Indicate by check mark whether
the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control
over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm
that prepared or issued its audit report. ☐
As of June 16, 2022, there
were 129,566,207 shares of the issuer’s common stock outstanding.
This Annual Report on Form
10-K (“Form 10-K”) contains forward-looking statements which are made pursuant to the safe harbor provisions of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
The forward-looking statements in this Form 10-K do not constitute guarantees of future performance and actual results could differ materially
from those contained in the forward-looking statements. These statements are based on current expectations of future events. Such statements
include, but are not limited to, statements about our products, including our newly acquired products, customers, regulatory approvals,
the potential utility of and market for our products and services, our ability to implement our business strategy and anticipated business
and operations, future financial and operational performance, our anticipated future growth strategy, including the potential merger with
Tingo, Inc or the acquisition of other companies or technologies, capital requirements, intellectual property, suppliers, joint venture
partners, future financial and operating results, the impact of the COVID-19 pandemic, plans, objectives, expectations and intentions,
revenues, costs and expenses, interest rates, outcome of contingencies, business strategies, regulatory filings and requirements, the
estimated potential size of markets, capital requirements, the terms of any capital financing agreements and other statements that are
not historical facts. You can find many of these statements by looking for words like “believes,” “expects,” “anticipates,”
“estimates,” “may,” “should,” “will,” “could,” “plan,” “intend,”
or similar expressions in this Form 10-K. We intend that such forward-looking statements be subject to the safe harbors created thereby.
PART
I
Item 1. Business.
MICT, Inc. (“MICT”,
the “Company”, “we”, “us”, “our”) was formed as a Delaware corporation on January 31,
2002 under the name Lapis Technologies, Inc. On March 14, 2013, we changed our corporate name to Micronet Enertec Technologies, Inc. On
July 13, 2018, following the sale of our former subsidiary, Enertec Systems Ltd., we changed our name to MICT, Inc. Our shares have been
listed for trading on The Nasdaq Capital Market under the symbol “MICT” since April 29, 2013.
MICT is a holding company
conducting financial technology business through its subsidiaries and entities controlled through various VIE arrangements (“VIE
entities”). The company is principally focused on developing insurance broker business and products across approximately 120 cities
in China through its subsidiaries and VIE entities, with planned expansion into additional markets. The company has developed highly scalable
proprietary platforms for insurance products (B2B, B2B2C and B2C) and financial services/products (B2C), the technology for which is highly
adaptable for other applications and markets. MICT through its subsidiaries has also acquired and holds the requisite license and approvals
with the Hong Kong Securities and Futures Commission to deal in securities and provide securities advisory and asset management services.
MICT also has memberships/registrations with the Hong Kong Stock Exchange, the London Stock Exchange and the requisite Hong Kong and China
Direct clearing companies. MICT’s financial services business and first financial services product, the Magpie Invest app, is able
to trade securities on NASDAQ, NYSE, TMX, HKSE, China Stock Connect, LSE, the Frankfurt Stock Exchange and the Paris Stock Exchange.
Since July 1, 2020,
after MICT completed its acquisition of GFHI (the “GFHI Acquisition”) 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 GFH Intermediate Holdings Ltd. (“GFHI” or “Intermediate”), and
MICT Merger Subsidiary Inc., a British Virgin Islands company and a wholly owned subsidiary of MICT (“Merger Sub”), 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 increase its capabilities and its
technological platforms through acquisition and licensing technologies to support its growth efforts in the different market
segments. After the Merger, MICT included the business of Intermediate, MICT’s wholly-owned subsidiary, operating through
Intermediate operating subsidiaries.
Following Intermediate’s
acquisition of Magpie Securities Limited (“Magpie”), a Hong Kong securities and investment services firm, on February 26,
2021 and the subsequent receipt of regulatory approval from the Hong Kong Securities and Futures Commission, Magpie is licensed to deal
in securities, futures and options, and also undertake the business of securities advisory services and asset management.
Intermediate launched Magpie
Invest, a global stock trading app, on September 15, 2021, through its wholly owned subsidiary, Magpie Securities Limited (“Magpie”).
It is a proprietary technology investment trading platform that is currently operational in Hong Kong. Magpie Invest’s technology
allows the platform to connect to all major stock exchanges and we planned to expand into Australia and Switzerland by Q4 2022.
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. We believe
that this will allow the Company to enter into the market quickly and leverage existing assets in order to promote our growth strategy.
Prior to July 1, 2020, MICT
operated primarily through its Israel-based then majority-owned subsidiary, Micronet. Micronet, through both its Israeli and U.S. operational
offices, designs, develops, manufactures and sells rugged mobile computing devices that provide fleet operators and field workforces with
computing solutions in challenging work environments. Micronet’s vehicle portable tablets are designed to increase workforce productivity
and enhance corporate efficiency by offering computing power and communication capabilities that provide fleet operators with visibility
into vehicle location, fuel usage, speed and mileage. Furthermore, users are able to manage the drivers in various aspects, such as: driver
behavior, driver identification, reporting hours worked, customer/organization working procedures and protocols, route management and
navigation based on tasks and time schedule. End users may also receive real time messages for various services, such as pickup and delivery,
repair and maintenance, status reports, alerts, notices relating to the start and ending of work, digital forms, issuing and printing
of invoices and payments. Through its SmartHub product, Micronet provides its consumers with services such as driver recognition, identifying
and preventing driver fatigue, recognizing driver behavior, preventive maintenance, fuel efficiency and an advanced driver assistance
system. In addition, Micronet provides TSPs a platform to offer services such as “Hours of Service.” Micronet previously commenced
and continues to evaluate integration with other TSPs. On May 9, 2021, following the exercise of options by certain minority stockholders,
the Company’s ownership interest of Micronet was diluted to 49.88% and as a result the Company is no longer required to consolidate
Micronet’s financial statements with the Company’s and include Micronet’s operating results in its financial statements. the
Company owned 36.8% of the outstanding ordinary shares of Micronet and 26.56% on a fully diluted basis as of December 31, 2021.
Potential Merger with
Tingo, Inc.
On May 10, 2022, Tingo, Inc.,
a Nevada corporation (“Tingo” or the “Seller”), entered into an Agreement and Plan of Merger (the “Merger
Agreement”) with MICT Merger Sub, Inc., a Nevada corporation and a wholly-owned subsidiary of MICT (“Merger Sub”), and
MICT, Inc., a Delaware corporation (“MICT”).
Pursuant to the Merger Agreement,
subject to the terms and conditions set forth therein, upon the consummation of the transactions contemplated by the Merger Agreement
(the “Closing”), Merger Sub will merge with and into Tingo (the “Merger” and, together with the other transactions
contemplated by the Merger Agreement, the “Transactions”), with the Seller continuing as the surviving corporation in the
Merger and a wholly-owned subsidiary of MICT. It is expected that current holders of Tingo Shares will own approximately 77% of the total
shares of the post-merger company and the current shareholders of MICT will own the remaining 23% of the Shares of the post-merger company.
Tingo is the leading Agri
fintech company operating in Africa, with a marketplace platform that empowers social upliftment through mobile, technology and financial
access for rural farming communities. Their ‘device as a service’ model allows them to add market leading applications to
enable customers to trade, buy top ups, pay bills, access insurance and lending services. With 9.3 million existing customers, Tingo is
seeking to expand its operations across select markets in Africa. Tingo’s strategic plan is to become the eminent Pan African Agri-Fintech
business delivering social upliftment and financial inclusion to millions of SME farmers and women-led businesses. There can be no assurances
given that the Company will consummate this merger since there are several conditions before the merger could be consummated including,
but not limited to, the approval by the shareholders of the Company and Tingo, Regulatory approvals and other closing conditions.
The following diagram illustrates
the Company’s current corporate structure, including its subsidiaries, and variable interest entities (“VIEs”), as
of December 31, 2021:
![](https://content.edgar-online.com/edgar_conv_img/2022/06/17/0001213900-22-033622_image_001.jpg)
VIE
agreements with Guangxi Zhongtong:
On January 1, 2021, as
amended on August 6, 2021, Bokefa, our wholly foreign-owned enterprise (“WFOE”), Guangxi Zhongtong, and nominee
shareholders of Guangxi Zhongtong entered into six agreements, (together, the “Guangxi Zhongtong VIE Agreements”),
described below, pursuant to which Bokefa is deemed to have controlling financial interest and be the primary beneficiary of Guangxi
Zhogntong. Therefore, Guangxi Zhongtong is deemed a VIE of Bokefa.
Loan
Agreement
Pursuant to this agreement,
Bokefa agreed to provide loans to the registered shareholders of Guangxi Zhongtong. The term of the loan shall start from the date when
the loan is actually paid, until the date on which the loan is repaid in full. 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
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 to Guangxi 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 shareholders
pledged all their equity interest in Guangxi Zhongtong to Bokefa as security for the obligations in 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.
