NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Note
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Ideanomics, Inc. (Nasdaq: IDEX) is a Nevada
corporation that primarily operates in the United States and Asia. The Company comprised of (i) our Legacy YOD business with primary
operations in the PRC, and (ii) our Wecast Service business, a global financial technology (“Fintech”) advisory and
Platform-as-a-Service company with the intent of offering customized services based on best-in-class blockchain, AI and other technologies
to mature and emerging businesses across various industries. To do so, we are building a technology ecosystem through license agreements,
joint ventures and strategic acquisitions, which we refer to as our “Fintech Ecosystem”. In parallel, through strategic
acquisitions, equity investments and joint ventures, we are building a network of businesses, operating across industry verticals
which we refer to as our “Industry Ventures”. We believe these industry verticals have significant potential to recognize
benefits from blockchain and AI technologies that may, for example, enhance operations, address cost inefficiencies, improve documentation
and standardization, unlock asset value and improve customer engagement. Our core business strategy is to promote the use, development
and advancement of blockchain- and AI-based technologies, and our positioning in the fintech industry overall, by bringing technology
leaders together with industry leaders and creating synergies between the businesses in our expanding Fintech Ecosystem and the
businesses in our Industry Ventures.
Various aspects of the development of our
Fintech Ecosystem and our Industry Ventures are still in the planning and testing phase and are generally
not operational or revenue generating.
Basis of Presentation
In this Form 10-Q, unless the context otherwise
requires, the use of the terms "we," "us", "our" and the “Company” refers to Ideanomics,
Inc, its consolidated subsidiaries and variable interest entities (“VIEs”).
On April 24, 2018, the Company completed
the acquisition of 100% equity ownership in Shanghai Guang Ming Investment Management (“Guang Ming”), a PRC limited
liability company. One of the two selling shareholders is a related party, an affiliate of Dr. Wu. Guang Ming holds a special fund
management license. The acquisition will help the Company develop a fund management platform. Under Accounting Standard Codification
(“ASC”) 805-50-05-5 and ASC 805-50-30-5, the transaction was accounted for as a reorganization of entities under common
control, in a manner similar to a pooling of interest, using historical costs. As a result of the reorganization, the net assets
of Guang Ming were transferred to the Company, and the accompanying consolidated financial statements as of and for the three months
ended March 31, 2018 have been prepared as if the current corporate structure had been in place at the beginning of periods presented
in which the common control existed.
In the opinion of management, all adjustments
(which include normal recurring adjustments) necessary to present a fair statements of the financial position as of March 31, 2019,
results of operations for the three months ended March 31, 2019 and 2018, and cash flows for the three months ended March 31, 2019
and 2018, have been made. All significant intercompany transactions and balances are eliminated on consolidation. However, the
results of operations included in such financial statements may not necessary be indicative of annual results.
We use the same accounting policies in
preparing quarterly and annual financial statements. Certain information and footnote disclosures normally included in the annual
consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of
America (“U.S. GAAP”) have been condensed or omitted. These unaudited consolidated financial statements should be read
in conjunction with the Company's audited consolidated financial statements and notes thereto included in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission on April 1, 2019 (“2018
Annual Report”).
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, we evaluate our estimates,
including those related to the bad debt allowance, variable considerations, fair values of financial instruments, intangible assets
(including digital tokens) and goodwill, useful lives of intangible assets and property and equipment, asset retirement obligations,
income taxes, and contingent liabilities, among others. We base our estimates on assumptions, both historical and forward looking,
that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets
and liabilities.
Fair Value Measurements
Accounting standards require the categorization
of financial assets and liabilities, based on the inputs to the valuation technique, into a three-level fair value hierarchy. The
various levels of the fair value hierarchy are described as follows:
|
•
|
Level 1 - Financial assets and liabilities whose values are based on unadjusted quoted market prices for identical assets and
liabilities in an active market that we have the ability to access.
|
|
•
|
Level 2 - Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model
inputs that are observable for substantially the full term of the asset or liability.
|
|
•
|
Level 3 - Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that
are both unobservable and significant to the overall fair value measurement.
|
The fair value hierarchy requires an entity
to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The Company reviews the valuation techniques
used to determine if the fair value measurements are still appropriate on an annual basis, and evaluate and adjust the unobservable
inputs used in the fair value measurements based on current market conditions and third party information.
Our financial assets and liabilities that
are measured at fair value on a recurring basis include cash and cash equivalents, accounts receivable, accounts payable,
accrued expenses, other current liabilities and convertible notes. The fair values of these assets approximate carrying values
because of the short-term nature of these instruments. If these instruments were measured at fair value in the financial statements,
they would be classified as Level 1 in the fair value hierarchy.
Our financial assets that are measured
at fair value on a nonrecurring basis include goodwill and other intangible assets, asset retirement obligations, and adjustment
in carrying value of equity securities for which the measurement alternative of cost less impairment plus or minus observable price
changes is used. There were no material impairments and no material adjustments to equity securities using the measurement alternative
for the three months ended March 31, 2019 and 2018.
Digital Tokens
Digital tokens consist of GTB tokens
received in connection with the services agreement and assets purchase agreement with GT Dollar Pte. Ltd.
(“GTD”), our minority shareholder (Note 3 and 13 (b)). Given that there is limited precedent regarding the
classification and measurement of cryptocurrencies and other digital tokens under current GAAP, the Company has determined to
account for these tokens as indefinite-lived intangible assets in accordance with ASC 350, Intangibles—Goodwill and
Other until further guidance is issued by the FASB.
Indefinite-lived intangible assets are
recorded at cost and are not subject to amortization, but shall be tested for impairment annually and more frequently if events
or changes in circumstances indicate that it is more likely than not that the asset is impaired. If, at the time of an impairment
test, the carrying amount of an intangible asset exceeds its fair value, an impairment loss in an amount equal to the excess is
recognized. The fair value of GTB tokens was a Level 2 measurement (see Note 3) based upon the consideration agreed by GTD and
the Company with a discount considering volatility, risk and limitations at contract inception.
Reclassifications of a General Nature
Certain amounts in the prior periods presented
have been reclassified to conform to the current period financial statement presentation. These reclassifications have no effect
on previously reported net income. Note 2 provides information about our adoption of new accounting standards for leases.
Note
2. New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
We adopted Financial Accounting Standards
Board (FASB) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), as of January 1, 2019, using
a modified retrospective transition method and as a result, the consolidated balance sheet prior to January 1, 2019 was not restated,
continues to be reported under ASC Topic 840, Leases, or ASC 840. For all leases at the lease commencement date, a right-of-use
asset and a lease liability are recognized. The right-of-use asset represents the right to use the leased asset for the lease term.
The lease liability represents the present value of the lease payments under the lease.
The lease liability is based on the present
value of the remaining minimum lease payments, determined under ASC 840, discounted using our incremental borrowing rate at the
effective date of January 1, 2019, using the original lease term as the tenor. As permitted under the transition guidance, we
elected several practical expedients that permit us to not reassess (1) whether a contract is or contains a lease, (2) the classification
of existing leases, and (3) whether previously capitalized costs continue to qualify as initial indirect costs. The application
of the practical expedients did not have a significant impact on the measurement of the operating lease liability. Adoption of
the new standard resulted in the recording of operating right of use assets and the related lease liabilities of approximately
$3.6 million and $3.7 million, respectively, as of January 1, 2019. The difference between the additional lease assets and lease
liabilities was immaterial. The standard did not materially impact our consolidated operating results and had no impact on cash
flows. Please see Note 9.
