Company Quick10K Filing
Quick10K
Seven Stars Cloud Group
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-04-01 Earnings, Exhibits
8-K 2019-03-14 Enter Agreement
8-K 2019-03-05 Enter Agreement, Officers, Other Events, Exhibits
8-K 2019-02-19 Enter Agreement
8-K 2019-01-10 Enter Agreement, Other Events, Exhibits
8-K 2018-12-27 Shareholder Vote
8-K 2018-12-24 Enter Agreement, Other Events, Exhibits
8-K 2018-11-14 Earnings, Exhibits
8-K 2018-11-12 Officers
8-K 2018-10-24 Enter Agreement, Other Events, Exhibits
8-K 2018-10-10 Enter Agreement, Other Events, Exhibits
8-K 2018-09-10 Enter Agreement, Officers, Exhibits
8-K 2018-09-07 Enter Agreement, Off-BS Arrangement, Sale of Shares, Other Events, Exhibits
8-K 2018-08-31 Enter Agreement, Other Events, Exhibits
8-K 2018-08-19 Enter Agreement, Other Events, Exhibits
8-K 2018-08-13 Earnings, Regulation FD, Exhibits
8-K 2018-08-07 Officers, Other Events, Exhibits
8-K 2018-08-03 Enter Agreement, Shareholder Vote, Other Events, Exhibits
8-K 2018-07-18 Enter Agreement
8-K 2018-07-18 Enter Agreement
8-K 2018-07-11 Enter Agreement
8-K 2018-06-21 Enter Agreement, Off-BS Arrangement, Sale of Shares, Other Events, Exhibits
8-K 2018-06-21 Enter Agreement, Sale of Shares, Other Events, Exhibits
8-K 2018-06-01 Officers, Exhibits
8-K 2018-05-15 Earnings, Regulation FD, Exhibits
8-K 2018-04-06 Officers, Other Events, Exhibits
8-K 2018-03-17 Enter Agreement, Sale of Shares, Other Events, Exhibits
8-K 2018-03-04 Enter Agreement, Sale of Shares
8-K 2018-02-23 Earnings, Exhibits
8-K 2018-02-16 Accountant, Exhibits
8-K 2018-01-12 Enter Agreement, Sale of Shares
8-K 2018-01-10 Officers
8-K 2017-12-31 Enter Agreement
CPB Campbell Soup 11,870
DVA Davita 9,210
MANH Manhattan Associates 3,730
LAUR Laureate Education 3,480
JJSF J&J Snack Foods 2,930
FBK FB Financial 1,080
OPY Oppenheimer Holdings 339
AIQ Alliance Healthcare Services 42
MOXC Moxian 40
SGLB Sigma Labs 16
SSC 2018-09-30
Part I &Mdash; Financial Information
Item 1. Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.1 tv506832_ex10-1.htm
EX-10.2 tv506832_ex10-2.htm
EX-10.3 tv506832_ex10-3.htm
EX-10.4 tv506832_ex10-4.htm
EX-10.5 tv506832_ex10-5.htm
EX-10.6 tv506832_ex10-6.htm
EX-10.7 tv506832_ex10-7.htm
EX-10.8 tv506832_ex10-8.htm
EX-10.9 tv506832_ex10-9.htm
EX-31.1 tv506832_ex31-1.htm
EX-31.2 tv506832_ex31-2.htm
EX-31.3 tv506832_ex31-3.htm
EX-32.1 tv506832_ex32-1.htm
EX-32.2 tv506832_ex32-2.htm
EX-32.3 tv506832_ex32-3.htm

Seven Stars Cloud Group Earnings 2018-09-30

SSC 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 tv506832_10q.htm FORM 10-Q

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2018

 

¨ 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.)

 

55 Broadway, 19th Floor

New York, NY 10006

(Address of principal executive offices)

 

212-206-1216

(Registrant's telephone number, including area code)

 

SEVEN STARS CLOUD GROUP, INC.

(Former name if changed since last report)

 

No. 4 Drive-in Movie Theater Park,

No. 21, Liangmaqiao Road, Chaoyang District, Beijing, China 100125

(Former address if changed since last report)

 

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  x    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  x    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 “larger accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer                  ¨
Non-accelerated filer  x Smaller reporting company x
  Emerging growth company  ¨

 

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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨      No x

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 102,266,066 shares as of November 10, 2018.

 

 

 

   

 

 

QUARTERLY REPORT ON FORM 10-Q

OF IDEANOMICS, INC.

FOR THE PERIOD ENDED SEPTEMBER 30, 2018

 

TABLE OF CONTENTS

 

PART I -FINANCIAL INFORMATION  
     
Item 1. Financial Statements 3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 34
Item 3 Quantitative and Qualitative Disclosures About Market Risk 45
Item 4. Controls and Procedures 45
     
PART II -OTHER INFORMATION  
     
Item 1. Legal Proceedings 46
Item 1A. Risk Factors 46
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 63
Item 3. Defaults Upon Senior Securities 63
Item 4. Mine Safety Disclosures 63
Item 5. Other Information 63
Item 6. Exhibits 64
Signatures 65

 

References

 

Except as otherwise indicated by the context, references in this report to the following:

(i)the “Company,” “Ideanomics,”, “IDEX”, “we,” “us,” and “our” are to Ideanomics, Inc.(formerly known as Seven Stars Cloud Group, Inc.), a Nevada corporation, and its consolidated subsidiaries and variable interest entities;
(ii)“CB Cayman” refers to our wholly-owned subsidiary China Broadband, Ltd., a Cayman Islands company;
(iii)“Exchange Act” refers to the Securities Exchange Act of 1934, as amended;
(iv)“Hua Cheng” refers to Hua Cheng Hu Dong (Beijing) Film and Television Communication Co., Ltd., a PRC company 39% owned by Sinotop Beijing and 20% owner of Zhong Hai Media;
(v)“PRC” and “China” refer to People’s Republic of China;
(vi)“Renminbi” and “RMB” refer to the legal currency of China;
(vii)“SEC” refers to the United States Securities and Exchange Commission;
(viii)“Securities Act” refers to Securities Act of 1933, as amended;
(ix)“Sinotop Beijing” or “Sinotop” refers to Beijing Sino Top Scope Technology Co., Ltd, a PRC company controlled by YOD Hong Kong through contractual arrangements;
(x)“SSF” refers to Tianjin Sevenstarflix Network Technology Limited, a PRC company controlled by YOD Hong Kong through contractual arrangements;
(xi)“U.S. dollar,” “$” and “US$” refer to United States dollars;
(xii)“VIEs” refers to our current variable interest entities, Sinotop Beijing, and Tianjin Sevenstarflix Network Technology Limited;
(xiii)“Wecast Services” refers to our wholly-owned subsidiary Wecast Services Group Limited (formerly known as Sun Video Group Hong Kong Limited,) a Hong Kong company;
(xiv)“Wecast SH” refers to Shanghai Wecast Supply Chain Management Limited, a PRC company 51% owned by the Company;
(xv)“Wide Angle” refers to Wide Angle Group Limited, a Hong Kong company 55% owned by the Company;

(xvi)“Zhong Hai Media” refers to Zhong Hai Shi Xun Media Co., Ltd., a PRC company 80% owned by Sinotop Beijing until June 30, 2017

 2 

 

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

IDEANOMICS, INC., ITS SUBSIDIARIES AND VARIABLE INTEREST ENTITIES

INDEX TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED SEPTEMBER 30, 2018

 

  Page
Unaudited Consolidated Balance Sheets 4
Unaudited Consolidated Statements of Operations 5
Unaudited Consolidated Statements of Comprehensive Income (Loss) 6
Unaudited Consolidated Statements of Cash Flows 7
Unaudited Consolidated Statements of Equity 8
Notes to Unaudited Consolidated Financial Statements 10

 

 3 

 

 

Ideanomics, Inc., Its Subsidiaries and Variable Interest Entities
UNAUDITED CONSOLIDATED BALANCE SHEETS

 

   September 30, 2018   December 31, 2017 
       (As adjusted*) 
ASSETS          
Current assets:          
Cash  $16,030,248   $7,208,037 
Restricted cash   -    369,280 
Accounts receivable, net   105,534,523    26,962,085 
Licensed content   16,958,148    16,958,149 
Inventory   216,453    216,453 
Prepaid expenses   1,995,538    2,202,728 
Other current assets   3,054,573    2,276,096 
Total current assets   143,789,483    56,192,828 
Property and equipment, net   258,053    127,275 
Intangible assets, net   3,124,979    148,874 
Goodwill   1,399,646    - 
Long term investments   18,767,510    6,975,511 
Other non-current assets   383,797    - 
Total assets  $167,723,468   $63,444,488 
LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK AND EQUITY          
Current liabilities: (including amounts of the consolidated VIEs without recourse to Ideanomics, Inc. See Note 3)          
Accounts payable  $33,390,027   $26,829,593 
Deferred revenue   588,824    222,350 
Accrued interest due to a related party   109,808    20,055 
Accrued salaries   720,385    737,072 
Amount due to related parties   71,908,057    434,030 
Other current liabilities   1,906,147    801,560 
Convertible promissory note due to a related party   3,074,197    3,000,000 
Total current liabilities   111,697,445    32,044,660 
Convertible note, net of debt discount   10,734,949    - 
Deferred tax liabilities   673,706    - 
Other non-current liabilities   -    384,243 
Total liabilities  $123,106,100   $32,428,903 
Commitments and contingencies (Note 15)          
Convertible redeemable preferred stock:          
Series A - 7,000,000 shares issued and outstanding, liquidation and deemed liquidation preference of $3,500,000 as of September 30, 2018 and December 31, 2017, respectively  $1,261,995   $1,261,995 
Equity:          
Common stock - $0.001 par value; 1,500,000,000 shares authorized,  77,246,801 and 68,509,090 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively   77,246    68,509 
Additional paid-in capital   190,188,410    158,449,544 
Accumulated deficit   (145,921,262)   (126,693,022)
Accumulated other comprehensive loss   (239,775)   (782,074)
Total shareholders’ equity   44,104,619    31,042,957 
Non-controlling interest   (749,246)   (1,289,367)
Total equity   43,355,373    29,753,590 
Total liabilities, convertible redeemable preferred stock and equity  $167,723,468   $63,444,488 

 

*The above consolidated balance sheets present the Shanghai Guang Ming Investment Management Limited (“Guang Ming”), acquired from Tianjin Sun Seven Stars Culture Development Co. Ltd. (“Tianjin”) and Beijing Nanbei Huijin Investment Co. Ltd. on April 4 2018 as if it had been owned by the Company since November 10, 2016 in accordance with ASC Subtopic 805-50 (See Note 4 “Acquisition”).

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 4 

 

 

Ideanomics, Inc., Its Subsidiaries and Variable Interest Entities
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30,   September 30,   September 30, 
   2018   2017   2018   2017 
       (As adjusted*)       (As adjusted*) 
Revenue  $43,707,937    30,229,255   $362,628,296   $106,724,866 
Cost of revenue from third parties   42,844,876    28,273,863    115,729,433    100,889,004 
Cost of revenue from related parties   -    -    244,110,132    - 
Gross profit   863,061    1,955,392    2,788,731    5,835,862 
                     
Operating expenses:                    
Selling, general and administrative expense   4,333,259    3,684,749    16,861,425    8,021,825 
Research and development expense   667,416    400,040    1,393,025    400,040 
Professional fees   1,927,431    839,836    3,280,729    1,888,361 
Depreciation and amortization   291,512    36,952    314,737    294,272 
Impairment of other intangible assets   -    152,847    -    216,468 
Total operating expense   7,219,618    5,114,424    21,849,916    10,820,966 
                     
Loss from operations   (6,356,557)   (3,159,032)   (19,061,185)   (4,985,104)
                     
Interest and other income (expense)                    
Interest expense, net   (145,610)   (26,029)   (201,782)   (70,779)
Change in fair value of warrant liabilities   -    131,357    -    (112,642)
Equity in loss of equity method investees   (13,882)   (23,632)   (44,316)   (100,468)
Other   (925,771)   72,120    (558,271)   (38,480)
Loss before income taxes   (7,441,820)   (3,005,216)   (19,865,554)   (5,307,473)
                     
Income tax expense (benefit)   -    -    -    - 
                     
Net loss   (7,441,820)   (3,005,216)   (19,865,554)   (5,307,473)
                     
Net loss attributable to non-controlling interest   254,973    (22,723)   637,314    608,910 
                     
Net loss attributable to common shareholders  $(7,186,847)  $(3,027,939)  $(19,228,240)  $(4,698,563)
                     
Basic loss per share  $(0.10)  $(0.05)  $(0.27)  $(0.08)
Diluted loss per share  $(0.10)  $(0.05)  $(0.27)  $(0.08)
                     
Weighted average shares outstanding:                    
Basic   74,063,495    62,146,168    71,574,303    59,594,289 
Diluted   74,063,495    62,146,168    71,574,303    59,594,289 

 

* The above consolidated statements of operation present Guang Ming, acquired from Tianjin and Beijing Nanbei Huijin Investment Co., Ltd. on April 4, 2018, as if it had been owned by the Company since November 10, 2016 in accordance with ASC Subtopic 805-50 (See Note 4 “Acquisition”).

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 5 

 

 

Ideanomics, Inc., Its Subsidiaries and Variable Interest Entities
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30,   September 30,   September 30, 
   2018   2017   2018   2017 
       (As adjusted*)       (As adjusted*) 
Net loss  $(7,441,820)  $(3,005,216)  $(19,865,554)  $(5,307,473)
                     
Other comprehensive income (loss), net of nil tax                    
Foreign currency translation adjustments   708,140    57,374    565,315    760,363 
Comprehensive loss   (6,733,680)   (2,947,842)   (19,300,239)   (4,547,110)
                     
Comprehensive loss attributable to non-controlling interest   243,078    (17,517)   614,298    647,074 
Comprehensive loss attributable to common shareholders  $(6,490,602)  $(2,965,359)  $(18,685,941)  $(3,900,036)

 

* The above consolidated statements of comprehensive loss present the Guang Ming, acquired from Tianjin and Beijing Nanbei Huijin Investment Co. Ltd on April 4, 2018, as if it had been owned by the Company since November 10, 2016 in accordance with ASC Subtopic 805-50 (See Note 4 “Acquisition”).

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 6 

 

 

Ideanomics, Inc., Its Subsidiaries and Variable Interest Entities
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

   Nine Months Ended 
   September 30, 2018   September 30, 2017 
       (As adjusted*) 
Cash flows from operating activities:          
Net loss  $(19,865,554)  $(5,307,473)
Adjustments to reconcile net loss to net cash used in operating activities          
Share-based compensation expense   3,372,447    202,501 
Provision for doubtful accounts   -    103,040 
Depreciation and amortization   314,737    294,272 
Equity in  loss of equity method investees   44,316    100,468 
Loss on disposal of assets   -    683,195 
Change in fair value of warrant liabilities   -    112,642 
Impairment of intangible assets   -    216,468 
Foreign currency exchange losses   -    (42,891)
           
Change in assets and liabilities:          
Accounts receivable   (78,572,438)   (34,582,490)
Inventory   -    (159,240)
Licensed content   -    759,698 
Prepaid expenses and other assets   (3,332,696)   3,646,384 
Accounts payable   6,560,434    29,792,542 
Amount due to related parties   71,939,834    - 
Accrued expenses, salary and other current liabilities   1,530,544    (867,504)
Deferred revenue   366,474    (1,139,357)
Net cash used in operating activities   (17,641,902)   (6,187,745)
           
Cash flows from investing activities:          
Acquisition of property and equipment   (167,891)   (46,260)
Proceeds from disposal of property and equipment   -    2,450,044 
Disposal of subsidiaries, net of cash disposed   -    (8,751)
Cash paid for the acquisition of subsidiaries   (2,840,219)   (26,857)
Investment in long term investments   (2,035,190)   (250,000)
Net cash (used in) provided by investing activities   (5,043,300)   2,118,176 
           
Cash flows from financing activities          
Proceeds from convertible note   12,000,000    - 
Repayment of amounts due to related parties   -    (682,364)
Proceeds from issuance of warrant and shares   19,186,771    2,607,974 
Net cash provided by financing activities   31,186,771    1,925,610 
Effect of exchange rate changes on cash   (48,638)   62,078 
Net increase (decrease) in cash, cash equivalents and restricted cash   8,452,931    (2,081,881)
           
Cash, cash equivalents and restricted cash at beginning of period   7,577,317    3,761,814 
           
Cash, cash equivalents and restricted cash at end of period  $16,030,248   $1,679,933 
           

Supplemental Cash Flow Information:

          
Cash paid for income tax  $-   $- 
Cash paid for interest  $-   $- 
           
Non-Cash Investing and Financing Activities:          
Exchange of Series E Preferred Stock for common stock  $-   $7,155 

 

* The above consolidated statements of cash flows present Guang Ming, acquired from Tianjin and Beijing Nanbei Huijin Investment Co., Ltd on April 4, 2018, as if it had been owned by the Company since November 10, 2016 in accordance with ASC Subtopic 805-50 (See Note 4 “Acquisition”).

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 7 

 

 

Ideanomics, Inc., Its Subsidiaries and Variable Interest Entities

UNAUDITED CONSOLIDATED STATEMENTS OF EQUITY

For the Nine Months Ended September 30, 2017

 

  

Series E

Preferred

Stock

  

Series E

Par

Value

  

Common

Stock

  

Par

Value

  

Additional

Paid-in

Capital

  

Accumulated

Deficit

  

Accumulated

Other

Comprehensive

Income (Loss)

  

Shareholders'

Equity

  

Non-

controlling

Interest

  

Total

Equity

 
Balance, January 1, 2017 (As adjusted*)   7,154,997   $7,155    53,918,523   $53,918   $152,792,855   $(115,829,451)  $(1,371,498)  $35,652,979   $(5,325,481)  $30,327,498 
Share-based compensation   -    -    -    -    202,501    -    -    202,501    -    202,501 
Common stock issuance   -    -    727,273    727    1,999,273    -    -    2,000,000    -    2,000,000 
Common stock issuance for RSU vested   -    -    111,465    111    (111)   -    -    -    -    - 
Common stock issuance for option exercised   -    -    41,131    41    39,862    -    -    39,903    -    39,903 
Common stock issued for warrant exercised   -    -    311,105    311    681,916    -    -    682,227    -    682,227 
Common stock issued from conversion of series E preferred stock   (7,154,997)   (7,155)   7,154,997    7,155    -    -    -    -    -    - 
Disposal of Zhong Hai Shi Xun   -    -    -    -    (9,887,398)   (360,521)   (220,737)   (10,468,656)   3,947,473    (6,521,183)
Acquisition of Guang Ming                       78,630              78,630         78,630 
Net loss   -    -    -    -    -    (4,698,563)   -    (4,698,563)   (608,910)   (5,307,473)
Foreign currency translation adjustments, net of nil tax   -    -    -    -    -    -    787,372    787,372    (27,009)   760,363 
Balance, September 30, 2017 (As adjusted*)   -   $-    62,264,494   $62,263   $145,907,528   $(120,888,535)  $(804,863)  $24,276,393   $(2,013,927)  $22,262,466 

 

* The above consolidated statements of equity present Guang Ming, acquired from Tianjin and Beijing Nanbei Huijin Investment Co., Ltd. on April 4, 2018, as if it had been owned by the Company since November 10, 2016 in accordance with ASC Subtopic 805-50 (See Note 4 “Acquisition”).

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 8 

 

 

Ideanomics, Inc., Its Subsidiaries and Variable Interest Entities
UNAUDITED CONSOLIDATED STATEMENTS OF EQUITY

For the Nine Months Ended September 30, 2018 

 

   Common
Stock
   Par
Value
   Additional
Paid-in
Capital
   Accumulated
Deficit
   Accumulated
Other
Comprehensive
Income (Loss)
   Shareholders'
Equity
   Non-
controlling
Interest
   Total
Equity
 

Balance, January 1, 2018 (As adjusted*)

   68,509,090   $68,509   $158,449,544   $(126,693,022)  $(782,074)  $31,042,957   $(1,289,367)  $29,753,590 
Share-based compensation             3,372,447              3,372,447         3,372,447 
Investment from GTD and SSS             11,188,502              11,188,502         11,188,502 
Common stock issuance for RSU vested   1,240,707    1,241    (1,241)             -         - 
Common stock issuance for option exercised   82,797    82    2,550              2,632         2,632 
Common stock issued for warrant exercised   643,714    644    1,125,856              1,126,500         1,126,500 
Common stock issuance for acquisition of BDCG   3,000,000    3,000    7,797,000              7,800,000    -    7,800,000 
Common stock issuance for Star Thrive Group Limited   3,770,493    3,770    6,869,138              6,872,908         6,872,908 
Conversion feature of convertible note             1,384,614              1,384,614         1,384,614 
Acquisition of Grapevine                                 1,154,419    1,154,419 
Net loss                  (19,228,240)        (19,228,240)   (637,314)   (19,865,554)
Foreign currency translation adjustments                       542,299    542,299    23,016    565,315 

Balance,  September 30, 2018

   77,246,801   $77,246   $190,188,410   $(145,921,262)  $(239,775)  $44,104,619   $(749,246)  $43,355,373 

 

 

* The above consolidated statements of equity present Guang Ming, acquired from and Beijing Nanbei Huijin Investment Co., Ltd, on April 4, 2018, as if it had been owned by the Company since November 10, 2016 in accordance with ASC Subtopic 805-50 (See Note 4 “Acquisition”).

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 9 

 

 

Ideanomics, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1.Organization and Principal Activities

 

Ideanomics, Inc. (Nasdaq:IDEX), formerly known as Seven Stars Cloud Group, Inc., is a Nevada corporation that primarily operates in China (“PRC”) through its subsidiaries and consolidated variable interest entities (“VIEs”). The Company, its subsidiaries and consolidated VIEs are collectively referred to as Ideanomics (“Ideanomics”, “we”, “us”, or “the Company”).

 

In the Company’s video on demand (“VOD”) business, the Company provides premium content and integrated value-added service solutions for the delivery of VOD and paid video programing to digital cable providers, Internet protocol television (“IPTV”) providers, over-the-top (“OTT”) streaming providers, mobile manufacturers and operators, as well as direct customers. The Company historically has offered these products under the business name “YOU On Demand” and refers to these operations as the legacy YOD business.

 

Starting in early 2017, while continuing to support the legacy YOD business, Ideanomics began transitioning its business model to become a next generation financial technology (“fintech”) company through several acquisitions and the establishment of joint ventures, with the intention of offering financing solutions and logistics solutions, each based on the emergence of systems that utilize blockchain and artificial intelligence (“AI”) technologies. On the financing solutions side, the Company has been building capabilities both in providing business consulting services related to traditional financings, as well as in developing digital asset securitization services via AI and blockchain enabled platforms. On the logistics side, the Company has been building expertise in the traditional commodities trading business, with an initial focus on crude oil trading and consumer electronics trading, with the goal of leveraging such expertise to inform the development of an AI and blockchain enabled logistics platform.

 

The Company refers to its YOD business as the Legacy YOD segment, and to all our other operations as the Wecast Service segment. Aside from the Legacy YOD segment, only the commodities trading component of the Company’s logistics business is operational and revenue generating.

 

On January 30, 2017, the Company entered into a Securities Purchase Agreement (the “SVG Purchase Agreement”) with BT Capital Global Limited, a British Virgin Islands company (“BT”) and an affiliate of the Company’s Chairman, Bruno Wu, for the purchase by the Company of all of the outstanding capital stock of Sun Video Group Hong Kong Limited, a Hong Kong company (“Wecast Services”). On January 31, 2017, the Company entered into another Securities Purchase Agreement (the “Wide Angle SPA”) with BT and Sun Seven Stars Media Group Limited (“SSMGL”), a Hong Kong company and one of the Company’s largest shareholders, controlled by Mr. Wu, as guarantor, for the purchase by us of 55% of the outstanding capital stock of Wide Angle Group Limited (“Wide Angle”). Details of these two acquisitions are in Note 4. By acquiring these two entities, the Company became engaged in consumer electronics and smart supply chain management operations.

 

In 2017, the Company entered into another Securities Purchase Agreement (the “BT SPA”) with BT, pursuant to which the issued and outstanding stock that the Company holds in one loss-generating non-core asset, was sold to BT for zero. The details of this transaction have been disclosed in Note 11.

 

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the financial position as of September 30, 2018, results of operations for the three and nine months ended September 30, 2018 and 2017, and cash flows for the nine months ended September 30, 2018 and 2017, have been made. All significant intercompany transactions and balances are eliminated on consolidation.

 

Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with 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, 2017 filed with the Securities and Exchange Commission on March 30, 2018 (“2017 Annual Report”).

