BF Borgers CPA PC
BF Borgers CPA PC
PCAOB ID 5041
We served as the Company's auditor from 2018 to 2021
IDEANOMICS, INC. CONSOLIDATED BALANCE SHEETS (USD in thousands)
As of December 31,
2022
2021
ASSETS
Current assets:
Cash and cash equivalents
$
21,929
$
269,863
Accounts receivable, net
5,855
3,338
Contract assets
3,579
2,772
Amount due from related parties
899
266
Notes receivable from third parties, net
31,653
54,907
Notes receivable from related party
—
697
Inventory
28,246
6,159
Prepaid expenses
13,341
20,015
Other current assets
8,536
4,490
Total current assets
114,038
362,507
Property and equipment, net
9,072
2,905
Intangible assets, net
52,768
42,546
Goodwill
37,775
16,161
Operating lease right of use assets
15,979
12,827
Financing lease right of use assets
1,565
—
Long-term investments
10,284
35,588
Other non-current assets
1,320
903
Total assets
$
242,801
$
473,437
LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK AND EQUITY
Current liabilities
Accounts payable
$
29,699
$
6,674
Deferred revenue (including customer deposits of $2,280 and $3,163 as of December 31, 2022 and 2021, respectively)
2,749
5,392
Accrued salaries
9,848
8,957
Amount due to related parties
2,376
1,102
Other current liabilities
13,676
7,137
Current portion of operating lease liabilities
4,082
3,086
Current portion of financing lease liabilities
345
—
Current contingent consideration
867
648
Promissory note due to related party-short term
2,021
—
Promissory note due to third parties-short term
7,270
312
Convertible promissory note due to third-parties
3,928
57,809
Total current liabilities
76,861
91,117
Promissory note-long term
1,957
—
Operating lease liability-long term
12,273
9,647
Financing lease liabilities-long term
1,188
—
Non-current contingent liabilities
—
350
Deferred tax liabilities
3,000
5,073
Other long-term liabilities
959
620
Total liabilities
96,238
106,807
Commitments and contingencies (Note 19)
Convertible redeemable preferred stock:
Series A - 7,000,000 shares issued and outstanding, liquidation and deemed liquidation preference of $3,500,000 as of December 31, 2022 and 2021, respectively
1,262
1,262
Series B - 5,000,000 shares issued and outstanding
8,850
—
Equity:
Common stock - $0.001 par value; 1,500,000,000 shares authorized, 598,286,221 and 497,272,525 shares issued and outstanding as of December 31, 2022 and 2021, respectively
597
497
Additional paid-in capital
1,004,082
968,066
Accumulated deficit
(866,450)
(605,758)
Accumulated other comprehensive (income) loss
(6,104)
222
Total Ideanomics, Inc. shareholder's equity
132,125
363,027
Non-controlling interest
4,326
2,341
Total equity
136,451
365,368
Total liabilities, convertible redeemable preferred stock and equity
$
242,801
$
473,437
The accompanying notes are an integral part of these consolidated financial statements.
IDEANOMICS, INC. OPERATIONS (USD in thousands, except per share data)
For the years ended December 31,
2022
2021
2020
Revenue from sales of products (including from a related party of $10, $1 and $10 for the years ended December 31, 2022, 2021 and 2020, respectively)
$
64,452
$
37,009
$
25,128
Revenue from sales of services
36,070
75,766
1,631
Other revenue
414
1,305
—
Total revenue
100,936
114,080
26,759
Cost of revenue from sales of products (including from a related party of $0, $36 and $13 for the years ended December 30, 2022, 2021 and 2020, respectively)
72,047
37,845
23,644
Cost of revenue from sales of services
29,330
51,562
1,058
Cost of other revenue
374
1,445
—
Total cost of revenue
101,751
90,852
24,702
Gross profit
(815)
23,228
2,057
Operating expenses:
Selling, general and administrative expenses
148,678
107,535
44,940
Research and development expense
3,888
760
1,635
Asset impairments
91,333
71,070
33,230
Goodwill impairments
38,868
101,470
18,089
Change in fair value of contingent consideration, net
(131)
(9,600)
(5,503)
Litigation settlements
1,362
5,432
—
Depreciation and amortization
7,717
6,118
5,310
Total operating expenses
291,715
282,785
97,701
Loss from operations
(292,530)
(259,557)
(95,644)
Interest and other income (expense):
Interest income
3,504
1,502
108
Interest expense
(2,950)
(2,139)
(16,078)
Expense due to conversion of notes
—
—
(2,266)
Gain on extinguishment of debt
—
300
8,891
(Loss) Gain on disposal of subsidiaries, net
(276)
(1,264)
276
Gain on remeasurement of investment
10,965
2,915
—
Other income, net
6,478
1,261
6,604
Loss before income taxes and non-controlling interest
(274,809)
(256,982)
(98,109)
Income tax benefit
7,711
11,786
3,308
Impairment of and equity in loss of equity method investees
(15,018)
(11,529)
(16,780)
Net loss
(282,116)
(256,725)
(111,581)
Deemed dividend related to warrant repricing
—
—
(184)
Net loss attributable to common shareholders
(282,116)
(256,725)
(111,765)
Net loss attributable to non-controlling interest
21,424
716
10,501
Net loss attributable to Ideanomics, Inc. common shareholders
$
(260,692)
$
(256,009)
$
(101,264)
Basic and diluted loss per share
$
(0.51)
$
(0.57)
$
(0.47)
Weighted average shares outstanding:
Basic and diluted
512,702,986
447,829,204
213,490,535
The accompanying notes are an integral part of these consolidated financial statements.
Ideanomics, Inc. (Nasdaq: IDEX) is a Nevada corporation that primarily operates in Asia, Europe and the United States through its subsidiaries. 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.
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
As of the period covered by this report, there has been a trend in many parts of the world of increasing availability and administration of vaccines against COVID-19, as well as an easing of restrictions on social, business, travel and government activities and functions. On the other hand, infection rates and regulations continue to fluctuate in various regions and there are ongoing global impacts resulting from the pandemic, including challenges and increases in costs for logistics and supply chains, such as increased port congestion, intermittent supplier delays, labor shortages, and a shortfall of semiconductor supply.
We have been experiencing varying levels of inflation resulting in part from various supply chain disruptions, increased shipping and transportation costs, increased raw material and labor costs and other disruptions caused by the COVID‐19 pandemic and general global economic conditions. The inflationary impact on our cost structure has contributed to adjustments in our product pricing, despite a continued focus on reducing our manufacturing costs where possible.
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, and supply chain shortages of various materials may have a negative effect on our EV sales or production capacity in the longer-term. The Company's Tree Technologies business, which focuses on the sale of motorbikes in the ASEAN region, is experiencing disruption in its operations as a result the continued lockdowns in the region, which have adversely impacted its ability to fulfill committed orders.
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. 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.
As of December 31, 2022, the Company had cash and cash equivalents of approximately $21.9 million, of which $15.5 million is held in China and is subject to local foreign exchange regulations in that country and additionally two subsidiaries have required capital or liquidity requirements of $2.2 million. The company has initiated a formal process to repatriate approximately $7.0 million in cash funds located in China. This process is not subject to local foreign exchange regulations rather is subject to the other administrative regulatory applications and approvals. The Company also had accounts payable and accrued expenses of $39.5 million, other current liabilities of $13.7 million, current contingent consideration of $0.9 million, lease payments due within the next twelve months of $4.1 million, and payments of short-term and long-term debt due within the next twelve months of $5.9 million. The Company had a net loss of $282.1 million for the year ended December 31, 2022, and an accumulated deficit of $866.5 million.
The Company believes that its current level of cash and cash equivalents are not sufficient to fund continuing operations, including VIA, which acquisition was closed by the company on January 31, 2023. 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.
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. ### 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. In addition, our independent auditors have included in their report on our financial statements for the year ended December 31, 2022, an paragraph related to the existence of substantial doubt about our ability to continue as a going concern.
The Company has experienced greater net losses and negative cash flows from operating and investing activities in the year ended December 31, 2022, 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. The company has raised approximately $43 million, since the beginning of the fourth quarter 2022, including the sale of preferred shares, issuance of a convertible note, the sale of financial assets and the sale of shares under the SEPA. In the next 90 days, we anticipate we will utilize the remainder of the 24.0 million shares available under the SEPA ($2.5 million). In addition, the company is working to close on multiple term sheets, which if successful, could bring in excess of $50 million in proceeds to the company.
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.
On September 12, 2022, the Board authorized management to pursue a plan to restructure the current electric vehicle resale activities in China. While the current operational activities will decline in scale over the next year, the company will continue to source materials from Chinese suppliers through its procurement team in China and evaluate opportunities for the sale of current Ideanomics' subsidiaries technologies in China. We believe that this change in the scope of activities in China will result in a significant reduction in the number of operating entities, a simplification of the legal entity structure and a pivot to margin expansion opportunities.
In the year ended December 31, 2021, the company generated $29.7 million in revenues in the PRC, primarily from the sale of electric vehicle products. For the year ended December 31, 2022, the company generated $39.1 million iin revenues in the PRC. The carrying value of long lived assets in the PRC for the year ended December 31, 2022, was $0.1 million aand cash held in the PRC was approximately $15.5 million for the year ended December 31, 2022.
For the year ended December 31, 2022, the Company recorded charges of $1.2 million in connection with its restructuring actions and selling, general and administrative expenses. The restructuring charges consist of employee termination costs of $1.1 million. Employee termination benefits were recorded based on statutory requirements, completed negotiations and Company policy.
Note 2. Summary of Significant Accounting Policies
(a)Basis of Presentation
The consolidated financial statements of Ideanomics, its subsidiaries 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 20 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.
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 5 for additional information.
Similar to accounts receivable, each reporting period the Company evaluates the collectability of outstanding notes receivable balances and records an allowance for doubtful accounts if the Company determines if the risk of non-payment of the loan is probable and estimable.
(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 10 years 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. The Company recorded impairment losses of $3.3 million in the year ended December 31, 2020, related to Fintech Village’s land, building and capitalized architect costs. Refer to Note 8 for additional information.
In the year 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 recorded impairment losses related to retirement asset costs of $2.0 million in the year ended December 31, 2020. There were no impairment losses related to retirement asset costs for the years ended December 31, 2022 and 2021, respectively. Refer to Note 8 for more information.