In June 2018, the FASB issued ASU No. 2018-07,
Improvements to Nonemployee Share-Based Payment Accounting, which largely aligns the measurement and classification guidance for
share-based payments to nonemployees with the guidance for share-based payments to employees. The ASU also clarifies that any share-based
payment issued to a customer should be evaluated under ASC 606,
Revenue from Contracts with Customers
. The ASU requires
a modified retrospective transition approach. We adopted ASU 2018-07 as of January 1, 2019 and there is no impact to our consolidated
financial statement because we did not have such payments in 2019.
In July 2017, the FASB issued ASU No. 2017-11,
(Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral
for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling
Interests with a Scope Exception. The new standard applies to issuers of financial instruments with down-round features. A down-round
provision is a term in an equity-linked financial instrument (i.e. a freestanding warrant contract or an equity conversion feature
embedded within a host debt or equity contract) that triggers a downward adjustment to the instrument’s strike price (or
conversion price) if equity shares are issued at a lower price (or equity-linked financial instruments are issued at a lower strike
price) than the instrument’s then-current strike price. The purpose of the feature is typically to protect the instrument’s
counterparty from future issuances of equity shares at a more favorable price. The ASU amends (1) the classification of such instruments
as liabilities or equity by revising the certain guidance relative to evaluating if they must be accounted for as derivative instruments
and (2) the guidance on recognition and measurement of freestanding equity-classified instruments. For the Company, this ASU was
effective January 1, 2019. Please see Note 11.
Standards Issued and Not Yet Adopted
In June 2016, the FASB issued Accounting
Standards Update No. 2016-13 (ASU 2016-13) "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments" which requires the measurement and recognition of expected credit losses for financial assets held
at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires
the use of forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary
impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit
losses rather than as a reduction in the amortized cost basis of the securities. These changes will result in earlier recognition
of credit losses. We will adopt ASU 2016-13 effective January 1, 2020. We are currently evaluating the effect of the adoption of
ASU 2016-13 on our consolidated financial statements. The effect will largely depend on the composition and credit quality of our
investment portfolio and the economic conditions at the time of adoption.
Note
3. Revenue
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.
The majority of the Company’s revenue
is derived from Wecast Service. The following table presents our revenues disaggregated by revenue source, geography (based on
our business locations) and timing of revenue recognition.
|
|
Three Months Ended
|
|
|
|
March 31, 2019
|
|
|
March 31, 2018
|
|
|
|
|
|
|
|
|
Geographic Markets
|
|
|
|
|
|
|
|
|
Singapore
|
|
$
|
-
|
|
|
$
|
178,178,605
|
|
USA
|
|
|
26,945,564
|
|
|
|
-
|
|
Hong Kong
|
|
|
-
|
|
|
|
7,755,216
|
|
|
|
$
|
26,945,564
|
|
|
$
|
185,933,821
|
|
Services Lines
|
|
|
|
|
|
|
|
|
-Wecast Service
|
|
|
|
|
|
|
|
|
Crude oil
|
|
$
|
-
|
|
|
$
|
178,178,605
|
|
Consumer electronics
|
|
|
-
|
|
|
|
7,613,113
|
|
Digital asset management services
|
|
|
26,600,000
|
|
|
|
-
|
|
Digital advertising services and other
|
|
|
345,564
|
|
|
|
142,103
|
|
|
|
|
26,945,564
|
|
|
|
185,933,821
|
|
-Legacy YOD
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
26,945,564
|
|
|
$
|
185, 933,821
|
|
|
|
|
|
|
|
|
|
|
Timing of Revenue Recognition
|
|
|
|
|
|
|
|
|
Products transferred at a point in time
|
|
$
|
345,564
|
|
|
$
|
185, 933,821
|
|
Services provided over time
|
|
|
26,600,000
|
|
|
|
-
|
|
Total
|
|
$
|
26,945,564
|
|
|
$
|
185, 933,821
|
|
Wecast service revenue
Wecast Services is mainly engaged in the
logistics management, including sales of crude oil, consumer electronics, and digital consulting services such as assets management
and marketing services.
Logistics management revenue:
Revenue from the sales of crude oil and
consumer electronics is recognized when the customer obtains control of the Company’s crude oil and consumer electronics,
which occurs at a point in time, usually upon shipment or upon acceptance. The contracts are generally short-term contracts where
the time between order confirmation and satisfaction of all performance obligations is less than one year.
The most significant judgment is determining
whether we are the principal or agent for the sales of crude oil and consumer electronics. We report revenues from these transactions
on a gross basis where we are the principal considering the following principal versus agent indicators:
|
(a)
|
We are primarily responsible for fulfilling the promise to provide the goods to the customer. The
Company enters into contracts with customers with specific quality requirements and the suppliers separately. The Company is obliged
to provide the goods if the supplier fails to transfer the goods to the customer and responsible for the acceptability of the goods.
|
|
(b)
|
The Company has certain inventory risk. Although the Company has the title to the good only momentarily
before passing title on to the customer, the Company is responsible to arrange and issue bill of lading to the customer so that
the customer can have the right to obtain the required oil product. In addition, the customer can seek remedies and submit the
clam against the Company regarding the quality or quantity of the products delivered.
|
|
(c)
|
The Company has discretion in establishing prices. Upon delivery of the crude oil and consumer
electronics to the customer, the terms of the contract between the Company and the supplier require the Company to pay the supplier
the agreed-upon price. The Company and the customer negotiate the selling price, and the Company invoices the customer for the
agreed-upon selling price. The Company’s profit is based on the difference between the sales price negotiated with the customer
and the price charged by the supplier. The sales price for crude oil is based on the daily benchmark price of spot product plus
any premium determined by the Company.
|
Digital asset management service with GTD:
On March 14, 2019, the Company entered
into a service agreement with one of our minority shareholders, GTD to provide digital asset management services including consulting,
advisory and management services which will be delivered in two phases. There are two performance obligations: (1) the development
of a master plan for GTD’s assets for 7,083,333 GTB tokens agreed by both parties; and (2) exclusive marketing and business
development management services for a fee as percentage (0.25%) of the total market value of GTB tokens; based on a 10-day average
of the 10 business days leading up to the end of a respective calendar month, and paid on the first day of each new calendar month.
The Company recognizes revenue for
the master plan development services over the contract period (expected to be completed in six months), based on the progress
of the services provided towards completed satisfaction. Based on ASC 606-10-32, at contract inception, the Company
considered the following factors to estimate the fair value of GTB token (noncash consideration): a) it only trades in one
exchange, which operations have been less than one year; b) its historical volatility is high; c) the Company’s
intention to hold the majority of GTB tokens, as part of our digital asset management services; and d) associated risks
discussed in Note 18 (f). Therefore, the fair value of 7,083,333 GTB tokens using Level 2 measurement was approximately $40.7
million with a 76% discount to the fixed contract price agreed upon by both parties when signed the contract. We considered similar token exchanges in Singapore and considered
the volatility of the quoted prices and determined a discount of 76%. We recognized $26.6 million for the three months ended
March 31, 2019 and recognized deferred revenue in the amount of $14.1 million as of March 31, 2019.