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
of Guangxi 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.
On
August 23, 2021, Beijing Yibao Technology Co., Ltd (“Beijing Yibao”), Guangxi Zhongtong Insurance Agency Co., Ltd (“Guangxi
Zhongtong”), and two shareholders of Guangxi Zhongtong entered into a capital increase agreement pursuant to which Beijing Yibao
will invest approximately RMB30 million (USD 4.7 million) into Guangxi Zhongtong. On October 21, 2021, Beijing Yibao transferred
the funds separately and the transaction closed. As a result of the transaction, Beijing Yibao 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 on January 1, 2021 per the GZ Frame Work Loan became null and void, and the loan should be repaid
by the shareholders before December 31, 2022.
VIE
agreements with Beijing Fucheng:
On December 31, 2020, as amended on August 25, 2021, Bokefa, Beijing
Fucheng Lianbao Technology Co., Ltd. (“Beijing Fucheng”), and the 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 on December 29, 2020 and had no assets
or liabilities as of December 31, 2020.
Loan
Agreement
Pursuant to this agreement,
Bokefa agreed to provide loans to the registered shareholders of Beijing Fucheng. The term of the loan under this agreement shall start
from the date when the loan is actually paid and shall continue until the shareholders repay all the loan in accordance with this agreement.
The agreement shall terminate 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. As of December
31, 2021 the loans were not drawn.
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 for their obligations under the 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. 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.
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.
Entrustment and Power of Attorney Agreement
The shareholders of Beijing
Fucheng agreed to entrust all the rights to exercise their voting power and any other rights as shareholders of Beijing Fucheng to Bokefa.
The shareholders of Beijing Fucheng 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 Beijing Fucheng.
VIE agreements with All Weather:
On
July 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 loans to the shareholders of All Weather. The term of the loan shall start from the
date when the loan is actually paid until the date on which the loan is repaid in full.
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.
MICT’s Insurance Business Platform
The Company is an
holding Company, that operates through its VIEs entities and our subsidiaries, including one insurance brokerage company, Beijing
Fucheng, and two insurance agency companies, All Weather and Guangxi Zhongtong, the Company conducts insurance brokerage and agency
businesses in China and operates an online platform for sales of a wide range of insurance products, including, but not limited to,
automobile insurance, property and liability insurance, life insurance and health insurance, which products are underwritten by over
forty insurance companies in China.
Market Opportunity
China’s insurance brokerage
market has experienced rapid growth due to increased demand for insurance products in the past few years. According to iResearch report,
the total insurance premium in China is expected to grow at a CAGR of 12.9% from 2019 to 2024. China is the second biggest insurance
market in the world. 497 insurance broker companies, which sell insurance policies underwritten by insurance companies and design and
develop insurance products themselves according to customer needs, and 1764 insurance agent companies, which are only licensed to only
sell insurance policies underwritten by insurance, sold insurance products with an aggregate premium amount of 3.98 trillion RMB (approximately
$0.62 trillion) in the year of 2020.
Although the size of China’s
insurance market in terms of insurance premium was the second largest in the world according to the iResearch report, insurance penetration
(defined as insurance premium over GDP) and insurance density (defined as insurance premium per capita) in China were still substantially
lower than those in developed countries, indicating significant growth potentials. According to the 14th Five Year Plan formulated
by the Chinese government, China’s insurance penetration and density are expected to reach 6.8% and RMB6,596 (approximately US$971),
respectively, by 2025.
Driven by the significant
medical protection gap and rising awareness for protection, the Chinese insurance market is expected to reach RMB7.8 trillion by 2024,
representing a CAGR of 12.9% from 2019. Thanks to regulatory tailwinds, growth in household disposable income and increasing awareness
for health protection, Chinese insurance market is expected to continue to maintain the strong growth momentum in the long term.
As set forth in the table
below, the total insurance market in China in 2019 was RMB 4.3 trillion (approximately $0.68 trillion), according to a report by the China
Banking and Insurance Regulatory Commission, which represents a 10% growth in market size from 2018.
|
| |
Property Insurance (Unit: RMB 100 Billion) | | |
Life Insurance (Unit: RMB 100 Billion) | | |
Health Insurance (Unit: RMB 100 Billion) | | |
Accident Insurance (Unit: RMB 100 Billion) | | |
Total (Unit: RMB 100 Billion) |
2018 |
| |
| 10.77 | | |
| 20.72 | | |
| 5.45 | | |
| 1.08 | | |
38.02 |
2019 |
| |
| 11.65 | | |
| 22.75 | | |
| 7.07 | | |
| 1.18 | | |
42.65 |
Local insurance companies
in China only offer a limited range of insurance products, which cannot meet the needs of a 1.4 billion Chinese population, as compared
to the product offerings by U.S. or European insurers in those countries with a smaller population.
Through its regulatory actions,
the Chinese government encourages participation of foreign investors in insurance companies and related businesses. Under the PRC law,
foreign investors are permitted to have up to 100% ownership in insurance companies. Furthermore, foreign joint venture companies may
transact insurance business online and offline.
Products and Services
The Company started to set
up its insurance business team in China in November 2020. The Company entered into VIE Agreements with one insurance brokerage company,
Beijing Fucheng, and two insurance agency companies, All Weather and Guangxi Zhongtong, to conduct its insurance brokerage and agency
businesses. As of the date of this Annual Report, the Company has 120 insurance business branches in China and a business operation team
with approximately 500 employees. In addition, the Company has established collaboration relationships with leading insurance companies
in China, such as The People's Insurance Company of China Limited, Ping An Insurance, Pacific Insurance, Sunshine Insurance and Dadi Insurance.
For the year ended December 31, 2021, the Company generated income from sales of insurance products through insurance agents, which is
the traditional sales model, aka “B (business) to A (agent)” model, and recognized $42.3 million of revenues in this insurance
segment.
The Company sells insurance
products, mainly consisting of automobile insurance, property and liability insurance products, life insurance products and health insurance
products, all of which are underwritten by insurance companies in China.
Automobile Insurance Products
The Company’s primary
insurance products are automobile insurance. The standard automobile insurance policies the Company sells typically have a term of one
year and cover damages caused to the insured vehicle from collision and other traffic accidents, falling or flying objects, fire, explosion
and natural disasters. The Company also sell standard third-party liability insurance policies, which cover bodily injury and property
damage caused in an accident involving an insured vehicle to a person not in the insured vehicle.
Property and Liability Insurance Products
The Company also offers commercial
property insurance and liability insurance products. The commercial property insurance policies the Company sells typically cover damages
to the insured property caused by fire, explosion, thunder and lightning. Comprehensive commercial property insurance policies generally
cover damage, to the insured property caused by fire, explosion and certain natural disasters.
The liability insurance products
the Company sells are primarily product liability and employer’s liability insurance products. These products generally cover losses
to third parties due to the misconduct or negligence of the insured party but exclude losses due to fraud or the willful misconduct of
the insured party.
Life Insurance Products
The life insurance products
the Company offers can be broadly classified into three categories, as set forth below. Due to constant product innovation by insurance
companies, some of the insurance products the Company offers combine features of one or more of the following categories:
|
● |
Individual Whole Life Insurance. The individual whole life insurance products the Company sells provide insurance for the insured’s entire life in exchange for the periodic payment of fixed premiums over a pre-determined period. The face amount of the policy or, for some policies, the face amount plus accumulated interests, is paid upon the death of the insured. |
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Individual Term Life Insurance. The individual term life insurance products the Company sells provide insurance for the insured for a specified time period or until the attainment of a certain age, in return for the periodic payment of fixed premiums over a pre-determined period. Term life insurance policies generally expire without value if the insured survives the coverage period. |
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Group Life Insurance. The Company sells several group life insurance products, including group health insurance. These group products generally have a policy period of one year and require a single premium payment. |
Health Insurance Products
The health insurance products
the Company sells generally have a policy period of one year and require a single premium payment. These products generally cover medical
expenses that arise due to an illness or casualty. The products we offer primarily include hospitalization subsidy insurance, group health
insurance, group travel casualty insurance and group insurance for senior citizens.
Other Innovative Insurance Products
The Company has also worked
together with a number of insurance companies to develop proprietary insurance products, such as student safety insurance, migrant workers'
wage guarantee insurance, golf sports insurance and loan credit guarantee insurance.
Services
In order to enhance customer
satisfaction, the Company also provides customer with insurance plan proposal and claim service. Based on risk characteristics of the
customer, the Company conducts an in-depth analysis of the risks a customer may encounter, and then uses the analysis as the basis to
develop a customized risk management and transfer plan for the customer.