(g)Business Combinations
The Company includes the results of operations of the businesses that are acquired as of the acquisition date. The Company allocates the purchase price of the acquisitions to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase price over the fair values of identifiable assets and liabilities is recorded as goodwill. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.
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 $38.9 million, $101.5 million and $18.1 million, respectively, related to goodwill in the year ended December 31, 2022, 2021 and 2020, respectively. Refer to Note 9 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.
The Company recorded impairment losses related to intangible assets acquired in various acquisitions of$43.3 million, $50.6 million and $20.4 million in the years ended December 31, 2022, 2021 and 2020, respectively. Refer to Note 9 for additional information.
(i)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 excluding electronic motorcycles. Electronic motorcycle inventories are stated on a specific identification method. 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, electric tractors and electric motorcycles 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, 2022
December 31, 2021
Raw materials
$
12,043
$
245
Work in progress
10,868
90
Finished goods
11,043
6,689
Inventory Reserve
(5,708)
(865)
Total
$
28,246
$
6,159
The following table summarizes the movement in the inventory reserve (in thousands):
As of December 31, 2022, the carrying amount of inventories serving as collateral for short-term borrowing agreements is $2.0 million. The borrowing agreement was not executed until 2022, and as such, no inventory serviced as collateral for short-term borrowing agreements as of December 31, 2021.
(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 $0.0 million, $1.5 million and $0.2 million in the years ended December 31, 2022, 2021 and 2020, respectively, for equity investments accounted for under the measurement alternative, and recorded impairment losses of $11.8 million, $7.9 million and $16.7 million in the years ended December 31, 2022, 2021 and 2020, respectively, for investments accounted for as equity method investments. Refer to Note 10 for additional information on impairment losses related to investments.
(k) Leases
The Company leases certain facilities, vehicles 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 majority of the Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. The majority 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, 2022, 2021 and 2020, the Company recorded impairment losses of $0.0 million, $0.1 million and $6.3 million, respectively, related to right of use assets subsequent to vacating the real estate.
Refer to Note 11 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, 2022 and 2021 is $0.6 million and $0.5 million, respectively, and is included in “Other current liabilities” within the consolidated balance sheet.
(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
Our financial instruments that are not re-measured at fair value include cash and cash equivalents, accounts receivable, net, notes receivable, net, accounts payable and other current liabilities. The carrying values of theses financials instruments approximate their fair values with the exception of contingent consideration. Refer to Note 23 for additional information.
Our non-financial assets that are measured at fair value on a nonrecurring basis include goodwill and other intangible assets, 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.
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 subsidiaries located worldwide are either in RMB, HKD or the EURO. 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 $4.3 million, $0.2 million, and $(0.1) million were recorded in the years ended December 31, 2022, 2021, and 2020, 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, 2022 and 2021, were $9.3 million and $21.4 million respectively. 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. Revenues recognized in a Principal capacity are reported gross, while revenues recognized as an Agent are reported net.
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.
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 $4.0 million, $2.3 million and $0.2 million in the years ended December 31, 2022, 2021 and 2020, 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, 2022, 2021 and 2020, 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 2018, and requires companies to pay a one-time transition tax on certain unrepatriated earnings from non-U.S. subsidiaries that is payable over eight years. No tax was due under this provision. The 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.
(x)VIE Structures and Arrangements
In the year ended December 31, 2022, the Company consolidated its VIE located in Italy in which it holds variable interests and was the primary beneficiary through contractual agreements. The Company is the primary beneficiary because it holds the power to direct activities that most significantly affected their economic performance and has the obligation to absorb or right to receive the majority of their losses or benefits. The results of operations and financial position of this VIE are included in the consolidated financial statements for the year ended December 31, 2022. Refer to Note 6.
Additionally, VIA was identified as a VIE in consideration of the aggregate funding provided since August 2021 through the acquisition date of January 31, 2023. Prior to entering into the Merger Agreement, on June 7, 2021, the Company and VIA entered into a SAFE for an amount of $7.5 million which is recorded in Long-term investments as a cost method investment. VIA is not consolidated as the Company did not participate in the design of VIA, does not have significant influence over VIA to make management decisions, did not have any representation on the VIA’s board and did not provide more than half of the total equity as of the years ended December 31, 2022 and 2021.
The maximum exposure for this VIE is represented in the consolidated balance sheets. The maximum exposure is limited to $39.1 million and $50.6 million for the years ended December 31, 2022 and 2021, respectively, recorded in Notes receivables from third parties, net and Long-term investments. Refer to Notes 5, 10 and 23 for additional information regarding transactions with VIA.
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.
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 adopted ASU 2021-04 on January 1, 2022. The Company has no freestanding equity-classified written call options and as such there was 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 has adopted ASU 2016-13 effective January 1, 2023 during Q1 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 accounts receivable and the economic conditions at the time of adoption.
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 3. 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):
The following table provides information about client receivables, contract liabilities and contract assets from contracts with customers:
Year ended
Balances from contracts with customers:
December 31, 2022
December 31, 2021
Accounts receivable, net
$
5,855
$
3,338
Deferred revenue
2,749
5,392
Contract assets
3,579
2,772
In the years ended December 31, 2022 and 2021, the Company recorded grant revenue of $0.3 million and $1.3 million in "Other revenue" in the consolidated statements of operations. There was no grant revenue for the year ended December 31, 2020.
For the years ended December 31, 2022 and 2021, the Company recorded a contract assets of $3.6 million and $2.2 million, respectively, for WAVE. This increase is primarily due to the inability to invoice all projects prior to resolving government billing requirements. The Company expects to resolve these billing issues and invoice for the outstanding contract assets of $3.6 million in the year ending December 31, 2023, and at that time will reclassify the contract assets to accounts receivable, net.
The following table reflects the Company’s deferred revenue balance as of December 31, 2022 and 2021 (in thousands):
Year ended
Deferred revenue from contracts with customers:
December 31, 2022
December 31, 2021
Beginning balance
$
5,392
$
2,879
Revenue recognized, included in beginning balance
(3,975)
(650)
Additions, net of revenue recognized during period, and other
1,332
3,163
Ending Balance
$
2,749
$
5,392
In the years ended December 31, 2022, 2021, and 2020, the Company recognized revenue of $4.0 million, $0.7 million, and $0.5 million, respectively, recorded in deferred revenue as of the beginning of the period.
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 5. Notes Receivable from Third Parties
The following table provides certain information related to notes receivable consists of the following (in thousands):
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.
As of December 31, 2022, the principal amount of the convertible promissory note was $63.2 million, the note was secured by the certain assets and rights of VIA, bore interest at an annual rate of 4.0% and the scheduled maturity date was 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 contained 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 Company entered into a secured promissory note (VIA Note-2) of $2.2 million with VIA on May 20, 2022. The Company entered into an amendment of the secured promissory note during the second quarter of 2022 to provide an additional $5.1 million. The company entered into further amendments during the third quarter of 2022 to provide a total of an additional $4.4 million and additional amendments in the fourth quarter of 2022 to provide an additional $4.6 million, bringing the total payable under the note as of December 31, 2022 to $16.3 million. The note was secured by the certain assets and rights of VIA, bore interest at an annual rate of 4.0%. The principal and interest is due and payable in the event of the termination of the merger agreement.
The company experienced significant delays in the closing of the acquisition of VIA and in the fourth quarter of 2022 withdrew the S-4 resulting in an inability to close the acquisition in the manner originally contemplated. Consequently, the outstanding balances were re-evaluated as to recovery and the balances adjusted to estimated recovery values inclusive of the risks associated with the consummation of the acquisition and the credit risks in the event of an unsuccessful closing.
(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, was 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 loan due from Inobat matured in December 2022 without any receipt of payment, in March 2023, the company extended the maturity date of the loan to May 2023 The Company determined that the Inobat note was fully impaired and recorded an impairment loss of $11.6 million recorded in "Asset impairments" in the year ended December 31, 2022.
(c)Timios Promissory Note
During the first quarter of 2022, Timios purchased mortgage notes at a fair value of $0.5 million, the notes bear interest of 3.5% and 4.875%. The notes mature August 2043 and December 2049. Installments for the loans are approximately $3,000.
In the fourth quarter of 2022, Timios sold the mortgage notes for $0.3 million, this resulted in a loss of $0.2 million in the year ended December 31, 2022.
On July 29, 2022, the Company loaned $43,500, to Green Power Motor Company. Interest will accrue on the outstanding principal at a rate of fixed interest rate per annum equal to 7.50%. Borrower will make 80 consecutive monthly payments commencing on September 1, 2022.
Note 6. 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.
For all acquisitions, 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 Company has included tables for the respective acquisitions by calendar year below. Where a purchase price allocation is considered final this has been disclosed respectively.
In addition to evaluating potential acquisitions, 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. Details and the impacts of any dispositions are noted below.
2022 Acquisitions and Divestitures
The Company has completed the below acquisition in the year ended December 31, 2022. 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.
Energica Acquisition
On March 3, 2021, the Company entered into an investment agreement with Energica to acquire 20.0% of Energica share capital. 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 72.4%. The Energica founders shall continue to own approximately 27.6% 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.
Acquisition Method Accounting Estimates
The final purchase price allocation for Energica was $58.1 million including $2.0 million in cash obtained through the acquisition. The purchase price was paid in cash and funded from available cash resources. The table below summarizes the fair value of identifiable assets acquired and liabilities assumed in the acquisition of Energica.
In conjunction with the acquisition of Energica, the Company remeasured the 20.0% previously accounted for as an equity method investment. The fair value measurement is based on significant inputs to include discounted cash flow analyses that are not observable in the market and thus represents a Level 3 measurement as defined in ASC 820. 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 stepping up the value of the 20.0% equity ownership to reflect the proceeds paid to gain control of Energica. This remeasurement resulted in a gain of $11.0 million recorded in the year ended December 31, 2022, this was recorded in Gain on remeasurement of investment, in our consolidated statement of operations.
The fair value of the 27.6% non-controlling interest in Energica is estimated to be $24.8 million. The fair value measurement is based on significant inputs to include discounted cash flow analyses that are not observable in the market and thus represents a Level 3 measurement as defined in ASC 820. 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 non-controlling interest by stepping up the value of the non-controlling interest less a discount for lack of marketability. The discount for the lack of marketability was calculated by external specialists using a Finnerty model.