The Company considers the payments for
marketing and business development management services as performance based consideration, in accordance with ASC 606 on constraining
estimates of variable consideration, including the following factors:
|
•
|
The
susceptibility of the consideration amount to factors outside the Company’s influence.
|
|
•
|
The uncertainty associated with the consideration amount is not expected to be resolved for a long period
of time.
|
|
•
|
The Company
’
s experience with similar types of contracts.
|
|
•
|
Whether the Company expects to offer price concessions or change the payment terms.
|
|
•
|
The range of possible consideration amounts.
|
For the three months ended March
31, 2019, the Company only provided the development service and recognized revenue of $26.6 million.
Legacy YOD revenue
Since 2017, we run our legacy YOD segment
with limited resources. No revenue was recognized for the three months ended March 31, 2019 and 2018.
Arrangements with multiple performance
obligations
Our contracts with customers may include
multiple performance obligations. For such arrangements, we allocate revenue to each performance obligation based on its relative
standalone selling price. We generally determine standalone selling prices 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.
Variable consideration
Certain customers may receive discounts,
which are accounted for as variable consideration. We estimate these amounts based on the expected amount to be provided to customers
and reduce revenues recognized. Our revenue reserves, consisting of various discounts and allowances, which are components of variable
consideration as discussed above, are considered an area of significant judgment. Additionally, our digital asset management service
revenue, as discussed above, is calculated as a percentage (0.25%) of the total market value of GTB tokens. For these areas of
significant judgment, actual amounts may ultimately differ from our estimates and are adjusted in the period in which they become
known.
Deferred revenues
We record deferred revenues when cash
payments are received or due in advance of our performance, including amounts which are refundable. The increase in the
deferred revenue balance for the three months ended March 31, 2019 is primarily driven by cash payments and GTB tokens
received or due in advance of satisfying our performance obligations.
Our payment terms vary by the type and
location of our customer and the products or services offered. The term between invoicing and when payment is due is not significant.
For certain products or services and customer types, we require payment before the products or services are delivered to the customer.
Practical expedients and exemptions
We do not disclose the value of unsatisfied
performance obligations for contracts with an original expected length of one year or less.
Note
4. VIE Structure and Arrangements
We consolidate VIEs in which we hold a
variable interest and are the primary beneficiary through contractual agreements. We are the primary beneficiary because we have
the power to direct activities that most significantly affect their economic performance and have the obligation to absorb the
majority of their losses or benefits. The results of operations and financial position of these VIEs are included in our consolidated
financial statements.
For these consolidated VIEs, their assets
are not available to us and their creditors do not have recourse to us. As of March 31, 2019 and December 31, 2018, assets (mainly
long-term investments) that can only be used to settle obligations of these VIEs were approximately $3.6 million and $3.5 million,
respectively, and the Company is the major creditor for the VIEs.
In order to operate our Legacy YOD business
in PRC and to comply with PRC laws and regulations that prohibit or restrict foreign ownership of companies that provides value-added
telecommunication services, the Company entered into a series of contractual agreements with two VIEs: Beijing Sinotop Scope Technology
Co., Ltd (“Sinotop Beijing”) and Tianjin Sevenstarflix Network Technology Limited (“SSF”). These contractual
agreements will be expired in March 2030 and April 2036, respectively and may not be terminated by the VIEs, except with the consent
of, or a material breach by us. Currently, the Company is still evaluating the overall operating strategy for YOD legacy business
and does not have plan to provide any funding to these two VIEs. Please refer to Note 18(a) for associated regulatory risks.
Based on the contracts we entered with
VIEs’ shareholders, we consider that there is no asset of the VIEs that can be used only to settle obligation of the Company,
except for the registered capital of VIEs amounting to RMB 38.2 million (approximately $5.7 million).
Note
5. Acquisitions
|
(a)
|
Assets Acquisition of SolidOpinion, Inc (“SolidOpinion”)
|
On February 19, 2019, the Company completed
the acquisition of certain assets from SolidOpinion in exchange for 4,500,000 shares of the Company’s common stock. The
assets include cash ($2.5 million) and an intellectual property (“IP”) which is complementary
to the IP of Grapevine. The parties agreed that 450,000 of such shares of common stock (“Escrow Shares”) will be held
in escrow until February 19, 2020 in connection with SolidOpinion’s indemnity obligations pursuant to the agreement. SolidOpinion
have the rights to vote and receive the dividends paid with respect to the Escrow Shares.
|
(b)
|
Acquisition of Tree Motion Sdn. Bhd. (“Tree Motion”)
|
On March 5, 2019, the Company entered into
the following acquisition agreements:
|
·
|
Acquire 51% of Tree Motion, a Malaysian company, for 25,500,000 shares of the Company’s common
stock at $2.00 per share.
|
|
·
|
Acquire 11.22% of Tree Motion’s parent company, Tree Manufacturing Sdn. Bhd., for 12,190,000 shares
of the Company’s common stock and $620,000 in cash or/and loan. Therefore, we will directly and indirectly own 55.50% of
Tree Motion.
|
The transactions are conditioned upon the
Company’s completion of its due diligence, customary closing conditions and regulatory approval. We paid $620,000 in March 2019 as an investment deposit and recorded in prepayments on our consolidated balance sheet
as of March 31, 2019.
Note
6. Property and Equipment, net
The following is a breakdown of property
and equipment:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Furniture and office equipment
|
|
$
|
345,541
|
|
|
$
|
357,064
|
|
Vehicle
|
|
|
64,632
|
|
|
|
63,135
|
|
Leasehold improvements
|
|
|
198,584
|
|
|
|
200,435
|
|
Total property and equipment
|
|
|
608,757
|
|
|
|
620,634
|
|
Less: accumulated depreciation
|
|
|
(196,566
|
)
|
|
|
(186,514
|
)
|
Construction in progress (Fintech Village)
|
|
|
15,181,064
|
|
|
|
14,595,307
|
|
Property and Equipment, net
|
|
$
|
15,593,255
|
|
|
$
|
15,029,427
|
|
The Company recorded depreciation
expense of approximately $16,609 and $7,584, which is included in its operating expense for the three months ended
March 31, 2019 and 2018, respectively.
The Company capitalized direct costs and
interest cost incurred on funds used to construct Fintech Village and the capitalized cost is recorded as part of construction
in progress. Capitalized cost was approximately $586,000 for the three months ended March 31, 2019 mainly related to the legal
and architect costs.
Note
7. Goodwill and Intangible Assets
Goodwill
There were no acquisitions that closed
during the first three months of 2019 and there is no change in the carrying amount of goodwill.