Additionally, as competition
among insurance companies in China intensifies, some insurance companies have started to outsource their claim settlement functions to
insurance claims adjusting companies. The Company has been providing its customers with insurance adjustment service.
Insurance Platform
Since the beginning of 2021,
the Company has started to develop and build an online platform to help insurance brokers with client management and insurance policy
sales. This platform supports insurance core data storage, policy management, insurance policy issuance, insurance agent management and
service management, and auto insurance after-market (repair and maintenance for members) service management. This platform can be accessed
as a mobile application from smart phones and as a built-in program on WeChat. Revenues streams for the insurance platform come from commissions
earned on insurance sales, as well as from finance fees, insurer marketing fees and through the monetization of the Company’s big
data technology.
Customers
Through the VIE entities and
our subsidiaries, the Company sells insurance products and provides insurance proposal and claim services to both individual and institutional
customers, including but not limited to automobile owners, small, medium and large companies, employers, employees, students and their
parents, migrant workers, golf players and so on. By providing quality insurance products and premium services to customers, the Company
strives to build a loyal customer base.
Licenses
The VIE entities and our subsidiaries
have obtained necessary approvals and licenses from the relevant PRC regulatory entities to operate insurance brokerage and agency business
in China. We are the only company in China that has National Insurance Brokerage License, the National and Regional Insurance Agency License
and the Insurance Adjuster License. The National Insurance Brokerage License enables us not only to sell policies to customers across
the most developed China both online and offline, but also to design and develop insurance products and policies by ourselves as broker,
which products and policies are underwritten by insurance companies, to better meet customers’ needs. The Insurance Agency License
allows us to process the business all over China and locally at designated provinces by connecting to numerous insurance companies and
sell a variety of existing insurance products and policies. Insurance Adjuster License allows us to inspect property damage or personal
injury claims and collect information from all parties involved and assess the amount of insurance claims. Lastly but not least, we are
also licensed to operate insurance brokerage and agency business through internet, which enable us to promote our products and service
online to establish a cost-efficient, scalable and sustainable customer acquisition model.
Currently, Beijing Fucheng
has valid National Insurance Brokerage License, and All Weather and Guangxi Zhongtong hold valid National and Regional Insurance Agency
Licenses and Insurance Adjuster License. The relevant entities have also obtained the ICP licenses to conduct insurance transactions online,
which allows customer to evaluate and purchase insurance products and/or receive customer services online.
Competitive Strengths
The Company believes the following
strengths contribute to its success and differentiate the Company from its competitors:
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Strong and Proven Execution Capabilities.
We have 500 employees, including 450 insurance sales staff, 30 technical staffs and 20 senior management staff. Most of them have over
10 years of experience in insurance industry. These employees are located in our 120 branches across the country. Our management
team have a long track record of operating through large retail stores in China. We also have the advantage of being able to sign deals
with those people and bring huge amounts of new stores, which are our new insurance sales channels onto our platform.
|
|
● |
Unique and Comprehensive Insurance Licenses.
We are the only company in China that has National Insurance Brokerage License, the National and Regional Insurance Agency License and
the Insurance Adjuster License. Insurance agencies are entities that have obtained an insurance agency license from the regulator and
engage in the sale of insurance products for, and within the authorization of, insurance companies. Insurance brokers are entities that
have obtained an insurance broker license from the regulator and generally act on behalf the insurance applicants in seeking insurance
coverage from insurance companies. Some insurance brokers also engage in reinsurance brokering and act on behalf of insurance companies
in their dealings with reinsurance companies. Insurance adjuster firms are entities that have been approved by the regulator to engage
in insurance adjusting activities such as the assessment, survey, authentication and loss estimation. With the licenses we are able to
process the business throughout most of developed China, as well as rural areas across China, develop and provide comprehensive products
and services by connecting to numerous insurance companies. With the broad business scope in which the licenses allow us to operate, we
are able to serve 384 million car drivers on car insurance and repairing services, 280 million students in school and colleges and their
parents on safe insurance and health insurance and 500 million farmers in rural areas on health insurance and life insurance.
|
|
● |
Business Relationships. we have established collaboration relationships with a number of other companies, including oil and gas sector, financial services sector, large internet portals and other insurance companies in the PRC, to promote our insurance products and after-market and after-sales services offerings to their customers. |
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National Network. We have built up a nationwide service network including over 120 cities and 30 provinces in China. Any insurance agent, no matter where he or she lives, can register at our local branch and be qualified as an insurance agent. These branches have signed business cooperation agreements with hundreds of local insurance companies to sell their developed insurance products in the region and provide insurance after-sales services for policyholders. |
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Brand Awareness. We have established ourselves as a trusted brand through our VIE entities and subsidiaries. We are able to provide standard services with the prestigious brand across China. |
Business Challenges
The Company is, and expects
for the foreseeable future to be, subject to all the risks and uncertainties, inherent to a development-stage business and in a developing
industry in China. These risks and challenges are, among other things:
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we operate in an industry that is heavily regulated by relevant governmental agencies in China; |
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we rely on contractual arrangements with VIE entities and our subsidiaries, including Guangxi Zhongtong, Beijing Fucheng and All Weather, and their respective shareholders for our operations in China, which arrangement may not be as effective in providing operational control as direct ownership; |
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our management may lack expertise, human and capital resources to implement important strategic initiatives in all branches across China; |
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we may require additional capital to develop and expand our operations which may not be available to us when we require; |
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our marketing and growth strategy may not be successful; |
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our business may be subject to significant fluctuations in operating results; and |
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we may not be able to attract, retain and motivate
qualified professionals.
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Business Strategy
The Company’s business
strategy is to:
| ● | Upgrade the online insurance plan to attract
more insurance agents users for insurance sales through the Company’s platform. The Company plans to devote significant efforts
to upgrading online platform to attract individual and institutional insurance agents to register on the Company’s platform and
share commissions. The Company’s platform will provide the application programming interface to insurance agents and allow them
to register as the Company’s insurance agents, sell insurance policies under the Company’s licenses with the Company’s
platform. It will also enable the agents to have access to a vast selection of insurance products and receive higher commission on the
Company’s platform through competitive pricing. The platform will also provide registered insurance agents (individuals or stores)
with one-stop services, such as online insurance business training, business development, product promotion, policy issuing, claims settlement
and after-sales service. |
| ● | Increase automobile insurance product offering. The Company plans
to build comprehensive online automobile insurance after-market service features on its insurance platform to (i) connect automobile insurance
customers with thousands of auto repair shops and auto wash stores nationwide and (ii) provide customers auto membership services, including
online gas card recharge, online shopping, insurance claim settlements, roadside assistance, car wash appointment and maintenance and
promotion coupons, insurance loyalty points and other related supporting services for insurance members. Through this platform, the Company
will provide competitive insurance products and build a one-stop customer service system, including mobile billing function, online payment,
inspection, loss assessment, online claim settlement and car purchase loans. |
| ● | Enhance business partner network and expand distribution network.
The Company is currently negotiating collaboration agreements with large organizations in postal industry and gas stations industry, lottery
stores, tobacco stores, car wash and maintenance chain stores all of which have big traffic of customers. The Company aims to transform
the salesperson from the retail stores into users of the Company’s insurance platform and sell the insurance products online via
the platform. Through the implementation of the B (business) to A (agent) to C (customer) and both online and offline promotion service
model, the Company will lay out the sales scenarios of auto insurance and non-auto insurance products to reach insurance customers offline
and provide customers with insurance product sales and after-sales claim services online. The Company also plans to expand its distribution
network through opening more local branches in a number of selective major cities throughout China. |
| ● | Recruit talents and build a stronger sales force. The Company, through
its VIE entities and our subsidiaries, has recruited a team of accomplished insurance industry and technology specialists, including senior
executives from several of China’s largest listed and unlisted insurance companies, as well as from a number of China’s leading
technology companies. The Company continues to recruit talents to join its professional team and sales force. |
| ● | Build a comprehensive and loyal customer base.
In light of our expanded business and prospect, the increased recognition of our brand, and the latest market development, we have
aim to focus on serving 384 million car drivers on car insurance and repairing services, 280 million students in school and colleges and
their parents on safe insurance and health insurance and 500 million farmers in rural area on health insurance and life insurance. |
Stock
Trading and Wealth Management Platform: Magpie Invest
The Company launched Magpie Invest, a global stock
trading app, on September 15, 2021, through its wholly owned subsidiary, Magpie Securities Limited (“Magpie”).
Magpie Invest is a proprietary
technology investment trading platform that is currently operational in Hong Kong. Magpie Invest’s technology allows the platform
to connect to all major stock exchanges and we plan to expand into Australia and Switzerland by Q4 2022.