 

In the first quarter of 2018, we adopted the following Accounting Standards Updates (ASU): ASU 2014-09, Revenue from Contracts with Customers (Topic 606); ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10) and ASU 2016-18 Statement of Cash Flows (Topic 230): Restricted Cash ASU 2018-02. ASU 2014-09 has no financial impact to our unaudited financial statement, and impact by ASU 2016-01 and ASU 2016-18 has been reflected in our unaudited consolidated statements of cash flow and Note 8 to this unaudited consolidated financial statements.

 

 10 

 

 

Ideanomics, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

2.Going Concern and Management’s Plans

 

For the nine months ended September 30, 2018 and 2017, the Company incurred loss from operations of approximately $19.1 million and $5.0 million, respectively, and incurred net loss of $19.9 million and $5.3 million, respectively, and cash used in operations was approximately $17.6 million and $6.2 million, respectively. Further, the Company had accumulated deficit of approximately $145.9 million and $126.7 million as of September 30, 2018 and December 31, 2017, respectively, due to recurring losses since the inception of its business.

 

The Company must continue to rely on proceeds from debt and equity issuances to pay for ongoing operating expenses in order to execute its business plan. In May, 2017, the Company completed a common stock financing for $2.0 million with certain investors, officers & directors and affiliates in a private placement. In October 2017, the Company completed a common stock financing with Hong Kong Guo Yuan Group Capital Holdings Limited for $10 million. In June 2018, the Company entered into a Subscription Agreement with Sun Seven Stars Investment Group Limited for $3.0 million, and the Company has received $1.1 million as of September 30, 2018 (See Note 9). In July 2018, the Company completed a common stock financing from GT Dollar Pte. Ltd for $10.0 million (See Note 9). In July 2018, the Company entered into a Share Purchase & Option Agreement with Star Thrive Group Limited for $23.0 million and the Company has received $6.9 million as of September 30, 2018 (See Note 9). In July 2018, the Company completed a convertible note financing with Advantech Capital Investment II Limited for $12.0 million(See Note 9).

 

Although the Company may attempt to raise funds by issuing debt or equity instruments, additional financing may not be available to the Company on terms acceptable to the Company or at all or such resources may not be received in a timely manner. If the Company is unable to raise additional capital when required or on acceptable terms, the Company may be required to scale back or to discontinue certain operations, scale back or discontinue the development of new business lines, reduce headcount, sell assets, file for bankruptcy, reorganize, merge with another entity, or cease operations.

 

These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements have been prepared assuming that the Company will continue as a going concern and, accordingly, do not include any adjustments that might result from the outcome of this uncertainty. If the Company is in fact unable to continue as a going concern, the shareholders may lose their entire investment in the Company.

 

3.VIE Structure and Arrangements

 

a)Sinotop VIE structure and arrangement

 

To comply with PRC laws and regulations that prohibit or restrict foreign ownership of companies that provides value-added telecommunication services, the Company provides its services through Sinotop Beijing. The Company has the ability to control Sinotop Beijing through a series of contractual agreements entered into among YOD WOFE, YOD Hong Kong, Sinotop Beijing and the legal shareholders of Sinotop Beijing.

 

Prior to January 2016, the Company entered into a series of contractual agreements to give it the ability to control Sinotop Beijing with Zhang Yan, the former legal shareholder of Sinotop Beijing (the spouse of its then-CEO). In January 2016, in connection with the appointment of a new CEO and in accordance with its rights under the contractual agreements, (1) the legal ownership of Sinotop Beijing was transferred from Zhang Yan to Bing Wu, the brother of its current Chairman and Yun Zhu, the former Vice President of Beijing Sun Seven Stars Culture Development Limited (“SSS”), (2) the Company terminated the series of contractual arrangements with Zhang Yan, and (3) the Company entered into new contractual agreements with Bing Wu and Yun Zhu (collectively, the “Former Sinotop VIE Agreements”). In October 2016, in accordance with its rights under contractual agreements, (1) the legal ownership of Sinotop Beijing was transferred from Bing Wu to Mei Chen, the former CFO of the Company, (2) the Company terminated the series of contractual arrangements with Bing Wu, and (3) the Company entered into new contractual agreements with Mei Chen (collectively, the “New Sinotop VIE Agreements”). Although the Former Sinotop VIE Agreements and New Sinotop VIE Agreements resulted in changes to the legal shareholders of Sinotop Beijing, there was no change in the Company’s ability to control Sinotop Beijing or the Company’s rights to 100% of the economic benefits of Sinotop Beijing. The Company was the primary beneficiary of Sinotop Beijing prior to the signing of the Former Sinotop VIE Agreements and New Sinotop VIE Agreements and the Company remained the primary beneficiary of Sinotop Beijing after the signing of the former Sinotop VIE Agreements and the New Sinotop VIE Agreements. Accordingly, the change in legal ownership of Sinotop Beijing did not have any impact to the Company’s consolidation of Sinotop Beijing. The key terms of the New Sinotop VIE Agreements are summarized as follows:

 

Equity Pledge Agreement

 

Pursuant to the Equity Pledge Agreement among YOD WOFE, Sinotop Beijing, Mei Chen and Yun Zhu (collectively, the “Nominee Shareholders”), the Nominee Shareholders pledged all of their equity interests in Sinotop Beijing (the “Collateral”) to YOD WOFE as security for the performance of the obligations of Sinotop Beijing to make all the required technical service fee payments pursuant to the Technical Services Agreement and for performance of the Nominee Shareholders’ obligation under the Call Option Agreement. The terms of the Equity Pledge Agreement expire upon satisfaction of all obligations under the Technical Services Agreement and Call Option Agreement.

 

 11 

 

 

Ideanomics, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Call Option Agreement

 

Pursuant to the Call Option Agreement among YOD WOFE, Sinotop Beijing and the Nominee Shareholders, the Nominee Shareholders granted an exclusive option to YOD WOFE, or its designee, to purchase, at any time and from time to time, to the extent permitted under PRC law, all or any portion of the Nominee Shareholders’ equity in Sinotop Beijing. The exercise price of the option shall be determined by YOD WOFE at its sole discretion, subject to any restrictions imposed by PRC law. The term of the agreement is until all of the equity interest in Sinotop Beijing held by the Nominee Shareholders are transferred to YOD WOFE, or its designee and may not be terminated by any part to the agreement without consent of the other parties.

 

Power of Attorney

 

Pursuant to the Power of Attorney agreements among YOD WOFE, Sinotop Beijing and each of the respective Nominee Shareholders, each of the Nominee Shareholders granted YOD WOFE the irrevocable right, for the maximum period permitted by law, all of its voting rights as shareholders of Sinotop Beijing. The Nominee Shareholders may not transfer any of its equity interest in Sinotop Beijing to any party other than YOD WOFE. The Power of Attorney agreements may not be terminated except until all of the equity in Sinotop Beijing has been transferred to YOD WOFE or its designee.

 

Technical Service Agreement

 

Pursuant to the Technical Service Agreement between YOD WOFE and Sinotop Beijing, YOD WOFE has the exclusive right to provide technical service, marketing and management consulting service, financial support service and human resource support services to Sinotop Beijing, and Sinotop Beijing is required to take all commercially reasonable efforts to permit and facilitate the provision of the services by YOD WOFE. As compensation for providing the services, YOD WOFE is entitled to receive service fees from Sinotop Beijing equivalent to YOD WOFE’s cost plus 30% of such costs as calculated on accounting policies generally accepted in the PRC. YOD WOFE and Sinotop Beijing agree to periodically review the service fee and make adjustments as deemed appropriate. The term of the Technical Services Agreement is perpetual, and may only be terminated upon written consent of both parties.

 

Spousal Consent

 

Pursuant to the Spousal Consent, undersigned by the respective spouse of Nominee Shareholders (collectively, the “Spouses”), the Spouses unconditionally and irrevocably agreed to the execution of the Equity Pledge Agreement, Call Option Agreement and Power of Attorney agreement. The Spouses agreed to not make any assertions in connection with the equity interest of Sinotop Beijing and to waived consent on further amendment or termination of the Equity Pledge Agreement, Call Option Agreement and Power of Attorney agreement. The Spouses further pledge to execute all necessary documents and take all necessary actions to ensure appropriate performance under these agreements upon YOD WOFE’s request. In the event the Spouses obtain any equity interests of Sinotop Beijing which are held by the Nominee Shareholders, the Spouses agreed to be bound by the New Sinotop VIE Agreements, including the Technical Services Agreement, and comply with the obligations thereunder, including sign a series of written documents in substantially the same format and content as the New Sinotop VIE Agreements.

 

Letter of Indemnification

 

Pursuant to the Letter of Indemnification among YOD WOFE and Mei Chen and YOD WOFE and Yun Zhu, YOD WOFE agreed to indemnify Nominee Shareholders against any personal, tax or other liabilities incurred in connection with their role in equity transfer to the greatest extent permitted under PRC law. YOD WOFE further waived and released Nominee Shareholders from any claims arising from, or related to, their role as the legal shareholder of Sinotop Beijing, provided that their actions as a nominee shareholder are taken in good faith and are not opposed to YOD WOFE’s best interests. Conversely, the Nominee Shareholders will not be entitled to dividends or other benefits generated therefrom, or receive any compensation in connection with this arrangement. The Letter of Indemnification will remain valid until either Nominee Shareholders or YOD WOFE terminates the agreement by giving the other party hereto 60 days’ prior written notice.

 

In addition to the New Sinotop VIE Agreements, the Management Service Agreement between Sinotop Beijing and YOD Hong Kong continued to remain in effect, the key terms of which are as follows:

 

 12 

 

 

Ideanomics, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Management Services Agreement

 

Pursuant to a Management Services Agreement, as of March 9, 2010, YOD Hong Kong has the exclusive right to provide to Sinotop Beijing management, financial and other services related to the operation of Sinotop Beijing’s business, and Sinotop Beijing is required to take all commercially reasonable efforts to permit and facilitate the provision of the services by YOD Hong Kong. As compensation for providing the services, YOD Hong Kong is entitled to receive a fee from Sinotop Beijing, upon demand, equal to 100% of the annual net profits as calculated on accounting policies generally accepted in the PRC of Sinotop Beijing during the term of the Management Services Agreement. YOD Hong Kong may also request ad hoc quarterly payments of the aggregate fee, which payments will be credited against Sinotop Beijing’s future payment obligations.

 

The Management Services Agreement also provides YOD Hong Kong, or its designee, with a right of first refusal to acquire all or any portion of the equity of Sinotop Beijing upon any proposal by the sole shareholder of Sinotop Beijing to transfer such equity. In addition, at the sole discretion of YOD Hong Kong, Sinotop Beijing is obligated to transfer to YOD Hong Kong, or its designee, any part or all of the business, personnel, assets and operations of Sinotop Beijing which may be lawfully conducted, employed, owned or operated by YOD Hong Kong, including:

 

(a) business opportunities presented to, or available to Sinotop Beijing may be pursued and contracted for in the name of YOD Hong Kong rather than Sinotop Beijing, and at its discretion, YOD Hong Kong may employ the resources of Sinotop Beijing to secure such opportunities;

 

(b) any tangible or intangible property of Sinotop Beijing, any contractual rights, any personnel, and any other items or things of value held by Sinotop Beijing may be transferred to YOD Hong Kong at book value;

 

(c) real property, personal or intangible property, personnel, services, equipment, supplies and any other items useful for the conduct of the business may be obtained by YOD Hong Kong by acquisition, lease, license or otherwise, and made available to Sinotop Beijing on terms to be determined by agreement between YOD Hong Kong and Sinotop Beijing;

 

(d) contracts entered into in the name of Sinotop Beijing may be transferred to YOD Hong Kong, or the work under such contracts may be subcontracted, in whole or in part, to YOD Hong Kong, on terms to be determined by agreement between YOD Hong Kong and Sinotop Beijing; and

 

(e) any changes to, or any expansion or contraction of, the business may be carried out at the sole discretion of YOD Hong Kong, and in the name of and at the expense of, YOD Hong Kong; provided, however, that none of the foregoing may cause or have the effect of terminating (without being substantially replaced under the name of YOD Hong Kong) or adversely affecting any license, permit or regulatory status of Sinotop Beijing.

 

The term of the Management Services Agreement is 20 years, and may not be terminated by Sinotop Beijing, except with the consent of, or a material breach by, YOD Hong Kong.

 

Pursuant to the above contractual agreements, YOD WOFE can have the assets transferred freely out of Sinotop Beijing without any restrictions. Therefore, YOD WOFE considers that there is no asset of Sinotop Beijing that can be used only to settle obligations of Sinotop Beijing, except for the registered capital of the entity amounting to RMB10.6 million (approximately $1.6 million) as of September 30, 2018. As Sinotop Beijing is incorporated as limited liability company under PRC Company Law, creditors of this entity do not have recourse to the general credit of other entities of the Company.

 

b)Tianjin Sevenstarflix Network Technology Limited (“SSF”) VIE structure and arrangements

 

To comply with PRC laws and regulations that prohibit or restrict foreign ownership of companies that provides value-added telecommunication services, the Company plans to also provide its services through SSF, which is applying to hold the licenses and approvals to provide digital distribution and Internet content services in the PRC. The Company has the ability to control SSF through a series of contractual agreements, as described below, entered into among YOD WOFE, YOD Hong Kong, SSF and the legal shareholders of SSF.

 

On April 5, 2016, YOD WOFE entered into variable interest entity agreements with SSF and its nominee shareholders pursuant to the Amended Tianjin Agreement dated December 21, 2015 (see Note 12(c)) (the “SSF VIE Agreements”). Lan Yang, holder of 99% equity ownership in SSF and a party to certain of the SSF VIE Agreements, is the spouse of Bruno Zheng Wu, the Company’s Chairman. Yun Zhu, holder of 1% equity ownership in SSF and a party to certain of the SSF VIE Agreements, is the Vice President of SSS.

 

 13 

 

 

Ideanomics, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

The terms of the SSF VIE Agreements are as follows:

 

Equity Pledge Agreement

 

Pursuant to the Equity Pledge Agreement among YOD WOFE, Lan Yang and Yun Zhu (the “Nominee Shareholders”), dated April 5, 2016, the Nominee Shareholders pledged all of their capital contribution rights in SSF to YOD WOFE as security for the performance of the obligations of SSF to make all the required technical service fee payments pursuant to the Technical Services Agreement and for performance of the Nominee Shareholders’ obligation under the Call Option Agreement. The terms of the Equity Pledge Agreement expire upon satisfaction of all obligations under the Technical Services Agreement and Call Option Agreement.

 

Call Option Agreement

 

Pursuant to the Call Option Agreement among YOD WOFE, SSF and the Nominee Shareholders, dated April 5, 2016, the Nominee Shareholders granted an exclusive option to YOD WOFE, or its designee, to purchase, at any time and from time to time, to the extent permitted under PRC law, all or any portion of the Nominee Shareholders’ equity in SSF. The exercise price of the option shall be determined by YOD WOFE at its sole discretion, subject to any restrictions imposed by PRC law. The term of the agreement is until all of the equity interest in SSF held by the Nominee Shareholders is transferred to YOD WOFE, or its designee and may not be terminated by any party to the agreement without consent of the other parties.

 

Power of Attorney

 

Pursuant to the Power of Attorney agreements among YOD WOFE, SSF and each of the respective Nominee Shareholders, dated April 5, 2016, each of the Nominee Shareholders granted YOD WOFE the irrevocable right, for the maximum period permitted by law, to all of its voting rights as shareholders of SSF. The Nominee Shareholders may not transfer any of their equity interest in SSF to any party other than YOD WOFE. The Power of Attorney agreements may not be terminated except until all of the equity in SSF has been transferred to YOD WOFE or its designee.

 

Technical Service Agreement

 

Pursuant to the Technical Service Agreement, dated April 5, 2016, between YOD WOFE and SSF, YOD WOFE has the exclusive right to provide technical service, marketing and management consulting service, financial support service and human resource support services to SSF, and SSF is required to take all commercially reasonable efforts to permit and facilitate the provision of the services by YOD WOFE. As compensation for providing the services, YOD WOFE is entitled to receive service fees from SSF equivalent to YOD WOFE’s cost plus 20-30% of such costs as calculated on accounting policies generally accepted in the PRC. YOD WOFE and SSF agree to periodically review the service fee and make adjustments as deemed appropriate. The term of the Technical Services Agreement is perpetual, and may only be terminated upon written consent of both parties.

 

Spousal Consent

 

Pursuant to the Spousal Consent, dated April 5, 2016, undersigned by the respective spouse of the Nominee Shareholders (collectively, the “Spouses”), the Spouses unconditionally and irrevocably agreed to the execution of the Equity Pledge Agreement, Call Option Agreement and Power of Attorney agreement. The Spouses agreed to not make any assertions in connection with the equity interest of SSF and to waive consent on further amendment or termination of the Equity Pledge Agreement, Call Option Agreement and Power of Attorney agreement. The Spouses further pledge to execute all necessary documents and take all necessary actions to ensure appropriate performance under these agreements upon YOD WOFE’s request. In the event the Spouses obtain any equity interests of SSF which are held by the Nominee Shareholders, the Spouses agreed to be bound by the SSF VIE Agreements, including the Technical Services Agreement, and comply with the obligations thereunder, including sign a series of written documents in substantially the same format and content as the SSF VIE Agreements.

 

Letter of Indemnification

 

Pursuant to the Letter of Indemnification among YOD WOFE and Lan Yang and YOD WOFE and Yun Zhu, both dated as of April 5, 2016, YOD WOFE agreed to indemnify Nominee Shareholders against any personal, tax or other liabilities incurred in connection with their role in equity transfer to the greatest extent permitted under PRC law. YOD WOFE further waived and released the Nominee Shareholders from any claims arising from, or related to, their role as the legal shareholder of SSF, provided that their actions as a nominee shareholder are taken in good faith and are not opposed to YOD WOFE’s best interests. The Nominee Shareholders will not be entitled to dividends or other benefits generated therefrom, or receive any compensation in connection with this arrangement. The Letter of Indemnification will remain valid until either the Nominee Shareholders or YOD WOFE terminates the agreement by giving the other party hereto 60 days’ prior written notice.

 

 14 

 

 

Ideanomics, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Loan Agreement

 

Pursuant to the Loan Agreement among YOD WOFE and the Nominee Shareholders, dated April 5, 2016, YOD WOFE agrees to lend RMB 19.8 million and RMB0.2 million, respectively, to the Nominee Shareholders for the purpose of establishing SSF and for development of its business. As of September 30, 2018, RMB27.6 million ($4.2 million) and RMB nil have been lent to Lan Yang and Yun Zhu, respectively. Lan Yang has contributed all of the RMB27.6 million ($4.2 million) in the form of capital contribution. The loan can only be repaid by a transfer by the Nominee Shareholders of their equity interests in SSF to YOD WOFE or YOD WOFE’s designated persons, through (i) YOD WOFE having the right, but not the obligation to at any time purchase, or authorize a designated person to purchase, all or part of the Nominee Shareholders’ equity interests in SSF at such price as YOD WOFE shall determine (the “Transfer Price”), (ii) all monies received by the Nominee Shareholders through the payment of the Transfer Price being used solely to repay YOD WOFE for the loans, and (iii) if the Transfer Price exceeds the principal amount of the loans, the amount in excess of the principal amount of the loans being deemed as interest payable on the loans, and to be payable to YOD WOFE in cash. Otherwise, the loans shall be deemed to be interest-free. The term of the Loan Agreement is perpetual, and may only be terminated upon the Nominee Shareholders receiving repayment notice, or upon the occurrence of an event of default under the terms of the agreement. The loan extended to the Nominee Shareholders and the capital of SSF are fully eliminated in the consolidated financial statements.

 

Management Services Agreement

 

In addition to the SSF VIE Agreements, the Company’s subsidiary and the parent company of YOD WOFE, YOU On Demand (Asia) Limited, a company incorporated under the laws of Hong Kong (“YOD Hong Kong”) entered into a Management Services Agreement with SSF, dated as of April 6, 2016 (the “Management Services Agreement”). Pursuant to a Management Services Agreement, YOD Hong Kong has the exclusive right to provide to SSF management, financial and other services related to the operation of SSF’s business, and SSF is required to take all commercially reasonable efforts to permit and facilitate the provision of the services by YOD Hong Kong. As compensation for providing the services, YOD Hong Kong is entitled to receive a fee from SSF, upon demand, equal to 100% of the annual net profits as calculated on accounting policies generally accepted in the PRC of SSF during the term of the Management Services Agreement. YOD Hong Kong may also request ad hoc quarterly payments of the aggregate fee, which payments will be credited against SSF’s future payment obligations.

 

In addition, at the sole discretion of YOD Hong Kong, SSF is obligated to transfer to YOD Hong Kong, or its designee, any part or all of the business, personnel, assets and operations of SSF which may be lawfully conducted, employed, owned or operated by YOD Hong Kong, including:

 

(a)        business opportunities presented to, or available to SSF may be pursued and contracted for in the name of YOD Hong Kong rather than SSF, and at its discretion, YOD Hong Kong may employ the resources of SSF to secure such opportunities;

 

(b)        any tangible or intangible property of SSF, any contractual rights, any personnel, and any other items or things of value held by SSF may be transferred to YOD Hong Kong at book value;

 

(c)        real property, personal or intangible property, personnel, services, equipment, supplies and any other items useful for the conduct of the business may be obtained by YOD Hong Kong by acquisition, lease, license or otherwise, and made available to SSF on terms to be determined by agreement between YOD Hong Kong and SSF;

 

(d)        contracts entered into in the name of SSF may be transferred to YOD Hong Kong, or the work under such contracts may be subcontracted, in whole or in part, to YOD Hong Kong, on terms to be determined by agreement between YOD Hong Kong and SSF; and

(e)        any changes to, or any expansion or contraction of, the business may be carried out in the exercise of the sole discretion of YOD Hong Kong, and in the name of and at the expense of, YOD Hong Kong;

 

provided, however, that none of the foregoing may cause or have the effect of terminating (without being substantially replaced under the name of YOD Hong Kong) or adversely affecting any license, permit or regulatory status of SSF.

 

 15 

 

 

Ideanomics, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

The term of the Management Services Agreement is 20 years, and may not be terminated by SSF, except with the consent of, or a material breach by, YOD Hong Kong.

 

Pursuant to the above contractual agreements, YOD WOFE can have the assets transferred freely out of SSF without any restrictions. Therefore, YOD WOFE considers that there is no asset of SSF that can be used only to settle obligation of YOD WOFE, except for the registered capital of SSF amounting to RMB50.0 million (approximately $7.5 million), among which RMB27.6 million (approximately $4.2 million) has been injected as of September 30, 2018. As SSF is incorporated as limited liability company under PRC Company Law, creditors of this entity do not have recourse to the general credit of other entities of the Company.

 

Financial Information

 

The following financial information of our VIEs, as applicable for the periods presented, affected the Company's consolidated financial statements.

 

   September 30,   December 31, 
   2018   2017 
ASSETS          
Current assets:          
Cash  $1,495    3,898 
Prepaid expenses   1,635    3,604 
Other current assets   1,456    1,537 
Intercompany receivables due from the Company's subsidiaries(i)   2,363,133    2,494,505 
Total current assets   2,367,719    2,503,544 
Long term investments   3,677,927    3,719,467 
Total assets  $6,045,646    6,223,011 
           
LIABILITIES          
Current liabilities:          
Other current liabilities  $39    41 
Intercompany payables due to the Company's subsidiaries(i)   3,419,561    3,601,454 
Total current liabilities   3,419,600    3,601,495 
Total liabilities  $3,419,600    3,601,495 

 

   Nine Months Ended 
   September 30,   September 30, 
   2018   2017 
Revenue  $-    794,273 
Net income (loss)  $(46,508)   (4,293,469)

 

 

   Nine Months Ended 
   September 30,   September 30, 
   2018   2017 
Net cash used in operating activities  $(2,403)   (1,661,531)
Net cash used in investing activities  $-    (43,047)
Net cash provided by financing activities(i)  $-    189,515 

 

(i)Intercompany receivables and payables are eliminated upon consolidation. The intercompany financing activities include the capital injection of $0.2 million to Sinotop Beijing in the nine months period ended September 30, 2017.

 

The decrease in revenue, net income and net cash used in operating activities was mainly due to disposal of Zhong Hai Shi Xun Media in 2017.