Intangible Assets
Information regarding amortizing and indefinite
lived intangible assets consisted of the following:
|
|
|
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
|
|
Weight
Average Remaining
|
|
|
Gross
Carry
|
|
|
Accumulated
|
|
|
Impairment
|
|
|
Net
|
|
|
Gross
Carry
|
|
|
Accumulated
|
|
|
Impairment
|
|
|
Net
|
|
|
|
Useful
Life
|
|
|
Amount
|
|
|
Amortization
|
|
|
Loss
|
|
|
Balance
|
|
|
Amount
|
|
|
Amortization
|
|
|
Loss
|
|
|
Balance
|
|
Amortizing Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Animation Copyright (Note 13 (b))
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
301,495
|
|
|
$
|
(64,606
|
)
|
|
$
|
-
|
|
|
$
|
236,889
|
|
Software and licenses
|
|
|
-
|
|
|
|
97,308
|
|
|
|
(95,648
|
)
|
|
|
-
|
|
|
|
1,660
|
|
|
|
97,308
|
|
|
|
(93,251
|
)
|
|
|
-
|
|
|
|
4,057
|
|
Intellectual property (Note 5 (a))
|
|
|
4.9
|
|
|
|
4,655,000
|
|
|
|
(77,583
|
)
|
|
|
-
|
|
|
|
4,577,417
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Influencer network
|
|
|
9.5
|
|
|
|
1,980,000
|
|
|
|
(115,500
|
)
|
|
|
-
|
|
|
|
1,864,500
|
|
|
|
1,980,000
|
|
|
|
(66,000
|
)
|
|
|
-
|
|
|
|
1,914,000
|
|
Customer contract
|
|
|
2.5
|
|
|
|
500,000
|
|
|
|
(97,223
|
)
|
|
|
-
|
|
|
|
402,777
|
|
|
|
500,000
|
|
|
|
(55,556
|
)
|
|
|
-
|
|
|
|
444,444
|
|
Trade name
|
|
|
14.5
|
|
|
|
110,000
|
|
|
|
(4,277
|
)
|
|
|
-
|
|
|
|
105,723
|
|
|
|
110,000
|
|
|
|
(2,444
|
)
|
|
|
-
|
|
|
|
107,556
|
|
Technology platform
|
|
|
6.5
|
|
|
|
290,000
|
|
|
|
(24,165
|
)
|
|
|
-
|
|
|
|
265,835
|
|
|
|
290,000
|
|
|
|
(13,808
|
)
|
|
|
-
|
|
|
|
276,192
|
|
Total amortizing intangible
assets
|
|
|
|
|
|
$
|
7,632,308
|
|
|
$
|
(414,396
|
)
|
|
$
|
-
|
|
|
$
|
7,217,912
|
|
|
$
|
3,278,803
|
|
|
$
|
(295,665
|
)
|
|
$
|
-
|
|
|
$
|
2,983,138
|
|
Indefinite lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Website name
|
|
|
|
|
|
|
25,214
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,214
|
|
|
|
159,504
|
|
|
|
-
|
|
|
|
(134,290
|
)
|
|
|
25,214
|
|
Patent
|
|
|
|
|
|
|
28,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
28,000
|
|
|
|
28,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
28,000
|
|
GTB Tokens (Note 13 (b))
|
|
|
|
|
|
|
61,123,506
|
|
|
|
-
|
|
|
|
-
|
|
|
|
61,123,506
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total intangible assets
|
|
|
|
|
|
$
|
68,809,028
|
|
|
$
|
(414,396
|
)
|
|
$
|
-
|
|
|
$
|
68,394,632
|
|
|
$
|
3,466,307
|
|
|
$
|
(295,665
|
)
|
|
$
|
(134,290
|
)
|
|
$
|
3,036,352
|
|
Amortization expense relating to intangible assets was $227,568 and $2,621 for the three months ended
March 31, 2019 and 2018, respectively.
The following table outlines the expected
amortization expense for the following years:
|
|
Amortization
to be
|
|
Years ending December 31,
|
|
recognized
|
|
|
|
|
|
2019 (excluding the three months ended March 31, 2019)
|
|
$
|
1,198,499
|
|
2020
|
|
|
1,344,429
|
|
2021
|
|
|
1,288,873
|
|
2022
|
|
|
1,177,762
|
|
2023 and thereafter
|
|
|
2,208,350
|
|
Total amortization to be recognized
|
|
$
|
7,217,913
|
|
Note
8. Long-term Investments
Long-term investments
consisted
of Non-marketable Equity Investment and Equity Method Investment as below:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Non-marketable Equity Investment
|
|
$
|
6,266,880
|
|
|
$
|
9,452,103
|
|
Equity Method Investment
|
|
|
16,676,714
|
|
|
|
16,956,506
|
|
Total
|
|
$
|
22,943,594
|
|
|
$
|
26,408,609
|
|
Non-marketable equity investment
Our non-marketable equity investments are
investments in privately held companies without readily determinable fair values are carried at cost minus impairment, if any,
plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment
of the same issuer.
The Company reviews its equity securities
without readily determinable fair values on a regular basis to determine if the investment is impaired. For purposes of this assessment,
the Company considers the investee’s cash position, earnings and revenue outlook, liquidity and management ownership, among
other factors, in its review. If management’s assessment indicates that an impairment exists, the Company estimates the fair
value of the equity investment and recognizes in current earnings an impairment loss that is equal to the difference between the
fair value of the equity investment and its carrying amount. There is no impairment for the three months ended March 31, 2019.
Equity method investments
The Company’s investment in companies
accounted for using the equity method of accounting consist of the following:
|
|
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
Loss on
|
|
|
Impairment
|
|
|
translation
|
|
|
|
|
|
|
|
|
2018
|
|
|
Addition
|
|
|
investment
|
|
|
loss
|
|
|
adjustments
|
|
|
March 31, 2019
|
|
Wecast Internet
|
|
(i)
|
|
$
|
4,114
|
|
|
$
|
-
|
|
|
$
|
(5
|
)
|
|
$
|
-
|
|
|
$
|
1,930
|
|
|
$
|
6,039
|
|
Hua Cheng
|
|
(ii)
|
|
|
308,666
|
|
|
|
-
|
|
|
|
(14,598
|
)
|
|
|
-
|
|
|
|
(1,236
|
)
|
|
|
292,832
|
|
BDCG
|
|
(iv)
|
|
|
9,800,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,800,000
|
|
DBOT
|
|
(v)
|
|
|
6,843,726
|
|
|
|
-
|
|
|
|
(265,883
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
6,577,843
|
|
Total
|
|
|
|
$
|
16,956,506
|
|
|
$
|
-
|
|
|
$
|
(280,486
|
)
|
|
$
|
-
|
|
|
$
|
694
|
|
|
$
|
16,676,714
|
|
All the investments above are privately
held companies; therefore, quoted market prices are not available. We have not received any dividends since initial investments.
Starting from October 2016, we have 50%
interest in Wecast Internet Limited (“Wecast Internet”) and initial investment was invested RMB 1,000,000 (approximately
$149,750). Wecast Internet is in the process of liquidation and the remaining carrying value is immaterial.
|
(ii)
|
Hua Cheng Hu Dong (Beijing) Film and Television Communication Co., Ltd.(“Hua Cheng”)
|
The Company held 39% equity ownership in
Hua Cheng, a company established to provide integrated value-added service solutions for the delivery of VOD and enhanced content
for cable providers.
|
(iii)
|
Shandong Lushi Media Co., Ltd (“Shandong Media”)
|
The Company held 30% equity ownership
in Shandong Media, a print based media business, for Legacy YOD business. The accumulated operating loss of Shandong Media reduced
the Company’s investment in Shandong Media to zero. The Company has no obligation to fund future operating losses.
|
(iv)
|
BBD Digital Capital Group Ltd. (“BDCG”)
|
In 2018, we signed a joint venture agreement
with two unrelated parties, to establish BDCG located in the United States for providing block chain services for financial or
energy industries by utilizing AI and big data technology in the United States. On April 24, 2018, the Company acquired 20% equity
ownership in BDCG from one noncontrolling party with cash consideration of a total consideration of $9.8 million which consists
of $2 million in cash and $7.8 million paid in the form of the Company’s capital stock (valued at $2.60 per share and equal
to 3 million shares of the Company’s common stock), increasing the Company’s ownership to 60%. The remaining 40% of
BDCG are held by Seasail ventures limited (“Seasail”). The accounting treatment of the joint venture is based on the
equity method due to variable substantive participating rights (in accordance with ASC 810-10-25-11) granted to Seasail. The new
entity is currently in the process of ramping up its operations. In April 2019, the company rebranded the name of the BDCG joint
venture to Intelligenta. As part of the rebranding, Intelligenta’s strategy will now include credit services, corporation
services, index services and products, and capital market services and products.
|
(v)
|
Delaware Board of Trade Holdings, Inc. (“DBOT”)
|
As of March 31, 2019, the Company held
36.92% equity ownership in DBOT. DBOT is an approved and licensed FINRA- and SEC-regulated electronic trading platform with operations
in Delaware. One of our subsidiaries is powered by DBOT’s platform, trading system and technology.