Following
Intermediate’s acquisition of Huapei Global Securities, Ltd. (“Huapei”), a Hong Kong securities and investment services
firm, on February 26, 2021 and the subsequent receipt of regulatory approval from the Hong Kong Securities and Futures Commission, Magpie
is licensed to deal in securities, futures and options, and also undertake the business of securities advisory services and asset management.
Magpie
is a member of the Hong Kong Stock Exchange, the Hong Kong Stock Exchange Clearing Company, the Hong Kong Stock Exchange China Connect
and the London Stock Exchange.
In
the future, Magpie intends to launch new and differentiated marketing campaigns which we believe may attract higher value customers.
Magpie has offices in Hong Kong and Singapore and currently employs more than 50 full-time employees and 60 contract staff. Magpie aims
to expand into additional jurisdictions and geographical markets, both within Asia and other regions of the world.
The Platform for Securities Trading
We believe we offer a unique
user experience built upon a scalable and secure platform. The platform is designed to serve the emerging affluent Chinese population
and diaspora, and targets generation Z and the millennial population. We are pursuing an opportunity to facilitate a shift in the wealth
management industry and build a digital gateway into broader financial services. The platform is designed to provide a user experience
that integrates clear and relevant market and company data, and easy to use trade execution. We aim to continue to enhance this technology
and build a comprehensive, user-oriented and cloud-based platform that is fully licensed to conduct securities brokerage business on a
global basis as we expand our license portfolio. The stock trading platform will serve as a one of the foundations from which we can execute
our growth strategy of building a broader financial services platform.
We provide investing services
through a proprietary digital platform, which is accessible through any mobile device on IOS and Android. We plan to launch a web-based
platform in late Q2 of 2022 to offer an alternative to the mobile application. We intend for this platform to also complement our mobile
application. Our application currently offers market data, news, research, analytical tools and provides customers with a data foundation
to help simplify the investing decision-making process.
Market
Opportunity
According to an iResearch
Report, published on January 15, 2020, the market size of the online brokerage industry focusing on global Chinese investors in terms
of U.S. and Hong Kong stock trading volume experienced rapid growth over the past three years. This presents an attractive market opportunity
for online brokerage service providers focused on the global Chinese investor market. We believe that the technology, functionality and
user experience of our platform also creates the opportunity for us to target a larger investor market (not only the Chinese investor
market) in the major territories throughout the world.
Revenues
are currently generated primarily from stock trading commission income. Magpie is also generating income from other revenue streams such
as interest from financing and foreign exchange. We plan to add derivatives and charges from investment management introductions and
consulting to the platform in Q3 2022.
With
popularization of mobile technology and growing acceptance of online trading, we believe that the online securities market is characterized
by the following trends:
| ● | traditional
brokers are shifting online while purely offline brokers are increasingly at a disadvantage or, in some cases, exiting the market altogether; |
| ● | Internet
giants continue to invest in online brokerage services, demonstrating the industry’s recognition of online brokerage services as
an important component of a financial services business and potentially a gateway to broader opportunities; |
| ● | technological
barriers to entry remain high particularly relating to building a secure infrastructure that can transcend geographies and asset classes; |
| ● | operational
barriers to entry remain high particularly relating to regulatory and capital requirements; |
| ● | user
experience remains a key competitive strength as digitally born investors become a larger component of the addressable market; and |
| ● | revenue
models are evolving as competition intensifies, with ancillary and other value-added services underlying platform differentiation. |
Challenges
Our
ability to execute this business plan is subject to risks and uncertainties, including those relating to our ability to:
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manage the continued rollout of our trading platforms
and our future growth; |
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navigate a complex and evolving regulatory environment; |
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offer personalized and competitive services; |
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increase the utilization of our services by users and
clients; |
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maintain and enhance our relationships with our business
partners; |
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enhance our technology infrastructure to support the
growth of our business and maintain the security of our systems and the confidentiality of the information provided and utilized
across our systems; |
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improve our operational efficiency; |
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attract, retain and motivate talented employees to
support our business growth; |
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navigate economic condition and fluctuation; |
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defend ourselves against legal and regulatory actions,
such as actions involving intellectual property or privacy claims; and |
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obtain any and all licenses necessary for the operation
and growth of our business. |
Strategy
We
intend to provide a high-quality and comprehensive investing experience by focusing on delivering convenience and stability to our customers.
We
have designed every step of our platform’s experience, from sourcing and researching ideas to trade execution and subsequent portfolio
management, with a goal to create a simple and convenient experience. We identify certain hurdles that investors, particularly retail
investors, face along their investing journey, and we strive to mitigate inconvenience and information asymmetry through our platform
with the use of data and technology.
We
recognize that investing is a meaningful component of our customers’ broader wealth management. With this in mind, our platform
features the following:
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our platform features an automated multi-level protection
mechanism to ensure the services and functions we deliver to our users and clients are secure; |
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we have adopted strict security policies and measures,
including encryption technology and a two-factor authentication function, to protect our proprietary data such as customers’
personal information and trading data; |
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our cloud technology allows us to process large amounts
of data in-house, which should reduce the risks involved in data storage and transmission; |
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we back up our data at different servers spread across
different locations; |
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we process and execute all of our orders and transactions
electronically, which is designed to minimize the risks associated with human error while maintaining the stability of our platform.
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We
provide customers with a comprehensive set of services throughout their investing experience. Our core services include trade execution
and margin financing. The trade execution process is entirely online and automated. Orders are delivered directly to respective exchanges.
As
a result of the operational efficiencies afforded by our technology, we can offer very competitive brokerage commission rates for online
trading as compared to many of our more traditional competitors. Our revenues from securities brokerage services includes brokerage commissions
and platform service fees from our customers, which are recognized on a trade-date basis when the relevant transactions are executed.
Margin
Financing
We
offer margin financing to customers who trade securities listed on the Hong Kong Stock Exchange, the major stock exchanges in the U.S.,
the United Kingdom and Europe. This feature essentially allows customers to borrow against their own stock and cash holdings in order
to buy additional securities on margin. All financing extended to our customers is secured by stocks we feel have enough liquidity and
low volatility. They are automatically pledged in cross-market account assets so that the value in a customers’ multiple market
trading account, which may include cash in different currencies and acceptable securities listed on the three markets, will be aggregated
when calculating the value of the customers’ collateral. In particular, we believe this will provide efficiencies as it will eliminate
the costs and procedures involved in cross-market currency translation or exchange.
Our customers are eligible
for margin financing services when they hold securities that are acceptable as pledges to us in their accounts. We maintain a list of
acceptable marginable securities on our website www.MICT-inc.com. The credit line for each eligible customer is determined based on the
securities across all of his or her trading accounts. The margin financing services for eligible margin financing customers are activated
automatically, when the funds in their accounts are not sufficient to purchase the desired securities and there is still sufficient balance
in their credit lines.
We
have a list of securities acceptable as collateral to us and their respective margin ratios that is regularly updated and shared with
our customers. Our risk management team’s role is to determine the margin ratio for each of the acceptable securities based on
the trading frequency, historical price fluctuations and general market volatility. We will also reference the financing terms of major
financial institutions in establishing our margin ratios and intend for our margin requirements to be equal or lower than the financial
institutions. We believe this will differentiate our risk controls. Our margin ratios are monitored in real-time and our risk management
team review and adjust the margin ratios for each acceptable security on a quarterly basis and more frequently in the case of a significant
and rapid price decline.
Users
and Clients
Our current customer is investors
living in Hong Kong and in 14 other countries that allowed trading under the Securities and Futures Commission (“SFC”) rules.
We are growing our customer base mainly through online and offline marketing and promotional activities. Those activities include external
marketing channels that we cooperate with and directly pay for as well as promotional and marketing campaigns conducted on the platform,
word-of-mouth referrals, and our corporate services.
Risk
Management
We have established a comprehensive
and robust technology-driven risk management system to manage risks across our business and ensure compliance with relevant laws and regulations.
We have established a risk management committee which has formulated key risk management policies and procedures and a risk management
team having relevant experience to execute these policies and procedures. This committee meets on a weekly basis.
Data
Security and Protection
We
have established a comprehensive security system, to be supported by our network situational awareness and risk management system. The
security system is designed with the capability to handle malicious attacks to safeguard the security of the platform and to protect
the privacy of its users and clients.
We
have established a data security team of engineers and technicians dedicated to protecting the security of our data. We also have a data
protection policy and internal protocols to ensure the security of our proprietary data. On the customer side, we have a dual identification
verification function to protect our customer’s account security.
Competition
The
market for online stock trading and investment services is rapidly evolving. There are many competitors that are already operating of
various sizes offering access to overseas markets and wealth management products.
Licenses
We
are currently not onboarding customers located in mainland China due to the People’s Bank of China (“PBOC”) and the
China Securities Regulatory Commissions (“CSRC”) new guidance regarding the onboarding of residents via Hong Kong through
licensed entities under the Securities and Futures Commission (“SFC”) guidelines.