(Dollars in thousands)
Cash paid at closing
$
58,140
Fair value of previously held interest
22,183
Fair value of non-controlling interest
24,778
Purchase price
$
105,101
Allocated to:
Current assets
$
19,708
Property and equipment, net
1,927
Intangible assets –Customer relationships
14,226
Intangible assets – Development technology
18,603
Intangible assets – Trademark and trade name
14,496
Goodwill
60,394
Other assets
1,024
Current liabilities
(16,894)
Other liabilities
(8,383)
Fair value of assets acquired, less liabilities assumed
$
105,101
The useful lives of the intangible assets acquired is as follows:
Energica
Intangible assets – customer relationships
13.0
Intangible assets – development technology
8.0
Intangible assets – trademark and tradename
25.0
Weighted average
14.7
The estimated amortization expense related to these intangible assets for each of the years subsequent to December 31, 2022, is as follows (amounts in thousands):
Amortization expense related to intangible assets created as a result of the Energica acquisition for the year ended December 31, 2022 was $3.2 million.
The goodwill from the Energica acquisition represents future economic benefits that we expect to achieve as a result of the Energica acquisition, 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 deductible for tax purposes. Goodwill will not be amortized but instead will be tested for impairment at least annually and more frequently if certain indicators of impairment are present.
Revenue of $11.5 million and net loss of $35.1 million for the year ended December 31, 2022, respectively, have been included in the condensed consolidated financial statements.
Refer to Note 9 for information related to an impairment charge recognized for the Energica reporting unit during the year ended December 31, 2022.
Dispositions
Seven Stars Energy Pte. Ltd.
On February 9, 2022, the Company transferred its 51.0% interest in Seven Starts Energy Pte. Ltd. to Fan Yurong, a current shareholder of SSE, for a nominal amount.
The Company recognized a disposal loss of $0.2 million as a result of the deconsolidation of SSE and such loss was recorded in “Loss on disposal of subsidiaries, net” in the consolidated statements of operations for the year ended December 31, 2022.
Ideanomics Shengtong New Energy Co., Ltd.
On November 29, 2022, the Company sold its 80% ownership on Shandong to the entity’s minority shareholder and its related party in amount of RMB 2.7 million($0.5 million), 70%to the entity’s minority shareholder in amount of RMB 2.4 million ($0.4 million) and 10% to a third party in amount ofRMB 0.3 million ($0.1 million). The Company recognized a disposal loss of $0.1 million as a result of the deconsolidation and such loss was recorded in “Loss on disposal of subsidiaries, net” in the condensed consolidated statements of operations for the nine months ended December 31, 2022.
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.
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 $32.2 millionand net loss of $16.3 million for the year ended December 31, 2022, 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 9 for information related to an impairment charge recognized for the Timios reporting unit during the year ended December 31, 2022 and 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.
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. As of December 31, 2022, 0.5 million shares of the Company’s common stock remain unissued pending receipt of a final consent. 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 previously extended the time frame for this contractual provision as the receipt of the consents is was outside the control of the former WAVE shareholders, but at this time, more than twenty four months post-closing, any outstanding consents are unlikely to be obtained and the agreement provides that no issuance shall be forthcoming absent further extension, which we have not given. Therefore the Company will not issue the remaining 0.5 million shares.
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, 2022. 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 $2.7 million and net loss of $14.0 millionfor the year ended December 31, 2022, 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 9 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 millionpaid 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, 2022 the Company has accrued $0.3 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 $3.0 million and net loss of $9.6 million, for the year ended December 31, 2022, 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 9 for information related to an impairment charge recognized for the US Hybrid reporting unit during the year ended December 31, 2021.
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 stepping 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 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, 2022 the Company has not accrued any of this retention plan as the various criteria are not yet probable of occurring.
Revenue of $10.9 million and net loss of $15.2 million, for the year ended December 31, 2022, 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
Intangible Assets
During the year-ended December 31, 2021 the Company identified impairment indicators related to the 2021 Acquisitions resulting from changing market conditions and sustained supply chain issues that negatively impacted the subsidiaries' projections. The Company impaired all of the intangible assets for WAVE, US Hybrid and Solectrac. The intangibles assets related to Timios were partially impaired. Refer to Note 9 of the Form 10-K filed on September 2, 2022 for additional details of the impairment.
The table below represents the useful lives for the remaining intangibles assets related to the 2021 Acquisitions:
The estimated amortization expense adjusted for the impairment related to the remaining intangible assets for each of the years subsequent to December 31, 2022 is as follows (amounts in thousands):
2023 remaining
$
933
2024
933
2025
933
2026
933
2027
933
2028 and beyond
3,974
Total
$
8,639
Amortization expense related to intangible assets created as a result of the 2021 Acquisitions of $3.2 millionhas been recorded for the year ended December 31, 2022.
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 2022/2021 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.
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.
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 $0.3 million during the year ended December 31, 2022, related to the Energica acquisition.
•The Company incurred transaction costs of $1.4 million during the year ended December 31, 2021, related to the Energica acquisition.
Note 7. Accounts Receivable
The following table summarizes the Company’s accounts receivable (in thousands):
December 31, 2022
December 31, 2021
Accounts receivable, gross
$
6,201
$
4,945
Less: allowance for doubtful accounts
(346)
(1,607)
Accounts receivable, net
$
5,855
$
3,338
For the year ended December 31, 2022, there was no revenue included in the gross balance from the taxi commission revenue receivables from the related party Qianxi. For the year ended December 31, 2021, the gross balance includes the taxi commission revenue receivables from the related party Qianxi of $1.3 million.
The following table summarizes the movement of the allowance for doubtful accounts (in thousands):
December 31, 2022
December 31, 2021
December 31, 2020
Balance at the beginning of the year
$
(1,607)
$
(1,219)
$
—
Increase in the allowance for doubtful accounts
(348)
(350)
(1,219)
Write offs of accounts receivable
1,603
—
—
Effect of change in foreign currency exchange rates
6
(38)
—
Balance at the end of the year
$
(346)
$
(1,607)
$
(1,219)
In the years ended December 31, 2022 and 2021, the Company increased its allowance for doubtful accounts by $0.3 million for accounts receivable from a third-party and $0.4 million from a third party, respectively.
Note 8. Property and Equipment, net
The following table summarizes the Company’s property and equipment (in thousands):
December 31, 2022
December 31, 2021
Furniture and office equipment
$
2,753
$
1,432
Vehicles
1,257
900
Leasehold improvements
4,577
581
Shop equipment
3,204
825
Total property and equipment
11,791
3,738
Less: accumulated depreciation
(2,719)
(833)
Property and equipment, net
$
9,072
$
2,905
The Company recorded depreciation expense of$2.2 million, $0.5 million and $0.1 million in the years ended December 31, 2022, 2021 and 2020, respectively.
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, (in thousands):
January 1, 2021
Liabilities Incurred
Remediation Performed
Accretion Expense
Derecognition
December 31, 2021
Asset retirement obligation
$
4,653
$
—
$
—
$
—
$
(4,653)
$
—
In the year ended December 31, 2021, 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.
Note 9. 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, 2022, 2021 and 2020 (in thousands):
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,g)
(101,470)
Acquisitions
117,445
Effect of change in foreign currency exchange rates
(1)
Disposal of Grapevine (e)
(704)
Balance as of January 1, 2022
16,161
Measurement period adjustments
1,280
Impairment (g,h)
(38,868)
Acquisitions
60,394
Effect of change in foreign currency exchange rates
(a)Throughout 2021, 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 9 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. 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 6 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.
(g)During 2022, the financial services industry suffered a significant decline in transaction processing for services provided by Timios driven by continuous increases in lending rates and an industry sector decline. As a result, the projected financial performance of the reporting unit has declined compared to the prior year reflecting the recovery period expected for the industry sector.
Based on the results of the annual quantitative impairment test, the fair value of the Timios reporting unit was below the carrying value of its net assets. 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.
The quantitative analysis indicated that the carrying amount of the Timios reporting unit exceeded its fair value. As a result, the Company recorded a goodwill impairment charge of $16.2 million in the year ended December 31, 2022.
(h)While Energica significantly expanded the global dealer network and introduced product into the US market, the business did not meet its performance targets in 2022 and is expected to continue to miss business development targets in 2023. Consequently, updated projections reflecting the longer time period required for market development and sales expansion reflect a related decrease in the enterprise value.
Based on the results of the annual quantitative impairment test, the fair value of the Energica reporting unit was below the carrying value of its net assets. The fair value of the Energica 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 Energica’s ability to execute on the projected cash flows. The fair value of Energica’s 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 Energica reporting unit exceeded its fair value. As a result, the Company recorded a goodwill impairment charge of €21.1 million ($22.7 million) in the year ended December 31, 2022.
The following table summarizes information regarding amortizing and indefinite lived intangible assets (in thousands):
December 31, 2022
December 31, 2021
Weighted Average Remaining Useful Life (in years)
Gross Carrying Amount
Accumulated Amortization
Impairment Loss
Net Balance
Gross Carrying Amount
Accumulated Amortization
Impairment Loss
Net Balance
Amortizing Intangible Assets
Continuing membership agreement (b)
16.5
$
1,179
$
(679)
$
(500)
$
—
$
1,179
$
(649)
$
—
$
530
Patents, trademarks and brands (a,d,g,f,h,i)
37.2
22,974
(1,625)
(1,520)
19,829
39,820
(2,715)
(30,492)
6,613
Customer relationships
13.7
13,937
(824)
—
13,113
—
—
—
—
Land use rights (c)
96.0
25,653
(649)
(25,004)
—
27,102
(411)
—
26,691
Licenses (d)
21.8
1,141
(148)
—
993
1,000
(65)
—
935
Lender relationships (d)
5.0
16,600
(2,034)
(12,548)
2,018
16,600
(1,638)
(12,550)
2,412
Internally developed software (e,k)
1.6
760
(266)
(494)
—
452
(76)
—
376
Software (h,j,k)
9.7
4,491
(1,288)
(3,182)
21
4,492
(178)
—
4,314
Non-compete (i)
0
—
—
—
—
520
(57)
(463)
—
Technology (h,i)
7.2
18,225
(1,956)
—
16,269
7,460
(347)
(7,113)
—
Other
0.9
150
(81)
(69)
—
150
(6)
—
144
105,110
(9,550)
(43,317)
52,243
98,775
(6,142)
(50,618)
42,015
Indefinite lived intangible assets
Timios Title plant (d)
500
—
—
500
500
—
—
500
Website name
25
—
—
25
25
—
—
25
Title License
6
—
(6)
—
6
—
—
6
Patent
—
—
—
—
—
—
—
—
Total
$
105,641
$
(9,550)
$
(43,323)
$
52,768
$
99,306
$
(6,142)
$
(50,618)
$
42,546
(a)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 6 for additional information related to the acquisition.