In April, 2019, the Company entered into
a securities purchase agreement to acquire additional shares in DBOT for 4,427,870 shares of the Company’s common stock at
$2.11 per share, thereby becoming the majority and controlling shareholder in DBOT.
Note
9. Leases
We lease certain office space and equipment
from third parties. Leases with an initial term of 12 months or less are not recorded on the balance sheet and we recognize lease
expense for these leases on a straight-line basis over the lease term. For leases beginning in 2019 and later, at the inception
of a contract we assess whether the contract is, or contains, a lease. Our assessment is based on: (1) whether the contract involves
the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use
of the asset throughout the period, and (3) whether we have the right to direct the use of the asset. At inception of a lease,
we allocate the consideration in the contract to each lease component based on its relative stand-alone price to determine the
lease payments. Leases entered into prior to January 1, 2019, are accounted for under ASC 840 and were not reassessed. We account
for lease components (e.g., fixed payments including rent, real estate taxes and insurance costs) separately from the nonlease
components (e.g.,common-area maintenance costs).
Most leases include one or more options
to renew, with renewal terms that can extend the lease term from one year or more. The exercise of lease renewal options is at
our sole discretion. Our 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 of our lease agreements include rental payments adjusted periodically
for inflation. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. All
our leases are operating lease. We have 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.
As of March 31, 2019, our operating lease
right of use assets and operating lease liability are approximately $6.8 million and $7.0 million, respectively. The operating
lease expenses including in Selling, general and administrative expense are approximately $428,000 and $216,000 for the three
months ended March 31, 2019 and 2018, respectively. The weighted-average remaining lease term is 3.8 years and the average discount
rate is 7.25%.
Maturity of operating lease liability is
as follows:
Maturity of Lease Liability
|
|
Operating Lease
|
|
2019
|
|
$
|
1,320,442
|
|
2020
|
|
|
1,177,261
|
|
2021
|
|
|
1,202,496
|
|
2022
|
|
|
1,294,781
|
|
2023
|
|
|
1,343,668
|
|
After 2024
|
|
|
2,529,735
|
|
Total lease payments
|
|
|
8,868,383
|
|
Less: Interest
|
|
|
(1,824,219
|
)
|
Total
|
|
$
|
7,044,164
|
|
Note
10. Supplemental Financial Statement Information
Other Current Assets
“Other current assets” were
approximately $3.8 million and $3.6 million as of March 31, 2019 and December 31, 2018, respectively. Component of "Other
current assets" that was more than 5 percent of total current assets: other receivable from third parties in our subsidiaries
located in PRC in the amount of $3.5 million and $3.3 million respectively.
Other Current Liabilities
“Other current liabilities”
were approximately $5.5 million and $5.3 million as of March 31, 2019 and December 31, 2018, respectively. Components of "Other
current liabilities" that were more than 5 percent of total current liabilities were other payable to third parties in the
amount of $4.8 million and $4.6 million respectively.
Note
11. Convertible Note
The following is the summary of outstanding
convertible notes as of March 31, 2019:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Convertible Note-Mr. McMahon(Note 13 (a))
|
|
$
|
3,169,644
|
|
|
$
|
3,140,055
|
|
Convertible Note-SSSIG (Note 13 (a))
|
|
|
1,142,917
|
|
|
|
1,000,000
|
|
Convertible Note-Advantech
|
|
|
11,664,914
|
|
|
|
11,313,770
|
|
Senior Secured Convertible Note
|
|
|
346,870
|
|
|
|
-
|
|
Total
|
|
$
|
16,324,345
|
|
|
$
|
15,453,825
|
|
Short-term Note
|
|
|
4,312,561
|
|
|
|
4,140,055
|
|
Long-term Note
|
|
|
12,011,784
|
|
|
|
11,313,770
|
|
On June 28, 2018, the Company entered into
a convertible note purchase agreement with Advantech Capital Investment II Limited (“Advantech”) in the aggregate principal
amount of $12,000,000 (the Notes). The Notes bear interest at a rate of 8%, mature on June 28, 2021, and are convertible into approximately
6,593,406 shares of the Company’s common stock at a conversion price of $ 1.82 per share. The difference between the conversion
price and the fair market value of the common stock on the commitment date (transaction date) resulted in a beneficial conversion
feature recorded of approximately $1.4 million. Total interest expense recognized relating to the beneficial conversion feature
was $114,000 and $0.0 during the three months ended March 31, 2019 and 2018, respectively. The agreement also requires the Company
to comply with certain covenants, including restrictions on the use of the proceeds and other convertible note offering. As of
March 31, 2019, the Company was in compliance with all ratios and covenants.
Issuance of Senior Secured Convertible
Debenture
On February 22, 2019, the Company executed
a security purchase agreement with ID Venturas 7, LLC (“IDV”), whereby the Company issued $2,050,000 of senior secured
convertible note. The note bears interest at a rate of 10% per year payable either in cash or in kind at the option of the Company
on a quarterly basis and matures on August 22, 2020. In addition, IDV is entitled to the following: (i) the convertible note is
senior secured; (ii) convertible at $1.84 per share of Company common stock at the option of IDV (approximately 1,114,130 shares),
subject to adjustments if subsequent equity shares have a lower conversion price, (ii) 1,166,113 shares of common stock of the
Company and (iii) a warrant exercisable for 150% of the number of shares of common stock which the Note is convertible into (approximately
1,671,196 shares) at an exercise price of $1.84 per share and will expire 5 years after issuance.
The Company received aggregate gross
proceeds of $2 million, net of $50,000 for the issuance expenses paid by IDV. Total funds received were allocated to convertible
note, common stocks and warrants based on their relative fair values in accordance with ASC 470-20-30. The value of the convertible
note and common stocks was based on the closing price on February 22, 2019. The fair value of the warrants was determined using
the Black-Scholes option-pricing model, with the following assumptions: expected life of 5 years, expected dividend rate of 0%,
volatility of 111.83% and an interest rate of 2.48%. The relative fair value of the warrants was recorded as additional
paid-in capital and reduced the carrying amount of the convertible note. The Company recognized a beneficial conversion feature
discount on convertible note at its intrinsic value, which was the fair value of the common stock at the commitment date for convertible
note, less the effective conversion price. The Company recognized approximately $600,000 of beneficial conversion feature as an
increase in additional paid in capital and reduced (discount on) the carrying amount of the convertible note in the accompanying
consolidated balance sheet.
The discounts on the convertible note for
the warrants and beneficial conversion feature are being amortized to interest expense, using the effective interest method over
the term of the convertible note. As of March 31, 2019, the unamortized discount on the convertible note is approximately $1,724,000.
Total interest expense recognized relating to the discount was approximately $326,000 during the period ended March 31, 2019.