Under
PRC securities laws and regulations, entities operating securities brokerage business in the PRC are now required to obtain a securities
brokerage license to onboard mainland residents even if they have overseas bank accounts.
Magpie Securities (Singapore)
Pte Ltd has been set up and submitted its MAS license application in late December. the first round of questions has been received and
answered, we are expecting the approval in late May 2022.
The Company’s platforms
in China, provided through its operating subsidiaries, will be subject to the following laws and regulations that are specific to the
industries in which it plans to conduct businesses, in addition to the PRC laws and regulations that are generally applicable to the contemplated
businesses in China.
Impact
of COVID-19 and Our Resources and Opportunities
The
ongoing COVID-19 pandemic disrupted business operations of many companies in Hong Kong, China and elsewhere. We have taken a series of
measures in response to the outbreak to protect our staff, including, among others, combined office and remote working arrangements for
our employees and travel restrictions or suspension. Our operations, including our services to our clients and internal control over
financial reporting, have not been materially affected by these measures as we timely implemented our business continuity plan without
any meaningful resource constraints.
Further,
in view of the increased market volatility witnessed in the global capital markets and increased COVID-19 restrictions in Hong Kong,
although people are spending more time at home, it has not led to an increased in new account sign-ups, or increasing trading velocity
and higher net asset inflow.
This
has increased competition and raised the cost of acquisition of customers and also lengthened the cost recovery period which we believe
is not currently economical.
PRC
Regulations Relating to Insurance Agencies, Insurance Brokers and Other Intermediaries
The
insurance industry is heavily regulated in the PRC. The applicable laws and regulations governing insurance activities undertaken within
the territories of the PRC consist principally of the PRC Insurance Law and rules and regulations promulgated under that law. China Banking
and Insurance Regulatory Commission, or the CBIRC, is the authority authorized by the PRC State Council to regulate and supervise the
insurance industry in the PRC.
The
PRC Insurance Law, which provided the initial framework for regulating the PRC insurance industry, was enacted in 1995, and significantly
amended on January 1, 2003, October 1, 2009, August 31, 2014 and April 24, 2015. Among other things, the major provisions of the PRC
Insurance Law include: (1) licensing of insurance companies and insurance intermediaries, such as agents and brokers; (2) separation
of property and casualty business and life insurance business; (3) regulation of market conduct by participants; (4) substantive regulation
of insurance products; (5) regulation of the financial condition and performance of insurance companies; and (6) supervisory and enforcement
powers of the CBIRC
Regulations
of Insurance Agencies
According
to the Provisions on the Regulation of Insurance Agents, or the PRIA, which was promulgated by the China Banking and Insurance Regulatory
Commission (CBIRC) on November 12, 2020 and was effective on January 1, 2021, the establishment of an insurance agency is subject to
minimum registered capital requirement and other requirements and to the approval of the CBIRC. The term “insurance agency”
refers to an institution or individual, including professional insurance agency, concurrent-business insurance agency and individual
insurance agent, who, under the entrustment by an insurance company, collects corresponding commission therefrom, and, within the scope
of authorization thereby, handles insurance business on behalf of the insurance company. A professional insurance agency company may
take any of the following forms: (i) a limited liability company; or (ii) a joint stock limited company. The minimum registered capital
of a professional insurance agency company whose business area is not limited to the province, autonomous region, municipality directly
under the central government or city specifically designated in the state plan where its place of registration is located shall be RMB50
million. The minimum registered capital of a professional insurance agency company whose business area is the province, autonomous region,
municipality directly under the central government or city specifically designated in the state plan where its place of registration
is located shall be RMB20 million. The registered capital of a professional insurance agency company must be paid-in monetary capital.
A professional insurance agency may engage in all or part of the following businesses:
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sales of insurance products as an agency; |
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collection of insurance premiums as an agency; |
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loss investigation and claims settlement of insurance-related
services as an agency; and |
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other relevant businesses as prescribed by the insurance
regulator under the State Council. |
The
name of a professional insurance agency company must contain the words “insurance agency”. A professional insurance agency
falling under any of the following circumstances shall, within five days from the date on which such circumstance arise, report the same
via the regulatory information system prescribed by the insurance regulator under the State Council, and make public disclosure thereof
as required: (i) change of name, domicile or business premises; (ii) change of any shareholder, registered capital or form of organization;
(iii) change of the name of any shareholder or the amount of capital contribution; (iv) changing the company’s articles of association;
(v) making equity investment, establishing any overseas insurance institution or non-business institution; (vi) undergoing division,
merger or dissolution, or any of its branches terminating insurance agency business activities; (vii) change of the main principal of
any branch other than a provincial-level branch office; (viii) being subjected to administrative punishment or a criminal penalty, or
under investigation for being suspected of committing any illegal or criminal offense; or (ix) any other matter to be reported as prescribed
by the insurance regulator under the State Council. The senior managers of an insurance agency or its branches must meet specific qualification
requirements and each senior manager of a professional insurance agency shall obtain the post-holding qualification approved by the competent
insurance regulator prior to holding the post.
Under
the PRIA, a professional insurance agency or a concurrent-business insurance agency collecting insurance premiums by proxy shall open
an independent account for the collection of insurance premiums by proxy for settlement. A professional insurance agency or a concurrent-business
insurance agency shall open an independent account for the collection of commission. They may not engage in the following activities:
engaging in insurance agency business that may exceed the business scope and business area of the relevant principal insurance company;
modifying any publicity material provided by the relevant principal insurance company without authorization; damaging the commercial
goodwill of any competitor by means of fabricating or disseminating misrepresented facts, etc., or disrupting the order of the insurance
market through false advertising, false publicity or other acts of unfair competition; having any insurance agency business dealing with
an institution or individual illegally engaging in insurance business or insurance intermediary business; deducting any insurance commission
directly from insurance premiums collected by proxy.
Regulations
of Insurance Brokerages
The
principal regulation governing insurance brokerages is the Provisions on the Supervision and Administration of Insurance Brokers, or
the “POSAIB”, promulgated by the China Insurance Regulatory Commission, or the CIRC (the predecessor of the CBIRC) on February
1, 2018 and effective on May 1, 2018. The term of “insurance broker” refers to an entity which, representing the interests
of insurance applicants, acts as an intermediary between insurance applicants and insurance companies for entering into insurance contracts,
and collects commissions for the provision of such brokering services. To engage in insurance brokerage business within the territory
of the PRC, an insurance brokerage shall satisfy the requirements prescribed by the CIRC and obtain an insurance brokerage business permit
issued by the CIRC, after obtaining a business license. An insurance brokerage may take any of the following forms: (i) a limited liability
company; or (ii) a joint stock limited company. The minimum registered capital of an insurance brokerage company whose business area
is not limited to the province in which it is registered is RMB50 million while the minimum registered capital of an insurance brokerage
company whose business area is limited to its place of registration is RMB10 million. The name of an insurance broker shall include the
words “insurance brokerage.” An insurance brokerage may conduct the following insurance brokering businesses:
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making insurance proposals, selecting insurance companies
and handling the insurance application procedures for the insurance applicants; |
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assisting the insured or the beneficiary to claim compensation;
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reinsurance brokering business; |
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providing consulting services to clients with respect
to disaster and damage prevention, risk assessment and risk management; and |
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other business activities approved by the CIRC. |
According
to the POSAIB, to operate insurance brokerage business, an insurance brokerage company shall satisfy the following conditions: (i) its
shareholders meet the requirements thereof, and make capital contribution with their self-owned, true and lawful funds instead of bank
loans or non-self-owned funds in various forms; (ii) its registered capital meets the requirements above and is under the custody in
accordance with the relevant provisions of the CIRC; (iii) its business scope recorded in the business license is in compliance with
the relevant provisions; (iv) its articles of association are in conformity with the relevant provisions; (v) its company name is in
conformity with the relevant provisions; (vi) its senior officers meet the qualification requirements thereof; (vii) it has established
a governance structure and internal control system as stipulated by the CIRC, and a scientifically and reasonably feasible business mode;
(viii) it has a fixed domicile in line with its scale of business; (ix) it has a business and financial information management system
as stipulated by the CIRC; and (x) other conditions provided for in laws and administrative regulations and by the CIRC. In addition,
any entities or individuals who are under any of the following circumstances may not be a shareholder of an insurance brokerage company:
(i) have been punished or subject to major administrative penalties during the last five years; (ii) are being investigated by the relevant
departments for suspected major offenses; (iii) have been identified as a subject of joint sanctions against discreditable conduct by
relevant state authorities due to a serious discreditable conduct and shall be sanctioned accordingly in the insurance sector, or has
had other bad records of serious discredits within the most recent five years; (iv) cannot invest in any enterprises in accordance with
laws and administrative regulations; or (v) other circumstances where the CIRC deems the entity or individual inappropriate to be a shareholder
of an insurance brokerage company in accordance with the principle of prudential supervision.
