TINGO GROUP, INC. This Quarterly Report on Form 10-Q (the "Quarterly Report"), contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other Federal securities laws, and is subject to the safe-harbor created by such Act and laws. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "intend," "plan," "anticipate," "believe," "estimate," "predict," "potential" or "continue," the negative of such terms, or other variations thereon or comparable terminology. The statements herein and their implications are merely predictions and therefore inherently subject to known and unknown risks, uncertainties, assumptions and other factors that may cause actual results to be materially different from those contemplated by the forward-looking statements. Such factors include, but are not limited to changes in economic conditions, government regulations, contract requirements and abilities, competitive pressures and constantly changing technology and market acceptance of our products and services and other risks and uncertainties discussed in this annual Form 10-K report. Such forward-looking statements appear in this Item 2 - "Management's Discussion and Analysis of Financial Condition and Results of Operations," and may appear elsewhere in this Quarterly Report and include, but are not limited to, statements regarding the following:
? our ownership position in Micronet's share capital;
? the impact of COVID-19 on both our operations and financial outlook and those
of Intermediate, Micronet and
? our financing needs and strategies, and our ability to continue to raise
capital in the future;
? our corporate development objectives;
? our financial position and the value of and market for our common stock;
? use of proceeds from any future financing, if any; and
? the sufficiency of our capital resources.
Our business is subject to substantial risks, which increase the uncertainty inherent in the forward-looking statements contained or implied in this report. Except as required by law, we assume no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements. Further information on potential factors that could affect our business is described in ourSEC filing and the risk factors included in Part II, Item IA below. Readers are also urged to carefully review and consider the various disclosures we have made below and in that report. The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and related notes included elsewhere in this Quarterly Report. OverviewMICT, Inc. ("MICT", the "Company", "We", "us", "our") was formed as aDelaware corporation onJanuary 31, 2002 . OnMarch 14, 2013 , we changed our corporate name fromLapis Technologies, Inc. toMicronet Enertec Technologies, Inc. OnJuly 13, 2018 , following the sale of our former subsidiaryEnertec Systems Ltd. , we changed our name fromMicronet Enertec Technologies, Inc. toMICT, Inc. . Our shares have been listed for trading on The Nasdaq Capital Market under the symbol "MICT" sinceApril 29, 2013 .
On
OnDecember 11, 2019 ,Bokefa Petroleum and Gas Co., Ltd ("Bokefa Petroleum") was incorporated inHong Kong as a holding company, and is the wholly-owned subsidiary of BI Intermediate. OnOctober 22, 2020 andMarch 8, 2021 , Bokefa Petroleum established another two holding companies,Shanghai Zheng Zhong Energy Technologies Co., Ltd ("Shanghai Zheng Zhong") and Tianin Bokefa Technology
Co.,
Ltd. ("Bokefa").
34
On June 10, 2020 , MICT Telematics purchased 5,999,996 ordinary shares of
Micronet Ltd. ("Micronet") for aggregate proceeds of New Israeli Shekel ("NIS")
1.8 Million (or $515,000 ) through a tender offer issued by MICT Telematics. As a
result, we have increased our ownership interest in Micronet to 45.53% of
Micronet's issued and outstanding ordinary shares.
Subsequently, on June 23, 2020 we, purchased through public offering consummated
by Micronet on the Tel Aviv Stock Exchange ("TASE"), 10,334,000 of Micronet's
ordinary shares for total consideration of NIS 3,100,200 (or $887,000 ). As a
result, we increased our ownership interest in Micronet to 53.39% of Micronet's
outstanding ordinary shares. MICT applied purchase accounting and began to
consolidate Micronet's operating results into our financial statements beginning
on such date. MICT recognized a $665,000 gain on previously held equity in
Micronet.
On October 11, 2020 , Micronet consummated a public equity offering on the "TASE,
in which the Company purchased 520,600 of Micronet's ordinary shares and 416,480
of Micronet's stock options convertible into 416,480 Micronet ordinary shares
(at a conversion price of NIS 3.5 per share), for total consideration of NIS
4,961,202 (or $1,417,486 ). Following Micronet's offering, including the purchase
of Micronet shares, the exercise of our stock options and additional purchase of
115,851 Micronet shares from an individual seller, our ownership interest in
Micronet was diluted from 53.39% to 50.31% of Micronet's outstanding share
capital. On May 9, 2021 , following the exercise of options by minority
stockholders, the Company's ownership interest was diluted to 49.88% and, as a
result we no longer consolidate Micronet's operating results in our financial
statements. As of May 9, 2021 , the Company accounted for the investment in
Micronet using the equity method of accounting.
Prior to July 1, 2020 , MICT operated primarily through its Israel -based
majority-owned subsidiary, Micronet. Since July 1, 2020 , after MICT completed
its acquisition (the "Acquisition") of GFH Intermediate Holdings Ltd. ("GFHI" or
"Intermediate"), pursuant to that certain agreement and plan of merger entered
into on November 7, 2019 by and between MICT , GFHI, Global Fintech Holding Ltd.
("GFH"), a British Virgin Islands company and the sole shareholder of GFHI, and
MICT Merger Subsidiary Inc. , a British Virgin Islands company and a wholly owned
subsidiary of MICT , as amended and restated on April 15, 2020 (the "Restated
Merger Agreement" or "Merger"), we have been operating in the financial
technology sector. GFHI is a financial technology company with a marketplace in
China , as well as other areas of the world, and is currently in the process of
building various platforms for business opportunities in different verticals and
technology segments in order to capitalize on such technology and business. GFHI
plans to continue to advance its capabilities and technological platforms
through acquisition and licensing technologies to support its growth efforts in
the different market segments. After the Merger, MICT includes the business of
Intermediate, its wholly-owned subsidiary, operating through its operating
subsidiaries, as described herein.