 

 16 

 

 

Ideanomics, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

4.Acquisition

 

(i) Acquisition of SVG and Wide Angle

 

On January 30, 2017, the Company entered into a Securities Purchase Agreement (the “Sun Video SPA”) with BT Capital Global Limited, a British Virgin Islands company (“BT”) which is controlled by Company’s Chairman Bruno Wu, for the purchase by SSC of all of the outstanding capital stock of Sun Video Group Hong Kong Limited, a Hong Kong corporation (“SVG”), for an aggregate purchase price of $800,000 and a $50 million Promissory Note (the “SVG Note”) with the principal and interest thereon convertible into shares of the Company’s common stock at a conversion rate of $1.50 per share. BT has guaranteed that SVG will achieve certain financial goals within 12 months of the closing. Until receipt of necessary shareholder approvals, the SVG Note is not convertible into shares of our common stock, but once the necessary shareholder approval is received, the unpaid principal and interest thereon will automatically convert. Under the terms of the Sun Video SPA, BT has guaranteed that the business of SVG and its subsidiaries (the “Sun Video Business”) shall achieve revenue of $250 million and $15 million of gross profit (collectively the “Performance Guarantees”) within 12 months of the closing. If the Sun Video Business fails to meet either of the Performance Guarantees within such time, BT shall forfeit back to the Company the shares of the Company’s common stock or the SVG Note, on a pro rata basis based on the Performance Guarantee for which the Sun Video Business achieves the lowest percentage of the respective amount guaranteed.

 

In addition, if the Sun Video Business achieves more than $50 million in cumulative net income within 3 years of closing, (the “Net Income Threshold”), the Company shall pay BT 50% of the amount of any cumulative net income above the Net Income Threshold. Profit share payments shall be made on an annual basis, in either cash or stock at the discretion of our Board of Directors. If the Board decides to make the payment in stock, the number of our shares of common stock to be awarded shall be calculated based on the market price of such shares.

 

After the acquisition SVG, the Company changed its name to Wecast Services Group Limited, and is therefore also referred to herein as Wecast Services.

 

On January 31, 2017, the Company entered into a Securities Purchase Agreement (the “Wide Angle SPA”) with BT and Sun Seven Stars Media Group Limited, a Hong Kong company (“SSSMGL”), one of the Company’s largest shareholders, controlled by our Chairman Bruno Wu, as guarantor, for the purchase by the Company of 55% of the outstanding capital stock of Wide Angle for the sole consideration of the Company adding Wide Angle to the Sun Video Business acquired by the Company under the SVG Purchase Agreement and thereby including 100% of the revenue and gross profit from Wide Angle in the calculation of the SVG Performance Guarantees set forth in the Sun Video SPA considering the Company has consolidated Wide Angle.

 

As of September 30, 2018, the Company recorded the $24.3 million SVG Note as additional paid in capital, as the Company believes that the Performance Guarantees can be met within 12 months of the closing. Considering the proceeds transferred were larger than carrying amounts of the net assets received, such $24.3 million was then recognized as a reduction to the Company’s additional paid in capital. The Company has not begun accruing any reserves relating to potential Net Income Threshold earnout payments, since the Sun Video Business is currently not close to exceeding this threshold.

 

(ii) Acquisition of BBD Digital Capital Group Ltd.

 

On December 7, 2017, the Company entered into a Securities Purchase Agreement (the “BDCG Purchase Agreement”) with Tiger Sports Media Limited, a Hong Kong limited liability company (“Tiger”) pursuant to which the Company agreed to purchase Tiger’s 20% equity ownership in BBD Digital Capital Group Ltd. (“BDCG”), a New York corporation. The Company will purchase the 20% equity from Tiger for a total purchase price of $9.8 million (the “Transaction”), 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). The valuation report was received post-signing of the BDCG Purchase Agreement with both parties agreeing that there is no obligation to close the Transaction until a satisfactory valuation report has been received, evaluated and approved by the Company’s Audit Committee. On April 24, 2018, the Audit Committee approved the satisfactory valuation report provided by an independent third party and closed this transaction. The Company paid the $2 million in cash upon the execution of the BDCG Purchase Agreement and issued the 3 million shares of Company common stock upon the closing of the Transaction. According to the BDCG Joint Venture Agreement, Board actions shall only be valid with more than 2/3 of the directors’ approval. As the Company is only able to assign 3 directors of the 5 in the Board, it is concluded that the Company does not have control in BDCG and should use an equity method to record the investment in BDCG. After such acquisition, the Company owns 60% of BDCG. It will be consolidated once the Company changes BDCG’s article of incorporation (or that joint venture agreement), pursuant to GAAP.

 

(iii) Acquisition of Shanghai GuangMing

 

On December 7, 2017, the Company entered into a Securities Purchase Agreement (the “GuangMing Purchase Agreement”) with Tianjin Sun Seven Stars Culture Development Co. Ltd, a PRC limited liability company (“Tianjin SSCD”) and Beijing Nanbei Huijin Investment Co., Ltd., a PRC limited liability company (“Beijing Nanbei”), pursuant to which the Company agreed to purchase Tianjin SSCD’s 80% equity ownership in Shanghai GuangMing Investment Management (“Shanghai GuangMing”), a PRC limited liability company, and Beijing Nanbei’s 20% equity ownership in Shanghai GuangMing. SSC will purchase the 100% equity for a total purchase price of $0.36 million (the “Transaction”). The fairness opinion report, which is delivered by Deloitte & Touche Financial Advisory Services Limited, has been received, evaluated and approved by the Company’s Audit Committee in April, 2018.

 

 17 

 

 

Ideanomics, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 

 

(iv) Acquisition of Grapevine

 

On July 18, 2018, the Company entered into an Agreement and Plan of Merger with GLI Acquisition Corp. (the “Merger”), a Delaware corporation and wholly owned subsidiary of the Company (the “Merger Sub”), and Grapevine Logic, Inc., a Delaware corporation (“GLI”), and Mr. Grant Deken, as the representative of the holders of capital stock of GLI, pursuant to which the Company agreed to acquire 65.65% share of GLI for an aggregate cash payment of $2.4 million to the holders of capital stock of GLI.

 

On September 4, 2018, the Company have completed the acquisition of 65.65% share of GLT. The Company has preliminarily recorded $1.4 million of Goodwill, $2.9 million of Intangible Assets and $0.7 million of deferred tax liabilities based on the estimated fair values. The preliminary fair value estimates for the assets acquired and liabilities assumed for our acquisitions were based upon preliminary calculations and our estimates and assumptions for each of these acquisitions are subject to change as we obtain additional information for our estimates during the respective measurement periods (up to one year from the respective acquisition dates).The Company has included the financial results of GLI in our consolidated financial statements from the acquisition date.

 

Fomalhaut Limited, a British Virgin Islands company and an affiliate of Bruno Wu, the Chairman and Co-CEO of the Company (“Fomalhaut”), was an equity holder of 34.35% in GLI (the “Fomalhaut Interest”) prior to the merger and remains so following the merger. Fomalhaut will not receive any part of the Purchase Price. Fomalhaut entered into a Stock Option Agreement, effective as of August 31, 2018 (the “Option Agreement”), with the Company pursuant to which the Company provided Fomalhaut with the option to sell the Fomalhaut Interest to the Company. The aggregate sale price for the Fomalhaut Interest is the fair market value of the Fomalhaut Interest as of the close of business on the date preceding the date upon which the right to sell the Fomalhaut Interest to the Company is exercised by Fomalhaut. If the option is exercised, the sale price for the Fomalhaut Interest is payable in a combination of 1/3 cash and 2/3 Company shares of common stock at the then market value. The exercise period for the Option Agreement terminates on August 31, 2021.

 

(v) Acquisition of Fintalk

 

On September 7, 2018, the Company entered into an Intellectual Property and Purchase and Assumption Agreement (the “SSIL Agreement”) with Sun Seven Star International Limited, a Hong Kong company (“SSIL”) and an affiliate of Mr. Bruno Wu, the Company’s Chairman and Co- CEO, pursuant to which SSIL sold the assets of FinTalk to the Company in exchange for $1.0 million promissory note (the “Note”) and shares of the Company’s common stock with a fair market value of $6.0 million. The Company shall repay the Note in 12 equal monthly installments commencing on October 7, 2018 at an interest rate of 2.51% per annum. The principal amount of the Note shall become due and payable in the event of a default pursuant to the Note. The transaction has not been completed as of September 30, 2018.

 

5.Accounts Receivable, Net

 

Accounts receivable consists of the following:

 

   September 30,   December 31, 
   2018   2017 
Accounts receivable  $105,538,117    26,965,731 
Less: allowance for doubtful accounts   (3,594)   (3,646)
Accounts receivable, net  $105,534,523    26,962,085 

 

The movement of the allowance for doubtful accounts is as follows:

 

   September 30,
2018
   December 31,
2017
 
Balance at the beginning of the period  $(3,646)   (2,828,796)
Additions charged to bad debt expense   -    (145,512)
Write-off of bad debt allowance   52    89,851 
Disposal of Zhong Hai Shi Xun   -    2,880,811 
Balance at the end of the period  $(3,594)   (3,646)

 

 18 

 

 

Ideanomics, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

6.Property and Equipment, Net

 

The following is a breakdown of the Company’s property and equipment:

 

   September 30,   December 31, 
   2018   2017 
Furniture and office equipment  $312,829    308,383 
Vehicle   143,249    147,922 
Leasehold improvements   163,311    8,058 
Total property and equipment   619,389    464,363 
Less: accumulated depreciation   (361,336)   (337,088)
Property and Equipment, net  $258,053    127,275 

 

The Company recorded depreciation expense of approximately $14,820 and $32,941 for the three and nine months ended September 30, 2018 and $8,341 and $209,139 for the three and nine months ended September 30, 2017, respectively.

 

7.Intangible Assets

 

As of September 30, 2018 and December 31, 2017, the Company’s amortizing and indefinite lived intangible assets consisted of the following:

 

   September 30, 2018   December 31, 2017 
   Gross
Carrying
   Accumulated   Impairment   Net   Gross
Carrying
   Accumulated   Impairment   Net 
Amortizing Intangible Assets  Amount   Amortization   Loss   Balance   Amount   Amortization   Loss   Balance 
Charter/ Cooperation agreements   301,495    (32,303)   -     269,192    -    -    -    - 
Intangible assets – Content (ii)   2,903,762    (241,980)   -    2,661,782    -    -    -    - 
Software and licenses   238,163    (203,663)   -    34,500    214,210    (199,626)   -    14,584 
Patent and trademark (i)   92,965    (39,943)   (53,022)   -    92,965    (39,943)   (53,022)   - 
Total amortizing intangible assets  $3,536,385    (517,889)   (53,022)   2,965,474   $307,175   $(239,569)  $(53,022)  $14,584 
                                         
Indefinite lived intangible assets                                        
Website name   159,505    -    -    159,505    134,290    -    -    134,290 
Patent (i)   10,599    -    (10,599)   -    10,599    -    (10,599)   - 
Total intangible assets  $3,706,489    (517,889)   (63,621)   3,124,979   $452,064   $(239,569)  $(63,621)  $148,874 

 

(i) During the second quarter of 2017, the Company determined that one of its subsidiaries in the US would not serve the core business or generate future cash flow. As no future cash flows will be generated from using the patents owned by this subsidiary, the Company estimated the fair value of those patents to be nil as of June 30, 2017. Fair value was determined using unobservable (Level 3) inputs. Impairment loss from patents of $63,621 was recognized in 2017 to write off the entire book value of the patents.

 

(ii) During the third quarter of 2018, the Company completed the acquisition of 65.65% share of GLT, and preliminarily recorded $1.4 million of Goodwill, $2.9 million of intangible assets and $0.7 million of deferred tax based on the estimated fair values (Note 4)

 

The following table outlines the amortization expense for the following years:

 

   Amortization to be 
Years ending December 31,  Recognized 
2018 (3 months)  $760,680 
2019   2,076,117 
2020   114,677 
2021 and thereafter   14,000 
Total amortization to be recognized  $2,965,474 

 

 19 

 

 

 

Ideanomics, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

8.Long Term Investments

 

Equity investments without readily determinable fair values

 

Equity investments without readily determinable fair values as of September 30, 2018 and December 31, 2017 are as follow:

 

   September 30,
2018
   December 31,
2017
 
Topsgame (i)  $3,365,969   $3,365,969 
Frequency (ii)   3,000,000    3,000,000 
DBOT (iii)   250,000    250,000 
Liberty (iv)   1,011,916    - 
Asia Times (v)   1,023,274    - 
Total  $8,651,159   $6,615,969 

 

In the first quarter of 2018, we adopted the ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10). Under the new ASC, entities no longer use the cost method of accounting as it was applied before, but it can elect a measurement alternative for equity investments that do not have readily determinable fair values and do not qualify for the practical expedient in ASC 820 to estimate fair value using the NAV per share. After management’s assessment of each of these three equity investments, management concluded that these three investments should be accounted for using measurement alternative. Under the alternative, the Company measures these investments at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer, and the Company has to make a separate election to use the alternative for each eligible investment and has to apply the alternative consistently from period to period until the investment’s fair value becomes readily determinable. ASU further requires that the Company should use prospective method for all equity investments without readily determinable fair values.

 

(i)Investment in Topsgame

 

On April 13, 2016, SSF entered into a Game Right Assignment Agreement with SSS for the acquisition of certain game IP rights (“Game IP Rights”) for approximately $2.7 million (RMB18 million) in cash. On April 15, 2016, SSF entered into a Capital Increase Agreement with Nanjing Tops Game Co., Ltd. (“Topsgame”) and its shareholders whereby SSF transferred the Game IP Rights acquired from SSS to Topsgame in exchange for 13% of Topsgame’s equity ownership. Topsgame is a PRC company that specializes in the independent development and operation of online, stand-alone and other games as well as the distribution of domestic and overseas games. The Company’s 13% ownership interest does not provide the Company with the right to nor does the Company have representation on the board of directors of Topsgame.

 

The Company has recognized the cost of the investment in Topsgame, which is a private company with no readily determinable fair value, based on the acquisition cost of Game IP Rights of approximately $2.7 million and accounts for the investment by the cost method.

 

On September 14, 2016, SSF increased its investment in Topsgame by RMB3,900,000 (approximately $584,000) and maintained its 13% equity ownership of Topsgame. The investment continued to be accounted for as equity investments without readily determinable fair values.

 

The Company expects to sell its investment interest in Topgame and other owned IP and its investment interest in Frequency (discussed in Note 8 (ii)) to an independent third party with consideration greater than its net book value in 2018. The Company has signed a letter of intent with this third party and management believes it will close this transaction in 2018 on the basis of a valuation report provided by a qualified independent valuation firm. Accordingly, the Company did not make any impairment to either of these long-lived assets as of September 30, 2018.

 

(ii)Investment in Frequency

 

In April 2016, the Company and Frequency Networks Inc. (“Frequency”) entered into a Series A Preferred Stock Purchase Agreement (the “SPA”) for the purchase of 8,566,271 shares of Series A Preferred Stock, Frequency (the “Frequency Preferred Stock”) for a total purchase price of $3 million. The 8,566,271 Series A Preferred Stock represent 9% ownership and voting interest on an as converted basis and does not provide the Company with the right to nor does the Company have representation on the board of directors of Frequency.

 

 20 

 

  

Ideanomics, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

The Frequency Preferred Stock is entitled to non-cumulative dividends at the rate of $0.02548 per share per annum, declared at the discretion of Frequency’s board of directors. The Frequency Preferred Stock is also convertible into shares of Frequency common stock at the Company’s election any time after issuance on a 1:1 basis, subject to certain adjustment. Each share of Frequency Preferred Stock also has a liquidation preference of $0.42467 per share, plus any declared but unpaid dividends.

 

The Company has recognized the cost of the investment in Frequency, which is a private company with no readily determinable fair value, at its cost of $3 million and accounts for the investment by the cost method.

 

There were no identified events or changes in circumstances that may have had a significant adverse effect on the fair value of this investment.

 

(iii)Investment in DBOT

 

In August, 2017, the Company subscribed for a strategic investment of US$250,000 in the Delaware Board of Trade Holdings, Inc. (“DBOT”) to acquire 187,970 common shares. DBOT is a FINRA member firm, and filed an initial operations report on Form ATS to give notice of DBOT ATS’s operations. DBOT is powered through the blockchain technology from one of our strategic licensing partners. The Company accounts for the investment in DBOT as equity investments without readily determinable fair values, as the Company owns less than 4% of the common shares and the Company has no significant influence over DBOT.

 

On December 18, 2017, January 12, 2018 and February 28, 2018, the Company entered into three stock purchase agreements with certain existing DBOT shareholders to acquire their owned shares of common stock of DBOT in an aggregate amount of 3,543,546 shares. To acquire those shares, the Company agreed to issue the aggregate amount of 2,267,869 shares of the Company’s common stock. The transaction closed in October 2018. Together with shares acquired in 2017, the Company owns 28% of the common shares and will account for the investment using equity method starting from October 2018.

 

(iv)Investment in Liberty

 

On September 7, 2018, the Company entered into a Share Purchase Agreement with Sun Seven Stars Investment Group Limited (“Sun”), an affiliate of Bruno Wu, the then Chairman and Co-CEO of the Company, pursuant to which the Company agreed to purchase from Sun and other persons for whom Sun acted as seller-representative:

 

an aggregate of 8,583,034 shares of common stock of Liberty Biopharma, an entity listed on the TSX venture exchange (“Liberty”), at fair market value, in consideration for Company common stock of equivalent value; and

 

an aggregate of 3,240,433 additional shares of Liberty, subject to the sellers receiving those shares from Liberty as award of performance shares if and when certain performance and vesting conditions set out in an agreement among Sun, Liberty and the sellers are achieved, in consideration for Company common stock of equivalent value. These Liberty shares represent 50% of performance based Liberty shares to which the sellers are entitled. In the event the performance criteria are not met, the Liberty performance shares will not be issued to the sellers and thus the purchase of these performance shares by the Company will not close.

 

The Company shares to be issued to the sellers in consideration for the Liberty shares are valued at fair market value on the date of each closing. As of September 30, 2018 this transaction was not completed, the Company had not received any shares from Liberty, nor had the Company issued any shares to the sellers.

 

On September 28, 2018, the Company signed the Subscription Agreement with Liberty to purchase 1,173,333 common shares for $2.0 million.  The Company paid $1.0 million of the purchase price as of September 30, 2018.  As of September 30, 2018, this subscription transaction has not yet closed and the Company has not received the shares from Liberty.

 

(v)Investment in Asia Times

 

On September 12 2018, the Company announced a 50/50 Joint Venture (JV) with Asia Times Holdings, to be named Asia Times Financial Limited. JV will be providing next generation financial information service by AI-enabled financial data analytics and end-to-end encrypted messaging system that will work alongside blockchain-based financial services. As part of the deal, the Company will take a 10% stake in Asia Times Holdings for $4.0 million cash investment and Asia Times Holdings agreed to contribute $1.0 million of the $4.0 investment to the JV. The Purchase Price is payable in 4 tranches of $1,000,000 payable on September 21, 2018, October 15, 2018, November 15, 2018 and December 15, 2018, respectively. The Company paid the first $1.0 million payment prior to September 30, 2018. No shares from Asia Times have been issued as of September 30, 2018.

 

 21 

 

  

Ideanomics, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Equity method investments

 

Equity method investment movement for the nine months ended on September 30, 2018 is as follow:

 

      September 30, 2018 
      December 31,
2017
   Addition   Loss on
 investment
   Foreign currency
translation adjustments
   September 30,
2018
 
Wecast Internet  (i)   6,044    -    (1,652)   1    4,393 
Hua Cheng  (ii)   353,498    -    (42,664)   1,124    311,958 
Shandong Media  (iii)   -    -    -    -    - 
BDCG  (iv)   -    9,800,000    -    -    9,800,000 
Total     $359,542    9,800,000    (44,316)   1,125    10,116,351 

 

(i)Investment in Wecast Internet

 

In October 2016, the Company’s subsidiary, YOU On Demand (Asia) Ltd., invested RMB1,000,000 (approximately $149,750) in Wecast Internet Limited (“Wecast Internet”) and held its 50% equity ownership. In 2017, Wecast Internet closed its 100% owned subsidiary and the Company received $35,612 from its previous capital investment, and expects to receive the remaining investment from Wecast Internet in 2018.

 

(ii)Investment in Hua Cheng

 

As of September 30, 2018 and December 31, 2017, the Company held 39% equity ownership in Hua Cheng, and accounted for the investment by the equity method.

 

(iii)Investment in Shandong Media

 

As of September 30, 2018 and December 31, 2017, the Company held 30% equity ownership in Shandong Media, and accounts for the investment by the equity method. The investment was fully impaired as of September 30, 2018 and December 31, 2017.

 

(iv)Investment in BDCG

 

As of September 30, 2018 and December 31, 2017, the Company held 60% and 20% equity ownership in BDCG respectively, and accounts for the investment by the equity method, as indicated in Note 4.

 

9.Stockholders’ Equity

 

On May 19, 2017, the Company entered into a subscription agreement with certain investors, including officers, directors and other affiliates of the Company, pursuant to which the Company issued and sold to such investors, in a private placement, an aggregate of 727,273 shares of the common stock of the Company, for $2.75 per share, or a total purchase price of $2.0 million. Investors in the private placement included Lan Yang, the wife of the Company’s Chairman Bruno Wu, and China Telenet Ventures Limited, an entity owned and controlled by Sean Wang, a member of the Company’s Board of Directors. As of July 18, 2017, all subscription amounts have been received by the Company.

 

On October 23, 2017, the Company entered into a Securities Purchase Agreement with Hong Kong Guo Yuan Group Capital Holdings Limited. Pursuant to the terms of the agreement, the Company has agreed to sell and issue 5,494,505 shares of the Company’s common stock to the Hong Kong Guo Yuan Group Capital Holdings Limited for $1.82 per share, or a total purchase price of $10.0 million.

 

On March 17, 2018, the Company entered into a subscription agreement (the “Subscription Agreement”) with GT Dollar Ptd. Ltd. (“GTD”) for a private placement (“GT Financing”) in the total amount of $40.0 million, which consists of issuance of new shares in the amount of $25.1 million and issuance of two promissory notes in the amount of $ 10.0 million and $4.9 million, respectively. The Subscription Agreement was subsequently amended and restated (the “Amended Agreement”) on June 28, 2018 to reduce the amount of such investment to $10.0 million and to terminate the two promissory notes. Pursuant to the terms of the Amended Agreement, the Company will issue and sell to GTD, an aggregate of 5,494,506 shares of the common stock of the Company, for $1.82 per share, or a total purchase price of $10.0 million. The Company has received $5.3 million in the second quarter of 2018 and the remaining $4.7 million in the third quarter of 2018. The shares have been issued on October 3, 2018.

 

On June 21, 2018, the Company entered into a Subscription Agreement (the “Subscription Agreement”) with Sun Seven Stars Investment Group Limited, a British Virgin Islands corporation (“SSSIG”), an affiliate of Bruno Wu, the Company’s Chairman and Co- CEO, pursuant to which SSSIG purchased $3 million of Common Stock at the then market price. The Company has received $1.1 million as of September 30, 2018 and the remaining $1.9 million on November 9, 2018. No shares have been issued as of as of September 30, 2018.

 

 22 

 

 

Ideanomics, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 

 

On July 24, 2018, the Company entered into a Share Purchase & Option Agreement (the “Purchase Agreement”) with Star Thrive Group Limited (“Star”), a British Virgin Islands corporation, pursuant to which Star will purchase 12,568,306 shares of the Company’s common stock, for $23.0 million (the “Investment”). The Investment will be made over 6 separate monthly closings between now and December 31, 2018. The Company also granted to Star a share purchase option (the “Call Option”) pursuant to which the Purchaser may, within 24 months after July 24, 2018, purchase from the Company such number of shares of common stock that would bring Star’s total ownership of the Company’s issued and outstanding shares up to 19.5% on a fully diluted basis, at a price equal to 95% of the weighted average trading price of the common stock within 3 months prior to the exercise date of the Call Option. As of September 30, 2018, the Company has received $6.9 million and 3,770,493 shares have been issued. The fair value of the call option is $8.0 million using the Black-Sholes valuation model using the following assumptions: expected terms 1.81 years; volatility 132.55%; dividend yield: zero and risk free interest rate 2.81%.

 

10.Convertible Note

 

On June 28, 2018, the Company entered into a Convertible Note Purchase Agreement (the “Purchase Agreement”) and a Convertible Bond (the “Bond”) with Advantech Capital Investment II Limited, an exempted company incorporated and existing under the laws of the Cayman Islands (“Advantech”), pursuant to which Advantech invested $12 million. Such investment is convertible into common stock, at a conversion price of $1.82. The Bond matures on June 28, 2021 and accrues at an 8% interest rate. the Company records $1.4 million of beneficial conversion feature (“BCF”) in the additional paid in capital. The BCF for the Bond is recognized and measured by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The intrinsic value is generally calculated at the commitment date as the difference between the conversion price and the fair value of the common stock or other securities into which the security is convertible, multiplied by the number of shares into which the security is convertible. As of September 30, 2018, the carrying amount of the Bond net of the discount related to the beneficial conversion feature is $10.7 million.