(b)During the three months ended December 31, 2020, 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, 2021, 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 6 for additional information related to the acquisition.
(c)During the three months ended March 31. 2021, the Company completed the acquisition of 100.0% interest in Timios. Refer to Note 6 for additional information related to the acquisition.
(d)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.
(e)During three months ended March 31, 2021, the Company completed the acquisition of 100% interest in WAVE. Refer to Note 6 for additional information related to the acquisition.
(f)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.
(g)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 6 for additional information related to the acquisition.
(h)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 6 for additional information related to the acquisition.
(i)Relates to software costs capitalized during the three months ended September 30, 2021
.
(j)Relates to licensing costs that were capitalized during the three months ended September 30, 2022.
(k)For the year ended December 31, 2022, market conditions have had an adverse impact on Timios’s business forecasts. The projections have negatively impacted Timios’s performance, resulting in lower gross margins and revenue forecasts for 2023 being reduced. As a result, the Company recorded an impairment charge of $1.2 million to the internally generated software for the year ended December 31, 2022.
Amortization expense, excluding impairment losses of $29.7 million, $13.9 million and $20.5 million for the years ended December 31, 2022, 2021 and 2020, respectively, mentioned above, relating to intangible assets was $6.0 million, $5.5 million and $5.2 million for the years ended December 31, 2022, 2021 and 2020, respectively.
The following table summarizes future expected amortization expense (in thousands):
Years ending December 31,
Amortization to be recognized
2023
$
4,889
2024
4,875
2025
4,875
2026
4,833
2027
4,722
2028 and thereafter
28,049
Total
$
52,243
Note 10. Long-term Investments
The following table summarizes the composition of long-term investments (in thousands):
December 31, 2022
December 31, 2021
Non-marketable equity investments
$
7,500
$
7,500
Equity method investments
2,784
28,088
Total
$
10,284
$
35,588
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, there were no impairment losses recorded in the year ended
December 31, 2022, and impairment losses of $4.5 million and $0.2 million were recorded in the years ended December 31, 2021 and 2020, 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, 2022
January 1, 2021
Addition
Income (loss) on investment
Foreign currency translation adj
Impairment losses
Reclassification to subsidiaries
Return of basis
December 31, 2022
Energica
(a)
$
12,329
$
—
$
(1,031)
$
—
$
—
$
(11,298)
$
—
$
—
FNL
(b)
2,856
—
(915)
—
(1,941)
—
—
—
MDI Fund
(c)
3,765
401
(406)
—
(3,102)
—
(658)
—
PEA
(d)
9,138
—
(626)
(1,766)
(6,746)
—
—
—
Orangegrid
(e)
—
3,076
(292)
—
—
—
—
2,784
Total
$
28,088
$
3,477
$
(3,270)
$
(1,766)
$
(11,789)
$
(11,298)
$
(658)
$
2,784
December 31, 2021
January 1, 2020
Addition
Income (loss) on investment
Reclassification to equity method investee
Impairment losses
Reclassification to subsidiaries
Dilution loss due to investee share issuance
December 31, 2021
Solectrac
(f)
$
2,556
$
—
$
(153)
$
—
$
—
$
(2,372)
$
(31)
$
—
Energica
(a)
—
13,555
(1,226)
—
—
—
—
12,329
FNL
(b)
—
3,505
(899)
250
—
—
—
2,856
MDI Fund
(c)
—
4,646
(881)
—
—
—
—
3,765
TM2
(g)
1,144
7,226
(506)
—
(7,864)
—
—
—
PEA
(d)
—
9,138
—
—
—
—
—
9,138
Total
$
3,700
$
38,070
$
(3,665)
$
250
$
(7,864)
$
(2,372)
$
(31)
$
28,088
The Company has received no dividends from equity method investees in the years ended December 31, 2022, 2021 and 2020.
(a)Energica
Refer to Note 6.
(b)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.
In the fourth quarter of 2022, FNL continued to pursue securing incremental funds. Success has been limited and they requested the loan be converted into equity in the fourth quarter of 2022. After rejecting the offer to convert, the company sold the loan at a loss to an investor in FNL in the fourth quarter. In addition, FNL currently has financial payables significantly in excess of cash balances and available committed credit.
Based on the limited success in raising funds in 2022 to date and the perceived decline in value of the platform evidenced by the lack of success in raising funds, the company has concluded the investment should be impaired. The investment was fully impaired at year end December 31, 2022.
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.
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. As capital markets continue their rotation from growth to value investments, the company has evaluated impairment risks associated with all of its investments and adjusted the carrying values to reflect the valuation risks associated. As part of this investment review, we have impaired the investment in MDI. As a result, impairment losses of $3.1 million were recorded in the year ended December 31, 2022, and are recorded in “Asset impairments” in the consolidated statements of operations.
(d)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 joined 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. In the fourth quarter of 2022, Prettl reassessed timing associated with product introduction in the North American market and identified risks which could result in delays and potential incremental costs, which result in revisions to the timing of the recovery of the investment in Prettl. Consequently, the company has adjusted the carrying value of the equity method investment to incorporate updated product launch timing and the costs required to successfully launch product. As a result, impairment losses of $6.7 million were recorded in the year ended December 31, 2022, and are recorded in “Asset impairments” in the consolidated statements of operations.
(e)Orangegrid
On May 20, 2022, Timios purchased 6.6 million Series A-1 preferred share units in Orangegrid for a total investment of $3.0 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.
The Company has decided to account for Orangegrid on a one quarter lag due to the availability of financial results.
(f)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 6 for additional information on the acquisition of Solectrac.
(g)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.
Note 11. Leases
The following tables provide the components of lease expense included within the Consolidated Statement of Comprehensive Income(Loss) for the years ended December 31, 2022, 2021 and 2020 (in thousands):
Year Ended
December 31, 2022
December 31, 2021
December 31, 2020
Operating lease cost
$
4,701
$
1,764
$
1,600
Short-term lease cost
898
720
349
Finance lease cost:
Amortization of right-of-use assets
163
—
—
Interest on lease liabilities
16
—
—
Sublease income
—
—
(74)
Total
$
5,778
$
2,484
$
1,875
The following table provides the weighted average remaining lease term and the weighted average discount rate for the Company's leases as of December 31, 2022 and 2021:
Year Ended
December 31, 2022
December 31, 2021
Operating and Finance lease weighted average remaining lease term (in years):
Operating leases
5.3
4.2
Finance leases
4.0
—
Year Ended
December 31, 2022
December 31, 2021
Operating and Finance lease weighted average discount rate:
Operating leases
4.9
%
5.2
%
Finance leases
2.2
%
—
%
As of December 31, 2022, the Company’s future maturities of operating and finance lease liabilities were as follows:
The following table provides supplemental cash flow information related to leases for the ended December 31, 2022, 2021 and 2020 (in thousands):
Year Ended
December 31, 2022
December 31, 2021
December 31, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
4,454
$
1,856
$
991
Operating cash flows from finance leases
242
—
—
Right-of-use assets obtained in exchange for new operating lease liabilities
6,773
14,293
486
Right-of-use assets obtained in exchange for new finance lease liabilities
$
1,134
$
—
$
—
In the years ended December 31, 2022 and 2021, the Company recorded an impairment losses related to the right of use asset of $0.4 million and $0.1 million, respectively.
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 12. Supplementary Information
Other Current Assets
“Other current assets” were $8.5 million and $4.5 million as of December 31, 2022 and 2021, respectively. Components of “Other current assets” as of December 31, 2022 include a receivable of $2.3 million for employee retention tax credit and $3.3 million for Value-added tax credit. Components of “Other current assets” as of December 31, 2021, include a receivable of $1.9 million from a third-party. There were no components of "Other current assets" as of December 31, 2022 and 2021, which were more than 5% of total current assets.
“Other current liabilities” were$13.7 million and $7.1 million as of December 31, 2022 and 2021, respectively. Components of "Other current liabilities" as of December 31, 2022 that were more than 5% of total current liabilities were other payables to a third-parties in the amount of $6.8 million and accrued expense of $4.2 million. There were no components of "Other current liabilities" as of December 31, 2021, which were more than 5% of total current liabilities.
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 13. Promissory Notes
The following is the summary of outstanding promissory notes as of December 31, 2022 and 2021 (in thousands):
December 31, 2022
December 31, 2021
Interest rate
Principal Amount
Carrying Amount*
Principal Amount
Carrying Amount*
Convertible Debenture (a,b)
4.0%
$
4,442
$
3,928
$
57,500
$
57,809
Small Business Association Paycheck Protection Program (c)
1.0%
219
219
311
312
Promissory note (d)
0.2
2,000
2,021
—
—
Commercial Insurance Premium Finance (e)
5.49% - 7.8%
1,335
1,335
—
—
Other lending agreements (f)
0.1% - 12.0%
7,673
7,673
—
—
Total
$
15,669
15,176
$
57,811
58,121
Less: Current portion
(13,219)
(58,121)
Long-term Note, less current portion
$
1,957
$
—
*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 the short term borrowings is 8.1% and 4.0% as of December 31, 2022 and December 31, 2021, respectively.
As of December 31, 2022 and 2021, 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, 2022
December 31, 2021
December 31, 2020
Interest expense excluding amortization of debt discount
$
1,839
$
2,139
$
1,593
Interest expense related to amortization of debt discount
1,111
—
14,485
Total interest expense
$
2,950
$
2,139
$
16,078
Expense due to conversion of notes
$
—
$
—
$
2,266
(Gain)loss on extinguishment of debt
$
—
$
(300)
$
(8,891)
(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.