On October 2, 2020 , BI Intermediate entered into a strategic agreement (the
"Strategic Agreement") to acquire the entire share capital of Magpie Securities
Limited ("Magpie"), a Hong Kong based securities and investments firm, for a
total purchase price of approximately $3.0 million ("Purchase Price"). Magpie is
licensed to trade securities on leading exchanges in Hong Kong , the U.S. and
China , including China A-Shares, all of which are the primary target markets for
Company's global fintech business. The Strategic Agreement provided that the
acquisition would be consummated in two phases, an initial purchase whereby 9%
of the share capital of Magpie was acquired and thereafter, the remaining 91% of
Magpie would be purchased by BI Intermediate upon, and subject to, the approval
of the Hong Kong Securities and Futures Commission (SFC), the principal
regulator of Hong Kong's securities and futures markets. On November 11, 2020 ,
BI Intermediate closed on its acquisition of the first 9% and paid 9% of the
Purchase Price. Additionally, pursuant to the Strategic Agreement, upon the
initial closing, BI Intermediate loaned Magpie an amount equivalent to the
remaining 91% of the Purchase Price. Upon closing on the remaining 91%, which
remains subject to SFC approval, the loan would be cancelled, and BI
Intermediate would acquire the remaining 91% of Magpie. The loan was secured
against the pledge of 91% of the share capital of Magpie purchased at such time
by BI Intermediate. The obligations of Magpie, and the seller of the interests
of Magpie, under the loan agreement have been guaranteed by the majority
shareholder of Magpie. On February 26, 2021 , we finalized the acquisition of
Magpie. The acquisition was consummated following the receipt of approval from
the SFC effecting the change in the majority shareholder of Magpie. In
consideration for the entire share capital of Magpie, we paid a total Purchase
Price of $2.947 million (reflecting the net asset value of Magpie estimated at
$2.034 million recorded as a working capital, and a premium $902 thousand that
was recorded as a license in the Intangible assets). The Company, through and
together with the Company's wholly owned subsidiaries, Beijing Magpie Securities
Consulting Services Co., Ltd ("Beijing Magpie") and Shenzhen Magpie Information
Consulting Technology Co., Ltd ("Shenzhen Magpie"), are in the process of
integrating its mobile app supporting platforms with Magpie's licensed trading
assets.
35
Upon completion of the Magpie acquisition, we were able to obtain the licenses
and permits needed for operating our online platform. After we complete the
appropriate system testing to ensure scale and reliability, we will be in a
position to notify the
OnJanuary 1, 2021 , we entered into a transaction through Bokefa, with the shareholders ofGuangxi Zhongtong Insurance Agency Co., Ltd ("Guangxi Zhongtong"), a local Chinese entity with business and operations in the insurance brokerage business. Pursuant to the transaction, we loaned theGuangxi Zhongtong shareholders through a frame work loan (the "GZ Frame Work Loan") in the amount of up toRMB 40 million (approximately$6,125,000 ) ("GZ Frame Work Loan Amount") which is designated, if exercised, to be used as a working capital loan for Guangxi Zhongtong As ofSeptember 30, 2021 , onlyRMB 8,010,000 (approximately$1,243,000 ) was drawn down from the GZ Frame Work Loan for working capital and approximately$857,000 was drawn down for loans to shareholders of Guangxi Zhongtong (as stipulated in the agreement). In consideration for the GZ Frame Work Loan, the parties entered into various additional agreements which include: (i) a pledge agreement pursuant to which the shareholders have pledged their shares for the benefit of Bokefa in order to secure the GZ Frame Work Loan Amount (ii) an exclusive option agreement pursuant to which Bokefa has an exclusive option to purchase the entire shares of Guangxi Zhongtong from the shareholders ("Option Agreement") under such terms set forth therein (which include an exercise price not less than the maximum GZ Frame Work Loan Amount and the right to convert the GZ Frame Work Loan Amount into the purchased shares) (iii) an entrustment agreement and power of attorney agreement pursuant to which the shareholders irrevocably entrusted and appointed Tianjin Bokefa as their proxy and trustee to exercise on their behalf any and all rights under applicable law and the articles of association ofGuangxi Zhongtong in the shareholder's equity interest in Guangxi Zhongtong, and (iv) a business cooperation agreement and a master exclusive service agreement which grants Bokefa rights related to Guangxi Zhongtong's business and operations in order to secure repayment of the GZ Frame Work Loan Amount. This transaction was structured pursuant to a Variable Interest Entity ("VIE") Structure (in which we do not hold the shares). Given our direct ownership in Bokefa and its contractual arrangements with Guangxi Zhongtong, we are regarded as Guangxi Zhongtong's controlling entity and primary beneficiary ofGuangxi Zhongtong's business. We have, therefore, consolidated the financial position and operating results of Guangxi Zhongtong into our consolidated financial statements, using the fair value of the assets and liabilities ofGuangxi Zhongtong, in accordance withU.S. GAAP.Beijing Fucheng Lianbao Technology Co., Ltd ("Beijing Fucheng") is an entity incorporated onDecember 29, 2020 , in which Bokefa owns 24% equity interest with the remaining 76% controlled by Bokefa through VIE agreements. OnFebruary 10, 2021 , Beijing Fucheng acquired all of the shares ofBeijing Yibao Technology Co., Ltd. , ("Beijing Yibao") which holds 100% of the equity interest inBeijing Fucheng Insurance Brokerage Co., Ltd. ("Fucheng Insurance ").Fucheng Insurance is a Chinese insurance brokerage agency and is a nation-wide licensed entity which offers insurance brokerage services for a broad range of insurance products.Fucheng Insurance , with and through their nationwide license, will give us the flexibility to offer and create tailor-made insurance products, leverage customers directly or through distribution partners and procure better deals with both our existing and new insurance company partners.Fucheng Insurance further enables us to accelerate onboarding of new agents onto our platforms all throughoutChina . It also creates the opportunity to promote our business through some ofChina's biggest online portals, which will provide business-to-business-to-consumer (B2B2C) as well as business-to-consumer (B2C) channels. WhenFucheng Insurance initiates its nationwide rollout of its mobile application, it will facilitate access to those portals' vast customer bases, which will also offerMICT'S full suite of insurance products. Beijing Fucheng shares were acquired for approximately$5.7 million , and funded throughMICT . For further information, please refer to Note 7. OnJune 16, 2021 , Micronet announced that it completed a public equity offering on the TASE. Pursuant to the offering, Micronet sold an aggregate of 18,400 securities units (the "Units") at a price ofNIS 14.6 per Unit with each Unit consisting of 100 ordinary shares, 25 series A options and 75 series B options, resulting in the issuance of 1,840,000 ordinary shares, 460,000 series A options and 1,380,000 series B options. Micronet raised total gross proceeds ofNIS 26,864,000 (approximately$8,290,000 ) in the offering. The Company did not participate in the offering, and, as a result, the Company owned 36.95% of the outstanding ordinary shares of Micronet and 26.56% on a fully diluted basis
as ofSeptember 30, 2021 . 36