 

11.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.

 

Accounting standards require the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.

 

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.

 

Common stock is valued at closing price reported on the active market on which the individual securities are traded.

 

The carrying amount of cash, accounts receivable, notes receivable, accounts payable, accrued other expenses, other current liabilities and convertible notes as of September 30, 2018 and December 31, 2017, approximate fair value because of the short maturity of these instruments.

 

12.Related Party Transactions

 

(a)$3.0 Million Convertible Note

 

On May 10, 2012, the Executive Chairman and Principal Executive Officer, Mr. Shane McMahon, made a loan to the Company in the amount of $3.0 million. In consideration for the loan, the Company issued a convertible note to Mr. McMahon in the aggregate principal amount of $3.0 million (the “Note”) at a 4% interest rate computed on the basis of a 365 day year. Upon issuance, the conversion price of the Note was equal to the price per share paid for securities by investors in the most recent financing (as of the date of conversion) of equity or equity-linked securities of the Company.

 

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Ideanomics, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 

 

On November 9, 2017, the Board of Directors approved Amendment No. 7 to $3.0 million Note, pursuant to which the maturity date of the Note was extended to December 31, 2019. The Note remains payable on demand or convertible on demand into common stock at a conversion price of $1.50.

 

For the three and nine months ended September 30, 2018, the Company recorded interest expense of $30,247 and $89,753, respectively, related to the Note; For the three and nine months ended September 30, 2017, the Company recorded interest expense of $30,247 and $89,753, respectively, related to the Note.

 

(b) Asset Disposal to BT

 

On November 28, 2017, for strategic reasons, the Company and BT agreed to amend the BT SPA, in which the Company will neither sell the equity of Nanjing Tops Game Co., Ltd, and the equity of the Pantaflix joint venture to BT nor receive the previously agreed upon consideration for such sales. Instead the Company sold to BT 80% of the outstanding capital stock of Zhong Hai Shi Xun Media to streamline the operations of the Company and to eliminate the Company’s exposure to any liabilities and obligations of Zhong Hai Shi Xun Media.

 

(c) Acquisition of GuangMing

 

On December 7, 2017, the Company entered into a Securities Purchase Agreement with Shanghai Guang Ming Investment Management Limited, a PRC limited liability company (“Guang Ming”), Tianjin Sun Seven Stars Culture Development Co. Ltd. (“Tianjin”) and Beijing Nanbei Huijin Investment Co. Ltd. (“BNH”) The Company purchased 100% of Guang Ming’s issued and outstanding shares for a total purchase price of RMB2.4 million (approximately $363,436). Guang Ming holds a special fund management license. The acquisition will help the Company develop a fund management platform. The closing of the acquisition is conditioned upon, among other things, Guang Ming, Tianjin and BNH obtaining all of the necessary approvals from the Asset Management Association of China (“AMAC”), a self-regulatory organization that oversees and regulates fund management companies in China. In the event that AMAC does not accept the submission for change of ownership, this agreement shall be rescinded, and the Company shall receive a refund from the sellers of any portion of the purchase price previously paid within 15 days of notice from the Company. This agreement was approved by the Company’s Audit Committee. The closing of the acquisition is also subject to the receipt of a fairness opinion and valuation report satisfactory to the Company, which together conclude that the purchase price of the acquisition is fair from a financial point of view to the Company’s shareholders. The acquisition is deemed to be a related party transaction because Tianjin is an affiliate of Bruno Wu, the Company’s Chairman and Co-Chief Executive Officer. In April 2018, the fairness opinion was approved by Audit Committee, and the Company paid the consideration and closed this acquisition.

 

(d) Crude Oil Trading

 

During the first nine months of 2018, ten of our crude oil transactions were purchased from three entities of which our minority shareholder has significant influence upon and because this minority shareholder has significant influence on both our Singapore joint venture and these three entities/suppliers, the Company reported these ten purchases as related party transaction from accounting perspective and hence recorded this as separate related party costs in its financial statement. Associated amounts payable represents almost 58.3% of total liabilities.

 

 24 

 

 

Ideanomics, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  

 

(e) Acquisition of Grapevine

 

On September 4, 2018, the Company have completed the acquisition of 65.65% share of GLT (Note 4). Fomalhaut Limited, a British Virgin Islands company and an affiliate of Bruno Wu, the Chairman and Co-CEO of the Company (“Fomalhaut”), was an equity holder of 34.35% in GLI (the “Fomalhaut Interest”) prior to the merger and remains so following the merger. Fomalhaut will not receive any part of the Purchase Price. Fomalhaut entered into a Stock Option Agreement, effective as of August 31, 2018 (the “Option Agreement”), with the Company pursuant to which the Company provided Fomalhaut with the option to sell the Fomalhaut Interest to the Company. The aggregate sale price for the Fomalhaut Interest is the fair market value of the Fomalhaut Interest as of the close of business on the date preceding the date upon which the right to sell the Fomalhaut Interest to the Company is exercised by Fomalhaut. If the option is exercised, the sale price for the Fomalhaut Interest is payable in a combination of 1/3 cash and 2/3 Company shares of common stock at the then market value. The exercise period for the Option Agreement terminates on August 31, 2021.

 

(f) Investment in Asia Times

 

On September 12 2018, the Company announced a 50/50 Joint Venture (JV) with Asia Times Holdings, to be named Asia Times Financial Limited. to take a 10% stake in Asia Times Holdings. (Note 8). As part of the deal, the Company will take a 10% stake in Asia Times Holdings for $4.0 million cash investment and Asia Times Holdings agreed to contribute $1.0 million of the $4.0 investment to the JV. The Purchase Price is payable in 4 tranches. The Company paid the first $1.0 million payment prior to September 30, 2018. Uwe Parpart, the Company’s Chief Strategy Officer, is the Chairman of Asia Times Holdings.

 

(g) SSSIG Investment

 

On June 21, 2018, the Company entered into a Subscription Agreement (the “Subscription Agreement”) with Sun Seven Stars Investment Group Limited, a British Virgin Islands corporation (“SSSIG”), an affiliate of Bruno Wu, the Company’s Chairman and Chief Executive Officer, pursuant to which SSSIG purchased $3 million of Common Stock at the then market price. The Company has received $1.1 million as of September 30, 2018. No shares have been issued as of as of September 30, 2018.

 

(h) Acquisition of Fintalk

 

On September 7, 2018, the Company entered into an Intellectual Property and Purchase and Assumption Agreement (the “SSIL Agreement”) with Sun Seven Star International Limited, a Hong Kong company (“SSIL”) and an affiliate of Mr. Bruno Wu, the Company’s Chairman and Co- CEO, pursuant to which SSIL sold the assets of FinTalk to the Company in exchange for $1.0 million promissory note (the “Note”) and shares of the Company’s common stock with a fair market value of $6.0 million. The Company shall repay the Note in 12 equal monthly installments commencing on October 7, 2018 at an interest rate of 2.51% per annum. The principal amount of the Note shall become due and payable in the event of a default pursuant to the Note.” The transaction has not been completed as of September 30, 2018.

 

(i) Investment in Liberty

 

On September 7, 2018, the Company entered into a Share Purchase Agreement with Sun Seven Stars Investment Group Limited (“Sun”), an affiliate of Bruno Wu, the then Chairman and Co-CEO of the Company, pursuant to which the Company agreed to purchase from Sun and other persons for whom Sun acted as seller-representative:

 

an aggregate of 8,583,034 shares of common stock of Liberty Biopharma, an entity listed on the TSX venture exchange (“Liberty”), at fair market value, in consideration for Company common stock of equivalent value; and

 

an aggregate of 3,240,433 additional shares of Liberty, subject to the sellers receiving those shares from Liberty as award of performance shares if and when certain performance and vesting conditions set out in an agreement among Sun, Liberty and the sellers are achieved, in consideration for Company common stock of equivalent value. These Liberty shares represent 50% of performance based Liberty shares to which the sellers are entitled. In the event the performance criteria are not met, the Liberty performance shares will not be issued to the sellers and thus the purchase of these performance shares by the Company will not close.

 

The Company shares to be issued to the sellers in consideration for the Liberty shares are valued at fair market value on the date of each closing. As of September 30, 2018 this transaction was not completed, the Company had not received any shares from Liberty, nor had the Company issued any shares to the sellers.

 

On September 28, 2018, the Company signed the Subscription Agreement with Liberty to purchase 1,173,333 common shares for $2.0 million.  The Company paid $1.0 million of the purchase price as of September 30, 2018.  As of September 30, 2018, this subscription transaction has not yet closed and the Company has not received the shares from Liberty.

 

13.Share-Based Payments

 

As of September 30, 2018, the Company had 1,706,431 options, 90,586 restricted shares and 60,000 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 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.

 

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Ideanomics, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  

 

Total share-based payments expense recorded by the Company during the three and nine months ended September 30, 2018 and September 30, 2017, respectively, is as follows:

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30,   September 30,   September 30, 
   2018   2017   2018   2017 
Employees and directors share-based payments  $11,530   $54,846   $3,372,447   $202,501 

 

Effective as of December 3, 2010, the Company’s Board of Directors approved the Wecast Network, Inc. 2010 Stock Incentive Plan (“the 2010 Plan”) pursuant to which options or other similar securities may be granted. The maximum aggregate number of shares of our common stock that may be issued under the Plan is 4,000,000 shares. As of September 30, 2018, options available for issuance are 132,499 shares.

 

(a)Stock Options

 

Stock option activity for the nine months ended September 30, 2018 is summarized as follows:

 

           Weighted Average     
           Remaining   Aggregated 
   Options   Weighted Average   Contractual Life   Intrinsic 
   Outstanding   Exercise Price   (Years)   Value 
Outstanding at January 1, 2018   1,853,391   $3.20    2.99    0.02 
Granted   -    -           
Exercised   (110,295)   1.99           
Expired   (36,665)   1.58           
Forfeited   -    -           
Outstanding at September 30, 2018   1,706,431    3.28    4.34    0.86 
Vested and expected to vest as of September 30, 2018   1,706,431    3.28    4.34    0.86 
Options exercisable at September 30, 2018 (vested)   1,615,598    3.36    4.09    0.80 

 

As of September 30, 2018, approximately $110,584 of total unrecognized compensation expense related to non-vested share options is expected to be recognized over a weighted average period of approximately 1.67 years. The total fair value of shares vested during the nine months ended September 30, 2018 and 2017 was approximately $319,001 and $56,765 respectively. 

 

(b) Warrants

 

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 will expire on Jan 31, 2019. The warrants that were issued to SSS has been expired on March 28, 2018.

 

As of September 30, 2018, the weighted average exercise price of the warrants was $1.75 and the weighted average remaining life was 0.59 years. The following table outlines the warrants outstanding and exercisable as of September 30, 2018 and December 31, 2017:

 

   September 30,   December 31,        
   2018   2017        
   Number of   Number of        
   Warrants   Warrants   Exercise   Expiration
Warrants Outstanding  Outstanding   Outstanding   Price   Date
                
2014 Broker Warrants (Series E Financing)   60,000    703,714   $1.75   01/31/2019
2016 Warrants to SSS   -    1,818,182   $2.75   03/28/2018
    60,000    2,521,896         

 

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. The grant date of the Warrants will be the first date that the Company’s common stock trades at or above the Exercise Price (the “Grant Date”) and the Warrants shall vest as follows: (i) 25% will vest 9 months following the Grant Date; (ii) 50% will vest 18 months following the Grant Date; and (iii) 25% will vest 24 months following the Grant Date. The Company has reserved 8,000,000 shares for issuance in connection with these Warrants. The Company’s shares have not traded at or above the Exercise Price and no warrants have been granted during the nine months ended September 30, 2018. No stock based compensation expense was recognized since the warrants have not been granted as of September 30, 2018.

 

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Ideanomics, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  

 

(c) Restricted Shares

 

In January, 2017, the Company granted 35,000 restricted shares to one employee under the “2010 Plan”. The restricted shares have a vesting period of four years with the first one-fourth vesting on the first anniversary from grant date and the remaining three-fourth vesting ratably over twelve quarters. The grant date fair value of the restricted shares was $43,750. As this employee left the Company in February, no expense was recorded.

 

In March and April, 2017, the Company granted 365,000 restricted shares to certain employees under the “2010 Plan”. The restricted shares have a vesting period of four years with the first one-fourth vesting on the first anniversary from grant date and the remaining three-fourth vesting ratably over twelve quarters. The grant date fair value of the restricted shares was $778,200.

 

In November, 2017, the Board of Directors approved 2017 independent board compensation plan, which approved to grant 4,488 restricted shares to each of four then independent directors under the “2010 Plan.” The restricted shares were all vested immediately since commencement date. The aggregated grant date fair value of all those restricted shares was $100,000.

 

In April and June, 2018, the Company granted 1,342,743 restricted shares to certain employees under the “2010 Plan”. 1,239,743 of the restricted shares were all vested immediately since commencement date. Rest of the shares have a vesting period of two years with the first half vesting on the first anniversary from grant date and the other half vesting on the second anniversary. The grant date fair value of the restricted shares was $3,469,532.

 

A summary of the restricted shares is as follows:

 

   Shares   Weighted-average
fair value
 
Restricted shares outstanding at January 1, 2018   109,586    1.92 
Granted   1,342,743    2.58 
Forfeited   (97,000)   2.26 
Vested   (1,264,743)   2.56 
Restricted shares outstanding at September 30, 2018   90,586    2.46 

 

14.Earnings (Loss) Per Common Share

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30,   September 30,   September 30, 
   2018   2017   2018   2017 
Net loss attributable to common stockholders  $(7,186,847)  $(3,027,939)  $(19,228,240)  $(4,698,563)
Basic                    
Basic weighted average shares outstanding   74,063,495    62,146,168    71,574,303    59,594,289 
                     
Diluted                    
Diluted weighted average common shares outstanding   74,063,495    62,146,168    71,574,303    59,594,289 
                     
Net loss per share:                    
Basic  $(0.10)  ($0.05)  $(0.27)  ($0.08)
Diluted  $(0.10)  ($0.05)  $(0.27)  ($0.08)

 

Basic earnings (loss) per common share attributable to shareholders is calculated by dividing the net earnings (loss) attributable to shareholders by the weighted average number of outstanding common shares during the applicable period.

 

Diluted earnings (loss) per share is calculated by taking net earnings (loss), divided by the diluted weighted average common shares outstanding. Diluted earnings (loss) per share for the three and nine months ended September 30, 2018 and 2017 both equal to basic loss per share for respective periods because the effect of securities convertible into common shares is anti-dilutive.

 

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Ideanomics, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  

 

The following table includes the number of shares that may be dilutive potential common shares in the future. These shares were not included in the computation of diluted earnings (loss) per share because the effect was either antidilutive or the performance condition was not met.

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30,   September 30,   September 30, 
   2018   2017   2018   2017 
Warrants   60,000    3,118,181    60,000    3,118,181 
Options   1,797,017    2,267,095    1,797,017    2,267,095 
Series A Preferred Stock   933,333    933,333    933,333    933,333 
Convertible note and interest   10,227,507    35,598,447    10,227,507    35,598,447 
Total   13,017,857    41,917,056    13,017,857    41,917,056 

 

15.Income Taxes

 

As of September 30, 2018, the Company had approximately $38.0 million of the US domestic cumulative tax loss carryforwards and approximately $33.2 million of the foreign cumulative tax loss carryforwards, which may be available to reduce future income tax liabilities in certain jurisdictions. No U.S. tax loss would be expired based on new Tax Law. These PRC tax loss carryforwards will expire beginning year 2019 to year 2023.

 

The income tax expense for the nine months ended September 30, 2018 is close to nil because of net operating loss and deferred tax assets related to the net operating loss carryovers utilized had been offset by a valuations allowance. The Company had established a 100% valuation allowance against its net deferred tax assets due to its history of pre-tax losses and the likelihood that the deferred tax assets will not be realized. The valuation allowance increased by approximately $4.5 million during the nine months ended September 30, 2018, which consists of $3.8 million resulting from operations and $0.7 million resulting from deferred tax liabilities acquired in the Grapevine aquisition.

 

As of September 30, 2018, there are no unrecorded tax benefits which would impact our financial position or our results of operations.

 

16.Contingencies and Commitments

 

(a) Operating Lease Commitment

 

The Company is committed to paying leased property costs related to our offices as follows:

 

   Leased Property 
Years ending December 31,  Costs 
2018(3 months)   274,640 
2019   515,016 
2020   167,712 
Thereafter   - 
Total  $957,368 

 

(b) 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 September 30, 2018, 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.

 

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Ideanomics, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  

 

17.Concentration, Credit and Other Risks

 

(a) PRC Regulations

 

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 through Zhong Hai Media, which the Company controls as a result of a series of contractual arrangements entered among YOD WOFE, Sinotop Beijing as the parent company of Zhong Hai Media, SSF and the respective legal shareholders of Sinotop Beijing and SSF. 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, YOD WOFE or YOD HK 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 YOD WOFE 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 WOFE, 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.

 

(b) Major Customers

 

Legacy YOD business

 

The Company has agreements with distribution partners, including digital cable operators, IPTV operators, OTT streaming operators and mobile smartphone manufacturers and operator. A distribution partner that individually generates more than 10% of the Company’s revenue is considered a major customer.

 

On October 8, 2016, the Company signed an agreement to form a partnership with Zhejiang Yanhua ("Yanhua Agreement"), where Yanhua will act as the exclusive distribution operator (within the territory of the People's Republic of China) of WCST's licensed library of major studio films. According to the Yanhua Agreement, the existing legacy Hollywood studio paid contents as well as other IP contents specified in the agreement, along with the corresponding authorized rights letter that WCST is entitled to, will be turned over to Yanhua as a whole package, which was agreed to be priced at RMB13.0 million. In addition to the above-mentioned minimal guarantee fee of RMB13.0 million specified, there is a provision in the Yanhua Agreement which states that once the revenue recognized from the existing contents transferred from WCST to Yanhua reaches the amount of RMB13.0 million, the revenue above RMB13.0 million will be shared with WCST from the date when this revenue threshold is reached based on certain revenue-sharing mechanism stipulated in the Yanhua Agreement.

 

According to the Yanhua Agreement, the total price of the Existing Contents to be transferred is RMB13.0 million. The payment is agreed to be paid in two installments, the first half of RMB6.5 million was received on December 30, 2016. The remaining RMB6.5 million will be paid under the scenario that the license content fees due to Studios for the existing legacy Hollywood paid contents will be settled. Due to the fact that the second installment will depend upon some future events and is contingent in nature, the Company deems this portion of the fee is not fixed or determinable and therefore, this portion of the revenue did not meet the revenue recognition criteria to be recognized accordingly.

 

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Ideanomics, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  

 

In terms of the additional revenue-sharing fee over the above-mentioned RMB13.0 million fee specified, considering that this part of arrangement fee is not fixed or determinable at the time point as of September 30, 2018, it has not met the criteria for revenue recognition, management will recognize it once it becomes determinable and meet the other revenue recognition criteria in the future.

 

Pursuant to the Yanhua Agreement, RMB6.5 million was recognized as revenue in 2017 based on the relative fair value of licensed content delivered to Yanhua.

 

Wecast Services

 

The holdings and businesses from Company’s two acquisitions in January 2017(Note 4) now reside under “Wecast Services”, our wholly-owned subsidiary Wecast Services Group Limited. Wecast Services is currently primarily engaged with consumer electronics e-commerce and crude oil supply chain management operations. The Company has been engaged in the crude oil supply chain business since October 2017.

 

For the nine months ended September 30, 2017, 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 September 30, 2017, respectively.

 

For the nine months ended September, 2018, one customer individually accounted for more than 10% of the Company’s revenue. One customer individually accounted for more than 10% of the Company’s net accounts receivables as of September 30, 2018.

 

(c) Major Suppliers

 

Legacy YOD business

 

The Company relies on agreements with studio content partners to acquire video contents. A content partner that accounts for more than 10% of the Company’s cost of revenues is considered a major supplier. Since January 1, 2017, only the content that was acquired from SSS in the amount of $17.7 million were still recorded as licensed content assets and amortized into cost of sales based on revenue and gross profit margin estimates. For the nine months ended September 30, 2017, $0.8 million was recorded in cost of sales and $0.8 million was recorded as revenue. No further revenue nor cost of sales was recorded since March 31, 2017.

 

Wecast Services

 

The Company relies on agreements with consumer electronics manufacturers and crude oil suppliers.

 

For the nine months ended September 30, 2017, three suppliers individually accounted for more than 10% of the Company’s cost of revenues. Three suppliers individually accounted for more than 10% of the Company’s accounts payable as of September 30, 2017.

 

For the nine months ended September 30, 2018, two suppliers individually accounted for more than 10% of the Company’s cost of revenues. Two supplier individually accounted for more than 10% of the Company’s accounts payable and amount due to related parties as of September 30, 2018.

 

(d) Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to significant concentration of credit risk primarily consist of cash and accounts receivable. As of September 30, 2018 and December 31, 2017, 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

 

A portion of the Company’s 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 PRC’s 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 by us in currencies other than RMB in China must be processed through PBOC or other China foreign exchange regulatory bodies that require certain supporting documentation in order to complete the remittance.

 

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Ideanomics, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  

 

Cash consists 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:

 

   September 30,   December 31, 
   2018   2017 
RMB denominated bank deposits with financial institutions in the PRC  $961,428    684,115 
US dollar denominated bank deposits with financial institutions in the PRC  $328,021    628,481 
HKD denominated bank deposits with financial institutions in Hong Kong Special Administrative Region (“HK SAR”)  $35,695    17,508 
US dollar denominated bank deposits with financial institutions in Hong Kong Special Administrative Region (“HK SAR”)  $11,310,538    1,505,271 
US dollar denominated bank deposits with financial institutions in Singapore (“Singapore”)   884,060    1,033,769 
US dollar denominated bank deposits with financial institutions in The United States of America (“USA”)  $1,934,395    3,698,704 

 

As of September 30, 2018 and December 31, 2017, deposits of $nil and $398,243 were insured, respectively. To limit exposure to credit risk relating to bank deposits, the Company primarily places bank deposits only with large financial institutions in the PRC, HK SAR, USA, Singapore and Cayman with acceptable credit ratings.

 

18.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 $487 and $3,242 for the three and nine months ended September 30, 2018 respectively and $3,980 and $6,526 for the three and nine months ended September 30, 2017 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 $607,872 and $274,049 for the nine months ended September 30, 2018 and 2017, respectively.

 

19.Segment Reporting

 

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. In fiscal year 2016, the Company operated and reported its performance in one segment. However, starting from fiscal year 2017, since Company has acquired Wecast Services Limited and Wide Angle Group Limited in January 2017 (see note 4), the Company has operated two segments including Legacy YOD segment and Wecast Service segment. Therefore, there are two reportable segments for the nine months ended September 30, 2018. The two reportable segments are: 

 

(i)Legacy YOD – This segment provides premium content and integrated value-added service solutions for the delivery of VOD and paid video programming to digital cable providers, Internet Protocol Television (“IPTV”) providers. The core revenues are generated from both minimum guarantee payments and revenue sharing arrangements with distribution partners as well as subscription or transactional fees from subscribers.

 

(ii)Wecast Service - Wecast Services is currently primarily engaged with consumer electronics and oil crude supply chain management operations, and is also focused on acquiring and developing next-generation fintech solutions based on AI and blockchain technology.

 

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Ideanomics, Inc., Its Subsidiaries and Variable Interest Entities
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  

 

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. The following tables summarized the Company’s revenue and cost generated from different segments.

 

   Nine Months Ended 
   September 30,   September 30, 
   2018   2017 
NET SALES TO EXTERNAL CUSTOMERS          
-Legacy YOD  $-   $794,273 
-Wecast Service   362,628,296    105,930,593 
Net sales   362,628,296    106,724,866 
GROSS PROFIT          
-Legacy YOD   -    31,662 
-Wecast Service   2,788,731    5,804,200 
Gross profit   2,788,731    5,835,862 
           
   September 30,   December 31, 
   2018   2017 
TOTAL ASSETS          
-Legacy YOD  $27,034,157    27,141,163 
-Wecast Service   51,254,046    30,084,607 
-Unallocated assets   94,617,524    11,270,378 
-Intersegment elimination   (5,182,259)   (5,051,660)
Total   167,723,468    63,444,488 

  

20.Subsequent Events

 

As of November 14, 2018, the Company’s material subsequent events described below.