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.
During the year ended December 31, 2022, principal and accrued and unpaid interest in the amount of $16.8 million was converted into 67.1 million shares of common stock of the Company. The Company repaid principal and accrued and unpaid interest in the amount of $42.2 million in cash. Total interest expense recognized was $1.2 million for the year ended December 31, 2022.
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)$6.5 million Secured Convertible Debenture due February 24, 2023 – YA II PN
On October 25, 2022, the Company executed a secured debenture purchase agreement with YA II PN, whereby the Company issued a convertible note of $6.5 million, and received net proceeds of $4.9 million. The note is scheduled to mature on February 24, 2023 and bears interest at an annual rate of 8.0%, which would increase to 18.0% in the event of default. The note can be converted at a variable conversion price of 95% of the lowest daily VWAP during the five consecutive trading days immediately preceding the conversion date or other date of determination, but not lower than $0.05 per share. 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 The note contained customary events of default, indemnification obligations of the Company and other obligations and rights of the parties. The note is secured by the pledged collateral defined in the pledge agreement. The Company, YA IIPN and certain of the Company’s subsidiaries also entered into an option agreement. the Company agreed to effect a spin-off within one year from the Closing. YA II PN has the option to purchase the common stocks of spin-off entities and the spin-off call right to purchase each spin-off entity the spin-off call shares at the call purchase price.
During the year ended December 31, 2022, the Company repaid principal and accrued and unpaid interest in the amount of $2.2 million using the proceeds received from SEPA. Total interest expense recognized was $1.2 million for the year ended December 31, 2022, including $1.1 million of debt discount amortization.
(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. While the forgiveness application is under review, the Company has made payments totaling $31,674 of principal and interest during the year ended December 31, 2021 and $95,482 of principal and interest during the year ended December 31, 2022, respectively for the Small Business Association Paycheck Protection Program.
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 6.
(d)Promissory note with related party
On December 13, 2022, the Company entered into a promissory note with Tilllou in the amount of $2.0 million. Tillou is an entity controlled by Vince McMahon, the father of our Executive Chairman, the principal and interest payable on demand any time after January 15, 2023. The note has the flat interest rate 20% per annum. The Company granted to the Noteholder a security interest in the secured collateral. The subordinate agreement among the Company, Tillou and YA PN II agreed to subordinate YA PN II’s security interest in the Inobat Note to Tillou’s security interest up to an aggregate of $2.4 million, subject to the other provisions. The Company repaid the principal and the accrued interest $2.0 million on Jan 13 2023.
(e)Commercial insurance premium financing
The Companyentered two promissory notes of $1.3 million to finance insurance premium during the year ended December 31, 2022. The interest rate for one note is 5.49%, and is payable in 11 installment of $50,320 commencing on September 1, 2022. The interest rate for the other note 6.16% and is payable in 9 installment of $0.1 million commencing on December 1 2022.
(f)Other lending agreements
The Company also entered a few other short term and long term borrowing agreements. These instruments provide working capital for the operations through the combination of accounts receivable factoring, line of credits, vendor financing programs and other secured asset-based lending arrangements. The instruments bear interest rates ranging from 0.1% to 12%, with a weighted average interest rate of 5.3%. An amount of $5.7 million of the payable will be due within one year, and $2.0 million of the payable will due between 2026 and 2028 in installments ranging 41 to 68 months. The total unused line of credit is $0.4 million as of December 31, 2022.
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, 2022, 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.
Vendor Notes Payable Repaid in the Year Ended December 31, 2021
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.
Note 14. Stockholders’ Equity and Convertible Redeemable Preferred Stock
Convertible Preferred Stock Series A
Our Board has authorized 50.0 million shares of convertible preferred stock, $0.001 par value, issuable in series.
As of December 31, 2022 and 2021, 7.0 million shares of Series A redeemable and convertible 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.
2022 Equity Transactions
Convertible Preferred Stock Series B
On November 14, 2022, the Company entered into a Securities Purchase Agreement with Acuitas, pursuant to which Acuitas agreed to purchase (i) Series B Convertible Preferred Stock together with any additional preferred stock from the Company, such number of shares having an aggregate purchase price equal to $20.0 million convertible into shares of Common Stock; and (ii) warrants. The warrants are exercisable at a price of $0.2867 per share of Common Stock, have a five-year term, immediately exercisable (subject to a 9.99% beneficial ownership blocker provision), and contain cashless exercise provisions. The first Closing was held on November 14, 2022, at which 5.0 million shares of Preferred Stock and 5.0 million warrants for the First Closing were purchased and sold at the price of $5.0 million, the second Closing was held on December 27, 2022, at which 5.0 million shares of shares of Preferred Stock and 5.0 million warrants for the second closing were purchased and sold at the price $5.0 million, and the third closing were held on February 2, 2023, at which 10.0 million shares of shares of Preferred Stock and 10.0 million warrants for the third closing were purchased and sold at the price of $10.0 million. The fair value of the warrants as of December 31, 2022, is $1.2 million based on binomial lattice model and recorded on the "Additional paid-in capital" on the consolidated balance sheet.
Each share of Series B Convertible Preferred Stock will vote as a class with the common stock of the Company, and each share of Series B Convertible Preferred Stock will be convertible (subject to a 9.99% beneficial ownership blocker provision) into such number of Common Stock as is determined by dividing the Series B original issue price (plus all unpaid accrued and
accumulated dividends thereon, as applicable, whether or not declared), by the Series B Conversion Price, in effect on the date the certificate is surrendered for conversion. The initial Series B Conversion Price shall be the Series B Original Issue Price; provided, however, that the Series B Conversion Price shall be subject to certain adjustments. In addition, the Series B Convertible Preferred Stock bears 8.0% dividend per annum and has liquidation preference.
SEPA agreement with YA II PN, Ltd
On September 1, 2022 the Company entered into SEPA with YA II PN and subsequently amended it on September 15, 2022. The Company will be able to sell up to 150.0 million shares of its common stock at the Company’s request any time during the 36 months following the date of the Amended SEPA’s entrance into force. The shares would be purchased at 95% of the market price and would be subject to certain limitations, including that YA could not purchase any shares that would result in it owning more than 4.99% of the Company’s common stock. Pursuant to the SEPA, the Company is required to register all shares which YA II PN may acquire. The Company is required to have a Registration Statement declared effective by the SEC before it can raise any funds using the SEPA. There are no other restrictions on future financing transactions. The SEPA does not contain any right of first refusal, participation rights, penalties or liquidated damages. The Company has paid YA Global II SPV, LLC, a subsidiary of YA II PN, a structuring fee in the amount of $10,000, and, on the Effective Date, the Company agreed to issue to YA II PN an aggregate of 0.6 million Common Shares, as a commitment fee. 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 II PN shall have made payment of Advances pursuant to the SEPA for the Common Shares equal to the Commitment Amount. The Company issued 19.8 million shares of common stock, including 1.5 million shares as a commitment fee during the year ended December 31, 2022.
US Hybrid Escrow Shares
On July 12, 2022, the Company received 6,600,000 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 does not constitute a change in the purchase consideration of US Hybrid and accounts for this transaction as a Treasury Stock transaction in the third quarter of 2022.
Refer to Note 13 for information related to issuance of common stock with convertible notes, Note 16 for information related to the issuance to common stock for option exercise. The Company issued 16.9 millions shares to settle the debt owed by VIA motors and recorded as notes receivable due from VIA accordingly. The Company issued 0.4 million shares for the private placement from Alf Poor, the CEO of the Company.
Other Transactions
Redeemable Non-controlling Interest
The Company and Qingdao Xingyang Investment formed an entity named New Energy. Qingdao Xingyang Investment entered into a project collaboration 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 project collaboration agreement stipulated that New Energy must pay Qingdao Xingyang Investment dividends at the rate of 6.0%. After one year, Qingdao Xingyang Investment 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 Xingyang Investment officially requested redemption of the invested funds and interest, in the amount of 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.
The following table summarizes activity for the redeemable non-controlling interest for the years ended December 31, 2022 and 2021 (in thousands):
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, 2022, 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, 2022, 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, 2022, 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 6 for information related to the issuance to common stock for acquisitions, Note 13 for information related to issuance of common stock with convertible notes, Note 17 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, 2021.
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, 2021, the Company issued 122.9 million shares of common stock for a total of $182.5 million under the SEDA.
Refer to Note 13 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 16 for information related to the issuance to common stock for warrant and option exercise, and Note 6 for the information related to the issuance of common stock for DBOT contingent consideration.
Note 15. 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, 2022 and 2021, there was no recorded interest expense, and for the year ended December 31, 2020 we recorded interest expenses of $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, 2021.
For the years ended December 31, 2022 and 2021, there was no recorded interest expense and for the year ended December 31, 2020 we recorded interest expenses of $21,546, 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, 2022 and 2021, there was no recorded interest expense and for the year ended December 31, 2020, we recorded interest expense of $4,301, respectively. The Company did not pay the interest in cash on this note.
(b)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. As of December 31, 2019, the Company recorded a receivable of $0.5 million in "Other Non-Current Assets" as the share transfer registration was expected to not be completed by Shenma. During the twelve months ended December 31, 2021, the receivable was written off with an impairment expense recognized in the amount of $0.5 million.
(c)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" in the year ended December 31, 2021.
(d)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.
(e)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 services are currently being provided or expected to be provided under this contract in the future. One of the shareholders of this entity held a senior position in several of Dr. Wu’s affiliated entities.
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, 2022 and 2021, the Company has receivables of $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, 2022 and 2021, the Company has payables of $0.7 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, 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, 2022 and 2021.
(g)Purchase of receivables from Orangegrid
On December 28, 2022, Timios purchased $0.4 million of receivables from Orangegrid in the consideration of $0.4 million. The receivables represent the Employee Retention Tax Credit to be applied against the payroll taxes paid in Q4 2020 through Q3 2021 by Orangegrid. The transfer of receivables is without recourse for nonpayment. Orangegrid is responsible for collection of the receivables and will send to Timios upon receipt, net of 15% fee. As an incentive, Orangegrid agreed to issue $0.1 million worth of its convertible securities to Timios. In the event that Orangegrid returned the full consideration for the receivables on or before January 6, 2023, the receivables would revert back to Orangegrid, and the agreement would be voided. Orangegrid returned the full purchase price of the receivables on or before January 6, 2023. The receivables reverted back to Orangegrid, and the agreement was voided to include no issuance of convertible securities to Timios.