OnJuly 1, 2021 , Bokefa entered into a transaction with the shareholders ofAll Weather Insurance Agency Co., Ltd ("All Weather"), a local Chinese entity with business and operations in the field of broker insurance (the "Transaction"). Pursuant to the Transaction, Bokefa agreed to provide the All Weather shareholders with a frame work loan (the "AW Frame Work Loan") for a total amount of up toRMB 30 million (approximately$4.7 million ) (the "AW Frame work Loan Amount") which if and as utilized, will be sued for working capital purpose of All Weather. In consideration for the AW Frame Work Loan, the parties entered into various additional agreements which include: (i) a pledge agreement pursuant to which the shareholders pledged their shares for the benefit of Bokefa in order to secure the amount for the AW Frame Work Loan Amount (ii) an exclusive option agreement pursuant to which Bokefa has an exclusive option to purchase the entire issued and outstanding common shares of All Weather from the Shareholders ("Option Agreement") under such terms set forth in the Option Agreement (which include an exercise price not less than the maximum AW Frame Work Loan Amount and the right to convert the AW Frame Work Loan Amount into the purchased shares) (iii) an entrustment agreement and power of attorney agreement pursuant to which the shareholders irrevocably entrusted and appointed Bokefa as their proxy and trustee to exercise on their behalf any and all rights under applicable law and the articles of association of All Weather in the shareholder's equity interest in All Weather, and (iv) a business cooperation agreement and a master exclusive service agreement which grants Bokefa rights related to All Weather's business and operations in order to secure repayment of the AW Frame Work Loan Amount. The Transaction above was structured pursuant to a VIE structure (pursuant to which we do not technically hold the shares) and as a result of our direct ownership in Bokefa and its contractual arrangements with All Weather, we are regarded as All Weather's controlling entity and primary beneficiary of All Weather's business. OnOctober 27, 2021 , the entire AW Frame Work Loan Amount was utilized by the All Weather shareholders and was transferred to All Weather for purpose of working capital. In addition, as ofSeptember 30, 2021 , the Company granted the All Weather shareholders an additional loan in the sum of approximately$776,000 , to be provided in advance to a transaction between the parties pursuant to which the VIE structure described above shall be replaced by an equity structure for the purchase byMICT of such equity interests in All Weather at such commercial and other terms to be agreed by the parties. OnAugust 23, 2021 , Beijing Yibao, Guangxi Zhongtong, and two shareholders of Guangxi Zhongtong entered into a capital increase agreement, pursuant to which Beijing Yibao will invest approximatelyRMB30 million (USD 4.7 million ) into Guangxi Zhongtong. OnOctober 21, 2021 , Yibao transferred such funds and the transaction closed. As a result of the transaction, Yiabo now holds a sixty percent (60%) equity interest in Guangxi Zhongtong and is the controlling shareholder. As a condition of the closing, the previous agreements consummated onJanuary 1, 2021 per the GZ Frame Work Loan became null and void. From January throughSeptember 2021 ,Shenzhen Bokefa Technology Co., Ltd ("Shenzhen Bokefa") andTianjin Dibao Technology Co., Ltd ("Tianjin Dibao") were established under BI Intermediate as holding companies to further develop the Company's business inChina . Our current business, following the completion of the Acquisition, is primarily comprised and focused on the growth and development of the GFHI financial technology offering and the marketplace inChina . We are in the process of building various platforms for business opportunities in different verticals and technology segments in order to capitalize on such technology and business. As a result of our Acquisition of GFHI and the subsequent work we have undertaken with the management of Intermediate, we are positioned to establish ourselves, through our operating subsidiaries, to serve the markets as a financial technology company with a significant Chinese marketplace. We plan to expand on a global level as we continue to scale our business. GFHI has built various platforms to capitalize on business opportunities in a range of verticals and technology segments, which currently include stock trading and wealth management, commodities in segments of oil and gas trading and insurance brokerage. We are seeking to secure material contracts in all of these market segments inChina while also developing opportunities in order to allow GFHI access to these markets. We will continue to increase the capabilities of our platforms through acquisition and/or licensing different technologies to support our efforts. By building secure, reliable and scalable platforms with high volume processing capability, we intend to provide customized solutions that address the needs of a highly diverse and broad client base. 37
We implemented our plans by capitalizing on Intermediate's experience with local markets inChina , as well as with the Company's operating subsidiaries, which have begun to secure material contracts in fast growing market segments inChina .
Our current opportunities have given us access the following market segments:
? Stock trading and wealth management segment;
? Commodities in the field of Oil and gas trading segment; and
? Insurance brokerage segment
These opportunities will continue to be realized and executed through our business development efforts, which include the acquisition of potential target entities, business and assets (such as applicable required licenses) in the relevant business space and segments in which we plan to operate. This allows the Company to enter into the market quickly and leverage existing assets in order to promote our growth strategy.
VIE agreements with Guangxi Zhongtong:
On
Loan Agreement Pursuant to this agreement, Bokefa agreed to provide a loan to the registered shareholders of Guangxi Zhongtong. The effective term of the loan agreement is unlimited, and the agreement shall terminate when the shareholders repay the loan. The loan should be used solely for Guangxi Zhongtong's operating expenses, and should be exclusively repaid by transferring shares of Guangxi Zhongtong to Bokefa when PRC Law permits. Exclusive Option Agreement The effective term of the agreement is unlimited and the agreement shall terminate upon the transfer of all the equity interest of Guangxi Zhongtong to Bokefa in accordance with relevant laws and provisions as provided in the agreement, or upon written notice by Bokefa to the shareholders. In consideration of Bokefa's loan arrangement, the shareholders have agreed to grant Bokefa an exclusive option to purchase their equity interest. Distribution of residual profits, if any, are restricted without the approval of Bokefa. Upon request by Bokefa, Guangxi Zhongtong is obligated to distribute profits to the shareholders of Guangxi Zhongtong, who must remit such profits to Bokefa immediately. Guangxi Zhongtong and its shareholders are required to act in a manner that is in the best interest of Bokefa with regards toGuangxi Zhongtong's business operation. Equity Pledge Agreement The agreement will be terminated upon such date when the other agreements have been terminated. Pursuant to the agreement, the nominee shareholder pledged all its equity interest in Guangxi Zhongtong to Bokefa as security for their obligations pursuant to the other agreements. Bokefa has the right to receive dividends on the pledged shares, and all shareholders are required to act in a manner that is in the best interest of Bokefa.
Business Cooperation Agreement
The agreement is effective until terminated by both parties. Guangxi Zhongtong
and its shareholders agree that the legal person, directors, general manager and
other senior officers of Guangxi Zhongtong should be appointed or elected by
Bokefa. Guangxi Zhongtong and its shareholders agree that all the financial and
operational decisions for Guangxi Zhongtong will be made by Bokefa.