Interest on the convertible note is payable
quarterly starting from April 1, 2019. The convertible note is redeemable at the option of the Company in whole at an initial redemption
price of the principal amount of the convertible note plus additional warrants and accrued and unpaid interest to the date of redemption.
The security purchase agreement contains customary representations, warranties and covenants. The convertible
note is collateralized by the Company’s equity interest in Grapevine, which had a carrying amount of $2.6 million as of March
31, 2019. The Company has the right to request for the removal of the guarantee and collateral by issuance of additional 250,000
shares of common stock. In addition, IDV has registration rights that require the Company to file and register the common stock
issued or issuable upon conversion of the convertible note or the exercise of the warrants, within 180 days following the closing
of the transaction.
The Company is also subject to penalty
fee at 8% per annum for late payments of interests and compensation for the loss of IDV on failure to timely deliver conversion
shares upon conversion.
Note
12. Stockholders’ Equity
Convertible Preferred Stock
Our board of directors has authorized 50
million shares of convertible preferred stock, $0.001 par value, issuable in series.
As of March 31, 2019 and December 31, 2018,
7,000,000 shares of Series A preferred stock were issued and outstanding and is convertible, at any time at the option of the holder,
into 933,333 shares of common stock (subject to customary adjustments). The Series A preferred stock shall be entitled to ten vote
per common stock on an as-converted basis and only entitled to receive dividends when and if declared by the board. On liquidation,
both series of preferred stock are entitled to a liquidation preference of $0.50 per share. The shares are not redeemable except
on liquidation or if there is a change in control of the Company or a sale of all or substantially all of the assets of the Company.
The conversion price of the Series A may only be adjusted for standard anti-dilution, such as stock splits and similar events.
The Series A preferred stocks are considered to be equity instruments and therefore the embedded conversion options have not been
separated. Because the preferred stocks have conditions for their redemption that may be outside the control of the Company, they
have been classified outside of Shareholders’ Equity, in the mezzanine section of our balance sheet.
Common Stock
Our board of directors has authorized 1,500
million shares of common stock, $0.001 par value.
Note
13. Related Party Transactions
$3.0 Million Convertible Note with
Mr. Shane McMahon (“Mr. McMahon”)
On May 10, 2012, Mr. McMahon, our Vice
Chairman, made a loan to the Company in the amount of $3,000,000. In consideration for the loan, the Company issued a convertible
note to Mr. McMahon in the aggregate principal amount of $3,000,000 (the “Note”) at a 4% interest rate computed on
the basis of a 365-day year. We entered several amendments with respect to the effective conversion price (changed from $1.75 to
$1.5), convertible stocks (changed from of Series E Preferred Stock to Common Stock) and extension of the maturity date to December
31, 2019.
For the three months ended March 31, 2019
and 2018, the Company recorded interest expense of $29,589 and $30,000 related to the Note. Interest payable was $169,644 and $140,055 as of March 31, 2019 and December 31, 2018, respectively.
$2.5 Million Convertible Promissory
Note with Sun Seven Stars Investment Group Limited (“SSSIG”)
On February 8, 2019, the Company entered
into a convertible promissory note agreement with SSSIG, an affiliate of Mr. Wu, in the aggregate principal amount of $2,500,000.
The convertible promissory note bear interest at a rate of 4%, matures on February 8, 2020, and are convertible into the shares
of the Company’s common stock at a conversion price of $1.83 per share anytime at the option of SSSIG.
As of March 31, 2019, the Company
received $1.1 million from SSSIG. The Company has not received the remaining $1.4 million as of the date of this report. For
the three months ended March 31, 2019, the Company recorded interest expense of $10,617 related to the note.
|
(b)
|
Transactions with GTD
|
Disposal of Assets in exchange of
GTB tokens
In March 2019, the Company completed the
sale of the following assets (with total carrying amount of approximately $20.4 million) to GTD, a minority shareholder based in
Singapore, in exchange for 1,250,000 GTB tokens. The Company considers the arrangement is a nonmonetary transaction and the fair
values of GTB tokens are not reasonably determinable due to the reasons described in Note 3. Therefore, GTB tokens received are
recorded at the carrying amount of the assets exchanged and the Company did not recognize any gain or loss based on ASC 845-10-30.
|
·
|
License content (net carrying amount approximately $17.0 million)
|
|
·
|
Approximately 13% ownership interest in Nanjing Shengyi Network Technology Co., Ltd (“Topsgame”) (carrying amount
approximately $3.2 million which was included in long-term investment-Non-marketable Equity Investment)
|
|
·
|
Animation copy right (net carrying amount approximately $0.2 million which was included in intangible asset.)
|
Digital asset management services
Please refer to Note 3.
For the three months ended March 31, 2018, we purchased crude oil in the amount of approximately $162.3
million from two suppliers that a minority shareholder of the Company has significant influence upon because this minority shareholder
has significant influence on both our Singapore joint venture and these two suppliers. The Company has recorded the purchase on
a separate line item referenced as “Cost of revenue from related parties” in its financial statements. There is no
outstanding balances due (in Accounts Payable) as of March 31, 2019. No such related party transactions occurred for the same period
in 2019.
On February 20, 2019, the Company accepted
the resignation of former Chief Executive Officer, former Chief Investment Officer and former Chief Strategy Officer and agreed
to pay approximately $837,000 in total for salary, severance and expenses. The Company paid $637,000 in the first quarter of year
2019 and recorded $200,000 in other current liabilities on our consolidated balance sheet as of March 31, 2019.
Note
14. Share-Based Payments
As of March 31, 2019, the Company had 1,646,431 options, 87,586
restricted shares and 1,671,196 warrants outstanding.
The Company awards common stock and stock
options to employees and directors as compensation for their services, and accounts for its stock option awards to employees and
directors pursuant to the provisions of ASC 718,
Stock Compensation
. The fair value of each option award is estimated on
the date of grant using the Black-Scholes Merton valuation model. The Company recognizes the fair value of each option as compensation
expense ratably using the straight-line attribution method over the service period, which is generally the vesting period.
Effective as of December 3, 2010 and amended
on August 3, 2018, our Board of Directors approved the 2010 Stock Incentive Plan (“the 2010 Plan”) pursuant to which
options or other similar securities may be granted. As of March 31, 2019, the maximum aggregate number of shares of our common
stock that may be issued under the 2010 Plan is 31,500,000 shares. As of March 31, 2019, options available for issuance are 27,575,499
shares.
For the three months ended March 31,
2019 and 2018, total share-based payments expense was approximately $224,000 and $121,000, respectively.
Stock option activity for the three months
ended March 31, 2019 is summarized as follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregated
|
|
|
|
Options
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Outstanding
|
|
|
Price
|
|
|
Life (Years)
|
|
|
Value
|
|
Outstanding at January 1, 2019
|
|
|
1,706,431
|
|
|
$
|
3.28
|
|
|
|
4.08
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(60,000
|
)
|
|
|
1.91
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at March 31, 2019
|
|
|
1,646,431
|
|
|
$
|
3.33
|
|
|
|
3.66
|
|
|
$
|
54,565
|
|
Vested and expected to be vested as of March 31, 2019
|
|
|
1,646,431
|
|
|
$
|
3.33
|
|
|
|
3.66
|
|
|
$
|
54,565
|
|
Options exercisable at March 31, 2019 (vested)
|
|
|
1,634,348
|
|
|
$
|
3.34
|
|
|
|
3.63
|
|
|
$
|
53,365
|
|
As of March 31, 2019, approximately $12,448
of total unrecognized compensation expense related to non-vested share options is expected to be recognized over a weighted average
period of approximately 0.61 years. The total fair value of shares vested for the three months ended March 31, 2019 and 2018 was
$6,312 and $312,688 respectively. Cash received from options exercised during the three months ended March 31, 2019 and 2018
was approximately $0.0 and $2,632.