 

Business Name Change

 

On October 17, 2018, following approval from the Company’s shareholders received by written consent on August 28, 2018 and as disclosed in an information statement mailed to the Company’s stockholders on or about September 11, 2018, the Company filed a certificate of amendment to articles of incorporation with the Secretary of State of the State of Nevada changing the Company’s name from Seven Stars Cloud Group, Inc. to Ideanomics, Inc.

 

Global Headquarters for Technology and Innovation in Connecticut

 

On October 10, 2018, the Company purchased a 58-acre former University of Connecticut campus in West Hartford from the State of Connecticut and in connection for $5.2 million. The Company also obtained a surety bond in favor of the University of Connecticut and the State of Connecticut in connection with the Company’s environmental remediation obligations.  In order to obtain the surety bond the Company was required to post $3.6 million in cash collateral with the bonding company. Ideanomics plans to transform the property into a world-renowned technology campus named Fintech Village. The planned $283 million-plus investment will focus on being a leading technology and innovation facility for developing new and leading edge Fintech solutions utilizing artificial intelligence, deep learning, IoT, and blockchain.

 

In connection with the acquisition, the Company also entered into an Assistance Agreement by and between the State of Connecticut, acting by the Department of Economic and Community Development (the “Assistance Agreement"), pursuant to which the State of Connecticut may provide up to $10 million of financial assistance (the “Funding”) which in such case shall be evidenced by a promissory note, provided, however, that the aggregate principal of the funding shall not exceed 50% of the cost of the project. The Company will provide security for its obligation to repay the Funding to the State of Connecticut in the form of a first position mortgage. The Company agrees that in exchange for the Funding it will provide a minimum number of jobs at a minimum annual amount of compensation by December 31, 2021. Failure of the Company to do so will subject it to certain cash penalties for each employee below the minimum employment threshold. If the Company meets the employment obligations it is eligible for forgiveness of up to $10.0 million of the Funding. The Company will agree to certain covenants with respect to the Funding and such Funding may become immediately due and payable upon the occurrence of certain standard events of default.

 

Joint Venture with TPJ Ltd.

 

On October 9 2018,  the Company announced that it has entered into a joint venture agreement with TPJ Ltd, to create Ideanomics Resources LTD, a company organized under the laws of England and Wales and based in London. The joint venture will initially focus its efforts in Africa and Middle East, where it has significant long-term relationships and unlock value in the commodities and energy sectors by leveraging and utilizing the Ideanomics Platform-as-a-Service (“PaaS”) solutions. The Company will own 75% equity interest of Ideanomics Resources.

 

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Cautionary Note Regarding Forward Looking Statements

 

This Form 10-Q contains “forward-looking” statements that involve risks and uncertainties. You can identify these statements by the use of forward-looking words such as "may", "will", "expect", "anticipate", "estimate", "believe", "continue", or other similar words. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or financial condition or state other "forward-looking" information. For example, forward-looking statements include any statements regarding the strategies, prospects, plans, expectations or objectives of management for future operations, the progress, scope or duration of the development of our video on demand business, blockchain enabled logistics business, digital trading business, any business plans, timelines and potential results, the benefits that may be derived from certain acquisitions, joint venture or partnerships, or the commercial or market opportunity involving securitizing digital assets, our anticipated operations, financial position, revenues, costs or expenses, statements regarding future economic conditions or performance, statements of belief and any statement of assumptions underlying any of the foregoing. We believe that it is important to communicate our future expectations to our investors. However, these forward-looking statements are not guarantees of future performance and actual results may differ materially from the expectations that are expressed, implied or forecasted in any such forward-looking statements. There may be events in the future that we are unable to accurately predict or control, including weather conditions and other natural disasters which may affect demand for our products, and the product–development and marketing efforts of our competitors. Examples of these events are more fully described under Part II. Item 1A. Risk Factors.

 

Unless required by law, the Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. However, readers should carefully review the reports and documents the Company files from time to time with the SEC, particularly its Quarterly Reports on Form 10-Q, Annual Report on Form 10-K , Current Reports on Form 8-K and all amendments to those reports.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following management’s discussion and analysis should be read in conjunction with our financial statements and the notes thereto and the other financial information appearing elsewhere in this report. In addition to historical information, the following discussion contains certain forward-looking information. See “Cautionary Note Regarding Forward Looking Statements” above for certain information concerning those forward-looking statements.

 

Overview

 

From 2010 through 2017, our primary business activities have been providing premium content video on demand (“VOD”) services with primary operations in the People’s Republic of China through our subsidiaries and variable interest entities under the brand name YOU On Demand (“YOD”). In our YOD business, we provide premium content and integrated value-added service solutions for the delivery of VOD and paid video programing to digital cable providers, Internet protocol television (“IPTV”) providers, over-the-top (“OTT”) streaming providers, mobile manufacturers and operators, as well as direct customers.

 

Starting in early 2017, while continuing to support our legacy YOD business, we began transitioning our business model to become a next generation financial technology (“fintech”) company, with the intention of offering financing solutions and logistics solutions, each based on the emergence of trading systems that utilize blockchain and artificial intelligence (“AI”) technologies. On the financing solutions side, we have been building capabilities both in providing business consulting services related to traditional financings, as well as in developing digital asset securitization services via AI and blockchain enabled financial services platforms. On the logistics side, we have been building expertise in the traditional commodities trading business, with an initial focus on crude oil trading and consumer electronics trading, with the goal of leveraging such expertise to inform the development of an AI and blockchain enabled logistics platform.

 

We refer to our YOD business as our Legacy YOD segment, and to all our other operations as our Wecast Service segment. Aside from the Legacy YOD segment, only the commodities trading component of our logistics business is operational and revenue generating.

 

Financing Solutions

 

We plan to assist various companies across industry verticals in completing capital raising transactions by providing consulting services to companies seeking financing through conventional means, such as sales of traditional equity and debt securities, and through the sales of securitized assets represented by digital tokens, or “digital securitized assets.” We believe that this dual approach to raising capital will provide us with flexibility to address the needs of issuers and investors. In connection with this strategy, we intend to use AI and blockchain enabled financial technology to provide asset owners and the investment community a seamless method and platform for the creation of digital assets. Specifically, we plan to facilitate the securitization of tangible and intangible assets into new financial products, “tokenize” these financial products by digitally recording them on a blockchain, enable advanced platforms and capabilities using AI and blockchain technology, and support the distribution and monetization of digital assets. We believe the infrastructure we are developing in these areas will enable us to assist customers and derive revenues from fees in connection with the process of creating, marketing and selling digital securitized assets.

 

We believe that regulated alternative trading systems (“ATSs”) are important for the development of trading markets for blockchain based digital tokens, including the digital securitized assets we plan to originate as part of our financing solutions business. Accordingly, we are making strategic investments that are intended to promote the development of regulated ATSs that will enhance the blockchain token trading ecosystem. In 2017, we made an investment in Delaware Board of Trade Holdings, Inc. (“DBOT”), which is a FINRA member firm and has filed an initial operations report on Form ATS to give notice of operations of DBOT ATS, LLC, and which we believe is well positioned to develop blockchain enabled transactional platforms.

 

We also intend to enter into partnerships and joint ventures to support the use of AI powered analytics for the trading, pricing, indexing and ratings of digital tokens, including digital securitized assets, such as a joint venture to develop AI driven financial data services that we established in 2017. We expect the value of these strategic investments to increase as the market for digital tokens matures and to the extent these platforms begin to provide more robust solutions to the trading ecosystem.

 

Logistics Management Platform

 

As part of our larger blockchain strategy, we intend to enter into joint ventures, strategic investments and partnerships to explore the application of blockchain technologies to logistics management. We believe that blockchain enabled logistics platforms can eliminate standard transactional intermediaries in the freight and shipping industry. We believe that by decreasing middle-man costs, we can greatly improve the efficiency of capital utilization, expand margins and accelerate inventory turnover for companies shipping goods across myriad industries. We are continuing to investigate potential blockchain technologies that are well-suited to the development of products to streamline the logistics market.

 

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In connection with this strategy, we entered the commodities trading business through a series of acquisitions and investments. The primary goal for entering this business was to learn about the needs of buyers and sellers in industries that rely heavily on the shipment of goods, which we believe has informed our understanding of the features a blockchain platform would need to serve the logistics market. Specifically, we elected to focus on the crude oil and consumer electronics businesses, which are industries that we believe are sufficiently commoditized and high volume to serve as meaningful controls to identify inefficiencies in the logistics market and generate data to support the potential future application of AI solutions. Our crude oil trading business commenced in October 2017, when we formed our Singapore joint venture, Seven Stars Energy Pte. Ltd. Our consumer electronics trading business commenced on January 2017, and is operated out of Hong Kong through our subsidiary, Amer Global Technology Limited. Our end customers include about 15 to 20 corporations across the world. Our commodities trading business does not currently integrate blockchain or AI based logistics solutions.

 

Legacy YOD Segment

 

The core revenues from our Legacy YOD segment have been generated both from minimum guarantee payments and revenue sharing arrangements with distribution partners as well as subscription or transactional fees from subscribers. We run our legacy YOD business with limited resources, as our legacy YOD business since October 2016 has operated through a five-year partnership with Zhejiang Yanhua Culture Media Co., Ltd., a company organized under the laws of the PRC (“Yanhua”), where Yanhua will act as the exclusive distribution operator (within the territory of the PRC) of our licensed library of major studio films (the “Yanhua Partnership”). We entered into the Yanhua Partnership in order to offset losses from high upfront minimum guarantee licensing fees to studios. The Yanhua Partnership modified and improved our legacy major studio paid content business model by moving from a framework that included [high and fixed costs and upfront minimum guaranteed payments], rising content costs from major Hollywood studios and low margins to a structure that will now include relatively nominal costs to our Company and the opportunity to reach an even wider audience. With the Yanhua Partnership, Yanhua assumed all sales and marketing costs and will pay us a minimum guarantee in exchange for a percentage of the total revenue share.

 

Recent Developments

 

On August 3, 2018, we entered into a joint venture with Aladdin Fintech Company Limited (“Aladdin”). The joint venture will focus on three primary areas of business activities: (1) Fixed income-based real estate product offerings using Velocity Ledger for global fractionalization, securitization, and tokenization offerings, starting with the cash flow-producing commercial properties of large insurance companies as underlying assets; (2) Velocity Ledger-based fractionalization, securitization, and tokenization of Real Estate projects and services; and (3) the Company’s BBD Artificial Intelligence (AI) to enhance real estate ratings and risk management services. The Company and Aladdin each own 50% of the joint venture respectively. The joint venture’s board has three members, comprised of a Company appointee, an Aladdin appointee, and an independent appointee. Aladdin is contributing RMB300,000 as working capital, and the Company is contributing RMB300,000 as a loan at 4% and repaid as a priority from revenues generated. Aladdin’s subsidiary, I-House (“IHT”)  is responsible for staffing the joint venture’s management, sales and operations team. The Company will also contribute the systems and resources to facilitate digital offerings through the IHT platform. The Company is responsible for (i) all company registrations, licenses and regulatory approvals required for operations in the territories agreed by the two parties, (ii) contributing deal flow and strategic cooperation to ensure real estate assets are available for IHT token offerings and (iii) developing a global real estate index series utilizing its BBD AI Engine.

 

On August 19, 2018, we entered into a Financial Advisory Agreement with National Transport Capacity Co., Ltd, a company established in the People’s Republic of China (“NTC”), pursuant to which NTC agreed to engage the Company as NTC’s advisor with respect to NTC’s financing of its electric bus transformation business for the next 3 years. The Company shall assist NTC with conducting fractionalization sales of fixed income products in China on a non-exclusive basis. The Company shall also assist with conducting fixed income product issuance and digital asset issuance in areas other than mainland China on an exclusive basis.

 

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On September 7, 2018, the Company entered into a Global Advisory Agreement (the “First Auto Agreement”) with First Auto Loan (Oriental Huixin Investment Management Co., Ltd.), a company established in the People’s Republic of China (“First Auto”) pursuant to which First Auto agreed to engage the Company as First Auto’s advisor with respect certain areas, amongst other things, First Auto’s (i) electric vehicle upgrading and updating services; (ii) financing small businesses in the micro-car circulation industry; (iii) consumption installment of car loans and (iv) asset securitization of existing auto loan packages. The First Auto Agreement is exclusive other than with respect to mainland China and Hong Kong. The First Auto Agreement is for a 3 year term, however, each of the Company and First Auto may terminate the First Auto Agreement if proper progress is not made within 6 months.

 

On September 7, 2018, the Company entered into an Intellectual Property and Purchase and Assumption Agreement (the “SSIL Agreement”) with Sun Seven Star International Limited, a Hong Kong company (“SSIL”) and an affiliate of Mr. Bruno Wu, our Chairman, pursuant to which SSIL sold the assets of FinTalk to the Company in exchange for $1,000,000 promissory note and shares of the Company’s Common Stock with a fair market value of $6,000,000. The Company shall repay the promissory note in 12 equal monthly installments commencing on October 7, 2018 at an interest rate of 2.51% per annum. The principal amount of the Note shall become due and payable in the event of a default pursuant to the Note.

 

On October 10, 2018, the Company closed the transactions contemplated by the Purchase and Sale Agreement, which was effective July 11, 2018, with the State of Connecticut acting by and through the University of Connecticut pursuant to which the Company purchased the parcel of land formerly known as the University of Connecticut Greater Hartford campus, including buildings and improvements for purposes of creating a technology and innovation center. The Company delivered $5,200,000, the balance of the purchase price contemplated by the agreement is closed. The Company also obtained a surety bond in favor of the University of Connecticut and the State of Connecticut in connection with the Company’s environmental remediation obligations. In order to obtain the surety bond the Company was required to post $3.6 million in cash collateral with the bonding company. In connection with the acquisition, the Company also entered into an Assistance Agreement by and between the State of Connecticut, acting by the Department of Economic and Community Development (the “Assistance Agreement"), pursuant to which the State of Connecticut may provide up to $10,000,000 of financial assistance (the “Funding”) which in such case shall be evidenced by a promissory note, provided, however, that the aggregate principal of the funding shall not exceed 50% of the cost of the project. The Company will provide security for its obligation to repay the Funding to the State of Connecticut in the form of a first position mortgage. The Company agrees that in exchange for the Funding it will provide a minimum number of jobs at a minimum annual amount of compensation by December 31, 2021. Failure of the Company to do so will subject it to certain cash penalties for each employee below the minimum employment threshold. If the Company meets the employment obligations it is eligible for forgiveness of up to $10,000,000 of the Funding. The Company will agree to certain covenants with respect to the Funding and such Funding may become immediately due and payable upon the occurrence of certain standard events of default.

 

On October 18, 2018, we entered into a Financial Advisory Service Agreement (“Financial Advisory Agreement”) with Zhonjinhuifu Resources CO., LTD, a Hong Kong company (“Zhonjinhuifu”), pursuant to which the Company will advise Zhonjinhuifu on (i) its planned $200 million capital raise over the next two years and (ii) a security token offering (“STO”). Zhonjinhuifu operates various mining projects, including the kekeshisi magnesia-nickel silicon mine in Toli County, Xinjiang Uyghur Autonomous Region. Pursuant to the terms of the Financial Advisory Agreement, the Company’s services to Zhonjinhuifu will include advising on financing-related activities with respect to the issuance of both utility tokens and securities tokens outside of China and Hong Kong; fixed income products, other digital assets and other financing products; and recommending suitable traditional and digital financing tools, including those on blockchain platforms. The Company will receive a variable service fee of the aggregate funds raised by Zhonjinhuifu, subject to regulatory approval.

  

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Principal Factors Affecting Our Financial Performance

 

Our operating results are primarily affected by the following factors:

 

  · Our ability to transform our business and to meet internal or external expectations of future performance. We are aiming to become a next generation Artificial-Intelligent (AI) & Blockchain-Powered, Fintech company. By managing and providing an infrastructure and environment that facilitates the transformation of traditional financial markets such as commodities, currency and credit into the asset digitalization era, SSC hopes to provide asset owners and holders a seamless method and platform for digital asset securitization, tokenization and trading. Separately, SSC offers a closed supply chain trading ecosystem for corporate buyers and sellers designed to eliminate standard transactional intermediaries and create a more direct and margin-expanding path for principals. In connection with this transformation, the Company is in the process of considerable changes, which include the assemblement of a new management team in the U.S. and overseas, reconfiguring the business structure to reflect our Blockchain and FinTech strategy, continue to further enhance our controls, procedures, and oversight during this transformation, and expand the Company’s 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 the business. This includes having or hiring 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. Our current electronic and crude oil products and services compete in highly competitive global markets characterized by aggressive price competition and resulting downward pressure on gross margins, frequent introduction of new products, short product life cycles, evolving industry standards, continual improvement in product price/performance characteristics, rapid adoption of technological and product advancements by competitors and price sensitivity on the part of consumers. As part of our blockchain and AI focused stratgy, we are currently focused on consumer electronics and the  crude oil trading business in supply chain management with the intent to migrate this on to the blockchain with AI capabilites. As such, the company is co-developing the underlying technology platform with its technology partner with an aim to become a smart supply chain management platform with one token as means of settlement and digital wallet function. In the near future, once the technology platform is fully functional, the company will bring customers of traditional 3C consumer electronics business and crude oil trading business onto the platform, which will greatly improve the efficiency of capital utilization and inventory turnover for both consumer electronics and crude oil business by cutting middle-man cost. The above technology platforms will help both the consumer electronic and crude oil business to transform from supply chain only operations into digital ecosystem management platform.

 

Taxation

 

United States

 

Ideanomics, Inc. and M. Y. Products, LLC are subject to United States tax. No provision for income taxes in the United States has been made as none of the companies had taxable profit in the United States since inception. Under U.S. Tax Reform, the Comapny is required to pay, a one-time transition tax on certain unrepatriated earnings from non-U.S. subsidiaries that is payable over eight years. We have subsequently determined that there is only less than $150,000 unrepatriated earnings for each non-U.S. subsidiary in aggregate. Therefore, only a minimal tax is due under this provision.

 

Cayman Islands and the British Virgin Islands

 

Under the current laws of the Cayman Islands and the British Virgin Islands, we are not subject to tax on our income or capital gains. In addition, dividend payments are not subject to withholding tax in the Cayman Islands or British Virgin Islands.

 

Hong Kong

 

Our subsidiaries that were incorporated in Hong Kong were under the current laws of Hong Kong, are subject to Profits Tax of 16.5%. No provision for Hong Kong Profits Tax has been made as net operating loss carryovers offset current taxable income.

 

The People’s Republic of China

 

Under the PRC’s Enterprise Income Tax Law, our Chinese subsidiaries and VIEs are subject to an earned income tax of 25.0%.

 

Our future effective income tax rate depends on various factors, such as tax legislation, the geographic composition of our pre-tax income and non-tax deductible expenses incurred. Our management carefully monitors these legal developments to determine if there will be any change in the statutory income tax rate.

 

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Consolidated Results of Operations

 

Comparison of Three Months Ended September 30, 2018 and 2017

 

   Three Months Ended         
   September 30, 2018   September 30, 2017   Amount Change   % Change 
Revenue  $43,707,937   $30,229,255   $13,478,682    45%
Cost of revenue   42,844,876    28,273,863    14,571,013    52%
Gross profit   863,061    1,955,392    (1,092,331)   (56)%
                     
Operating expense:                    
Selling, general and administrative expenses expenses   4,333,259    3,684,749    648,510    18%
Research and development   667,416    400,040    267,376    67%
Professional fees   1,927,431    839,836    1,087,595    130%
Impairment of other intangible assets   -    152,847    (152,847)   (100)%
Depreciation and amortization   291,512    36,952    254,560    689%
                     
Total operating expense   7,219,618    5,114,424    2,105,194    41%
                     
Loss from operations   (6,356,557)   (3,159,032)   (3,197,525)   101%
Interest expense, net   (145,610)   (26,029)   (119,581)   459%
Change in fair value of warrant liabilities   -    131,357    (131,357)   (100)%
Equity in loss of equity method investees   (13,882)   (23,632)   9,750    (41)%
Others   (925,771)   72,120    (997,891)   (1384)%
                     
Loss before income taxes   (7,441,820)   (3,005,216)   (4,436,604)   148%
                     
Income tax benefit   -    -    -    0%
                     
Net loss   (7,441,820)   (3,005,216)   (4,436,604)   148%
                     
Net loss attributable to non-controlling interest   254,973    (22,723)   277,696    (1222)%
                     
Net loss attributable to common shareholders  $(7,186,847)  $(3,027,939)  $(4,158,908)   137%

 

Revenues

All revenues for the three months ended September 30, 2018 were generated by consumer electronics trading business in our Wecast segment. Our Legacy YOD segment has not generated significant revenue since the quarter ended March 31, 2017. We received an initial payment from Yanhua of RMB6.5 million (approximately $1 million) on December 30, 2016, which was recognized as revenue in the first quarter of 2017, but we have not received additional payments from Yanhua pursuant to the Yanhua partnership.

  

   2018Q3   2017Q3   Diff 
   USD   %   USD   USD   % 
Wecast Services   43,707,937    100%   30,229,255    13,478,682    45%
Total   43,707,937    100%   30,229,255    13,478,682    45%

 

Revenue for the three months ended September 30, 2018 was $43.7 million as compared to $30.2 million for the same period in 2017, an increase of approximately $13.5 million, or 45%. The increase was mainly due to our expanding business with consumer electronics .

 

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Cost of revenues

 

   2018Q3   2017Q3   Diff 
   USD   %   USD   USD   % 
Wecast Services   42,844,876    100%   28,273,863    14,571,013    52%
 Total   42,844,876    100%   28,273,863    14,571,013    52%

 

Cost of revenues was approximately $42.8 million for the three months ended September 30, 2018, as compared to $28.3 million for the three months ended September 30, 2017. Our cost of revenues increased by $14.6 million which is in line with our increase in revenues. Our cost of revenues is primarily comprised of costs to business with consumer electronics and smart supply chain management .

 

Gross profit

 

   2018Q3   2017Q3   Diff 
   USD   %   USD   USD   % 
Wecast Services   863,061    100%   1,955,392    (1,092,331)   (56)%
 Total   863,061    100%   1,955,392    (1,092,331)   (56)%

 

Our gross profit for the three months ended September 30, 2018 was approximately $0.9 million, as compared to gross profit in the amount of $2.0 million during the same period in 2017. The gross profit ratio for the three months ended September 30, 2018 was 2.0%, while in 2017, it was 6.47%. The decrease was mainly due to the gross profit ratio of our consumer electronics decreased compared to the same period in 2017.

 

Research and development expense

 

Research and development expenses for the three months ended September 30, 2018 was $0.7 million as compared to $0.4 million for the same period in 2017, an increase of approximately $0.3 million or 67%. The majority of the increase was due to the increase of expense on AI and blockchain technology.

 

Selling, general and administrative expenses

 

Selling, general and administrative expense for the three months ended September 30, 2018 was $4.3 million as compared to $3.7 million for the same period in 2017, an increase of approximately $0.6 million or 18%. The majority of the increase was due to our efforts to assemble a new management team in the U.S. and overseas.

 

Professional fees

 

Professional fees are generally related to public company reporting and governance expenses as well as legal fees related to our business transformation and expansion. Professional fees for the three months ended September 30, 2018 were $1.9 million as compared to $0.8 million for the same period in 2017, a increase of approximately $1.1 million. The increase was related to the above factors as well as fees associated with continuing to build out our technology ecosystem and establishing strategic partnerships and M&A activity as part of this technology ecosystem.

The majority of the increase was due to required professional services for legal, audit and tax.

 

Depreciation and amortization

 

Depreciation and amortization for the three months ended September 30, 2018 was $0.3 million as compared to $0.04 million for the same period in 2017, an increase of approximately $0.26 million. The increase was mainly due to aquisition for Grapevine.

 

Change in fair value of warrant liabilities

 

Certain of our warrants are recognized as derivative liabilities and re-measured at the end of every reporting period and upon settlement, with the change in value reported in the statement of operations. We reported a gain in the fair value of warrant liabilities of $0.13 million for the three months ended September 30, 2017. All the remaining warrant liabilities have been expired as of August 30, 2017.

 

Income tax expenses

 

The income tax expense for the three months ended September 30, 2018 is nil because net operating loss carryovers offset current taxable income and deferred tax assets related to the net operating loss carryovers utilized had been offset by a valuation allowance.

 

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Net loss attributable to non-controlling interest

 

Hua Cheng previously had a 20% non-controlling interest in Zhong Hai Media and accounting for that interest under the equity method was recognized by recording 20% of the operating losses of Zhong Hai Media. For the three months ended September 30, 2017, operating loss attributable to Hua Cheng was approximately $0.03 million. The Company sold Zhong Hai Media on June 30, 2017 and there have been no more such allocations since then.