38
Exclusive Service Agreement
The effective term of this agreement is for one year and it can be extended an unlimited number of times if agreed by both parties. Bokefa agrees to provide exclusive technical consulting and support services to Guangxi Zhongtong and Guangxi Zhongtong agrees to pay service fees to Bokefa.
Entrustment and Power of Attorney Agreement
The shareholders of Guangxi Zhongtong agreed to entrust all the rights to exercise their voting power and any other rights as shareholders ofGuangxi Zhongtong to Bokefa. The shareholders of Guangxi Zhongtong have each executed an irrevocable power of attorney to appoint Bokefa as their attorney-in-fact to vote on their behalf on all matters requiring shareholder approval. The agreement is effective until deregistration of Guangxi Zhongtong.
VIE agreements with Beijing Fucheng:
OnDecember 31, 2020 , Bokefa, Beijing Fucheng, and shareholders of Beijing Fucheng entered into six agreements, described below, pursuant to which Bokefa is deemed to have a controlling financial interest and be the primary beneficiary of Beijing Fucheng. Therefore, Beijing Fucheng is deemed a VIE of Bokefa. Beijing Fucheng was incorporated onDecember 29, 2020 and had no assets or liabilities as ofDecember 31, 2020 . Loan Agreement Pursuant to this agreement, Bokefa agreed to provide a loan to the registered shareholders of Beijing Fucheng. The effective term of the loan agreement is unlimited, and the agreement terminates when the shareholders repay the loan. The loan should be used solely for Beijing Fucheng's operating expenses, and should be exclusively repaid by transferring shares of Beijing Fucheng to Bokefa when PRC Law permits. Exclusive Option Agreement The effective term of the agreement is unlimited and the agreement shall terminate upon the transfer of all of the equity interest of Bejing Fucheng to Bokefa in accordance with relevant laws and provisions as provided in the agreement, or upon written notice by Bokefa to the shareholders. In consideration for Bokefa's loan arrangement, the shareholders have agreed to grant Bokefa an exclusive option to purchase their equity interest. Distribution of residual profits, if any, is restricted without the approval of Bokefa. Upon request by Bokefa, Beijing Fucheng is obligated to distribute profits to the shareholders of Beijing Fucheng, who must remit those profits to Bokefa immediately. Beijing Fucheng and its shareholders are required to act in a manner that is in the best interest of Bokefa with regards to Beijing Fucheng's business operations. Equity Pledge Agreement
The agreement will be terminated at the date when the other agreements have been terminated. Pursuant to the agreement, the shareholders pledged all their equity interest in Beijing Fucheng to Bokefa as security its obligations under the agreements. Bokefa has the right to receive dividends of the pledged shares, and all shareholders are required to act in a manner that is in the best interest of Bokefa.
Business Cooperation Agreement
The agreement is effective until terminated by both parties. Beijing Fucheng and
its shareholders agree that the legal person, directors, general manager and
other senior officers of Beijing Fucheng should be appointed or elected by
Bokefa. Beijing Fucheng and its shareholders agree that all financial and
operational decisions of Beijing Fucheng will be made by Bokefa.
39
Exclusive Service Agreement
The effective term of this agreement is for one year and it can be extended an unlimited number of times if agreed by both parties. Bokefa agrees to provide exclusive technical consulting and support services to Beijing Fucheng and Beijing Fucheng agrees to pay service fees to Bokefa.
VIE agreements with All Weather:
OnJuly 1, 2021 , Bokefa, All Weather, and nominee shareholders of All Weather entered into six agreements, described below, pursuant to which Bokefa is deemed to have a controlling financial interest and be the primary beneficiary of All Weather. All Weather is deemed a VIE of Bokefa Loan Agreement Pursuant to this agreement, Bokefa agreed to provide a loan to the registered shareholders of All Weather. The effective term of the loan agreement is unlimited, and the agreement shall terminate when the shareholders repay the loan. The loan should be used solely by All Weather for operating expenses, and should be exclusively repaid by transferring shares of All Weather to Bokefa when PRC Law permits. Exclusive Option Agreement The effective term of the agreement is unlimited and the agreement shall terminate upon the transfer of all of the equity interest of All Weather to Bokefa in accordance with relevant laws and provisions in the agreement, or upon written notice by Bokefa to the shareholders. In consideration for Bokefa's loan arrangement, the shareholders have agreed to grant Bokefa an exclusive option to purchase their equity interest. Distribution of residual profits, if any, is restricted without the approval of Bokefa. Upon request by Bokefa, All Weather is obligated to distribute profits to the shareholders of All Weather, who must remit the profits to Bokefa immediately. All Weather and its shareholders are required to act in a manner that is in the best interest of Bokefa with regard to All Weather's business operations. Equity Pledge Agreement
The agreement will be terminated at the date when the other agreements have been terminated. Pursuant to the agreement, the nominee shareholders pledged all of their equity interest in All Weather to Bokefa as security for their obligations pursuant to the other agreements. Bokefa has the right to receive dividends on the pledged shares, and all shareholders are required to act in a manner that is in the best interest of Bokefa.
Business Cooperation Agreement
The agreement is effective until terminated by both parties. All Weather and its shareholders agree that the legal person, directors, general manager and other senior officers of All Weather should be appointed or elected by Bokefa. All Weather and its shareholders agree that all the financial and operational decisions of All Weather will be made by Bokefa. Exclusive Service Agreement
The effective term of this agreement is for one year and it can be extended an unlimited number of times if agreed by both parties. Bokefa agrees to provide exclusive technical consulting and support services to All Weather and All Weather agrees to pay service fees to Bokefa.
Entrustment and Power of Attorney Agreement
The shareholders of All Weather agreed to entrust all their rights to exercise
their voting power and any other rights as shareholders of All Weather to
Bokefa. The shareholders of All Weather have each executed an irrevocable power
of attorney to appoint Bokefa as their attorney-in-fact to vote on their behalf
on all matters requiring shareholder approval. The agreement is effective until
the deregistration of All Weather.
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Non-GAAP Financial Measures
In addition to providing financial measurements based on generally accepted accounting principles in theU.S. , or GAAP, we provide additional financial metrics that are not prepared in accordance with GAAP, or non-GAAP financial measures. Management uses non-GAAP financial measures, in addition to GAAP financial measures, to understand and compare operating results across accounting periods, for financial and operational decision making, for planning and forecasting purposes and to evaluate our financial performance. Management believes that these non-GAAP financial measures reflect our ongoing business in a manner that allows for meaningful comparisons and analysis of trends in our business, as they exclude expenses and gains that are not reflective of our ongoing operating results. Management also believes that these non-GAAP financial measures provide useful information to investors in understanding and evaluating our operating results and future prospects in the same manner as management and in comparing financial results across accounting periods and to those of peer companies.