(h)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.
(i)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.
(j)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.
(k)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, 2022 and December 31, 2021. Refer to Note 6 for additional information.
(l)Amounts due from and due to Glory
As of December 31, 2022 and 2021, the Company has payables of $0.2 million, respectively, due to Glory as a result of the transactions incurred in 2020 and is recorded in “Amount due to related parties”.
(m)Receivable due from Tree Technology minority shareholders
As of December 31, 2022, the Company has receivables of $0.3 million due from Tree Technology minority shareholders for the registered capital contribution of the entity.
(n)Energica Note Receivable
The Company completed the acquisition of Energica on March 14, 2022. Prior to the acquisition, the Company had 20.0% ownership on Energica. The Company provided a loan of $0.7 million to Energica as of the year ended December 31, 2021. The Company recorded a nominal amount of interest income for the years ended December 31, 2022 and 2021 on the consolidated income statements. After the acquisition, the loan and related interest income was eliminated in the consolidated financial statements as of December 31, 2022.
(o)Energica Acquisition
The Company loaned $1.8 million to Energica senior management to exercise their stock options. In the second quarter of 2022, the Company purchased 0.8 million shares from options exercised for an additional $1.3 million. The total of the disbursements, $3.1 million, is considered part of the purchase price of Energica.
(p)Energica Purchases
During the year ended December 31, 2022, Energica has purchased $0.6 million of material and services from three entities owned by one of its senior management team. The balance as of December 31, 2022, with these three entities is $1.3 million and recorded in “Amounts due to related parties” in the condensed consolidated Balance Sheets.
(q)Promissory note with FNL
On June 7, 2022, the Company entered into a secured negotiable promissory note of $1.0 million with FNL. The note bears an interest rate of 6% and expires on March 7, 2023, or with a change of control of FNL, or in the event of default. The Company transferred the note to a third party at the price of $0.4 million and recorded $0.6 million impairment of this note during the year ended December 31, 2022.
(r)Promissory note with Tillou
On December 13, 2022, the Company entered into a promissory note with Tilllou in the amount of $2.0 million. Tillou is an entity controlled by Vince McMahon, the father of our Executive Chairman, the principal and interest payable on demand any time after January 15, 2023. The note has the flat interest rate 20% per annum. The Company granted to the Noteholder a security interest in the secured collateral. The subordinate agreement among the Company, Tillou and YA PN II agreed to subordinate YA PN II’s security interest in the Inobat Note to Tillou’s security interest up to an aggregate of $2.4 million, subject to the other provisions. The Company repaid the principal and the accrued interest of less than $0.1 million on January 13, 2023.
(s)CEO private placement
On October 20, 2022, Alf Poor, our CEO purchased 0.4 million shares of the Company in the amount of 0.1 million
On Nov 9, 2022, Shandong provided a note receivable to its minority interest in amount of RMB 2.2 million ($0.3 million). The note matures on November 18, 2023. The interest rate is the RMB Benchmark loan interest rate for financial institution for one-to-three year loan published by the the People's Bank of China. Shandong was disposed on November 29, 2022.
(u)Disposal of Shangdong
On November 29, 2022, the Company sold its 80% ownership on Shandong to the entity’s minority shareholder and its related party in amount of RMB 2.7 million($0.5 million), 70%to the entity’s minority shareholder in amount of RMB 2.4 million ($0.4 million) and 10% to a third party in amount ofRMB 0.3 million ($0.1 million). The Company recognized a disposal loss of $0.1 million as a result of the deconsolidation and such loss was recorded in “Loss on disposal of subsidiaries, net” in the condensed consolidated statements of operations for the twelve months ended December 31, 2022. The Company is not involved in the operations of Shangdong after the disposal and is no longer considered a related party.
(v)Disposal of Seven Stars Energy Pte. Ltd.
On February 9, 2022, the Company transferred its 51.0% interest in Seven Stars Energy Pte. Ltd. to Fan Yurong, a current shareholder of SSE, for a nominal amount. The Company recognized a disposal loss of $0.2 million as a result of the deconsolidation of SSE and such loss was recorded in “Loss on disposal of subsidiaries, net” in the condensed consolidated statements of operations for the twelve months ended December 31, 2022. The Company is not involved in the operations of SSE after the disposal and is no longer considered a related party.
Note 16. Share-Based Compensation
As of December 31, 2022, the Company had 33.2 million options, 3.7 million restricted shares and 10.0 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 from31.5 million shares to 56.8 million shares. As of December 31, 2022, options available for issuance are 60.3 million shares.
For the years ended December 31, 2022, 2021 and 2020, total share-based payments expense was $10.6 million, $22.0 million and $12.0 million, respectively.
The following table summarizes stock option activity for the years ended December 31, 2022 and 2021:
Options Outstanding
Weighted Average Exercise Price
Weighted Average Remaining Contractual Life (Years)
Aggregated Intrinsic Value
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
Granted
13,033,750
0.30
—
—
Exercised
(72,334)
0.53
—
—
Expired
(1,038,796)
2.08
—
—
Forfeited
(526,037)
1.75
—
—
Outstanding at December 31, 2022
33,240,364
1.17
7.8
—
Vested as of December 31, 2022
18,756,614
1.57
6.45
—
Expected to vest as of December 31, 2022
14,483,750
0.65
9.53
—
As of December 31, 2022, $5.4 million of total unrecognized compensation expense related to non-vested share options is expected to be recognized over a weighted average period of 1.17 years. The total intrinsic value of shares exercised in the years ended December 31, 2022, 2021 and 2020, was $0.0 million, $7.7 million and $2.4 million, respectively. The total fair value of shares vested in the years ended December 31, 2022, 2021 and 2020, was $8.4 million, $8.4 million and $11.8 million, respectively. Cash received from options exercised in the years ended December 31, 2022, 2021 and 2020, was $0.0 million, $8.4 million and $1.7 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, 2022, 2021 and 2020 are as follows:
Year ended
December 31, 2022
December 31, 2021
December 31, 2020
Expected term (in years)
0.5 - 5.55
4.79 - 7.17
5.15 - 5.52
Expected volatility
96% - 127%
112% - 130%
101% - 122%
Expected dividend yield
—
%
—
%
—
%
Risk free interest rate
1.69% - 4.58%
0.51% - 1.29%
0.39% - 0.44%
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:
For the Year Ended December 31, 2021
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 and fund raising agreements, the Company issued warrants to service providers and investors to purchase the common stock of the Company. As of December 31, 2022, the weighted average exercise price was $0.29, and the weighted average remaining life was 4.89 years.
In December 2022, the Company granted 8.2 million restricted shares to certain employees and directors under the 2010 Plan which was approved by the Board. The restricted shares were vested either immediately or over 24 months. The aggregated grant date fair value of all those restricted shares was $1.6 million.
In July 2022, the Company granted 0.6 million restricted shares to certain employees 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 $0.4 million.
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 sumary 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
—
Granted
8,800,000
0.22
Forfeited
—
—
Vested
(5,100,000)
0.25
Non-vested restricted shares outstanding at December 31, 2022
3,700,000
0.19
As of December 31, 2022, there was $0.7 million of unrecognized compensation cost related to unvested restricted shares.
The following table summarizes the Company's earnings (loss) per share (USD in thousands, except per share amounts):
December 31, 2022
December 31, 2021
December 31, 2020
Net loss
$
(260,692)
$
(256,009)
$
(101,264)
Preferred stock dividends
(56)
—
—
Net loss attributable to Ideanomics, Inc. common stockholders
(260,748)
(256,009)
(101,264)
Basic
Basic weighted average common shares outstanding
512,702,986
447,829,204
213,490,535
Diluted
Diluted weighted average common shares outstanding
512,702,986
447,829,204
213,490,535
Net loss per share:
Basic
$
(0.51)
$
(0.57)
$
(0.47)
Diluted
$
(0.51)
$
(0.57)
$
(0.47)
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, 2022
December 31, 2021
December 31, 2020
Warrants
10,000
1,100
900
Options and RSUs
42,055
21,859
25,172
Series A Preferred Stock
933
933
933
Series B Preferred Stock
62,500
—
—
Contingent shares
1,491
1,491
1,013
Convertible promissory note and interest
30,317
30,585
—
Total
147,296
55,968
28,018
Note 18. 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, 2022, the Company 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 Hong Kong. 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. Because of the ten-year expiration period of net operating loss carryovers under Malaysian tax law, it is unlikely that additional net operating losses will further reduce the deferred tax liabilities.
During the year ended December 31, 2022, Tree Technologies recorded a $4.2 million deferred tax benefit resulting almost entirely from the reduction of deferred tax liabilities that accompanied a total impairment of the land-use rights.
At the acquisition of a controlling interest in Energica on March 14, 2022, the Company recognized approximately $6.4 million of deferred tax liabilities related to various intangible assets not recognized for CIT purposes. This was in combination with some smaller temporary differences, as well as net of deferred tax assets, principally related to net operating loss carryovers.
During the period from its acquisition on March 14, 2022 and the end of 2022, Energica and its U.S. subsidiary recorded an income tax benefit of $3.5 million. This arose principally from the reduction of deferred tax liabilities as a result of amortization of the intangible assets as well as from net operating losses for the period, the deferred tax assets from which can be used, with limitations, to offset a portion of Energica’s deferred tax liabilities.
With the exception of the two Hong Kong 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):
Loss before tax, after impairment of and equity in loss of equity method investees
United States
$
(208,155)
$
(256,851)
$
(82,999)
PRC/Italy/Hong Kong/Malaysia and other
(81,672)
(11,660)
(31,890)
(289,827)
(268,511)
(114,889)
Deferred tax expense (benefit) of net operating loss
United States - Federal
(261)
—
—
United States - State
(197)
—
—
PRC/Italy/Hong Kong/Malaysia and other
(2,190)
(371)
(241)
(2,648)
(371)
(241)
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/Italy/Hong Kong/Malaysia and other
—
—
—
—
(10,134)
—
Deferred tax expense (benefit) other than the above two categories
United States - Federal
(116)
(89)
—
United States - State
(218)
(1,359)
—
PRC/Italy/Hong Kong/Malaysia and other
(5,030)
(58)
(3,067)
(5,364)
(1,506)
(3,067)
Total deferred income tax (expense) benefit
(8,012)
(12,011)
(3,308)
Current tax expense (benefit) other than benefit of net operating loss
United States - Federal
—
—
—
United States - State
301
225
—
PRC/Hong Kong/Singapore/Malaysia
—
—
—
Total current income tax (expense) benefit
301
225
—
Total income tax expense (benefit)
$
(7,711)
$
(11,786)
$
(3,308)
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. The current CIT for 2022 also relates to Timios arising from adjustments of prior period estimated amounts.