 

Dillon Yu has a 49% non-controlling interest in Shanghai Wecast Supply Chain Management Limited (“Wecast SH”) and as such we allocate 49% of the operating loss of Wecast SH to Dillon Yu. During the three months ended September 30, 2018, approximately $307 of our operating loss from Wecast SH was allocated to Dillon Yu, which was approximately $0.1 million in the same period in 2017.

 

Swiss Guorong Limited has a 45% non-controlling interest in Wide Angle and as such we allocate 45% of the operating profit of Wide Angle to Swiss Guorong Limited. During the three months ended September 30, 2018, approximately $0.05 million of our operating loss from Wide Angle was allocated to Swiss Guorong Limited, which was approximately $0.03 million in the same period in 2017.

 

Comparison of Nine Months Ended September 30, 2018 and 2017

 

   Nine Months Ended         
   September 30,
2018
   September 30,
2017
   Amount Change   % Change 
Revenue  $362,628,296   $106,724,866   $255,903,430    240%
Cost of revenue   359,839,565    100,889,004    258,950,561    257%
Gross profit   2,788,731    5,835,862    (3,047,131)   (52)%
                     
Operating expense:                    
                     
Selling, general and administrative expenses expenses   16,861,425    8,021,825    8,839,600    110%
Research and development   1,393,025    400,040    992,985    248%
Professional fees   3,280,729    1,888,361    1,392,368    74%
Impairment of other intangible assets   -    216,468    (216,468)   (100)%
Depreciation and amortization   314,737    294,272    20,465    7%
                     
Total operating expense   21,849,916    10,820,966    11,028,950    102%
                     
Loss from operations   (19,061,185)   (4,985,104)   (14,076,081)   282%
Interest expense, net   (201,782)   (70,779)   (131,003)   185%
Change in fair value of warrant liabilities   -    (112,642)   112,642    (100)%
Equity in loss of equity method investees   (44,316)   (100,468)   56,152    (56)%
Others   (558,271)   (38,480)   (519,791)   1351%
                     
Loss before income taxes   (19,865,554)   (5,307,473)   (14,558,081)   274%
                     
Income tax benefit   -    -    -    0%
                     
Net loss   (19,865,554)   (5,307,473)   (14,558,081)   274%
Net loss attributable to non-controlling interest   637,314    608,910    28,404    5%
                     
Net loss attributable to common shareholders  $(19,228,240)  $(4,698,563)  $(14,529,677)   309%

 

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Revenues

 

   Nine months ended September 30,
2018
   Nine months ended September 30,
2017
   Diff 
   USD   %   USD   USD   % 
Legacy YOD   -    -    794,273    (794,273)   (100)%
Wecast Services   362,628,296    100%   105,930,593    256,697,703    242%
Total   362,628,296    100%   106,724,866    255,903,430    240%

 

Revenue for the nine months ended September 30, 2018 was $362.6 million as compared to $106.7 million for the same period in 2017, an increase of approximately $255.9 million, or 240%. The increase was mainly due to our expanding business of crude oil trading initiated in October 2017. This increase was partially offset in the amount of $0.8 million by a decrease of our legacy YOD business, which has been operated under new exclusive distribution agreement with Yanhua since the fourth quarter of 2016.

 

Gross profit

 

   2018 1-9   2017 1-9   Diff 
   USD   %   USD   USD   % 
Legacy YOD   -    -    31,659    (31,659)   (100)%
Wecast Services   2,788,731    100%   5,804,203    (3,015,472)   (52)%
Total   2,788,731    100%   5,835,862    (3,047,131)   (52)%

 

Our gross profit for the nine months ended September 30, 2018 was approximately $2.8 million, as compared to gross profit in the amount of $5.8 million during the same period in 2017. The gross profit ratio for the nine months ended September 30, 2018 was 0.77%, while in 2017, it was 5.47%. The decrease was mainly due to the low gross profit margin of the crude oil trading business which has expanded and caused our gross profit margin ratio to decrease. 

 

Selling, general and administrative expenses

 

Our selling, general and administrative expenses for the nine months ended September 30, 2018 increased approximately $8.8 million, or 110%, as compared with the amount for the nine months ended September 30, 2017. The majority of the increase was due to 1) an increase in headcounts and relevant traveling expense in the amount of $2.6 million; 2) an increase of approximately of $3.2 million in share based compensation that were paid to our employees; 3) an increase of approximately of $1.2 million in consulting, legal, and professional service fees that were paid to our external consultants who provided various consulting services with respect to our on-going financial digital assets business; 4) an increase in our sales and marketing expense in the amount of $1.8 million relating to the introduction and promotion of our business models to various potential investors and business partners, as well as the marketing of Wecast Services, which was acquired in January 2017.

 

Research and development expenses

 

Research and development expenses for the nine months ended September 30, 2018 was $1.4 million as compared to $0.4 million for the same period in 2017, an increase of approximately $1.0 million or 348%. The majority of the increase was due to the increase of expense on AI and blockchain technology.

 

Professional fees

 

Professional fees are generally related to public company reporting and governance expenses as well as legal fees related to business transformation and expansion. Our costs for professional fees increased approximately $1.4 million, or 74%, to $3.3 million for the nine months ended September 30, 2018, compared with the same period in 2017. The increase was required professional services for legal, valuation, audit and tax as well as fees associated with continuing to build out our technology ecosystem and establishing strategic partnerships and M&A activity as part of this technology ecosystem.

 

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Depreciation and amortization

 

Depreciation and amortization for the nine months ended September 30, 2018 was $0.31 million as compared to $0.29 million for the same period in 2017, an increase of approximately $0.02 million.

 

Change in fair value of warrant liabilities

 

Certain of our warrants are recognized as derivative liabilities and re-measured at the end of every reporting period and upon settlement, with the change in value reported in the statement of operations. We reported a loss in the fair value of warrant liabilities of $0.1 million for the nine months ended September 30, 2017. All the remaining warrant liabilities have been expired as of August 30, 2017.

 

Net loss attributable to non-controlling interest

 

Hua Cheng previously had a 20% non-controlling interest in Zhong Hai Media and accounting for that interest under the equity method was recognized by recording 20% of the operating losses of Zhong Hai Media. During the nine months ended September 30, 2017, approximately $0.03 million of our operating loss from Zhong Hai Media was allocated to Hua Cheng. The Company sold Zhong Hai Media on June 30, 2017 and there have therefore no more such allocations since then.

 

Dillon Yu has a 49% non-controlling interest in Shanghai Wecast Supply Chain Management Limited (“Wecast SH”) and as such we allocate 49% of the operating loss of Wecast SH to Dillon Yu. During the nine months ended September 30, 2018, approximately $1,343 of our operating loss from Wecast SH was allocated to Dillon Yu, which was $0.6 million in the same period in 2017.

 

Swiss Guorong Limited has a 45% non-controlling interest in Wide Angle and as such we allocate 45% of the operating profit of Wide Angle to Swiss Guorong Limited. During the nine months ended September 30, 2018, approximately $0.3 million of our operating loss from Wide Angle was allocated to Swiss Guorong Limited, which was $0.003 million in the same period in 2017.

 

Liquidity and Capital Resources

 

As of September 30, 2018, the Company had cash of approximately $16.03 million. Approximately $11.4 million was held in our Hong Kong, US and Singapore entities and $4.63 million was held in our mainland China entities. The Company has no plans to repatriate these funds.

 

As discussed in Note 2 to the consolidated financial statements included in this report, the Company has incurred significant continuing losses in 2018 and 2017, and total accumulated deficits were $145.9 million and $126.7 million as of September 30, 2018 and December 31, 2017, respectively. The Company also used cash for operations of approximately $17.6 million and $6.2 million for the nine months ended September 30, 2018 and 2017, respectively.We must continue to rely on proceeds from debt and equity issuances to fund ongoing operating expenses to date, which could raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 2 to the consolidated financial statements in this report. The consolidated financial statements included in this report have been prepared assuming that the Company will continue as a going concern and, accordingly, do not include any adjustment that might result from the outcome of this uncertainty.

 

On May 19, 2017, we completed a common stock financing with certain investors, including officers, directors and other affiliates of the Company for $2.0 million. In addition, we completed a common stock financing with Hong Kong Guo Yuan Group Capital Holdings Limited for $10 million on October 23, 2017. In March 2018, the Company entered into a common stock financing with GT Dollar Pte. Ltd., for a private placement totaling $40.0 million, which agreement was subsequently amended and restated on June 28, 2018 to reduce such investment to $10.0 million (See Note 9). The Company has received $5.3 million during the second quarters, and received the remaining $4.7 million in the third quarter. The Company entered into a Convertible Note Purchase Agreement with Advantech Capital Investment II Limited on June 28, 2018 for $12.0 million. The funds were delivered on July 5, 2018. In July 2018, the Company entered into a common stock financing with Star Thrive Global, for a private placement totaling $23.0 million (with an option to acquire up to 19.9% of the Company), and such installments to be paid in six monthly installments beginning in July 2018. The Company has received all monthly installments due from Star Thrive Global that were due through October, 2018, and expects to receive the remaining installments that are due through December 2018. Although the Company may attempt to raise funds by issuing debt or equity instruments, additional financing may not be available to the Company on terms acceptable to the Company or at all or such resources may not be received in a timely manner.

 

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The following table provides a summary of our net cash flows from operating, investing and financing activities.

 

   Nine Months Ended 
   September 30,   September 30, 
   2018   2017 
Net cash used in operating activities  $(17,641,902)  $(6,187,745)
Net cash (used in) provided by investing activities   (5,043,300)   2,118,176 
Net cash provided by financing activities   31,186,771    1,925,610 
Effect of exchange rate changes on cash   (48,638)   62,078 
Net increase/(decrease in cash   8,452,931    (2,081,881)
           
Cash at beginning of period   7,577,317    3,761,814 
           
Cash at end of period  $16,030,248   $1,679,933 

 

Operating Activities

 

Cash used in operating activities increased by $11.5 million for the nine months ended September 30, 2018 compared to 2017, primarily due to an loss from operation from $5.3 million to $19.9 million.

 

Financing Activities

 

We received $31.1 million proceeds in a private placement from the issuance of common shares, warrant and options for nine months ended September 30, 2018, to certain investors, including officers, directors and other affiliates. While in the same period in 2017, we received $2.6 million proceeds in private replacement.

 

Investing Activities

 

We used $2.8 million to acuquire Grapevine and Shanghai Guangming and $2.0 million to invest in Liberty and Asia Times for nine months ended September 30, 2018. While in the same period in 2017, we received $2.5 million proceeds from the disposal of Zhong Hai Shi Xun.

 

Effects of Inflation

 

Inflation and changing prices have had an effect on our business and we expect that inflation or changing prices could materially affect our business in the foreseeable future. Our management will closely monitor the price change and make efforts to maintain effective cost control in operations.

 

Off Balance Sheet Arrangements

 

We do not have any 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

 

Our operating results and operating cash flows historically have not been subject to seasonal variations. However, we expect a disproportionate amount of our revenues generated from Wecast Services quarter over quarter to be subject to seasoned fluctuations at holiday periods and due to introduction of new products. This pattern may change, however, as a result of new market opportunities or new product introductions.

 

Critical Accounting Policies

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our 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. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an understanding of our financial condition and results of operations. Critical accounting policies are those that are most important to the portrayal of our 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. We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our financial statements.

 

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Variable Interest Entities

 

We account for entities qualifying as variable interest entities (“VIEs”) in accordance with Financial Accounting Standards Boards (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation. For our consolidated VIEs, management has made evaluations of the relationships between our VIEs and the economic benefit flow of contractual arrangement with VIEs. In connection with such evaluation, management also took into account the fact that, as a result of such contractual arrangements, we control the legal shareholders’ voting interests and have power of attorney in the VIEs, and therefore we are able to direct all business activities of the VIEs. As a result of such evaluation, management concluded that we are the primary beneficiary of our consolidated VIEs.

 

We have consulted our PRC legal counsel in assessing our ability to control our PRC VIEs. Any changes in PRC laws and regulations that affect our ability to control our PRC VIEs may preclude us from consolidating these companies in the future.

 

Revenue Recognition

 

In the first quarter of 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), using the modified retrospective method. Topic 606 requires revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the consideration to which the Company expects to be entitled in exchange for those goods or services. Because the Company's primary source of revenues is from industrial trading business, the impact on its consolidated financial statements is not material.

 

Product sales, including electronic products and crude oil sales are recognized when or as we transfer control of the promised products to our customer. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods. Sales orders are confirmed after negotiation on price between customers and us. Purchase orders are confirmed after careful selection of suppliers and negotiation on price. Company purchases finished goods from suppliers in accordance with sales orders from customers. Our suppliers then deliver goods to our customers directly. Company is required to bear the direct risk of damage to the goods that the direct default risk that cannot be delivered to the customer. When the delivery is completed, company recognizes revenue and the related cost at the same time. According to purchase orders with suppliers, company, as the owner of the goods, becomes the first responsible party for the goods. Therefore, the Company accounts for revenue from sales of goods on a gross basis. The Company is the primary obligor in the arrangements, as company has the ability to establish prices, and has discretion in selecting the independent suppliers and other third-party that will perform the delivery service, the Company is responsible for the defective products and the Company bears credit risk with customer payments. Accordingly, all such revenue billed to customers is classified as revenue and all corresponding payments to suppliers are classified as cost of revenues.

 

For certain contracts that involve sub-licensing content within the specified license period, revenue is recognized upon delivery of films when the arrangement includes a nonrefundable minimum guarantee, delivery is complete and we have no substantive future obligations to provide future additional services. Payments received from customers for the performance of future services are recognized as deferred revenue, and subsequently recognized as revenue in the period that the service obligations are completed.

 

In October, 2016, the Company signed an agreement to form a five years’ partnership with Yanhua, where Yanhua will act as the exclusive distribution operator (within the territory of PRC) of the Company’s licensed library of major studio films. Pursuant to the Yanhua agreement, the existing legacy Hollywood studio paid content as well as other IP content specified in the agreement, along with the corresponding authorized rights letter that the Company is entitled to, will be transferred over to Yanhua, which was agreed to be priced at RMB13,000,000 (approximately $2 million). According to the agreement, as a whole package, the payment is agreed to be paid in two installments equally in the amount of RMB6,500,000. As of the March 31, 2018, the Company only received the first installments and recorded it as revenue within Legacy YOD business, however, considering the second installment was due to be received if the license content fees due to studios for the existing legacy Hollywood paid contents was settled, while the Company did not expect and did not make the payment to the studios, we deemed this portion of the fee to be not fixed or determinable and therefore, this portion of the revenue did not meet the revenue recognition criteria to be recognized as of September 30, 2018. Meanwhile, as revenue generated by Yanhua did not exceed the revenue sharing threshold, no additional revenue was recorded.

 

Licensed Content

 

We obtain content through content licensing agreements with studios and distributors. We recognize licensed content when the license fee and the specified content titles are known or reasonably determinable. Prepaid license fees are classified as an asset on the consolidated balance sheets as licensed content and accrued license content fees payable are classified as a liability on the consolidated balance sheets.

 

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We amortize licensed content in cost of revenues over the contents contractual window of availability based on the expected revenue derived from the licensed content, beginning with the month of first availability, such that our revenues bear a representative amount of the cost of the licensed content. We review factors that impact the amortization of licensed content on a regular basis, including factors that may bear direct impact on expected revenue from specific content titles. We estimate expected revenue by reviewing relevant factors, including marketing considerations, programming efforts, relationship with our channel partners, expected customer renewals and content offered by other distributors on the same platform. Changes in our expected revenue from licensed content could have a significant impact on our amortization pattern.

 

Standards Issued and Not Yet Implemented

 

In February 2016, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842). The new standard is effective for reporting periods beginning after December 15, 2018 and early adoption is permitted. The standard will require lessees to report most leases as assets and liabilities on the balance sheet, while lessor accounting will remain substantially unchanged. The standard requires a modified retrospective transition approach for existing leases, whereby the new rules will be applied to the earliest year presented. We do not expect the new lease standard to have a material effect on our financial position, results of operations or cash flows.

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326)”. The pronouncement changes the impairment model for most financial assets, and will require the use of an “expected loss” model for instruments measured at amortized cost. Under this model, entities will be required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. We do not expect a material impact to its consolidated financial statement upon adoption of this ASU.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information that would be required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including to our Chief Executive Officer and Chief Financial Officer , as appropriate, to allow timely decisions regarding required disclosure.

 

As required by Rule 13a-15 under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2018. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2018, and as of the date that the evaluation of the effectiveness of our disclosure controls and procedures was completed, our disclosure controls and procedures were not effective to satisfy the objectives for which they are intended, as a result of one material weakness described below.

 

Changes in Internal Control Over Financial Reporting

 

On April 6, 2018, Mr. Simon Wang resigned from his position as Chief Financial Officer (“CFO”) of the Company. On April 11, 2018, the Board unanimously appointed its previous Finance Director, Mr. Jason Wu, as the interim CFO and principal accounting officer of the Company, effective immediately. On June 1, 2018, the Board appointed Mr. Federico Tovar as CFO of the Company. In 2016, a material weakness in financial reporting was identified related to the design, documentation and implementation of effective internal controls over the review of the cash flow forecasts used in the accounting for licensed content recoverability. Specifically, the Company did not design and maintain effective internal controls related to management’s review of the data inputs and assumptions used in its cash flow forecasts for licensed content recoverability. Management believes that this material weakness still exists as of the issuance of this quarterly report, even though we may no longer operate any license content business in the future.

 

Other than the changes stated above, there have been no other significant changes in internal control for the three months ended September 30, 2018, which have materially affected or would likely materially affect our internal control over financial reporting. The Company continues to invest resources in order to review, refine and upgrade internal controls.

 

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

There are no material pending legal proceedings to which we are a party or to which any of our property is subject. To the best of our knowledge, no such actions against us are contemplated or threatened.

 

Item 1A. Risk Factors

 

RISKS RELATED TO OUR BUSINESS AND STRATEGY

 

Substantial doubt about our ability to continue as a going concern.

 

We have incurred significant losses and have relied on debt and equity financings to fund our operations. As of September 30, 2018, the Company had accumulated deficit of $145.9 million, with liabilities of $123.1 million and cash on hand of $15.7 million. Based on this cash on hand and our expectation to continue to incur significant operating losses, we do not have the capital to finance operations for the next twelve months.

 

These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements have been prepared assuming that the Company will continue as a going concern and, accordingly, do not include any adjustments that might result from the outcome of this uncertainty. There is no assurance that we will be successful in transforming our business model or that we will be able to generate sufficient cash from operations, create and sell digital assets or borrow funds on favorable terms or at all. If we are in fact unable to continue as a going concern, our shareholders may lose their entire investment in our Company.

 

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

 

The Company 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 its business plan. Although the Company may attempt to raise funds by issuing debt or equity instruments, additional financing may not be available to the Company on terms acceptable to the Company or at all or such resources may not be received in a timely manner. If the Company is unable to raise additional capital when required or on acceptable terms, the Company may be required to scale back or to discontinue certain operations, scale back or discontinue the development of new business lines, reduce headcount, sell assets, file for bankruptcy, reorganize, merge with another entity, or cease operations.

 

We are in the process of transforming our business model, such that there is only a limited basis to evaluate our business and prospects. This transformation may continue to evolve, and ultimately may not be successful.

 

We are in the process of transforming our business model to become a next generation fintech company enabled by AI and blockchain technologies. In connection with this transformation, we are in the process of considerable changes, including initiatives to assemble a new management team, reconfigure the business structure and expand our mission and business lines. 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 the business. This includes having or hiring the right talent to execute our business strategy, and building a team with the technological capability and know-how to build the products and provide the services we envision. 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.

 

Although we have been operating our Legacy YOD business for several years, because our new Wecast Services business has only been developed since 2017, there is only a limited basis upon which to evaluate our business and prospects. Our future success depends, in part, on our ability to implement our business plans and complete the transformation we envision. An investor in our stock should consider the challenges, expenses, and difficulties we will face as a company seeking to provide new types of fintech solutions in a competitive market. For example, we have not generated and may never generate revenue from any AI or blockchain enabled products or services. Any failure to implement our business plans in accordance with our expectations may have a material adverse effect on our financial results.

 

Further, as digital assets and blockchain technologies become more widely available, we expect the services and products associated with them to evolve. Government regulation may cause us to potentially change our future business in order to comply fully with the federal securities and other laws as well as applicable state securities laws. As a result, to stay current with the industry, our business model may need to continue to evolve as well. From time to time, we may modify aspects four business model relating to our products and services. We cannot offer any assurance that these or any other modifications will be successful or will not have an adverse effect to our business.

 

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Even if we implement our plan in accordance with our expectations, our assumptions regarding costs and growth of revenue may differ substantially from reality. Furthermore, even if the anticipated benefits and savings are realized in part, there may be consequences, internal control issues, or business impacts that were not expected. Additionally, as a result of our restructuring efforts in connection with our business transformation plan, we may experience a loss of continuity, loss of accumulated knowledge or loss of efficiency during transitional periods. Reorganization and restructuring can require a significant amount of management and other employees’ time and focus, which may divert attention from operating activities and growing our business. If we fail to achieve some or all of the expected benefits of these activities, it could have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows.

 

Our operating results are likely to fluctuate significantly and may differ from market expectations.

 

Our annual and quarterly operating results have varied significantly in the past, and may vary significantly in the future, due to a number of factors which could have an adverse impact on our business. Our revenue may fluctuate as we expect a disproportionate amount of our revenues generated from our Wecast Services segment quarter over quarter due to the customers’ seasonal demand, as normally holiday demand for consumer electronics would increase our revenue. Furthermore, as the launch dates of our new products may not be the same as what we have planned, we expect the financial performance might fluctuate significantly depending on timing, quantity and outcome of such product launches.

 

The transformation of our business will put added pressure on our management and operational infrastructure, impeding our ability to meet any potential increased demand for our services and possibly hurting our future operating results.

 

Our business plan is to significantly grow our operations to meet anticipated growth in demand for the services that we offer, and by the introduction of new goods or services. Growth in our businesses will place a significant strain on our personnel, management, financial systems and other resources. The evolution of our business also presents numerous risks and challenges, including:

 

·our ability to successfully and rapidly expand sales to potential new distributors in response to potentially increasing demand;

 

·the costs associated with such growth, which are difficult to quantify, but could be significant; and

 

·rapid technological change.

 

To accommodate any such growth and compete effectively, we will need to obtain additional funding to improve information systems, procedures and controls and expand, train, motivate and manage our employees, and such funding may not be available in sufficient quantities, if at all. If we are not able to manage these activities and implement these strategies successfully to expand to meet any increased demand, our operating results could suffer.

 

The success of our business is dependent on our ability to retain our existing key employees and to add and retain senior officers to our management.

 

We depend on the services of our key employees. Our success will largely depend on our ability to retain these key employees and to attract and retain qualified senior and middle level managers to our management team. In addition, in connection with our transition to a new AI & blockchain-enabled fintech business model, we have recruited certain members of management and employees with extensive knowledge of the blockchain market or technology, and the loss of their expertise could diminish our business.

 

We have recruited executives and management both in U.S. and China 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. In addition, severe capital constraints have limited our ability to attract specialized personnel. Moreover, our budget limitations will restrict our ability to hire qualified personnel. 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.

 

Changes in our management team may adversely affect our operations.

 

Over the last several months, we have experienced turnover or changes in our senior management. On April 6, 2018, our CFO, Mr. Simon Wu announced his resignation as the CFO of the Company. On April 11, 2018, the Board appointed Mr. Jason Wu to serve as interim CFO. Effective June 1, 2018, the Board appointed Mr. Federico Tovar as our new CFO. On September 10, 2018, the Board appointed Mr. Brett McGonegal as Co-CEO of the Company, Mr. Evangelos Kalimtgis as Chief Investment Officer and Mr. Uwe Henke Von Parpart as Chief Strategist of the Company.

 

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While we expect to engage in an orderly transition process as we integrate newly appointed officers and managers, we face a variety of risks and uncertainties relating to management transition, including diversion of management attention from business concerns, failure to retain other key personnel or loss of institutional knowledge. These risks and uncertainties could result in operational and administrative inefficiencies and added costs, which could adversely impact our results of operations, stock price and research and development of our products.

 

The Company experiences significant competitive pressure, which may negatively impact our business, financial condition, and results of operations.