The non-GAAP financial measures do not replace the presentation of our GAAP financial results and should only be used as a supplement to, not as a substitute for, our financial results presented in accordance with GAAP.
The non-GAAP adjustments, and the basis for excluding them from non-GAAP financial measures, are outlined below:
? Amortization of acquired intangible assets - We are required to amortize the
intangible assets, included in our GAAP financial statements, related to the
Transaction and the Acquisition. The amount of an acquisition's purchase price
allocated to intangible assets and term of its related amortization are unique
to these transactions. The amortization of acquired intangible assets are
non-cash charges. We believe that such charges do not reflect our operational
performance. Therefore, we exclude amortization of acquired intangible assets
to provide investors with a consistent basis for comparing pre- and
post-transaction operating results.
? Expenses related to the settlement agreements - These expenses relate to a
settlement agreement as described in part III -Item 1. Legal Proceedings of
this reports. We believe that these expenses do not reflect our operational
performance. Therefore, we exclude them to provide the investors with a
consistent basis for comparing pre- and post-transaction operating results.
? Stock-based compensation - is share based awards granted to certain
individuals. They are non-cash and affected by our historical stock prices
which are irrelevant to forward-looking analyses and are not necessarily linked
to our operational performance.
? Options-based compensation - Refers to compensation components which includes
stock options awards granted to certain employees, officers, directors or
consultants of the Company. This is a non cash personal compensation component
for our employees, officers, directors or consultants and its cost to the
Company is calculated based on B&S. This these costs attributed to the grant of
stock options are irrelevant to the forward-looking analyses and are not necessarily linked to our operational performance. The following table reconciles, for the periods presented, GAAP net loss attributable toMICT to non-GAAP net income attributable toMICT . and GAAP loss per diluted share attributable toMICT to non-GAAP net loss per diluted share attributable toMICT .: Nine months endedSeptember 30 , (Dollars in Thousands, other than share and per share amounts) 2021 2020
GAAP net loss attributable to MICT, Inc.$ (28,185 ) $ (15,559 ) Amortization of acquired intangible assets 2,301 778 Expenses related to settlement agreements 566 - Expenses related to beneficial conversion feature expense - 8,482 Expenses related to purchase of a business - 1,295 Options- based compensation 585 - Stock-based compensation 9,869 2,675 Income tax-effect of above non-GAAP adjustments (604 ) (199 ) Total Non-GAAP net loss attributable toMICT, Inc.
Non-GAAP net loss per diluted share attributable to MICT, Inc.$ (0.15 ) $ (0.16 ) Weighted average common shares outstanding used in per share calculations 109,222,674 15,048,644 GAAP net loss per diluted share attributable to MICT, Inc.$ (0.26 ) $ (1.03 ) Weighted average common shares outstanding used in per share calculations
109,222,674 15,048,644
41
Three months ended
September 30 ,
(Dollars in Thousands,
other than share and
per share amounts)
2021 2020GAAP net loss attributable to MICT, Inc.$ (5,328 ) $ (14,151 ) Amortization of acquired intangible assets 733 788 Expenses related to beneficial conversion feature expense - 8,482 Expenses related to purchase of a business - 935 Expenses related to settlement agreements 34 - Options- based compensation 127 - Stock-based compensation 1,501 2,584 Income tax-effect of above non-GAAP adjustments (190 ) (199 ) Total Non-GAAP net loss attributable toMICT, Inc.
Non-GAAP net loss per diluted share attributable to MICT, Inc.$ (0.03 ) $ (0.07 ) Weighted average common shares outstanding used in per share calculations 121,419,308 22,832,683 GAAP net loss per diluted share attributable to MICT, Inc.$ (0.05 ) $ (0.61 ) Weighted average common shares outstanding used in per share calculations
121,419,308 22,832,683 Results of Operations
Three and Nine Months Ended
As ofJune 23, 2020 , we increased our ownership interest in Micronet to over 50% and started to consolidate Micronet's operations into our financial statements up untilMay 9, 2021 when our ownership in Micronet was diluted to less than 50%. In addition, onJuly 1, 2020 , we completed a merger transaction for the Acquisition of GFHI. We are consolidating the financial results of GFHI as of the date the Acquisition and for the period thereafter. BeginningDecember 2020 , we launched our insurance platform operated by GFHI for the Chinese market and have been generating revenues in GFHI in this segment of our operations. During the first quarter of 2021, as described above, we entered into a certain transaction withGuang Xi Zhong Tong ,Beijing Fucheng Lianbao Technology Co., Ltd. and completed the acquisition of Magpie, which operates in the field of securities trading platforms. As a result of these transactions, we have started to consolidate the financial results of these companies and business lines into our business. OnJuly 1, 2021 , we entered into a VIE transaction with All Weather and started to consolidate the financial results and business lines of All Weather into our business once the transaction was consummated.