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:
Additional tax cost basis on disposal of subsidiary
—
0.4
—
Expiration of and disposal of subsidiary NOL carryovers
(0.3)
(0.5)
—
Change in state tax rates due to change in state apportionment
(0.8)
1.1
1.3
Increase in valuation allowance
(16.9)
(10.3)
(15.7)
Tax rate differential(state and foreign)
3.2
5.0
1.3
Non-taxable gain on remeasurement of previously held equity interest Energica
0.9
—
—
Non-taxable gain Non-deductible (loss) on contingent consideration
—
0.9
1.1
Others
(0.4)
(0.6)
0.2
Effective income tax rate
2.7
%
4.4
%
2.9
%
The Company’s acquisition of WAVE in 2021, which is 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 related deferred tax assets in 2021, 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, 2022 and 2021 are as follows (in thousands):
December 31, 2022
December 31, 2021
U.S. NOL
$
73,209
$
46,693
Foreign NOL
14,340
6,554
U.S. capital loss carryover
841
873
U. S. Section 1231 carryover
2,274
2,360
Accrued payroll and expense
963
1,012
Nonqualified options
3,661
2,999
Intangible assets
3,247
—
Inventory reserve
884
563
Bad debt allowance
346
281
Impaired assets
28,497
10,728
Urealized losses
345
—
Other
218
126
Equity investment loss and others
5,505
5,081
Total deferred tax assets
134,330
77,270
Less: valuation allowance
(123,310)
(74,972)
Property and equipment
(292)
(357)
Intangible assets
(12,707)
(5,954)
Outside basis in domestic subsidiary and other
(1,021)
(1,060)
Total deferred tax liabilities
(14,020)
(7,371)
Net deferred tax assets (liabilities)
$
(3,000)
$
(5,073)
As of December 31, 2022, 2021 and 2020, the Company had U.S. domestic cumulative tax loss carryforwards of $303.7 million, $191.4 million and $99.3 million, respectively, and foreign cumulative tax loss carryforwards of $59.0 million, $26.9 million and $24.0 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 $26.2 million will expire beginning year 2023 to year 2027. Italian tax loss carryforwards of $24.8 million, do not expire. Malaysian tax loss carryforwards of $5.9 million will expire in the years 2030 to 2032. At December 31, 2022, 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.
The Company has conducted an analysis of potential limitations of the use of its loss US loss carryovers under Internal Revenue Code section 382, and has concluded that as of December 31, 2022, any such limitations would not have a significant impact on the ability to utilize the loss carryovers and other deferred tax assets discussed above.
Subsequent to December 31, 2022, the Company believes that the VIA transaction (see Note 24), in combination with previous issuances of Company stock, triggered the imposition of limits on the future use of losses that previously did not have any material limitations to approximately $4.8 million per year. This limit would not only apply to loss carryovers, but also to approximately $10.1 million of future amortization deductions. The limit would also apply to any realization in the next five years of the losses that give rise to the $34.3 million of deferred tax assets above that relate to impaired assets and equity method losses. Any portion of the annual limit not used on one year can be carried forward and used in later years.
The triggering of the 382 limitations has an immaterial effect on the net deferred tax assets due to the current valuation allowance. Under the limitations, it would still be at least theoretically possible to eventually utilize all of the Company’s deferred tax assets.
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, possible that the Company could record an income tax benefit in 2023 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 $48.3 million, $28.2 million and $16.5 million in the years ended December 31, 2022, 2021 and 2020, respectively.
The following table reflects the changes in the valuation allowance (in thousands):
Valuation allowance - January 1, 2020
$
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
Increase - year ended December 31, 2022
48,338
Valuation allowance - December 31, 2022
$
123,310
(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, 2022 and 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 other identified uncertain tax positions December 31, 2022, 2021 and 2020.
The following table reflects changes in the gross unrecognized tax positions (in thousands):
Unrecognized tax benefits at beginning of year - January 1, 2020
$
—
Gross changes - year ended December 31, 2020
—
Unrecognized tax benefits at end of year - December 31, 2020
—
Gross changes - year ended December 31, 2021
256
Unrecognized tax benefits at end of year - December 31, 2021
256
Gross increases - current year tax positions
—
Unrecognized tax benefits at end of year - December 31, 2022
$
256
As of December 31, 2022, 2021 and 2020, 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 2022 as applicable. All of Tree Technologies’ tax returns since inception in 2019 are subject to examination by the Malaysian tax authorities. Energica’s tax returns are subject to examination by Italian tax authorities for 2017 and later years.
From time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm the business.
Shareholder Class 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 2018 and 2019, seeking damages. As part of a mediation, the parties reached a settlement for $5.0 million, that has been recorded in litigation settlements. 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. On February 8, 2023 the Court denied Plaintiffs’ motion for leave to amend and Plaintiff did not appeal that decision within the required 30 day time limit, so this matter is now closed.
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. The court consolidated all of the above actions in January of 2022 and the cases were voluntarily dismissed on October 19, 2022, so these matters are closed.
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, the predecessor auditor, 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.
McCarthy v. Ideanomics
On December 14, 2022, Conor McCarthy, Ideanomics’ former CFO, filed an arbitration in front of the American Arbitration Association alleging breach of his separation agreement by Ideanomics and claiming as damages the entirety of his separation payment (approximately $0.7 million), double damages, statutory interest, and costs. The matter is set for arbitration on April 25, 2023.
Cantor Fitzgerald, LLC v. Ideanomics
On January 10, 2023, Cantor sued Ideanomics in the Supreme Court of the State of New York, New York County for breach of contract to pay $0.2 million in fees associated with a Letter Agreement entered into on October 22, 2021. The parties are negotiating a resolution, but the case is still pending in the interim.
Acuitas Capital, LLC v. Ideanomics
On March 14, 2023, Acuitas Capital, LLC filed suit against Ideanomics in the Southern District of New York, alleging breach of the SPA executed between the parties on November 14, 2022 and seeking an injunction for specific performance of the SPA as well as a declaratory judgment that the SPA is valid and enforceable. The hearing on the preliminary injunction motion is set for March 29, 2023.
On March 21, 2023, Ideanomics was served with a notice of lawsuit filed in the Supreme Court of New York, New York County. The summons alleges breach of contract regarding an exclusive term sheet and damages in excess of $10,000,000. No complaint was attached, but the company believes any damages associated with a term sheet (e.g. the failure to conclude a definitive agreement) should be less than the amount claimed by a wide margin.
Note 20. Concentration, Credit and Other Risks
a.Major Customers and Referring Financial Institutions
For the year ended December 31, 2022, no customer individually accounted for more than 10.0% of the Company’s revenue. No customer individually accounted for more than 10.0% of the Company’s net accounts receivable as of December 31, 2022.
Timios generates much of its revenue through referring financial institutions. For the year ended December 31, 2022, no individual referring financial institution accounted for more than 10.0% of the Company’s revenue.
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 (37.90% of accounts receivable).
For the year ended December 31, 2020, three customers individually accounted for more than 10.0% of the Company’s revenue (77.00% of revenue). Three customers individually accounted for more than 10.0% of the Company’s net accounts receivable as of December 31, 2020 (98.20% of accounts receivable).
Major Suppliers
For the year ended December 31, 2022, 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, 2022.
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.)
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, 2022 and 2021, the Company’s cash and cash equivalents were held by financial institutions (located in the PRC, Hong Kong, Malaysia, Italy, Australia 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, 2022, the Company had cash and cash equivalents of $21.9 million. Approximately $4.4 million was held in U.S. entities and $16.0 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 $0.3 million as of December 31, 2022, which was necessary for JUSTLY to meet its minimum capital requirements.
As of December 31, 2022 and 2021, deposits of$3.6 million and $4.7 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 Italy, PRC, HK, U.S., and Malaysia 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 21. Defined Contribution Plans
For U.S. employees, the Company sponsors a 401(k) plan that provides for a 100.0% employer matching contribution of the first 3.0% and 50.0% of the next 2.0% of eligible pay that the employee contributes to the plan. Employees contributions are 100.0% vestedimmediately. The Company’s matching contribution to the 401(k) plan is evenly vested over five years.
The Company paid total matching 401(k) contributions of $1.1 million in the year ended December 31, 2022, and $0.1 million in the years ended December 31, 2021 and 2020, 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 in the years ended December 31, 2022 and 2021, respectively, and $0.4 million in the year ended December 31, 2020.
Employees in Italy are entitled to TFR, commonly referred to as an employee leaving indemnity, which represents deferred compensation for employees in the private sector. Under Italian law, an entity is obligated to accrue for TFR on an individual employee basis payable to each individual upon termination of employment (including both voluntary and involuntary dismissal). The annual accrual is approximately 7.0% of total pay, with no ceiling, and is revalued each year by applying a pre-established rate of return of 1.5%, plus 75.0% of the Consumer Price Index, and is recorded by a book reserve. TFR is an unfunded plan. The costs of the retirement benefit obligation are accounted for under the provisions of ASC 715. The amount of the obligation at December 31, 2022 $0.5 million.
Note 22. Geographic Areas
The following table summarizes geographic information for long-lived assets (in thousands):
Other than the PRC, no other country’s revenues from external customers are significant enough to require separate disclosure. Revenues from external customers in the PRC were $39.1 million, $29.7 million, and $25.0 million million for the years ended December 31, 2022, 2021 and 2020, respectively.
Note 23. 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, 2022
Level 1
Level 2
Level 3
Total
DBOT - Contingent Considerationa
$
—
$
—
$
649
$
649
Tree Technology - Contingent Considerationb
—
—
118
118
Solectrac - Contingent Considerationc
—
—
100
100
Total
$
—
$
—
$
867
$
867
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
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 years ended December 31, 2022 and 2021, respectively.