 

The markets for the Company’s products and services is very competitive and subject to rapid technological advances, new market entrants, non-traditional competitors, changes in industry standards and changes in customer needs and consumption models. Our company aims to build operative blockchain platforms enhanced by AI technologies. Not only does the Company compete with global distributors, it also competes for customers with regional distributors and some of the Company’s own suppliers that maintain direct sales efforts. Our competitors may introduce new platforms and solutions that are superior to ours. Certain 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. In addition, as the Company expands its offerings and geographic presence, the Company may encounter increased competition from current or new competitors. The Company’s failure to maintain and enhance its competitive position could adversely affect its business and prospects. Furthermore, the Company’s efforts to compete in the marketplace could cause deterioration of gross profit margins and, thus, overall profitability.

 

The size of the Company’s competitors varies across market sectors, as do the resources the Company has allocated to the sectors and geographic areas in which it does business. Therefore, many competitors will have greater resources or a more extensive customer or supplier base than the Company has in one or more of its market sectors and geographic areas, which may result in the Company not being able to effectively compete in certain markets which could impact the Company’s profitability and prospects.

 

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 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;

 

·government regulation of e-commerce and other services, electronic devices, and competition, and restrictive governmental actions (such as trade protection measures, including export duties and quotas and custom 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;

 

·shorter payable and longer receivable cycles and the resultant negative impact on cash flow;

 

·laws and regulations regarding consumer and data protection, privacy, network security, encryption, payments, and restrictions on pricing or discounts;

 

·geopolitical events, including 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 operating environments different than that of China;

 

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·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.

 

As we expand further into new regions and markets, these risks could intensify, and efforts we make to expand our international and cross-border businesses and operations may not be successful. Failure to expand our international and cross-border businesses and operations could materially and adversely affect our business, financial condition and results of operations.

 

Transactions conducted through our international and cross-border platforms may be subject to different customs, taxes and rules and regulations, and we may be adversely affected by the complexity of and developments in customs and import/export laws, rules and regulations in the PRC and other jurisdictions. For example, effective as of April 8, 2016, the Notice on Tax Policies of Cross-Border E-Commerce Retail Importation, or the New Cross-Border E-commerce Tax Notice, replaced the previous system for taxing consumer goods imported into the PRC and introduced a 17% value-added tax, or VAT, on most products sold through e-commerce platforms and consumption tax on high-end cosmetics.

 

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 under President Donald Trump has advocated greater restrictions on trade generally and significant increases on tariffs on goods imported into the United States, particularly from China.

 

We may also have operations in various markets with volatile economic or political environments and may pursue growth opportunities in a number of newly developed and emerging markets. These investments may expose us to heightened risks of economic, geopolitical, or other events, including governmental takeover (i.e., nationalization) of our manufacturing facilities or intellectual property, restrictive exchange or import controls, disruption of operations as a result of systemic political or economic instability, outbreak of war or expansion of hostilities, and acts of terrorism, each of which could have a substantial adverse effect on our financial condition and results of operations. Further, the U.S. government, other governments, and international organizations could impose additional sanctions that could restrict us from doing business directly or indirectly in or with certain countries or parties, which could include affiliates.

 

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.

 

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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.

 

We derived a substantial portion of our revenue from several major customers. If we lose any of these customers, or if the volume of business with these distribution partners decline, our revenues may be significantly affected.

 

We have agreements with only one distribution partner to operate all our legacy YOD business, and during the nine months ended September 30, 2018, one customers individually accounted for more than 10% of third party revenue in our Wecast Service segment. Due to our reliance on those customers, any of the following events may cause a material decline in our revenue and have a material adverse effect on our results of operations:

 

·reductions, delays or cessation of purchases from one or more significant customer;

 

·loss of one or more significant customer and our inability to find new customers that can generate the same volume of business; and

 

·failure of any customer to make timely payment of our products and services.

 

We cannot be certain whether these relationships will continue to develop or if these significant customers will continue to generate significant revenue for us in the future.

 

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.

 

If we fail to develop and maintain an effective system of internal control over financial reporting, our ability to accurately and timely report our financial results or prevent fraud may be adversely affected, and investor confidence and market price of our shares may be adversely impacted.

 

As directed by Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX 404”), the SEC adopted rules requiring public companies to include a report of management on the company’s internal controls over financial reporting in their annual reports on Form 10-Q. Under current law, we became subject to these requirements beginning with our annual report for the fiscal year ended December 31, 2007. Our internal control over financial reporting and our disclosure controls and procedures have been ineffective, and failure to improve them could lead to future errors in our financial statements that could require a restatement or untimely filings, which could cause investors to lose confidence in our reported financial information, and a decline in our stock price.

 

In 2016, a material weakness was identified in the internal control of financial reporting related to the design, documentation and implementation of effective internal controls over the review of the cash flow forecasts used in the accounting for licensed content recoverability. Specifically, the Company did not design and maintain effective internal controls related to management’s review of the data inputs and assumptions used in its cash flow forecasts for licensed content recoverability. License content forecasts are highly subjective, even though we no longer operate any license content business in 2017 and onwards, management believes that this material weakness still exists.

 

Management used the framework set forth in the report entitled Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. As of December 31, 2017, our management has concluded that our internal control over financial reporting is ineffective based on this assessment. See “Item 4. Controls and Procedures.”

 

If we fail to develop and maintain effective internal control over financial reporting in the future, our management may not be able to conclude that we have effective internal control over financial reporting at a reasonable assurance level. This could in turn result in the loss of investor confidence in the reliability of our financial statements and negatively impact the trading price of our shares.

 

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RISKS RELATED TO OUR WECAST SEGMENT

 

There can be no assurance that we will ever develop, issue or support the trading of securitized digital assets, or that we or our partners will build blockchain-based trading and logistics management platforms, or that any such products will be well received.

 

We intend to securitize assets that may be owned by third parties or owned by our Company, to encode such securitized assets as digital tokens using blockchain technology, and to support the issuance and trading of such securitized digital assets. As part of our larger blockchain strategy, we also intend to enter into joint ventures, strategic investments and partnerships to explore the application of blockchain technologies to logistics management. There can be no assurance that we will ever develop, issue or support the trading of any securitized digital assets, whatsoever, or that we will ever develop a blockchain or AI enabled logistics management platform. Should we fail to do so, our financial position may be adversely affected.

 

Even if we do succeed in developing digital securitized assets, there can be no assurance that investors will be interested in purchasing such digital securitized assets, or that a robust ecosystem for their trading on our platforms will develop. For example, established financial institutions may refuse to process the digital assets for these transactions, process wire transfers, or maintain accounts for entities transacting in our digital assets. Conversely, a significate portion of demand for any digital securitized assets we develop may be generated by speculators and investors seeking to profit from the short- or long-term holding of our digital assets. Price volatility undermines the exchange of these digital assets and the liquidity of the digital assets we original may always be low, further fueling price volatility. Increased volatility may lead to a reduction in the value of the digital securitized assets we develop, which could adversely impact the value of any digital securitized assets we originate based on our own assets, and which could reduce demands for our digital financial services by reducing interest in using digital assets as a mean of creating liquidity from others’ owned assets.

 

In addition, the blockchain-enabled platforms and software upon which our products and services will be based, are in their early stages. Despite the efforts of our strategic partners and joint ventures to develop and complete the launch of, and subsequently to maintain, blockchain platforms for digital token trading and logistics management, it is possible that they will experience malfunctions or otherwise fail to be adequately secured and maintained. We may not have or may not be able to obtain the technical skills, expertise, or regulatory approvals needed to successfully develop blockchain platforms and products, including digital assets, and progress them to a successful launch. In addition, there are significant legal and regulatory considerations that will need to be addressed in order to develop and maintain a blockchain, and addressing such considerations will require significant time and resources. There can be no assurance that we will be able to develop the blockchain platform in such a way that achieves all of the features we anticipate that it will provide, or that the features provided will be sufficient to attract a significant number of users such that the blockchain platform will be widely adopted.

 

Blockchain technology and tokenized assets are subject to a number of inherent risks that may impact our ability to provide the services we are developing and adversely affect an investment in us.

 

Blockchain technology and tokenized assets are subject to a number of inherent risks, including reliability risks, security risks, and risks associated with human error, that may impact our ability to provide the services we are developing. For example, a blockchain platform’s functionality depends on the Internet, and a significant disruption in Internet connectivity could disrupt a platform’s operations until the disruption is resolved; such disruption may have an adverse effect on the value of the digital assets traded on a platform. In addition, a hacking or service attack on a platform may cause temporary delays in block creation on the blockchain and in the transfer of digital assets recorded on the chain. Any disruptions, attacks or other security breaches, or the perception that our blockchain technology is unreliable for any reason, may have a material adverse effect on the value of the digital assets, investment in the digital assets and the operations and success of our business operations and financial results.

 

In addition, tokenized digital assets based on blockchain technology can only be transferred with the private key associated with a platform’s address in which the digital assets are held. We intend to safeguard and securely store the private keys associated with a platform’s addresses by engaging a custodian. To the extent a private key is lost, destroyed, or otherwise compromised and no backup of the private key is accessible, the custodian will be unable to transfer the digital assets held in a platform’s addresses associated with that private key. Consequently, the digital assets associated with such address will effectively be lost, which would adversely affect an investment in digital assets.

 

We and our digital asset customers may be subject to the risks encountered by the digital asset exchanges we partner with, including a malicious hacking, sale of a digital asset exchange, loss of the digital assets by the exchange, and other risks. Many digital asset exchanges do not provide insurance and may lack the resources to protect against hacking and theft. If a material amount of our digital assets or the digital assets of our customers are held by exchanges, we and our customers may be materially and adversely affected if an exchange suffers a cyberattack or incurs financial problems

 

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Further, the recording of digital asset transactions are not, from an administrative perspective, reversible without the consent and active participation of the recipient of the transaction or, in theory, control or consent of a majority of the processing power on a certain blockchain platform. Once a transaction has been verified and recorded in a block that is added to the blockchain, an incorrect transfer of digital assets or a theft of such digital assets generally will not be reversible. We, our customers and our partners may not be capable of seeking compensation for any such transfer or theft. It is possible that, through computer or human error, or through theft or criminal action, digital assets could be transferred in incorrect amounts or to unauthorized third parties. To the extent that we, our customers or our partners are unable to seek a corrective transaction with such third party or are incapable of identifying the third party that has received the digital assets through error or theft, we, our customers or our partners will be unable to revert or otherwise recover incorrectly transferred digital assets. To the extent that we, our customers and our partners are unable to seek redress for such error or theft, such loss could adversely affect our reputation and our business.

 

The growth of the blockchain industry in general, as well as the blockchain networks, is subject to a high degree of uncertainty.

 

The factors affecting the further development of the digital asset industries, as well as blockchain networks, include uncertainty regarding:

 

·worldwide growth in the adoption and use of digital assets, and other blockchain technologies;

 

·government and quasi-government regulation of digital assets and other blockchain assets and their use, or restrictions on or regulation of access to and operation of blockchain networks or similar systems;

 

·the maintenance and development of the open-source software protocol of the blockchain networks;

 

·changes in consumer demographics and public tastes and preferences;

 

·the availability and popularity of other forms or methods of buying and selling goods and services, or trading assets including new means of using traditional currencies or existing networks;

 

·general economic conditions and the regulatory environment relating to digital assets; and

 

·The popularity or acceptance of blockchain-enabled tokens.

 

The digital assets industries as a whole have been characterized by rapid changes and innovations and are continually evolving. Although blockchain networks and blockchain assets have experienced significant growth in recent years, the slowing or stopping of the development, general acceptance and adoption and usage of these networks and assets may materially adversely affect our business plans and results of operations.

 

We currently have limited intellectual property rights related to our new Wecast Services business, and primarily rely on third parties through joint ventures 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 forseable future will have, limited direct intellectual property rights related to our new Wecast Services business. The intellectual property relevant to the products and services we plan to provide are held primarily by joint ventures and our strategic partners. Accordingly, we will rely on these third parties for research and development activities, which poses significant risks. For example, we will have limited control over the research and development activities of the business of our joint ventures, and may require licenses from these third parties if we wish to develop products directly. If our joint venture businesses are unable to effectively maintain a competitive edge relative to the market with its technologies and intellectual property, it may adversely affect our business and financial position.

 

Our reliance on third parties also presents are risks related to ownership, use and protection of proprietary information. We are required to rely on the terms of the joint venture and partnership agreements to protect our interests, as well as our joint ventures’ and partners trade secret protection, non-disclosure agreements, and invention assignment agreements to protect confidential and proprietary information. If the intellectual property and other confidential information of our joint ventures and strategic partners are not adequately protected, competitors may be able to use their proprietary technologies and information and thereby erode any competitive advantages that intellectual property provide us.

  

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Domestic and international regulatory regimes governing blockchain technologies, digital assets, distribution and utilization of digital assets is uncertain, and new regulations or policies may materially adversely affect the development and the value of certain digital assets.

 

Blockchain and distributed ledger platforms are recent technological innovations, and the regulatory schemes to which digital assets may be subject have not been fully explored or developed. Regulation of digital assets varies from country to country as well as within countries. In some cases, existing laws have been interpreted to apply to blockchain-based technologies and digital assets, and in other cases, jurisdictions have adopted laws, regulations or directives that specifically affect digital assets, and some jurisdictions have not taken any regulatory stance on digital assets and or have explicitly declined to apply regulation. Accordingly, there is no clear regulatory framework applicable to blockchain platforms or digital asset products, and laws that do apply at times may overlap or change. Regulation in these areas is likely to rapidly evolve as government agencies take regulatory action to monitor companies and their activities with respect to these areas.

 

Various legislative and executive bodies in the United States and in other countries may in the future adopt laws, regulations, or guidance, or take other actions, which may severely impact the operability of blockchain platforms and the permissibility of digital assets generally, the technology behind the assets, or the means of transacting or in transferring such assets. Failure by us to comply with any laws, rules and regulations, some of which may not yet exist or are subject to interpretation and may be subject to change, could result in a variety of adverse consequences, including civil penalties and fines.

 

Digital assets are novel and the application of U.S. federal and state securities laws is unclear in many respects. Digital assets are not traditional investment securities and issues that might be resolved with traditional securities may not be resolved with digital assets if the offer or sale of such digital assets is not made in full compliance with applicable registration exemptions or the federal securities laws, the token issuer may be in violation of such laws. It is possible that regulators may interpret laws in a manner that adversely affects a digital asset’s value.

 

Blockchain-enabled networks and distributed ledger technologies also face an uncertain regulatory landscape in many foreign jurisdictions, including China. Various foreign jurisdictions may, in the near future, adopt laws, regulations or directives that may conflict with those of the United States or may directly and negatively impact our business. The effect of any future regulatory change is impossible to predict, but such change could be substantial and materially adverse to our business.

 

The further development and acceptance of blockchain platforms, which represent a new and rapidly changing industry, are subject to a variety of factors that are difficult to evaluate. The slowing or stopping of the development or acceptance of blockchain platforms and blockchain assets would have a material adverse effect on our business plans and could have a material adverse effect on us.

 

Regulatory authorities may never permit a trading system or ATS on which digital assets could trade to become operational.

 

In order for a securities exchange to allow U.S. investors to participate on its platform, it must register as a broker-dealer with the SEC, become a member of FINRA, file a Form ATS with the SEC and comply with Regulation ATS. DBOT, one of our joint venture investments, has filed an initial operations report on Form ATS to give notice of operations of DBOT ATS, LLC. The Company’s investment in DBOT’s ATS is not approved by the SEC or FINRA. If FINRA, the SEC or any other regulatory authority objected to such system, such regulatory authorities could prevent the system from ever becoming operational.

 

If the digital assets we develop are considered to be derivatives or commodities, we may be subject to the provisions of the Commodities Exchange Act and the U.S. Commodity Futures Trading Commission (“CFTC”) regulations.

 

The U.S. Commodity Futures Trading Commission (“CFTC”) has defined “virtual currencies” as a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value, but does not have legal tender status in any jurisdiction. The CFTC has considered digital assets as commodities or derivatives, depending on the facts of the offering. If we facilitate borrowing transactions that permit the trading of the securitized digital assets we develop on a “leveraged, margined or financed basis,” we must comply with the provisions of the Commodities Exchange Act and CFTC regulations. Any regulatory issues encountered with respect to compliance with these regulations and laws would have a material adverse impact on the Company’s financial position.

 

Our sales of oil and natural gas may expose us to extensive regulation.

 

The Federal Energy Regulatory Commission, the CFTC and the Federal Trade Commission hold statutory authority to monitor certain segments of the physical energy commodities markets. The trading of digital assets linked to such energy commodities may be subject to such regulations. To the extent that any digital asset is deemed to fall within the definition of a commodity future, such as those represented by oil or energy assets, pursuant to subsequent rulemaking by the CFTC, the Company and/or the issuer of such digital asset may be required to register and comply with additional regulation under the CEA. Moreover, the Company or issuer may be required to register as a commodity pool operator and register the platform, or such other entity created to hold the digital assets, as a commodity pool with the CFTC through the National Futures Association. Such additional registrations may result in extraordinary expenses of the Company, and adversely impact the value of the common stock.

 

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If regulatory changes or interpretations of the Company’s activities require the registration as a money service business under the regulations promulgated by FinCEN under the authority of the U.S. Bank Secrecy Act, or licensing as a money transmitter (or equivalent designation) under state law in any state in which the Company operates, compliance with these requirements would result in extraordinary expenses to the Company or the termination of the Company.

 

To the extent that the activities of the Company cause it to be deemed a money service business (“MSB”) under the regulations promulgated by FinCEN under the authority of the U.S. Bank Secrecy Act, the Company may be required to comply with FinCEN regulations, including those that would mandate the Company to implement anti-money laundering programs, make certain reports to FinCEN and maintain certain records.

 

To the extent that the activities of the Company cause it to be deemed a “money transmitter” (or equivalent designation) (“MT”) under state law in any state in which it operates, the Company may be required to seek a license or otherwise register with a state regulator and comply with state regulations that may including the implementation of anti-money laundering programs, maintenance of certain records and other operational requirements.

 

Such additional federal or state regulatory obligations may cause the Company to incur extraordinary expenses, possibly affecting an investment in the common stock in a material and adverse manner. Furthermore, the Company and its service providers may not be capable of complying with certain federal or state regulatory obligations applicable to MSBs and MTs. Such noncompliance or extraordinary expense to comply with regulations may have an adverse effect on the value of the Company’s common stock and affect the financial position of the business.

 

RISKS RELATED TO DOING BUSINESS IN CHINA AND TO OUR LEGACY YOD BUSINESS

 

U.S. financial regulatory and law enforcement agencies, including without limitation the U.S. Securities and Exchange Commission, 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 People’s Republic of China concerning the Company, our PRC-based officers, directors, market research services or other professional services or experts.

 

A substantial part of our assets and our current operations are conducted in the PRC, and some of our officers, directors and other professional service providers are nationals and residents of China. U.S. financial regulatory and law enforcement agencies, including without limitation the U.S. Securities and Exchange Commission (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 the Company, and China 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 China, which could materially and adversely affect the growth of our business and our competitive position.

 

Our business operations are conducted in China. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. 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 China’s gross domestic product has slowed in recent years to 6.7% in 2016 and 6.9% in 2017, 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 Chinese economy has been transitioning from a planned economy to a more market-oriented economy. Although in recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of the productive assets in China is still owned by the Chinese government. 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.

 

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Any adverse change in the economic conditions or government policies in China 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.

 

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 and VIEs in the PRC. Our subsidiaries and VIEs are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to foreign invested entities established in the PRC (“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 China. For example, on January 19, 2015, MOFCOM published a draft of the PRC law on Foreign Investment (Draft for Comment), of the Draft Foreign Investment Law, which was open for public comments until February 17, 2015. At the same time, MOFCOM published an accompanying explanatory note of the Draft Foreign Investment Law, or the Explanatory Note, which contains important information about the Draft Foreign Investment Law, including its drafting philosophy and principles, main content, plans to transition to the new legal regime and treatment of business in China controlled by FIEs, primarily through contractual arrangements such as VIE arrangements. The Draft Foreign Investment Law is intended to replace the current foreign investment legal regime consisting of three laws: the Sino-Foreign Equity Joint Venture Enterprise Law, the Sino-Foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-Invested Enterprise Law, as well as detailed implementing rules. The Draft Foreign Investment Law proposes significant changes to the PRC foreign investment legal regime and may have a material impact on Chinese companies listed or to be listed overseas. The proposed Draft Foreign Investment Law is to regulate FIEs the same way as PRC domestic entities, except for those FIEs that operate in industries deemed to be either “restricted” or “prohibited” in a “Negative List.” As the Negative List has yet to be published, it is unclear whether it will differ from the current list of industries subject to restrictions or prohibitions on foreign investment. The Draft Foreign Investment Law also provides that only FIEs operating in industries on the Negative List will require entry clearance and other approvals that are not required of PRC domestic entities. As a result of the entry clearance and approvals, certain FIEs operating in industries on the Negative List may not be able to continue to conduct their operations through contractual arrangements. Moreover, it is uncertain whether business industries in which our VIEs operate will be subject to the foreign investment restrictions or prohibitions set forth in the “negative list” to be issued.

 

The Draft Foreign Investment Law has not taken a position on what actions will be taken with respect to the existing VIE structures, while it is soliciting comments from the public on this point by illustrating several possible options. Under these varied options, a company that has a VIE structure and conducts the business on the “negative list” at the time of enactment of the new Foreign Investment Law has either the option or obligation to disclose its corporate structure to the authorities, while the authorities may either permit the company to continue to maintain the VIE structure (if the company is deemed ultimately controlled by PRC nationals), or require the company to dispose of its businesses and/or VIE structure based on circumstantial considerations. The Draft Foreign Investment Law also provides that only FIEs operating in industries on the Negative List will require entry clearance and other approvals that are not required of PRC domestic entities. As a result of such entry clearance and approvals or certain restructuring of our corporate structure and operations, to be completed by companies with existing VIE structure like us, we face substantial uncertainties as to whether these actions can be timely completed, or at all, and our business and financial condition may be materially and adversely affected.

 

Although the overall effect of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign investment in China, China has not developed a fully integrated legal system. Recently enacted laws, rules and regulations may not sufficiently cover all aspects of economic activities in China or may be subject to significant degree of interpretation by PRC regulatory agencies and courts. 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 China may be protracted and result in substantial costs and diversion of resources and management’s attention. In addition, some of our executive officers and directors are residents of China and not of the United States, and substantially all the assets of these persons are located outside the United States. As a result, 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.

 

In order to comply with PRC regulatory requirements, we operate our legacy YOD businesses through companies with which we have contractual relationships. By virtue of these contractual relationships, we control the economic interests and have the power to direct the activities of these entities, and are therefore determined to be the primary beneficiary of these entities, but we do not have any equity ownership interest in these entities. If the PRC government determines that our contractual agreements with these entities are not in compliance with applicable regulations, our business in the PRC could be materially adversely affected.

 

We do not have direct or indirect equity ownership of our VIEs, which collectively operate all of our legacy YOD businesses in China, but instead have entered into contractual arrangements with our VIEs and each of its individual legal shareholder(s) pursuant to which we received an economic interest in, and have the power to direct the activities of the VIEs, in a manner substantially similar to a controlling equity interest. Although we believe that our business operations are in compliance with the current laws in China, we cannot be sure that the PRC government would view our operating arrangements to be in compliance with PRC regulations that may be adopted in the future. If we are determined not to be in compliance, the PRC government could levy fines, revoke our business and operating licenses, require us to restrict or discontinue our operations, restrict our right to collect revenues, require us to restructure our business, corporate structure or operations, impose additional conditions or requirements with which we may not be able to comply, impose restrictions on our business operations or on our customers, or take other regulatory or enforcement actions against us that could be harmful to our business. As a result, our legacy YOD business in the PRC could be materially adversely affected.

 

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We rely on contractual arrangements with our VIEs for our operations, which may not be as effective for providing control over these entities as direct ownership.

 

Our legacy YOD operations and financial results are dependent on our VIEs in which we have no equity ownership interest and must rely on contractual arrangements to control and operate the businesses of our VIEs. These contractual arrangements may not be as effective for providing control over the VIEs as direct ownership. For example, the VIEs may be unwilling or unable to perform its contractual obligations under our commercial agreements. Consequently, we may not be able to conduct our operations in the manner currently planned. In addition, the VIEs may seek to renew their agreements on terms that are disadvantageous to us. Although we have entered into a series of agreements that provide us with the ability to control the VIEs, we may not succeed in enforcing our rights under them insofar as our contractual rights and legal remedies under PRC law are inadequate. In addition, if we are unable to renew these agreements on favorable terms when these agreements expire or to enter into similar agreements with other parties, our legacy YOD business may not be able to operate or expand, and our operating expenses may significantly increase.

 

Our arrangements with our VIEs and its respective shareholders may be subject to a transfer pricing adjustment by the PRC tax authorities which could have an adverse effect on our income and expenses.