These business activities conducted by
Revenues Net revenues for the three and nine months endedSeptember 30, 2021 were$18,515,000 and$39,791,000 , respectively, compared to$349,000 and$349,000 for the three and nine months endedSeptember 30, 2020 , respectively. This represents an increase of$18,166,000 and$39,442,000 , respectively, for the three and nine months endedSeptember 30, 2021 , respectively. Net revenues related to the MRM segment for the three and nine months endedSeptember 30, 2021 were$0 and$726,000 , respectively, as compared to$349,000 and$349,000 for the three and nine months endedSeptember 30, 2020 and reflects a decrease of$349,000 and an increase of$377,000 for the three and nine months endedSeptember 30, 2021 , respectively. MRM revenues were solely contributed by Micronet. The changes is attributed to the consolidation of the MRM Segment (Micronet) results as of the second quarter of 2020 and the dilution in our ownership and voting interests in Micronet, causing us to cease consolidating Micronet's operations in our financial statements commencing fromMay 9, 2021 . Micronet did not generate any revenue during the second quarter of 2020 or since the beginning of the second quarter of 2021 until its deconsolidation. 42
Net revenues related to the verticals and technology segment for the three and nine months endedSeptember 30, 2021 were$18,515,000 and$39,065,000 , respectively, as compared to no revenues for the three and nine months endedSeptember 30, 2020 , and reflects an increase of$18,515,000 and$39,065,000 , respectively, for the three and nine months endedSeptember 30, 2021 . The increase is attributed to the consolidation of the GFHI results as ofJuly 1, 2020 and revenues generated as a result of certain commercial and business combination transaction entered by the Company during 2021 (as further detailed above). Cost of revenues Cost of revenues for the three and nine months endedSeptember 30, 2021 were$15,769,000 and$34,436,000 , respectively, compared to$347,000 and$347,000 for the three and nine months endedSeptember 30, 2020 , respectively. This represents an increase of$15,422,000 and$34,089,000 , respectively, for the three and nine months endedSeptember 30, 2021 as compared to the same period last year. Cost of revenues related to the MRM segment for the three and nine months endedSeptember 30, 2021 were$0 and$716,000 , respectively, as compared to$347,000 and$347,000 for the three and nine months endedSeptember 30, 2020 and reflects a decrease of$347,000 and an increase of$369,000 , respectively, for the three and nine months endedSeptember 30, 2021 . The change is attributed to the consolidation of the MRM segment (Micronet) results as of the second quarter of 2020 and the dilution in our ownership and voting interests in Micronet, causing us to cease consolidating Micronet's operations in our financial statements commencing fromMay 9, 2021 . Cost of revenues related to the verticals and technology segment for the three and nine months endedSeptember 30, 2021 , respectively, were$15,769,000 and$33,720,000 , as compared to$0 and$0 for the three and nine months endedSeptember 30, 2020 , respectively, and reflects an increase of$15,769,000 and$33,720,000 , for the three and nine months endedSeptember 30, 2021 , respectively. The increase is attributed to the commercial and business combination transaction entered by the Company during the first quarter of
2021 (as further detailed above). Gross profit Gross profit for the three and nine months endedSeptember 30, 2021 were$2,746,000 and$5,355,000 , respectively, and represents 15% and 13% of the revenues, respectively. This is in comparison to gross profit of$2,000 and$2,000 for the three and nine months endedSeptember 30, 2020 , respectively. With the transactions and development of our vertical and technology segment and the online stock trading platform segment, our gross profit increased accordingly.
Selling and Marketing Expenses
Selling and Marketing expenses are part of operating expenses. Selling and marketing cost for the three and nine months endedSeptember 30, 2021 , were$1,521,000 and$3,874,000 , respectively, as compared to expenses of$69,000 and$69,000 for three and nine months endedSeptember 30, 2020 , respectively. This represents an increase of$1,452,000 and$3,805,000 , respectively, for the three and nine months endedSeptember 30, 2021 as compared to the same period last year. The increase is attributed to the consolidation of the GFH results as ofJuly 1, 2020 and expenses generated as a result of certain commercial and business combination transaction entered by the Company during 2021 (as further detailed above).
General and Administrative Expenses
General and administrative expenses are part of operating expenses. General and administrative expenses for the three and nine months endedSeptember 30, 2021 were$6,618,000 and$26,039,000 , respectively, compared to$4,899,000 and$6,337,000 for the three and nine months endedSeptember 30, 2020 , respectively. This represents an increase of$1,719,000 and$19,702,000 , respectively, for the three and nine months endedSeptember 30, 2021 as compared to the same period last year. The increase is mainly a result of (i) the acquisitions as noted above, and (ii) an increase in retainer for professional advice from various services providers, in connection with the completion of the public offering closed inFebruary 2021 andMarch 2021 ; and (iii) an increase associated with the D&O insurance (iv) issuance costs of shares and options to Directors officers and employees. 43
Research and Development Expenses
Research and development expenses are part of operating expenses. Research and development costs, which mainly include wages, materials and sub-contractors, for the three and nine months endedSeptember 30, 2021 were$396,000 and$1,015,000 , respectively, compared to$230,000 and$230,000 for the three and nine months endedSeptember 30, 2020 , respectively. This represents an increase of$166,000 and$785,000 , for the three and nine months endedSeptember 30, 2021 , respectively, as compared to the same period last year. The increase is attributed to the consolidation of the GFH results as ofJuly 1, 2020 and the dilution in our ownership and voting interests in Micronet, causing us to cease consolidating Micronet's operations in our financial statements commencing fromMay 9, 2021 (as further detailed above). Loss from Operations
Our loss from operations for the three and nine months endedSeptember 30, 2021 were$6,521,000 and$27,874,000 , respectively, compared to loss from operations of$6,016,000 and$7,454,000 , for the three and nine months endedSeptember 30, 2020 , respectively. The increase in loss from operations is mainly a result of the acquisitions as mention above, as well as the increase in general and administrative costs and increase in selling and marketing costs as explained in the section above. Financial Expenses, net Financial income (expenses), net for the three and nine months endedSeptember 30, 2021 were$336,000 and$61,000 compared to$(8,960,000) and$(8,803,000) for the three and nine months endedSeptember 30, 2020 , respectively. This represents a decrease in financial expenses of$9,296,000 and$8,864,000 , for the three and nine months endedSeptember 30, 2021 . The decrease in financial expenses, net for the nine months endedSeptember 30, 2021 , is primarily due to the recognition of beneficial conversion expense of approximately$8,482,000 in 2020.
Net Income (Loss) Attributed to
Our net loss attributed toMICT, Inc. for the three and nine months endedSeptember 30, 2021 , respectively, was$5,328,000 and$28,185,000 , compared to 14,151,000 and$15,559,000 , for the three and nine months endedSeptember 30, 2020 , respectively. This represents a decrease of$8,823,000 and increase of$12,626,000 for the three and nine months endedSeptember 30, 2021 , respectively, as compared to the same period last year. The change for the three and nine months endedSeptember 30, 2021 is mainly a result of the increase in operating expenses on the one hand, and on the other hand we can see an increase in revenues.