(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, 2022 and 2021. 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, 2022
December 31, 2021
Weighted-average cost of capital
15.0%
15.0%
Probability
5%-20%
5%-10%
Solectrac Contingent Consideration
The fair value of the Solectrac contingent consideration as of December 31, 2022, 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, 2022
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, 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
Remeasurement loss/(gain) recognized in the income statement
(9,600)
December 31, 2021
999
Remeasurement loss/(gain) recognized in the income statement
As of December 31, 2022, the company had requested advances against the SEPA for an aggregate of 18.3 million shares. In 2023 year to date, the company has requested additional advances for 107.6 million shares and received proceeds in the aggregate of $10.8 million and a reduction in the balance of the outstanding convertible note of approximately $4.2 million. There are 24.0 million shares remaining under the SEPA as of March 15, 2023.
Promissory Note – Tillou Management
Effective March 20, 2023, the Company promised to pay to the order of Tillou Management and Consulting LLC, an entity controlled by Vince McMahon, the father of the Company’s Executive Chairman, Shane McMahon, the principal amount of $2.0 million, due on demand any time after April 20, 2023. The principal amount outstanding under the note accrues interest at 20.0% per annum. As collateral for the Company’s obligations under the note, the Company granted to the note holder a security interest in certain secured collateral with recorded value of $2.4 million.
VIA Motors Acquisition
On January 31, 2023, the company closed the acquisition of VIA Motors, pursuant to the terms of the Amended and Restated Merger Agreement. In closing, the company acquired all outstanding shares of VIA Motors in exchange for the issuance of 126.5 million common shares and up to 2 million convertible preferred shares (at a ratio of 20:1 to common) and the settlement of loans advanced to VIA Motors prior to closing with a settlement value of $72.4 million. The parties agreed to use the closing price on January 24, 2023 to calculate the exchange of share consideration, which was $0.1804. In addition, the VIA Motors selling shareholders will be entitled to receive up to $180 million in convertible preferred shares upon the satisfaction of earn out provisions included in the Amended and Restated Merger agreement. Between December 31, 2022 and the closing, the company provided incremental funds to VIA Motors of approximately $2.9 million.
Yorkville Convertible Note
Subsequent to December 31, 2022, $4.1 million of the convertible note outstanding balance was converted into shares pursuant to the terms and provisions of the debenture agreement executed in October 2022. As of March 15, 2023 the outstanding balance is $0.3 million.
Acuitas SPA
On February 1, 2023, the company issued 10 million Series B convertible preferred shares following the satisfaction of conditions associated with Closing #3 in the Buyers Schedule of the SPA in consideration for the receipt of $10 million. In addition, Acuitas Capital notified the company of their request convert 5 million preferred shares into 24.5 million common shares on February 3, 2023 and subsequently a second conversion notice was issued for the conversion of 5 million preferred shares into 24.5 million common shares on February 13, 2023. There are currently 10 million convertible preferred shares outstanding.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The information required by this Item 9 was "previously reported" as such term is defined in Rule 12b-2 of the Exchange Act.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures”, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (“Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of December 31, 2022 that our disclosure controls and procedures were not effective.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Exchange Act defines internal control over financial reporting as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our Board, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:
•Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
•Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of our management and Directors;
•Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we assessed the effectiveness of our internal control over financial reporting as of December 31, 2022, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (2013). Based on our assessment, we have concluded that our internal control over financial reporting was not effective as of December 31, 2022 due to the material weaknesses described below.
In 2022, our evaluation included Timios, WAVE, Solectrac and US Hybrid for the first time. Our evaluation excluded Energica which was acquired in the year ended December 31, 2022, and was not fully integrated with Ideanomics as of that date. As of and for the year ended December 31, 2022, Energica represented 11% of total assets and 11% of revenue. In accordance with guidance issued by the SEC, we have excluded the Energica acquisitions from our assessment of internal controls over financial reporting during the first year following the acquisition.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Management has determined that the Company has the following material weaknesses in its internal control over financial reporting as of December 31, 2022:
•The design and implementation of internal controls over the review of management’s inputs into valuation models and associated valuation outputs from third party valuation specialists .
•The design and implementation of internal controls over the revenue recognition process, specifically the failure to properly evaluate whether the Company was to be considered the principal or the agent in contracts with customers.
•There is a lack of sufficient personnel in accounting and financial reporting functions with sufficient experience and expertise with respect to the application of U.S. GAAP and SEC disclosure requirements.
•Operating effectiveness of internal controls to identify and evaluate the accounting implications of non-routine transactions.
•There is a lack of controls designed to address risk of material misstatement for various financial statement areas and related assertions.
•There is a lack of validation of completeness and accuracy of internally prepared data, including key reports generated from systems, utilized in the operations of controls.
•There is a lack of evidence to support the effective review in the operations of controls.
•There is a lack of controls at the entity level, particularly over the review of subsidiary financial information, including analysis of balance sheet data, operating results, non-routine transactions, litigation accruals and income tax matters.
•Controls are not designed with a sufficient level of precision to prevent or detect a material misstatement.
•An inventory of service organizations utilized to process transactions was not maintained throughout the reporting period. There is a lack of review over service organization reports. In instances in which service organization reports are not available, the Company does not have adequate complementary controls.
•There is a lack of segregation of duties that exists in the information technology environments and payroll and procure to pay cycles at the Company.
•There is a lack of documented compliance related to controls to evaluate potential risk of dealing with inappropriate vendors and/or customers.
•The Company’s information technology general controls over certain information technology systems were not designed properly and therefore did not operate effectively.
On July 26, 2022, subsequent to the dismissal of BDO as the company’s auditor, BDO informed the company of their belief that the Company also had the following material weaknesses as of December 31, 2021:
•There is ineffective oversight from the Company’s Audit Committee.
•There is a lack of documented compliance-related controls to evaluate transactions in accordance with the FCPA.
Management’s Plan for Remediation
In the fourth quarter of 2022, management analyzed the root causes of the material weaknesses described above with the Audit Committee and has completed the design phase to modify existing controls or add new controls to address risks identified in the material weaknesses identified in 2021. Management has also implemented over half of the proposed remediation measures in the first quarter of 2023 and expects to complete the rollout in the second quarter of 2023. We expect that the deficiencies
identified which aggregate to the material weaknesses noted above, will be subject to testing throughout 2023 subject to the control operation cycles to determine the operating effectiveness. A critical element of the remediation designed includes the monitoring of the operation of controls on a location basis both as to operation and the related documentation of the control operation.
As to the two material weaknesses communicated by BDO following their dismissal, management has discussed the related observations with the Audit Committee:
FCPA
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.
In addition, management believes that the current FCPA compliance program, as designed and currently in operation, is consistent with standard industry policies and practices related to FCPA compliance, which include amongst other activities regular updates to compliance policies as posted on the company’s website, standard procedures for vetting new customers, vendors and contractual counterparties supported by recognized external vendors for KYC and training for employees on the FCPA compliance program.
Following the conclusion of the investigation, the Audit Committee requested management to conduct an assessment of the effectiveness of the current FCPA compliance program in the fourth quarter of 2022 with the objective of ensuring optimization of the program. The review concluded that the transactions in question occurred prior to the currently implemented controls, which include the third-party validation of the beneficial ownership and public compliance history of contractual counter parties. The currently implemented controls are designed to identify counter party risk and have been applied to all commercial contracts entered into in the fourth quarter of 2022.
Audit Committee Oversight
Prior to the June 30, 2021 testing date, the company was a smaller reporting company and as of the testing date became a large accelerated filer. Throughout 2021 the Company completed multiple acquisitions and investments into early stage technology growth companies. The Audit Committee discussed with management the implications related to assessment activities for internal control over financial reporting. The change in the plan for the assessment of internal control over financial reporting for 2021 comprehended the risks associated with the change in reporting status and the financial accounting and reporting associated with the acquisitions, including but not limited to purchase price accounting, tax accounting and consolidation.
The response to these risks included amongst other items, the engagement of additional external resources to document and test controls, the engagement of external qualified valuation and tax resources to support financial accounting and reporting related to the acquisitions and the hiring of internal resources to collaborate with the external advisors. The plan was implemented in the first quarter of 2021, concurrent with the operational integration of the acquired businesses.
In 2022, the Audit Committee directed the investigation activities referred to above including but not limited to the establishment of the scope of the investigation, the review of the methodology employed and the basis for conclusions on procedures performed. In addition, the Audit Committee reviewed and approved the scoping for the 2022 evaluation including the risk assessment for new in scope locations, requested bi-weekly updates from management on the timeliness of the evaluation and reviewed the aggregation of deficiencies.
In 2023, the Audit Committee is in the process of recruiting new members for the Committee to enhance the current risk assessment and mitigation skill sets of the Committee. The addition of new independent members is expected to increase the level of engagement with key risk matters. The Committee expects that with the addition of new members and the broader scope of engagement specific to the risk assessment, this material weakness will be fully remediated in 2023.
Management believes that the number and nature of material weaknesses noted above result in a presumption of ineffective oversight and management of the internal control over financial reporting activities. In developing remediation plans to address this presumption, management is evaluating all existing and necessary oversight and operational administration activities associated with internal control over financial reporting.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our most recent fiscal year that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item 10 of Form 10-K will be included in our definitive 2023 Proxy Statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for our 2023 Annual Meeting of Stockholders and is incorporated herein by reference. The 2023 Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 of Form 10-K will be included in our definitive 2023 Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information required by this Item 12 of Form 10-K will be included in our definitive 2023 Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item 13 of Form 10-K will be included in our definitive 2023 Proxy Statement and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item 14 of Form 10-K will be included in our definitive 2023 Proxy Statement and is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Financial Statements and Schedules
The financial statements are set forth under Item 8 of this Annual Report on Form 10-K. Financial statement schedules have been omitted since they are either not required, not applicable, or the information is otherwise included.
Exhibit List
See the Exhibit Index immediately preceding the signature page of this Annual Report on Form 10-K, which is incorporated by reference here.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
IDEANOMICS, INC.
(Registrant)
Date: March 30, 2023
By
/s/ Alfred P. Poor
Alfred P. Poor
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