 

We could face material and adverse tax consequences if the PRC tax authorities determine that our contracts with our VIEs and their respective shareholders were not entered into based on arm’s length negotiations. Although our contractual arrangements are similar to those of other companies conducting similar operations in China, if the PRC tax authorities determine that these contracts were not entered into on an arm’s length basis, they may adjust our income and expenses for PRC tax purposes in the form of a transfer pricing adjustment. Such an adjustment may require that we pay additional PRC taxes plus applicable penalties and interest, if any.

 

We depend upon contractual arrangements with our VIEs for the success of our legacy YOD business and these arrangements may not be as effective in providing operational control as direct ownership of these businesses and may be difficult to enforce.

 

Our operations are partially conducted in the PRC, where the PRC government restricts or prohibits foreign-owned enterprises from owning certain other operations in the PRC. Accordingly, we depend on our VIEs, in which we have no direct ownership interest, to provide those services through contractual agreements among the parties and to hold some of our assets. These arrangements may not be as effective in providing control over our operations through direct ownership of these businesses. Due to our VIE structure, we have to rely on contractual rights to effect control and management of our VIEs, which exposes us to the risk of potential breach of contract by the VIEs or their shareholders. A failure by our VIEs or their shareholders to perform their obligations under our contractual arrangements with them could have an adverse effect on our business and financial condition. Furthermore, if the shareholders of our VIEs were involved in proceedings that had an adverse impact on their shareholder interests in such VIEs or on our ability to enforce relevant contracts related to the VIE structure, our legacy YOD business would be adversely affected.

 

As all of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through either arbitration or litigation in the PRC, they would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. We would have to rely for enforcement on legal remedies under PRC law, including specific performance, injunctive relief or damages, which might not be effective. As these PRC governmental authorities have wide discretion in granting such approvals, we could fail to obtain such approval. In addition, our VIE contracts might not be enforceable in China if PRC governmental authorities, courts or arbitral tribunals took the view that such contracts contravened PRC law or were otherwise not enforceable for public policy reasons. In the event we were unable to enforce these contractual arrangements, we would not be able to exert effective control over our VIEs, and our ability to conduct our legacy YOD business, and our financial condition and results of operations, would be severely adversely affected.

 

You may have difficulty enforcing judgments against us.

 

Most of our assets are located outside of the United States and a substantial part of our current operations are conducted in the PRC. In addition, some of our directors and officers are nationals and residents of countries other than the United States. A substantial portion of the assets of these persons is located outside the United States. 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. Recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. Courts in China may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. China 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. So it is uncertain whether a PRC court would enforce a judgment rendered against us by a court in the United States.

 

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The PRC government exerts substantial influence over the manner in which we must conduct our business activities.

 

The PRC government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property, and other matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of the jurisdictions in which we operate may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.

 

Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.

 

Our results could be adversely affected by the trade tensions between the United States and China.

 

With the increasing interconnectedness of global economic and financial systems and our business related to China, trade tensions between the United States and China 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 under President Donald Trump has advocated greater restrictions on trade generally and significant increases on tariffs on goods imported into the United States, particularly from China. Further, the U.S. or China 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.

 

The enforcement of the PRC labor contract law may materially increase our costs and decrease our net income.

 

China adopted a new Labor Contract Law, effective on January 1, 2008, issued its implementation rules and regulations, effective on September 18, 2008, and amended the Labor Contract Law, effective on July 1, 2013. The Labor Contract Law and related rules and regulations impose more stringent requirements on employers with regard to, among other things, minimum wages, severance payment and non-fixed-term employment contracts, time limits for probation periods, as well as the duration and the times that an employee can be placed on a fixed-term employment contract. Due to the limited period of effectiveness of the Labor Contract Law, its implementation rules and regulations and its amendment, and the lack of clarity with respect to its implementation and the potential penalties and fines, it is uncertain how it will impact our current employment policies and practices. In particular, compliance with the Labor Contract Law and its implementation rules and regulations may increase our operating expenses. 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 and regulations may also limit our ability to effect those changes in a manner that we believe to be cost-effective or desirable, and could result in a material decrease in our profitability.

 

Future inflation in China may inhibit our ability to conduct business in China.

 

In recent years, the Chinese economy has experienced periods of rapid expansion, significant stock market volatility and highly fluctuating rates of inflation. These factors have led to the adoption by the Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. In 2010 and 2011, for example, the Chinese economy experienced high inflation and to curb the accelerating inflation, the People’s Bank of China (“PBOC”), China central bank, raised benchmark interest rates three times in 2011. High inflation may in the future cause the Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products and services and our company.

 

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Restrictions on currency exchange may limit our ability to receive and use our sales effectively.

 

At present, a substantial part of our sales will be 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 China or to make dividend 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 China 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 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 and the variable interest entities. Recent volatility in the RMB foreign exchange rate as well as capital flight out of China 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 are 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 reaches 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.

 

Failure to comply with PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to personal liability, limit our ability to acquire PRC companies or to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute profits to us or otherwise materially adversely affect us.

 

SAFE has promulgated several regulations, including the Notice Concerning Foreign Exchange Controls on Domestic Residents’ Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles (“Circular 75”), effective on November 1, 2005, and the Circular on Issues Concerning Foreign Exchange Administration Over the Overseas Investment and Financing and Roundtrip Investment by Domestic Residents Via Special Purpose Vehicles (“Circular 37”), effective on July 4, 2015, which replaced Circular 75. Under Circular 37, PRC residents must register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity for the purpose of holding domestic or offshore assets or interests, referred to as a “special purpose vehicle” in Circular 37. In addition, amendments to the registration must be made in the event of any material change, such as an increase or decrease in share capital contributed by the individual PRC resident shareholder, share transfer or exchange, merger, division or other material event. Failure to comply with the specified registration procedures may result in restrictions being imposed on the foreign exchange activities of the relevant PRC entity, including the payment of dividends and other distributions to its offshore parent, as well as restrictions on capital inflows from the offshore entity to the PRC entity. Further, failure to comply with the SAFE registration requirements may result in penalties under PRC law for evasion of foreign exchange regulations.

 

We have asked our shareholders who are PRC residents as defined in Circular 37 and related rules to register with the relevant branch of SAFE, as currently required, in connection with their equity interests in us and our acquisitions of equity interests in our PRC subsidiaries. However, we cannot provide any assurances that they can obtain the above SAFE registrations required by Circular 37 and related rules. Moreover, because Circular 37 is newly issued, there is uncertainty over how Circular 37 and related rules will be interpreted and implemented and how or whether SAFE will apply it to us, and we cannot predict how it will affect our business operations or future strategies. For example, our present and prospective PRC subsidiaries’ ability to conduct foreign exchange activities, such as the remittance of dividends and foreign currency-denominated borrowings, may be subject to compliance with Circular 37 and related rules by our PRC resident beneficial holders. In addition, such PRC residents may not always be able to complete the necessary registration procedures required by Circular 37 and related rules. We have little control over either our present or prospective direct or indirect shareholders or the outcome of such registration procedures.

 

We may be unable to complete a business combination transaction efficiently or on favorable terms due to complicated merger and acquisition regulations which became effective on September 8, 2006.

 

On August 8, 2006, six PRC regulatory agencies, including the China Securities Regulatory Commission, promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors, which became effective on September 8, 2006 and was amended in June 2009. This regulation, among other things, governs the approval process by which a PRC company may participate in an acquisition of assets or equity interests. Depending on the structure of the transaction, the regulation will require the PRC parties to make a series of applications and supplemental applications to the government agencies. In some instances, the application process may require the presentation of economic data concerning a transaction, including appraisals of the target business and evaluations of the acquirer, which are designed to allow the government to assess the transaction. Government approvals will have expiration dates by which a transaction must be completed and reported to the government agencies. Compliance with the regulation is likely to be more time consuming and expensive than in the past and the government can now exert more control over the combination of two businesses. Accordingly, due to the regulation, our ability to engage in business combination transactions has become significantly more complicated, time consuming and expensive, and we may not be able to negotiate a transaction that is acceptable to our shareholders or sufficiently protect their interests in a transaction.

 

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The regulation allows PRC government agencies to assess the economic terms of a business combination transaction. Parties to a business combination transaction may have to submit to MOFCOM and other relevant government agencies an appraisal report, an evaluation report and the acquisition agreement, all of which form part of the application for approval, depending on the structure of the transaction. The regulation also prohibits a transaction at an acquisition price obviously lower than the appraised value of the PRC business or assets, and in certain transaction structures, may require that consideration be paid within defined periods, generally not in excess of a year. The regulation also limits our ability to negotiate various terms of the acquisition, including aspects of the initial consideration, contingent consideration, holdback provisions, indemnification provisions and provisions relating to the assumption and allocation of assets and liabilities. Transaction structures involving trusts, nominees and similar entities are prohibited. Therefore, such regulation may impede our ability to negotiate and complete a business combination transaction on financial terms that satisfy our investors and protect our shareholders’ economic interests.

 

Our existing contractual arrangements with Sinotop Beijing, SSF and their respective shareholders may be subject to national security review by MOFCOM, and the failure to receive the national security review could have a material adverse effect on our legacy YOD business and operating results.

 

In August 2011, MOFCOM promulgated the Rules of Ministry of Commerce on Implementation of Security Review System of Merger and Acquisition of Domestic Enterprises by Foreign Investors (the “Security Review Rules”) to implement the Notice of the General Office of the State Council on Establishing the Security Review System for Merger and Acquisition of Domestic Enterprises by Foreign Investors promulgated on February 3, 2011 (“Circular 6”). The Security Review Rules became effective on September 1, 2011. Under the Security Review Rules, a national security review is required for certain mergers and acquisitions by foreign investors raising concerns regarding national defense and security. Foreign investors are prohibited from circumventing the national security review requirements by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions. The application and interpretation of the Security Review Rules remain unclear. Based on our understanding of the Security Review Rules, we do not need to submit our existing contractual arrangements with Sinotop Beijing, SSF and their respective shareholders to the MOFCOM for national security review because, among other reasons, (i) we gained de facto control over Sinotop Beijing in 2010 prior to the effectiveness of Circular 6 and the Security Review Rules; and (ii) there are currently no explicit provisions or official interpretations indicating that our current businesses fall within the scope of national security review. Although we have no plan to submit our existing contractual arrangements with Sinotop Beijing and its shareholders to MOFCOM for national security review, the relevant PRC government agencies, such as MOFCOM, may reach a different conclusion. If MOFCOM or another PRC regulatory agency subsequently determines that we need to submit our existing contractual arrangements with Sinotop Beijing, SSF and their respective shareholders for national security review by interpretation, clarification or amendment of the Security Review Rules or by any new rules, regulations or directives promulgated, we may face sanctions by MOFCOM or another PRC regulatory agency. These sanctions may include revoking the business or operating licenses of our PRC entities, discontinuing or restricting our operations in China, confiscating our income or the income of Sinotop Beijing and SSF, and taking other regulatory or enforcement actions, such as levying fines, that could be harmful to our business. Any of these sanctions could cause significant disruption to our legacy YOD business operations.

 

The Security Review Rules may make it more difficult for us to make future acquisitions or dispositions of our business operations or assets in China.

 

The Security Review Rules, effective as of September 1, 2011, provide that when deciding whether a specific merger or acquisition of a domestic enterprise by foreign investors is subject to the national security review by MOFCOM, the principle of substance-over-form should be applied. Foreign investors are prohibited from circumventing the national security review requirement by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions. If the business of any target company that we plan to acquire falls within the scope of national security review, we may not be able to successfully acquire such company by equity or asset acquisition, capital increase or even through any contractual arrangement.

 

Under the Enterprise Income Tax 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.

 

On March 16, 2007, the National People’s Congress of China passed a new Enterprise Income Tax law (the “EIT Law”), and on November 28, 2007, the State Council of China passed its implementing rules, which took effect on January 1, 2008. Under the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define de facto management as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise.

 

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On April 22, 2009, the State Administration of Taxation issued the Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies (the “Notice”), further interpreting the application of the EIT Law and its implementation non-Chinese enterprise or group controlled offshore entities. Pursuant to the Notice, an enterprise incorporated in an offshore jurisdiction and controlled by a Chinese enterprise or group will be classified as a “non-domestically incorporated resident enterprise” if (i) its senior management in charge of daily operations reside or perform their duties mainly in China; (ii) its financial or personnel decisions are made or approved by bodies or persons in China; (iii) its substantial assets and properties, accounting books, corporate chops, board and shareholder minutes are kept in China; and (iv) at least half of its directors with voting rights or senior management often reside in China. A resident enterprise would be subject to an enterprise income tax rate of 25% on its worldwide income and must pay a withholding tax at a rate of 10% when paying dividends to its non-PRC shareholders that do not have an establishment or place of business in the PRC or which have such establishment or place of business but the dividends are not effectively connected with such establishment or place of business, to the extent such dividends are derived from sources within the PRC. Similarly, any gains realized on the transfer of our shares by such investors is also subject to PRC tax at a current rate of 10%, subject to any reduction or exemption set forth in relevant tax treaties, if such gain is regarded as income derived from sources within the PRC. However, it remains unclear as to whether the Notice is applicable to an offshore enterprise incorporated by a Chinese natural person. Detailed measures on the imposition of tax from non-domestically incorporated resident enterprises are not readily available. Therefore, it is unclear how tax authorities will determine tax residency based on the facts of each case.

 

We may be deemed to be a resident enterprise by Chinese tax authorities. If the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as interest on financing proceeds and non-China source income would be subject to PRC enterprise income tax at a rate of 25%. Second, although under the EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification could result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC shareholders and with respect to gains derived by our non-PRC shareholders from transferring our shares.

 

If we were treated as a “resident enterprise” by PRC tax authorities, we would be subject to taxation in both the United States and China, and our PRC tax may not be creditable against our U.S. tax.

 

Heightened scrutiny of acquisition transactions by PRC tax authorities may have a negative impact on our business operations or the value of your investment in us.

 

Pursuant to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises (“SAT Circular 698”), effective on January 1, 2008, and the Announcement on Several Issues Related to Enterprise Income Tax for Indirect Asset Transfer by Non-PRC Resident Enterprises (“SAT Announcement 7”), effective on February 3, 2015, issued by the SAT, if a non-resident enterprise transfers the equity interests of or similar rights or interests in overseas companies which directly or indirectly own PRC taxable assets through an arrangement without a reasonable commercial purpose resulting in the avoidance of PRC corporate income taxes, such a transaction may be re-characterized and treated as a direct transfer of PRC taxable assets subject to PRC corporate income tax. SAT Announcement 7 specifies certain factors that should be considered in determining whether an indirect transfer has a reasonable commercial purpose. However, as SAT Announcement 7 is newly issued, there is uncertainty as to its application and the interpretation of the term “reasonable commercial purpose.” In addition, under SAT Announcement 7, the entity which has the obligation to pay the consideration for the transfer to the transferring shareholders has the obligation to withhold any PRC corporate income tax that is due. If the transferring shareholders do not pay corporate income tax that is due for a transfer and the entity which has the obligation to pay the consideration does not withhold the tax due, the PRC tax authorities may impose a penalty on the entity that so fails to withhold, which may be relieved or exempted from the withholding obligation and any resulting penalty under certain circumstances if it reports such transfer to the PRC tax authorities.

 

As SAT Circular 698 and SAT Announcement 7 are relatively new and there is uncertainty over their application, we and our non-PRC resident investors may be subject to being taxed under Circular 698 and SAT Announcement 7 and may be required to expend valuable resources to comply with Circular 698 and SAT Announcement 7 or to establish that we or our non-PRC resident investors should not be taxed under Circular 698 and SAT Announcement 7, which could have a material adverse effect on our financial condition and results of operations.

 

We may be subject to fines and legal sanctions if we or our employees who are PRC citizens fail to comply with PRC regulations relating to employee share options.

 

Under the Administration Measures on Individual Foreign Exchange Control issued by the PBOC and the related Implementation Rules issued by the SAFE, all foreign exchange transactions involving an employee share incentive plan, share option plan or similar plan participated in by PRC citizens may be conducted only with the approval of the SAFE. Under the Notice of Issues Related to the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Listed Company (“Offshore Share Incentives Rule”), issued by the SAFE on February 15, 2012, PRC citizens who are granted share options, restricted share units or restricted shares by an overseas publicly listed company are required to register with the SAFE or its authorized branch and comply with a series of other requirements. The Offshore Share Incentives Rule also provides procedures for registration of incentive plans, the opening and use of special accounts for the purpose of participation in incentive plans, and the remittance of funds for exercising options and gains realized from such exercises and sales of such options or the underlying shares, both outside and inside the PRC. We, and any of our PRC employees or members of our Board who have been granted share options, restricted share units or restricted shares, are subject to the Administration Measures on Individual Foreign Exchange Control, the related Implementation Rules, and the Offshore Share Incentives Rule. If we, or any of our PRC employees or members of our Board who receive or hold options, restricted share units or restricted shares in us or any of our subsidiaries, fail to comply with these registration and other procedural requirements, we may be subject to fines and other legal or administrative sanctions.

 

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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 Foreign Corrupt Practice Act (“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 China. The PRC also strictly prohibits bribery of government officials. Our activities in China 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 China, 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 affect 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 China, 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. Unlike public reporting companies whose operations are located primarily in the United States, however, substantially all of our operations are located in China, Hong Kong and Singapore. Since substantially all of our operations and business takes place outside of 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. These same obstacles are not present for similar companies whose operations or business take place entirely or primarily in the United States. 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 are not subject to the review of the China Securities Regulatory Commission (“CSRC”), a PRC regulator that is tasked with oversight of the capital markets in China. 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.

 

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RISKS RELATED TO OUR STOCK

 

The market price of our common stock is volatile, leading to the possibility of its value being depressed at a time when you may want to sell your holdings.

 

The market price of our common stock is volatile, and this volatility may continue. Numerous factors, many of which are beyond our control or are not discernible or determinable by the Company, may cause the market price of our common stock to fluctuate significantly. In addition to market and industry factors, the price and trading volume for our common stock may be highly volatile for specific business reasons. Factors such as variations in our revenues, earnings and cash flow, announcements of new investments, cooperation arrangements or acquisitions, and fluctuations in market prices for our products could cause the market price for our shares to change substantially.

 

Securities class action litigation is often instituted against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs to us and divert our management’s attention and resources.

 

Moreover, the trading market for our common stock will be influenced by research or reports that industry or securities analysts publish about us or our business. If one or more analysts who cover us downgrade our common stock, the market price for our common stock would likely decline. If one or more of these analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which, in turn, could cause the market price for our common stock or trading volume to decline.

 

The market price of our common stock could be also subject to volatility if the value of our business and common stock is viewed as being linked to the price and value of digital assets. A decrease in the price of a single digital asset may cause volatility in the entire digital asset and security token industry. For example, a security breach that affects purchaser or user confidence in Bitcoin or Ether may affect the industry as a whole. If investors view our business and the value of our common stock as dependent upon or linked to the value or growth of digital assets, whether or not tokenized on our blockchain platforms, the price of such digital assets may influence significantly the market price of shares of our common stock.

 

Furthermore, securities markets may from time to time experience significant price and volume fluctuations for reasons unrelated to operating performance of particular companies. These market fluctuations may adversely affect the price of our common stock and other interests in our company at a time when you want to sell your interest in us.

 

Although publicly traded, the trading market in our common stock has been substantially less liquid than the average trading market for a stock quoted on the Nasdaq Stock Market and this low trading volume may adversely affect the price of our common stock.

 

Our common stock trades on the Nasdaq Capital Market. The trading volume of our common stock has been comparatively low compared to other companies listed on Nasdaq. Limited trading volume will subject our shares of common stock to greater price volatility and may make it difficult for you to sell your shares of common stock at a price that is attractive to you.

 

Provisions in our articles of incorporation and bylaws 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 the common stock.

 

Our articles of incorporation 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 the Board without further action by the shareholders. 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 shareholders 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.

 

In addition, 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.

 

Certain of our shareholders hold a significant percentage of our outstanding voting securities.

 

As of August 10, 2018, Wecast Media Investment Management Limited, Seven Stars Global Cloud Group Limited, Sun Seven Stars Media Group Limited and affiliates (controlled by our Chairman and Co-Chief Executive Officer, Mr. Wu) are the beneficial owners of approximately 42.0% of our outstanding voting securities (through their ownership of 100% our Series A Preferred Stock, which entitle the holder to cast ten votes for every share of common stock that is issuable upon conversion of a share of Series A Preferred Stock (each share of Series A Preferred Stock is convertible into 0.1333333 shares of common stock), or a total of 9,333,330 votes), Mr. Shane McMahon, our Vice Chairman, is the beneficial owner of approximately 7.6% of our outstanding voting securities, and our former director Mr. Xuesong Song and C Media Limited (of which Mr. Song is the Chairman and Co-Chief Executive Officer) are the beneficial owners of approximately 7.3% of our outstanding voting securities (as calculated in accordance with Rule 13d-3(d)(1) of the Exchange Act). As a result, each possesses significant influence over the election of our directors and the authorization of any proposed significant corporate transactions. Their respective ownership and control may also have the effect of delaying or preventing a future change in control, impeding a merger, consolidation, takeover or other business combination or discourage a potential acquirer from making a tender offer.

 

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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 PRC subsidiaries. PRC rules 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 shareholders. See “—Risks Related to Doing Business in China— 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.”

 

Even if we are able to pay dividends on our common stock or Series A preferred stock, our Board may choose not to declare dividends on our capital stock. In addition, financing agreements that we may enter into in the future may limit our ability to pay cash dividends. Fluctuations in exchange rates could adversely affect our business and the value of our securities.

 

The value of our common stock will be indirectly affected by the foreign exchange rate between the U.S. dollar and RMB and between those currencies and other currencies in which our sales may be denominated. Appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividend we issue that will be exchanged into U.S. dollars, as well as earnings from, and the value of, any U.S. dollar-denominated investments we make in the future.

 

Since July 2005, the RMB has no longer been pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.

 

Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

There were no unregistered sales of equity securities during the fiscal quarter ended September 30, 2018, other than those that were previously reported in our Current Reports on Form 8-K.

 

Item 3. Defaults Upon Senior Securities

 

There were no defaults upon senior securities during the fiscal quarter ended September 30, 2018.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

Not applicable.

 

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Item 6. Exhibits

 

The following documents are filed, or incorporated by reference, as applicable, as part of this report on Form 10-Q:

 

Exhibit   
No.  Description
10.1†  Purchase and Sale Agreement, dated July 11, 2018, by and between Seven Stars Cloud Group, Inc. and the State of Connecticut.
10.2  Assistance Agreement, dated July 11, 2018, by and between Seven Stars Cloud Group, Inc. and the State of Connecticut.
10.3  Share Purchase & Option Agreement, dated July 24, 2018, by and between Seven Stars Cloud Group, Inc. and Star Thrive Group Limited
10.4  Agreement and Plan of Merger, dated July 18, 2018, by and among Seven Stars Cloud Group, Inc., Grapevine Logic, Inc., GLI Acquisition Corp., and Mr. Grant Deken, as the representative of the holders of capital stock of Grapevine Logic, Inc.
10.5  Stock Option Agreement, effective August 31, 2018, by and among Seven Stars Cloud Group, Inc and Formalhut Limited
10.6  Employment Agreement, dated September 24, 2018, by and between the Company and Mr. Brett McGonegal
10.7  Amended and Restated Convertible Note Purchase Agreement, dated June 28, 2018, by and between Seven Stars Cloud Group, Inc. and Advantech Capital Investment II Limited
10.8  Convertible Bond Agreement, dated June 28, 2018, by and between Seven Stars Cloud Group, Inc. and Advantech Capital Investment II Limited
10.9†  Amended and Restated 2010 Equity Incentive Plan, dated August 28, 2018
10.10*†  Employment Agreement, dated as of June 1, 2018 by and between the Company and Mr. Federico Tovar
31.1   Certifications of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2   Certifications of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.3     Certifications of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1   Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2   Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.3   Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS   XBRL Instance Document
101.SCH   Taxonomy Extension Schema Document
101.CAL   Taxonomy Extension Calculation Linkbase Document
101.DEF   Taxonomy Extension Definition Linkbase Document
101.LAB   Taxonomy Extension Label Linkbase Document
101.PRE   Taxonomy Extension Presentation Linkbase Document

 

*Incorporated by reference to the Exhibit 10.1 to the Company’s Current Report on Form 8-K filed June 7, 2018.

†Denotes management contract, compensatory plan or arrangement.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on November 14, 2018.

  

Ideanomics, Inc.  
     
By: /s/ Federico Tovar  
     
Name: Federico Tovar  
Title: Chief Financial Officer  
(Principal Financial Officer and an Authorized Officer)   

 

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