Liquidity and Capital Resources
As ofSeptember 30, 2021 , our total cash balance was$105,289,000 , as compared to$29,049,000 as ofDecember 31, 2020 . This reflects an increase of$76,240,000 in cash for the reasons described below. Sales of our Securities OnNovember 2, 2020 the Company entered into a Securities Purchase Agreement (the "Purchase Agreement") with certain investors for the purpose of raising$25.0 million in gross proceeds for the Company (the "Offering"). Pursuant to the terms of the Purchase Agreement, the Company sold in a registered direct offering, an aggregate of 10,000,000 units (each, a "Unit"), with each Unit consisting of one share of the Company's common stock, par value$0.001 per share, and one warrant to purchase 0.8 of one share of common stock at a purchase price of$2.50 per Unit. The warrants are exercisable nine months after the date of issuance at an exercise price of$3.12 per share and will expire five years following the date the warrants become exercisable. The closing of the sale of Units pursuant to the Purchase Agreement occurred onNovember 4, 2020 . ByDecember 31, 2020 , the Company had received a total of$22.325 million in gross proceeds pursuant to Offering and issued in the aggregate, 7,600,000 Units. The remaining gross proceeds, in the additional aggregate amount of$2.675 million , were received by the Company onMarch 1, 2021 and in consideration for such proceeds, the Company issued the remaining 2,400,000 units. OnFebruary 11, 2021 , the Company announced that it has entered into a securities purchase agreement (the "February Purchase Agreement") with certain institutional investors for the sale of (i) 22,471,904 shares of common stock, (ii) 22,471,904 Series A warrants to purchase 22,471,904 shares of common stock and (iii) 11,235,952 Series B warrants to purchase 11,235,952 shares of common stock at a combined purchase price of$2.67 (the "February Offering"). The gross proceeds to the Company from the February Offering were expected to be approximately$60.0 million . The Series A warrants are exercisable nine months after the date of issuance, have an exercise price of$2.80 per share and will expire five and one-half years from the date of issuance. The Series B warrants are exercisable nine months after the date of issuance, have an exercise price of$2.80 per share and will expire three and one-half years from the date of issuance. The Company received net proceeds of$54.0 million onFebruary 16, 2021 after deducting the placement agent's fees and other expenses. 44
OnMarch 2, 2021 , the Company entered into a securities purchase agreement (the "March Purchase Agreement") with certain investors for the purpose of raising approximately$54.0 million in gross proceeds for the Company. Pursuant to the terms of the March Purchase Agreement, the Company agreed to sell, in a registered direct offering, an aggregate of 19,285,715 shares of the Company's common stock, par value$0.001 per share, at a purchase price of$2.675 per Share and in a concurrent private placement, warrants to purchase an aggregate of 19,285,715 shares of common stock, at a purchase price of$0.125 per warrant, for a combined purchase price per share and warrant of$2.80 which was priced at the market under Nasdaq rules. The warrants are immediately exercisable at an exercise price of$2.80 per share, subject to adjustment, and expire five years after the issuance date. The closing date for the March Purchase Agreement was onMarch 4, 2021 . The Company received net proceeds of$48.69 million onMarch 4, 2021 , after deducting the placement agent's fees and other expenses. Loans Provided byMICT
OnNovember 13, 2019 , the Company and Micronet executed a convertible loan agreement pursuant to which the Company agreed to loan Micronet$500,000 (the "Convertible Loan"). The Convertible Loan bears interest at a rate of 3.95% calculated and paid on a quarterly basis. In addition, the Convertible Loan, if not converted, shall be repaid in four equal installments, the first of such installment payable following the fifth quarter after the issuance of the Convertible Loan, with the remaining three installments due on each subsequent quarter thereafter, such that the Convertible Loan shall be repaid in full upon the lapse of 24 months from its issuance. In addition, the outstanding principal balance of the Convertible Loan, and all accrued and unpaid interest, is convertible at the Company's option, at a conversion price equal to0.38 NIS per Micronet share. Pursuant to the Convertible Loan agreement, Micronet also agreed to issue the Company an option to purchase one of Micronet's ordinary shares for each ordinary share that it issued as a result of a conversion of the Convertible Loan at an exercise price of0.60 NIS per share, exercisable for a period of 15 months. OnJuly 5, 2020 , Micronet had a reverse split where the price of the Convertible Loan changed from0.08 NIS per Micronet share into5.7 NIS per Micronet share. The option's exercise price changed from0.6 NIS per share to9 NIS per Micronet share.
On
OnAugust 13, 2020 , MICT Telematics extended to Micronet an additional loan in the aggregate amount of$175,000 (the "Third Loan") which governed the existing outstanding intercompany debt. The Third Loan does not bear any interest and has a term of twelve (12) months. The Third Loan was extended for the purpose of supporting Micronet's working capital and general corporate needs. The loan
was repaid onAugust 25, 2021 . Debt Repayment For the nine months endedSeptember 30, 2021 , our total debt was$0 as compared to$884,000 for the year endedDecember 31, 2020 . The change in total debt is primarily due to the dilution in our ownership and voting interests in Micronet, causing us to cease consolidating Micronet's operations in our financial statements commencing fromMay 9, 2021 .
Total Current Assets,
For the nine months ended
Our trade accounts receivable for the nine months endedSeptember 30, 2021 , were$20,644,000 as compared to$523,000 for the year endedDecember 31, 2020 . The increase is due to consolidation ofZhongtong Insurance financial reports.
For the nine months ended
For the
Nine Months Ended
September 30,
2021 2020
USD in thousands USD in thousands
(unaudited) (unaudited)
Net Cash Used in Operating Activities $ (35,081 ) $ (12,201 )
Net Cash Used in Investing Activities (6,487 ) (288 )
Net Cash Provided by Financing Activities 117,601 27,998
Translation adjustment on cash and restricted cash 207 (85 )
Cash and restricted cash at Beginning of Period 29,049 3,199
Cash and restricted cash at end of period $ 105,289 $ 18,623
45
Cash Flow from Operating Activities
For the nine months endedSeptember 30, 2021 , net cash used in operating activities was$35,081,000 , which consists of the net cash used in operating activities of$6,450,000 and with net loss of$28,631,000 . The total net cash used in operating activities primarily consisted of: (1) Stock-based compensation for employees and consultants of$(584,000) , (2) Loss from loss of control in Micronet of$(1,934,000) , (3) gain from equity investment of$636,000 , (4) Depreciation and amortization of$ (2,416,000) , (5) Changes in assets and liabilities of$ 10,748,000 . For the nine months endedSeptember 30, 2020 , net cash used in operating activities was$12,201,000 , which consists of the net cash used in operating activities of$3,820,000 and with net loss of$16,021,000 . The total net cash used in operating activities primarily consisted of: (1) Gain on previously held equity interest in Micronet of$665,000 , (2) Stock-based compensation for employees and consultants of$ (2,675,000) , (3) Loss from equity investment of$(786,000) , (4) Impairment of equity and loan method investment in Micronet of$263,000 , (5) Interest and exchange rate differences on loans of$(16,000) , (6) Depreciation and amortization of$ (890,000) , (7) Changes in assets and liabilities of$(381,000) .
Cash Flow from Investing Activities
For the nine months endedSeptember 30, 2021 , we had net cash used in investing activities of$6,487,000 , which consisted of the net cash used in investing activities of$2,342,000 , deconsolidation of Micronet operations of$2,466,000 , loan to related party of$1,133,000 and purchase of property and equipment of$546,000 . The majority net cash used in investing was for the investment in new companies and expansion of business activities.