In connection with the Company’s
financings, the Warner Brother Agreement and the service agreements, the Company issued warrants to service providers to purchase
common stock of the Company. The warrants issued to Warner Brother were expired without exercise on January 31, 2019. The Company
issued warrants to IDV in connection with senior secured convertible note (See Note 11) and the weighted average exercise price
was $1.84 and the weighted average remaining life was 5 years.
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
Outstanding and
|
|
|
Outstanding and
|
|
|
Exercise
|
|
|
Expiration
|
Warrants Outstanding
|
|
Exercisable
|
|
|
Exercisable
|
|
|
Price
|
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 Broker Warrants (Series E Financing)
|
|
|
-
|
|
|
|
60,000
|
|
|
$
|
1.75
|
|
|
01/31/19
|
2018 IDV (Senior secured convertible note )
|
|
|
1,671,196
|
|
|
|
-
|
|
|
$
|
1.84
|
|
|
2/22/2024
|
|
|
|
1,671,196
|
|
|
|
60,000
|
|
|
|
|
|
|
|
On September 24, 2018, the Company entered
into an employment agreements with three executives. As part of their employment agreements, they are entitled to warrants for
an aggregate of 8,000,000 shares at an exercise price of $5.375 per share (the “Exercise Price”), which is a 25% premium
to the $4.30 per share closing market price of the Company’s common stock on September 7, 2018, the date upon which the terms
of the employment agreements were mutually agreed. In February 2019, the rights to receive warrants were terminated due to the
resignation of three executives.
In January 2019, the Company granted 129,840 restricted shares to each of two then independent directors
under the “2010 Plan” which was approved by the Board of Directors for year 2018 independent board compensation plan.
The restricted shares were all vested immediately since commencement date. The aggregated grant date fair value of all those restricted
shares was $161,001.
A summary of the unvested restricted shares
is as follows:
|
|
|
|
|
Weighted-average
|
|
|
|
Shares
|
|
|
fair value
|
|
Non-vested restricted shares outstanding at January 1, 2019
|
|
|
87,586
|
|
|
$
|
2.46
|
|
Granted
|
|
|
129,840
|
|
|
$
|
1.24
|
|
Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
Vested
|
|
|
(129,840
|
)
|
|
$
|
1.24
|
|
Non-vested restricted shares outstanding at March 31, 2019
|
|
|
87,586
|
|
|
$
|
2.46
|
|
As of March 31, 2019, there was $106,600
of unrecognized compensation cost related to unvested restricted shares. This amount is expected to be recognized over a weighted-average
period of 1.01 years.
Note
15. Earnings (Loss) Per Common Share
Basic earnings (loss) per common share
attributable to our shareholders is calculated by dividing the net earnings (loss) attributable to our shareholders by the weighted
average number of outstanding common shares during the period.
Diluted earnings (loss) per share is calculated
by taking net earnings (loss), divided by the diluted weighted average common shares outstanding. The calculations of basic and
diluted earnings (loss) per share for the three months ended, 2019 and 2018 are as follows:
For the periods ended March 31,
|
|
2019
|
|
|
2018
|
|
Net earnings (loss) attributable to common stockholders
|
|
$
|
19,926,515
|
|
|
$
|
(3,721,369
|
)
|
Interest expense attributable to convertible promissory notes
|
|
|
738,219
|
|
|
|
-
|
|
Net earnings (loss) assuming dilution
|
|
$
|
20,664,734
|
|
|
$
|
(3,721,369
|
)
|
Basic weighted average common shares outstanding
|
|
|
105,345,673
|
|
|
|
68,816,303
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
Convertible preferred shares- Series A
|
|
|
933,333
|
|
|
|
-
|
|
Convertible promissory notes
|
|
|
10,022,230
|
|
|
|
-
|
|
Diluted potential common shares
|
|
|
116,301,236
|
|
|
|
68,816,303
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.19
|
|
|
$
|
(0.05
|
)
|
Diluted
|
|
$
|
0.18
|
|
|
$
|
(0.05
|
)
|
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 earnings (losses) and thus these
shares were not included in the computation of diluted earnings (loss) per share because the effect was antidilutive.
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Warrants
|
|
|
1,671,196
|
|
|
|
60,000
|
|
Options
|
|
|
1,646,431
|
|
|
|
1,706,431
|
|
Series A Preferred Stock
|
|
|
-
|
|
|
|
933,333
|
|
Convertible promissory note and interest
|
|
|
-
|
|
|
|
10,407,233
|
|
Total
|
|
|
3,317,627
|
|
|
|
13,106,997
|
|
Note
16. Income Taxes
During the three months ended March 31,
2019, the Company recorded an income tax benefit of $86,405 which consisted of a $4,750,449 expense related to current operations
and a $4,836,854 benefit from a reduction in the beginning of the year deferred tax valuation allowance. This resulted in an effective
tax rate of (1%). The effective tax rate for the three months ended March 31, 2019 differs from the U.S. statutory tax rate primarily
due to the effect of taxes on foreign earnings, non-deductible expenses and the reduction in the beginning of the year deferred
tax valuation allowance.
There was no identified unrecognized tax
benefit as of March 31, 2018 and 2019.
Note
17. Contingencies and Commitments
|
|
Lawsuits and Legal Proceedings
|
From time to time, we 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 our business. As of March
31, 2019, there are no such legal proceedings or claims that we believe will have a material adverse effect on our business, financial
condition or operating results.
Note
18. Concentration, Credit and Other Risks
The PRC market in which the Company operates
poses certain macro-economic and regulatory risks and uncertainties. These uncertainties extend to the ability of the Company
to conduct wireless telecommunication services through contractual arrangements in the PRC since the industry remains highly regulated.
The Company conducts legacy YOD business in China through a series of contractual arrangements (See Note 4). The Company believes
that these contractual arrangements are in compliance with PRC law and are legally enforceable. If Sinotop Beijing, SSF or their
respective legal shareholders fail to perform the obligations under the contractual arrangements or any dispute relating to these
contracts remains unresolved, We can enforce its rights under the VIE contracts through PRC law and courts. However, uncertainties
in the PRC legal system could limit the Company’s ability to enforce these contractual arrangements. In particular, the
interpretation and enforcement of these laws, rules and regulations involve uncertainties. If we had direct ownership of Sinotop
Beijing and SSF, it would be able to exercise its rights as a shareholder to effect changes in the board of directors of Sinotop
Beijing or SSF, which in turn could effect changes at the management level, subject to any applicable fiduciary obligations. However,
under the current contractual arrangements, the Company relies on Sinotop Beijing, SSF and their respective legal shareholders
to perform their contractual obligations to exercise effective control. The Company also gives no assurance that PRC government
authorities will not take a view in the future that is contrary to the opinion of the Company. If the current ownership structure
of the Company and its contractual arrangements with the VIEs and their equity holders were found to be in violation of any existing
or future PRC laws or regulations, the Company's ability to conduct its business could be affected and the Company may be required
to restructure its ownership structure and operations in the PRC to comply with the changes in the PRC laws which may result in
deconsolidation of the VIEs.