An
insurance brokerage shall submit a written report to the CIRC and make public disclosure within five days from the date of occurrence
of any of the following matters: (i) change of name, domicile or business premises; (ii) change of shareholders, registered capital or
form of organization; (iii) change of names of shareholders or capital contributions; (iv) amendment to the articles of association;
(v) equity investment, establishment of offshore insurance related entities or non-operational organizations; (vi) division, merger and
dissolution or termination of insurance brokering business activities of its branches; (vii) change of the primary person in charge of
its branches other than provincial branches; (viii) being a subject of administrative or criminal penalties, or under investigation for
suspected involvement in any violation of law or a crime; and (ix) other reportable events prescribed by the CIRC.
Insurance
brokerages are not allowed to sell non-insurance financial products, except for those products approved by relevant financial regulatory
institutions and the insurance brokerage shall obtain relevant qualification in order to sell non-insurance related financial products
that meets regulatory requirements.
Personnel
of an insurance brokerage and its branches who engage in any of the insurance brokering businesses described above must comply with the
qualification requirements prescribed by the CIRC. The senior managers of an insurance brokerage must meet specific qualification requirements
set forth in the POSAIB.
Regulation
of Internet Insurance Businesses
The
principal regulation governing the operation of Internet insurance business is the Measures for the Regulation of Internet Insurance
Business, or Regulation of Internet Insurance Business, promulgated by the CBIRC on December 7, 2020 and effective on February 1, 2021.
Under the Regulation of Internet Insurance Business, the term of “Internet insurance business” refers to insurance operating
activities in which insurance institutions conclude insurance contracts and provide insurance services relying on the Internet. Insurance
institutions include insurance companies (including mutual insurance organizations and internet insurance companies) and insurance intermediaries;
insurance intermediaries include insurance agents (excluding individual insurance agents), insurance brokers and insurance loss adjusters;
insurance agents (excluding individual insurance agents) include professional insurance agencies, banks as concurrent-business insurance
agencies and internet enterprises that have legally obtained insurance agency business permits; and professional insurance intermediaries
include professional insurance agencies, insurance brokers and insurance loss adjusters. Self-operated network platform refers to any
network platform being independently operated while enjoying complete data permission, which is legally established by an insurance institution
for the purpose of internet insurance business operation. No network platform established by any branch of an insurance institution or
any non-insurance institution with a related-party relationship with an insurance institution in terms of equity, personnel, etc., belongs
to the category of self-operated network platform. Internet insurance product refers to any insurance product sold by an insurance institution
via the Internet.
An
insurance institution which conducts internet insurance business along with its self-operated network platform shall meet the following
conditions: (i) its service access place is located within the territory of the PRC; if its self-operated network platform is a website
or mobile application, it shall legally go through the formalities for filing of internet information services with the relevant administrative
department for the internet industry and obtain a filing number; or otherwise, it shall comply with relevant laws and regulations and
meet the qualification requirements of the competent department for the relevant industry; (ii) it has an information management system
and core business system that can support its internet insurance business operation, which can be effectively isolated from its other
unrelated information systems; (iii) it has refined cybersecurity monitoring, information notification, emergency disposal working mechanisms
as well as such cybersecurity protection means as refined perimeter protection, intrusion detection, data protection and disaster recovery;
(iv) it implements the national classified cybersecurity protection system, carries out filing of cybersecurity classification, conducts
classified protection evaluation on a regular basis, and implements security protection measures for the corresponding class; in terms
of self-operated network platforms with insurance sales or insurance application function, as well as information management systems
and core business systems that support their operation, relevant self-operated network platforms and information systems shall be under
security protection of Class III or above; and in terms of self-operated network platforms without insurance sales or insurance application
function, as well as information management systems and core business systems that support their operation, relevant self-operated network
platforms and information systems shall be under security protection of Class II or above; (v) it has a legal and compliant marketing
model, and has established an operation and service system that meets the needs for internet insurance operation and complies with the
characteristics of internet insurance users while supporting its business coverage regions; (vi) it has established or defined its internet
insurance business management department staffed by appropriate professionals, appointed a senior executive to act as the principal in
charge of its internet insurance business, and specified the principal of each self-operated network platform; (vii) it has a sound internet
insurance business management system and operating procedures; (viii) as an insurance company, it shall, when conducting internet insurance
sales, comply with the relevant provisions of the CBIRC on regulatory evaluation of its solvency as well as protection of consumers’
rights and interests, etc.; (ix) as a professional insurance intermediary, it shall be a national institution with its operating area
not limited to the province (autonomous region, municipality directly under the central government, or city specifically designated in
the state plan) of the place where the business license of its head office is registered while complying with the relevant provisions
of the CBIRC on classified regulation of professional insurance intermediaries; and (x) other conditions prescribed by the CBIRC. The
Regulation of Internet Insurance Business also specifies requirements on disclosure of information regarding insurance products sold
on the Internet and provides guidelines for the operations of the insurance institutions that engage in Internet insurance business.
Regulations
of Foreign Investment in Insurance Intermediaries
Historically, PRC laws and regulations have restricted foreign investment
in ownership of insurance intermediary companies. In recent years, some rules and regulations governing the insurance intermediary sector
in China have begun to encourage foreign investment. For instance, On March 1, 2015, the MOFCOM and the NDRC jointly promulgated the Catalogue
for the Guidance of Foreign Investment Industries (Revision 2015), or the 2015 Guidance Catalog, pursuant to which insurance brokerage
are removed from the list of industries subject to foreign investment restriction. On April 27, 2018, the CBIRC further promulgated the
Circular on Lifting Limits on the Business Scope of Foreign-invested Insurance Broker, which further lifts the restrictions on the business
scope of foreign-invested insurance broker, and provides that foreign-invested insurance broker that has obtained the permit of in insurance
brokerage business may conduct the following insurance brokerage business: (1) design insurance policy plans, select insurers and handle
insurance formalities for policy holders; (2) assist the insured or beneficiaries with insurance claims; (3) reinsurance brokerage business;
(4) provide principals with assessment to prevent from disasters, damage or risks, or risk management consulting services; and (5) other
business approved by the CBIRC. For insurance agency business, the CBIRC promulgated the Circular on Permitting Foreign Investors to Engage
in Insurance Agency Business in China on June 19, 2018, which provides that: (1) a professional insurance agent invested and established
in China by an overseas insurance agent that has carried out the insurance agency business for over three years may apply for carrying
out the insurance agency business in China, and the scope of specific allowable business and the market access criteria shall be subject
to relevant provisions on professional insurance agents; or (2) a professional insurance agent established and invested in China by a
China-based foreign-invested insurance company which has commenced its business for over three years may apply for carrying out the insurance
agency business in China, and the scope of specific allowable business and the market access criteria shall be subject to relevant provisions
on professional insurance agents. In addition, the CBIRC further promulgated the Circular on Clarifying the Measures Relating to the Liberalization
of the Insurance Intermediary Market on December 3, 2021, which provides that an insurance brokerage company funded and established in
China by an overseas insurance brokerage company, which has the actual business experience and qualifies under the relevant regulations
of the CBIRC, is allowed to operate the insurance brokerage business; in the Circular on Issuing the Content relating to the Insurance
Sector in the Legal Documentation of China’s Accession to the WTO (Bao Jian Ban Fa [2002] No. 14), the related requirements that the foreign
investor to establish a foreign-funded insurance brokerage company in China should have a history of business operations of more than
30 years in any WTO member states, have maintained a representative office in China for a period of at least two consecutive years, and
have a total asset of not less than US$200 million in the year immediately prior to the application, shall not longer be applicable.
Regulations
Related to Telecommunications Service and Online Trading
The
Measures on Telecommunications Business Operating Licenses (2017 Revision), or the Telecom License Measures, which was promulgated by
the Ministry of Industry and Information Technology on March 1, 2009 and last amended on July 3, 2017, requires that any approved telecommunications
services provider shall conduct its business in accordance with the specifications in its license for value-added telecommunications
services, or VATS License. The Administrative Measures on Internet Information Services (2011 Revision), which was promulgated on September
25, 2000 and amended on January 8, 2011 by the State Council, requires that commercial Internet information services providers, which
mean providers of information or services to Internet users with charge, shall obtain a VATS License with the business scope of Internet
information services, namely the Internet Content Provider License or the ICP License, from competent government authorities before providing
any commercial Internet content services within the PRC. However, according to the 2019 Negative List/ the 2020 Negative List, the value-added
telecommunications services carried on in PRC falls in the restricted category, and foreign investors cannot hold over 50% of equity
interests in entities providing such services.