For the nine months ended
Cash Flow from Financing Activities
For the nine months endedSeptember 30, 2021 , we had net cash provided by financing activities of$117,601,000 , which primarily consisted of: (1) Proceeds from issuance of shares and warrants of$115,242,000 from our public offering in February andMarch 2021 ; (2) proceeds from the exercise of warrants of$2,554,000 ; (3) Repayment of current maturity of long-term bank loans of$(195,000) . For the nine months endedSeptember 30, 2020 , we had net cash provided by financing activities of$27,998,000 , which primarily consisted of receipt of loans from others, net of$(63,000) and Proceeds from issuance of shares and warrants of$1,612,000 and issuance of convertible preferred shares net of$409,000 . proceeds from the exercise of warrants of$2,366,000 , payment received by convertible notes purchasers$23,674,000 Financing Needs The Company will be required to support its own operational financial needs, which include, among others, our general and administrative costs (such as for our various consultants in regulatory, tax, legal, accounting and other areas of business) and our financing costs related to the loans and funding instruments assumed by us.
We expect the net proceeds from the sale of the securities will be used to fund the growth and development of our business, as well as for working capital and for other general corporate purposes. We may also use a portion of the net proceeds to acquire or invest in businesses, products and technologies that are complementary to our business, but we currently have no commitments or agreements relating to any of these types of transactions. Based on our current business plan, and in view of our cash balance following the transactions described in this Item 2, we anticipate that our cash balances will be sufficient to permit us to conduct our operations and carry out our contemplated business plans for at least the next 12 months from the date of this Report. Critical Accounting Policies Revenue Recognition
InMay 2014 , the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)", or ASU 2014-09. ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance inU.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. We adopted Topic 606 onJanuary 1, 2018 using the modified retrospective transition method, and the adoption did not have a material impact on our consolidated financial statements. We recognize revenue which represents the transfer of goods and services to customers in an amount that reflects the consideration to which we expect to be entitled in such exchange. We identify contractual performance obligations and determines whether revenue should be recognized at a point in time or over time, based on when control of goods and services are provided to customers. 46
We use a five-step model to recognize revenue from customer contracts. The five-step model requires us to (i) identify the contract with the customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur; (iv) allocate the transaction price to the respective performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy the performance obligation. We derive our revenues from sales contracts with our customers with revenues being recognized upon performance of services. Our contracts with customers generally do not include a general right of return relative to the delivered products or services. We applied practical expedient when sales taxes were collected from customers, meaning sales tax is recorded net of revenue, instead of cost of revenue, which are subsequently remitted to governmental authorities and are excluded from the transaction price. With respect to Micronet applicable revenue recognitionU.S. GAAP requirements, Micronet implements a revenue recognition policy pursuant to which it recognizes its revenues at the amount to which it expects to be entitled when control of the products or services is transferred to its customers. Control is generally transferred when the Company has a present right to payment and title and the significant risks and rewards of ownership of products are transferred to its customers. There is limited discretion needed in identifying the point control passes: once physical delivery of the products to the agreed location has occurred, Micronet no longer has physical possession of the product and will be entitled at such time to receive payment while relieved from the significant risks and rewards of the goods delivered. For most of Micronet's products sales, control transfers when products are shipped. The Company's revenues are generated from: a) providing customers with marketing promotion and information drainage services, which is to charge information service fees according to the customer traffic information provided to customers with business needs; b) to providing insurance brokerage services or insurance agency services on behalf of insurance carriers. With respect to the information drainage services and insurance brokerage services applicable to revenue recognitionU.S. GAAP requirements, the company implements a revenue recognition policy pursuant to which it recognizes its revenues at the amount to which it expects to be entitled when control of the products or services is transferred to its customers. Control is generally transferred when the Company has a present right to payment and title and the significant risks and rewards of ownership of products are transferred to its customers. Our performance obligation to the insurance carrier is satisfied and commission revenue is recognized at the point in time when an insurance policy becomes effective. The Company provides customers with information drainage services and settles service charges with customers on the monthly basis. Performance obligation is satisfied overtime during the contract term. In accordance with ASC 606-10-55, Revenue Recognition: Principal Agent Considerations, the Company considers several factors in determining whether it acts as the principal or as an agent in the arrangement of merchandise sales and provision of various related services and thus whether it is appropriate to record the revenues and the related cost of sales on a gross basis or record the net amount earned as service fees. For insurance brokerage services, we have identified our promise to sell insurance policies on behalf of the insurance carriers as the performance obligation in our contracts with the insurance
carriers. Investments The Company's long-term investments consist of equity investments in privately held entities accounted for using the measurement alternative and equity investments accounted for using the equity method. OnJanuary 1, 2018 , the Company adopted ASU 2016-01 Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. According to the guidance, the Company accounts for the equity investments at fair value, with gains and losses recorded through net earnings. The Company elected to measure certain equity investments without readily determinable fair value at cost, less impairments, plus or minus observable price changes and assess for impairment quarterly. The Company accounts for its equity investment over which it has significant influence but does not own a majority equity interest or otherwise control, using the equity method. The Company adjusts the carrying amount of the investment and recognizes investment income or loss for its share of the earnings or loss of the investee after the date of investment. The Company assesses its equity investment for other-than-temporary impairment by considering factors including, but not limited to, current economic and market conditions, operating performance of the entity, including current earnings trends and undiscounted cash flows, and other entity-specific information. The fair value determination, particularly for investments in a privately held entity, requires judgment to determine appropriate estimates and assumptions. Changes in these estimates and assumptions could affect the calculation of the fair value of the investment and determination of whether any identified impairment is other-than-temporary. 47 Operating leases The Company follows ASC No. 842, Leases. The Company determines if an arrangement is a lease or contains a lease at inception. Operating lease liabilities are recognized based on the present value of the remaining lease payments, discounted using the discount rate for the lease at the commencement date. As the rate implicit in the lease is not readily determinable for the operating lease, the Company generally uses an incremental borrowing rate based on information available at the commencement date to determine the present value of future lease payments. Operating lease right-of-use assets ("ROU assets") represent the Company's right to control the use of an identified asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. ROU assets are generally recognized based on the amount of the initial measurement of the lease liability. Lease expense is recognized on a straight-line basis over the lease term.
ROU assets are reviewed for impairment when indicators of impairment are present. ROU assets from operating and finance leases are subject to the impairment guidance in ASC 360, Property, Plant, and Equipment, as ROU assets are long-lived nonfinancial assets.
ROU assets are tested for impairment individually or as part of an asset group if the cash flows related to the ROU asset are not independent from the cash flows of other assets and liabilities. An asset group is the unit of accounting for long-lived assets to be held and used, which represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities.
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