In addition, the telecommunications, information
and media industries remain highly regulated. Restrictions are currently in place and are unclear with respect to which segments
of these industries foreign owned entities, like YOD WFOE, may operate. The PRC government may issue from time to time new laws
or new interpretations on existing laws to regulate areas such as telecommunications, information and media, some of which are
not published on a timely basis or may have retroactive effect. For example, there is substantial uncertainty regarding the Draft
Foreign Investment Law, including, among others, what the actual content of the law will be as well as the adoption and effective
date of the final form of the law. Administrative and court proceedings in China may also be protracted, resulting in substantial
costs and diversion of resources and management attention. While such uncertainty exists, the Company cannot assure that the new
laws, when it is adopted and becomes effective, and potential related administrative proceedings will not have a material and adverse
effect on the Company's ability to control the affiliated entities through the contractual arrangements. Regulatory risk also encompasses
the interpretation by the tax authorities of current tax laws, and the Company’s legal structure and scope of operations
in the PRC, which could be subject to further restrictions resulting in limitations on the Company’s ability to conduct business
in the PRC.
Wecast Services is currently primarily
engaged with consumer electronics e-commerce and smart supply chain management operations. The Company’s ending customers
are located across the world.
For the three months ended March 31,
2018, one customer individually accounted for more than 10% of the Company’s third parties revenue. Two customers individually
accounted for more than 10% of the Company’s net accounts receivables as of March 31, 2018, respectively.
For the three months ended March 31,
2019, one customer individually accounted for more than 10% of the Company’s revenue. Two customers individually accounted
for more than 10% of the Company’s net accounts receivables as of March 31, 2019, respectively.
For the three months ended March 31, 2018,
one supplier individually accounted for more than 10% of the Company’s cost of revenues. One supplier individually accounted
for more than 10% of the Company’s accounts payable and amount due to related parties as of March 31, 2018.
For the three months ended March 31, 2019,
two suppliers individually accounted for more than 10% of the Company’s accounts payable as of March 31, 2019.
|
(d)
|
Concentration of Credit Risks
|
Financial instruments that potentially
subject the Company to significant concentration of credit risk primarily consist of cash and accounts receivable. As of March
31, 2019 and December 31, 2018, the Company’s cash was held by financial institutions (located in the PRC, Hong Kong, the
United States and Singapore) that management believes have acceptable credit. Accounts receivable are typically unsecured and
are mainly derived from revenues from Wecast Services. 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.
|
(e)
|
Foreign Currency Risks
|
We have certain operating transactions
are denominated in RMB and a portion of the Company’s assets and liabilities is denominated in RMB. RMB is not freely convertible
into foreign currencies. The value of the RMB is subject to changes in the central government policies and to international economic
and political developments. In the PRC, certain foreign exchange transactions are required by laws to be transacted only by authorized
financial institutions at exchange rates set by the People’s Bank of China (“PBOC”). Remittances in currencies
other than RMB by the Company in China must be processed through PBOC or other China foreign exchange regulatory bodies which
require certain supporting documentation in order to complete the remittance.
Cash consist of cash on hand and demand
deposits at banks, which are unrestricted as to withdrawal.
Time deposits, which mature within one
year as of the balance sheet date, represent interest-bearing certificates of deposit with an initial term of greater than three
months when purchased. Time deposits which mature over one year as of the balance sheet date are included in non-current assets.
Cash and time deposits maintained at banks
consist of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
RMB denominated bank deposits with financial institutions in the PRC
|
|
$
|
483,829
|
|
|
$
|
1,523,622
|
|
US dollar denominated bank deposits with financial institutions in the PRC
|
|
$
|
24,436
|
|
|
$
|
133,053
|
|
HKD denominated bank deposits with financial institutions in Hong Kong Special Administrative Region (“HK SAR”)
|
|
$
|
215
|
|
|
$
|
13,133
|
|
US dollar denominated bank deposits with financial institutions in Hong Kong Special Administrative Region (“HK SAR”)
|
|
$
|
35,381
|
|
|
$
|
44,182
|
|
US dollar denominated bank deposits with financial institutions in Singapore (“Singapore”)
|
|
$
|
687,151
|
|
|
$
|
697,099
|
|
US dollar denominated bank deposits with financial institutions in The United States of America (“USA”)
|
|
$
|
780,886
|
|
|
$
|
695,155
|
|
Total
|
|
$
|
2,011,898
|
|
|
$
|
3,106,244
|
|
As of March 31, 2019 and December 31, 2018, there were no deposits insured. To limit exposure to credit
risk relating to bank deposits, the Company primarily places bank deposits only with large financial institutions in the PRC, HK
SAR, USA, Singapore and Cayman with acceptable credit rating.
As of March 31, 2019, the Company holds 8,333,333 GTB tokens.
The risks related to our holdings of GTB tokens including:
|
·
|
Digital token is highly volatile due to the limited trading history, and singular currency exchange platform;
|
|
·
|
Under the circumstances where governments prohibit or effectively prohibit the trading of digital token, this will significantly
impact the financial statements of the Company since the digital token market is currently largely unregulated; and
|
|
·
|
The Company is also subject to cybersecurity risk where hacking and breach of information will result in the loss of assets.
|
Note
19. Defined Contribution Plan
For our U.S. employees, during 2011, the
Company began sponsoring a 401(k) defined contribution plan ("401(k) Plan") that provides for a 100% employer matching
contribution of the first 3% and a 50% employer matching contribution of each additional percent contributed by an employee up
to 5% of each employee’s pay. Employees become fully vested in employer matching contributions after six months of employment.
Company 401(k) matching contributions were approximately $0.0 and $14,486 for the three months ended March 31, 2019 and 2018, respectively.
Full time employees in the PRC participate in a government-mandated defined contribution plan 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 contribution for such
PRC employee benefits was $77,199 and $211,704 for the three months ended March 31, 2019 and 2018, respectively.
Note
20. Segments and Geographic Areas
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.
We operate our business in two operating
segments: Legacy YOD and Wecast Service. Segment disclosures are on a performance basis consistent with internal management reporting.
The Company does not allocate expenses below segment gross profit since these segments share the same executive team, office space,
occupancy expenses, information technology infrastructures, human resources and finance department.
Information about segments during the periods
presented were as follows:
|
|
Three Months Ended
|
|
|
|
March 31, 2019
|
|
|
March 31, 2018
|
|
NET SALES TO EXTERNAL CUSTOMERS
|
|
|
|
|
|
|
|
|
-Legacy YOD
|
|
$
|
-
|
|
|
$
|
-
|
|
-Wecast Service
|
|
|
26,945,564
|
|
|
|
185,933,821
|
|
Net sales
|
|
|
26,945,564
|
|
|
|
185,933,821
|
|
Cost of Sales
|
|
|
|
|
|
|
|
|
-Legacy YOD
|
|
|
-
|
|
|
|
-
|
|
-Wecast Service
|
|
|
257,406
|
|
|
|
185,540,685
|
|
Gross profit
|
|
$
|
26,688,158
|
|
|
$
|
393,136
|
|
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
TOTAL ASSETS
|
|
|
|
|
|
|
|
|
-Legacy YOD
|
|
$
|
10,578,437
|
|
|
$
|
26,442,810
|
|
-Wecast Service
|
|
|
135,643,801
|
|
|
|
51,592,929
|
|
-Unallocated assets
|
|
|
-
|
|
|
|
16,199,383
|
|
Total
|
|
$
|
146,222,238
|
|
|
$
|
94,235,122
|
|