The
Guiding Opinions of the Ministry of Commerce on Online Transactions (Provisional), which was promulgated and implemented on March 6,
2007, aims to regulate online transactions, assist and encourage participants to carry out online transactions, alert and prevent transaction
risks, and provide guiding requirements on the basic principles for online transactions, the entering into of contracts by participants
of online transactions, and the use of electronic signatures, online payments and advertising.
The
Administrative Measures for On-line Trading, which was promulgated on February 17, 2014 and implemented with effect from March 15, 2014,
further specifies the relevant measures for protecting on-line consumers’ rights, especially with regard to after-sale service,
privacy protection and standard contract management, diversifies the types of unjust competitions conducted by an operator through network
or certain media, and clarifies the regulatory and administrative responsibilities of the industry and commerce administration bureaus
at different levels.
Pursuant
to the E-Commerce Law of the PRC, which was promulgated by the SCNPC on August 31, 2018 and took effect on January 1, 2019, an e-commerce
operator shall register itself as a market entity, fulfill its tax obligations pursuant to the relevant laws and obtain the administrative
approvals necessary for its business operation, shall also display the information about its business license and the administrative
approvals obtained for its business operation, or the links to the webpages with such information in the prominent position on its homepage,
and shall expressly indicate the methods and procedures for querying, correcting and deleting its users’ information or deregistering
their accounts and shall not set irrational conditions for such purposes.
In the area of online
trading, the Company and its operating subsidiaries are subject to the above-mentioned regulations because the Company’s and
its operating subsidiaries plan on acting as operators of various online platforms for online transactions in relation to all of its
business sectors.
In
addition, to the laws and regulations applicable to China which are summarized above, as a BVI incorporated company, to the extent that
Intermediate itself (rather than through its operating subsidiaries) were to conduct certain of the activities referenced above, consideration
would need to be given to certain regulatory requirements of the BVI and whether any licenses in the BVI are required.
Employees
As of December 31, 2021, the Company had approximately 431 full-time
employees, The Chinese companies had approximately 376 full-time employees. Of these employees, 107 were employed in marketing positions,
87 were employed in Customer Services & Risk positions and the remainder were employed in finance, research and development, management
and administrative positions. The HK companies had approximately 48 full-time employees. Of these employees, 4 were employed in marketing
positions, 11 were employed in Customer Services & Risk positions and the remainder were employed in finance, research and development,
management and administrative positions. The Israeli companies had approximately 3 full-time employees in the finance department. The
number of employees described above does not include Micronet’s employees, which is a separate company.
We have never experienced a work stoppage. To the best of our knowledge,
we have good and sustainable relations with our employees, respectively. Israeli labor laws and regulations apply to all employees based
in Israel. The laws principally address matters such as paid vacation, paid sick days, length of the workday, payment for overtime and
severance payments upon the retirement or death of an employee or termination of employment under specified circumstances. The severance
payments may be funded, in whole or in part, through a managers’ insurance fund or a pension fund. The payments to the managers’
insurance fund or pension fund toward severance amount to 8.3% of wages. Furthermore, Israeli employees and employers are required to
pay predetermined sums to the National Insurance Institute of Israel. Since January 1, 1995, these amounts also include payments for health
insurance.
Item
1A. Risk Factors.
Investing
in our securities is highly speculative and involves a high degree of risk. You should carefully consider the following factors and other
information in this Annual Report and our other SEC filings before making a decision to invest in our securities. Additional risks and
uncertainties that we are unaware of may become important factors that affect us. If any of the following events occur, our business,
financial conditions and operating results may be materially and adversely affected. In that event, the trading price of our common stock
and warrants may decline, and you could lose all or part of your investment.
Summary
of Risks Affecting our Company
Our business is subject to numerous risks described in the section
titled “Risk Factors” below. A summary of the material risk factors affecting our business is set forth below.
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The
Company may be unable to successfully execute its growth strategy including the consummation of the merger with Tingo. |
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MICT’s ability to be successful will be dependent upon the efforts of the MICT Board and key personnel and the loss of such persons could negatively impact the operations and profitability of MICT’s post-combination business. |
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We may need a significant amount of additional capital, which could substantially dilute your investment. |
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If MICT fails to meet all applicable Nasdaq requirements, Nasdaq may delist its Common Stock, which could have an adverse impact on its liquidity and market price. |
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MICT’s stockholders may not benefit from the Company’s
transaction with Tingo commensurate with the ownership dilution they will experience in connection with the transaction. |
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The COVID-19 pandemic, or any other pandemic, epidemic or outbreak of an infectious disease, may materially and adversely affect MICT’s business and operations. In addition, the COVID-19 pandemic, or any other pandemic, epidemic or outbreak of an infectious disease, may materially and adversely affect Intermediate’s and Micronet’s business and thereby have a material adverse effect on MICT’s investment in Intermediate and Micronet. |
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Because almost all of MICT’s officers and directors are located in non-U.S. jurisdictions, you may have no effective recourse against management for misconduct. |
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MICT anticipates that its operating costs and expenses will increase. |
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The Company’s platform and internal systems rely on software and technological infrastructure that is highly technical, and if they contain undetected errors, its business could be adversely affected. |
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Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and operations. |
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The complexities, uncertainties and rapid changes in PRC regulation of the Internet-related businesses and companies require significant resources for compliance and the uncertainties in the PRC legal system could limit the legal protections available to us. |
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The 2006 M&A Rules established complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it difficult to pursue growth through acquisitions in China. |
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Fluctuations in exchange rates of the RMB could materially affect financial results. Furthermore, MICT’s financial results may be negatively affected by foreign exchange rate fluctuations. |
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Under the enterprise income tax (“EIT”) Law, we may be classified as a “resident enterprise” of China. Such classification would likely result in unfavorable tax consequences. |
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Potential political, economic and military instability in Israel could adversely affect operations. |
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We have issued and may issue additional preferred stock in the future, and the terms of the preferred stock may reduce the value of our Common Stock. |
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The Company’s trading platform has no operating history, which makes it difficult to evaluate the Company’s future prospects. |
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Micronet operates in a highly competitive and fragmented market and
may not be able to maintain a competitive position in the future. Any such failure to successfully compete could have a material adverse
effect on the value of MICT’s equity interest in Micronet. |
Risk Factors Related to the Integration of
Intermediate and Ownership of MICT’s Securities
MICT may be unable to successfully execute
its growth strategy Including merger.
One of the Company’s
strategies is to pursue organic growth by increasing product offerings and expanding into new verticals and new markets such as China.
MICT may not be able to successfully execute all or any of these initiatives, and the results may vary from the expectations of the combined
entity or others. Further, even if these initiatives are successful, MICT may not be able to expand and upgrade its technology systems
and infrastructure to accommodate increases in the business activity in a timely manner, which could lead to operational breakdowns and
delays, loss of customers, a reduction in the growth of its customer base, increased operating expenses, financial losses, increased litigation
or customer claims, regulatory sanctions or increased regulatory scrutiny. In addition, Intermediate will need to continue to attract,
hire and retain highly skilled and motivated executives and employees to both execute the growth strategy and to manage the resulting
growth effectively.
The Tingo announced merger
may not be able to be completed due to situations and circumstances that may change from time to time. And the conditions for closing
any mergers and acquisitions may not be satisfied. Cross-border merger and acquisition transactions may also be subject to additional
rules and regulations and requirements that could make merger and acquisition activities more time-consuming and complex. Our ability
to expand our business through future mergers and acquisitions would as such be materially and adversely affected.
MICT may be required to take write-downs
or write-offs, restructuring and impairment or other charges that could have a significant negative effect on its financial condition
and its share price, which could cause you to lose some or all of your investment.
MICT cannot assure you that
the due diligence it conducted on Intermediate has revealed all material issues that may be present with regard to such companies, or
that it would be possible to uncover all material issues through a customary amount of due diligence or that risks outside of MICT’s
control will not later arise. Each of MICT and Intermediate therefore has made its decision to complete the Merger on the basis of limited
information, and the business combination may not be as profitable as expected, if at all. As a result of these factors, MICT may be forced
to later write-down or write-off assets, restructure operations, or incur impairment or other charges that could result in reporting losses.
Even if MICT’s due diligence successfully identified certain risks, unexpected risks may arise and previously known risks may materialize
in a manner not consistent with MICT’s preliminary risk analysis. Even though these charges may be non-cash items and would not
have an immediate impact on MICT’s liquidity, the fact that MICT reports charges of this nature could contribute to negative market
perceptions about MICT or MICT’s securities. Accordingly, MICT cannot predict the impact that the consummation of the Merger will
have on MICT’s securities.
MICT’s ability to be successful will
be dependent upon the efforts of the MICT Board and key personnel and the loss of such persons could negatively impact the operations
and profitability of MICT’s post-combination business.
MICT’s ability to be
successful will be dependent upon the efforts of the MICT Board and key personnel. Furthermore, the business of MICT following the Merger
is made up in part of Intermediate’s business, and is entirely different from MICT’s historical business. Individuals associated
with Intermediate may be unfamiliar with the requirements of operating a U.S. public company, which could cause MICT’s management
to have to expend time and resources helping them become familiar with such requirements.
MICT is dependent on the services of its
executive officers, whose potential conflicts of interest may not permit MICT to effectively execute its business strategy.
MICT is currently dependent
on the continued services and performance of its executive officers, particularly Darren Mercer, MICT’s Chief Executive Officer
and a director of the MICT Board. Darren Mercer, is also the Chief Executive Officer of GFH which may result in a potential conflict of
interest in Mr. Mercer carrying out his duties as a member of the MICT Board.
Provisions in MICT’s certificate of
incorporation and under Delaware law could make a future acquisition of MICT, which may be beneficial to stockholders, more difficult
and may prevent attempts by MICT stockholders to replace or remove the current management.
Provisions in MICT’s
certificate of incorporation, as amended, and MICT’s amended and restated bylaws may discourage, delay or prevent a merger, acquisition
or other change in control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium
for MICT’s common stock. These provisions could also limit the price that investors might be willing to pay in the future for MICT
securities, thereby depressing the market price of MICT’s securities. In addition, these provisions may frustrate, deter or prevent
any attempts by MICT stockholders to replace or remove current management by making it more difficult for stockholders to replace members
of the MICT Board. Because the MICT Board is responsible for appointing the members of the MICT management team, these provisions could
in turn affect any attempt by stockholders to replace current members of the MICT management team.
Moreover, because MICT is
incorporated in Delaware, it is governed by the provisions of Section 203 of the General Corporation Law of the State of Delaware,
or the DGCL, which prohibits a person who owns in excess of 15% of outstanding voting stock from merging or combining with MICT for a
period of three years after the date of the transaction in which the person acquired in excess of 15% of outstanding voting stock, unless
the merger or combination is approved in a prescribed manner. MICT has not opted out of the restrictions under Section 203.
We may need a significant amount of additional capital, which
could substantially dilute your investment
We
may need significant additional capital in the future to continue our planned operations. No assurance can be given that we will be able
to obtain such funds upon favorable terms and conditions, if at all. Failure to do so could have a material adverse effect on our business.
To the extent we raise additional capital by issuing equity securities, our stockholders may experience substantial dilution. We may
sell Common Stock, convertible securities, or other equity securities in one or more transactions that may include voting rights (including
the right to vote as a series on particular matters), preferences as to dividends and liquidation, and conversion and redemption rights,
subject to applicable law, and at prices and in a manner we determine from time to time.
Such
issuances and the exercise of any convertible securities will dilute the percentage ownership of our stockholders and may affect the
value of our capital stock and could adversely affect the rights of the holders of such stock, thereby reducing the value of such stock.
Moreover, any exercise of convertible securities may adversely affect the terms upon which we will be able to obtain additional equity
capital, since the holders of such convertible securities can be expected to exercise them at a time when we would, in all likelihood,
be able to obtain any needed capital on terms more favorable to us than those provided in such convertible securities.
If
we sell shares or other equity securities in one or more other transactions, or issue stock or stock options pursuant to any future employee
equity incentive plan, investors may be materially diluted by such subsequent issuances.
If
the price of our Common Stock is volatile, purchasers of our securities could incur substantial losses.
The price of MICT’s Common Stock has been and may continue to
be volatile. The market price of MICT’s Common Stock may be influenced by many factors, including but not limited to the following:
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developments regarding the Merger and the transactions; |
| ● | announcements of developments related to MICT’s business (including
those aspects of MICT’s business received in connection with the Merger); |
| ● | quarterly
fluctuations in actual or anticipated operating results; |
| ● | announcements
of technological innovations; |
| ● | new
products or product enhancements introduced by Micronet or its competitors; |
| ● | developments
in patents and other intellectual property rights and litigation; |
| ● | developments
in relationships with third party manufacturers and/or strategic partners; |
| ● | developments
in relationships with customers and/or suppliers; |
| ● | regulatory
or legal developments in the United States, Israel, China and other countries; |
| ● | general
conditions in the global economy; and |
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other factors described in this “Risk Factors” section. |
For
these reasons and others, you should consider an investment in our Common Stock as risky and invest only if you can withstand a significant
loss and wide fluctuations in the value of such investment.
A sale by MICT of a substantial number
of shares of the Common Stock or securities convertible into or exercisable for Common Stock may cause the price of the Common Stock
to decline and may impair the ability to raise capital in the future.
Our Common Stock is traded
on Nasdaq and despite certain increases of trading volume from time to time, there have been periods when it could be considered “thinly-traded,”
meaning that the number of persons interested in purchasing Common Stock at or near bid prices at any given time may have been relatively
small or non-existent. Financing transactions resulting in a large amount of newly-issued securities, or other events that cause current
stockholders to sell shares, could place downward pressure on the trading price of Common Stock. In addition, the lack of a robust resale
market may require a stockholder who desires to sell a large number of shares of Common Stock to sell those shares in increments over
time to mitigate any adverse impact of the sales on the market price of MICT stock. If MICT stockholders sell, or the market perceives
that its stockholders intend to sell for various reasons, including the ending of restriction on resale, substantial amounts of Common
Stock in the public market, including shares issued upon the exercise of outstanding options or warrants, the market price of Common Stock
could fall. Sales of a substantial number of shares of Common Stock may make it more difficult for MICT to sell equity or equity-related
securities in the future at a time and price that MICT deems reasonable or appropriate. Moreover, MICT may become involved in securities
class action litigation arising out of volatility resulting from such sales that could divert management’s attention and harm
MICT’s business.
We may acquire other companies or technologies,
and the Tingo Merger could divert our management’s attention, result in additional dilution to our stockholders and otherwise disrupt
our operations and adversely affect our operating results.
We may in the future seek to acquire or invest in other businesses,
features or technologies that we believe could complement or expand our market, enhance our technical capabilities or otherwise offer
growth opportunities. The pursuit of potential acquisitions including Tingo, may divert the attention of management and cause us to incur
various expenses in identifying, investigating and pursuing suitable acquisitions, whether or not they are consummated. In addition, to
the extent that we enter into any term sheets or otherwise announce any intention to acquire any additional businesses, features or technologies,
any such acquisition would generally be subject to completion of due diligence and required approvals, and would require additional financing,
and there can be no assurance that any such acquisition will occur or be completed in a timely manner, or at all.
If
we acquire additional businesses, we may not be able to integrate the acquired personnel, operations, existing contracts and technologies
successfully or effectively manage the combined business following the acquisition. We also may not achieve the anticipated benefits
from any acquired business, due to a number of factors, including:
| ● | failure
to identify all of the problems, liabilities or other shortcomings or challenges of an acquired company or technology, including issues
related to intellectual property, regulatory compliance practices, product quality and safety, revenue recognition or other accounting
practices, or employee or client issues; |
| ● | difficulty
incorporating acquired technology and rights into our proprietary software and of maintaining quality and security standards consistent
with our brands; |
| ● | inability
to generate sufficient revenue to offset acquisition or investment costs; |
| ● | incurrence
of acquisition-related costs or equity dilution associated with funding the acquisition; |
| ● | difficulties
and additional expenses associated with supporting legacy products and hosting infrastructure of the acquired business; |
| ● | risks
of entering new markets or new product categories in which we have limited or no experience; |
| ● | difficulty
converting the customers of the acquired business into our customers; |
| ● | diversion
of our management’s attention from other business concerns; |
| ● | adverse
effects to our existing business relationships as a result of the acquisition; |
| ● | potential
loss of key employees, clients, vendors and suppliers from either our current business or an acquired company’s business; |
| ● | use
of resources that are needed in other parts of our business; |
| ● | possible
write offs or impairment charges relating to acquired businesses; |
| ● | compliance
with regulatory matters covering the products of the acquired business; and |
| ● | use
of substantial portions of our available cash to consummate the acquisition. |
In
addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill and intangible assets,
which must be assessed for impairment at least annually. In the future, if our acquisitions do not yield expected returns, we may be
required to take charges to our operating results based on this impairment assessment process, which could adversely affect our results
of operations. Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely
affect our operating results. If an acquired business fails to meet our expectations, our business, operating results and financial condition
may suffer.
If securities or industry analysts do not
publish research or reports or publish unfavorable research about MICT’s business, the price of its Common Stock could decline.
MICT does not currently have
any significant research coverage by securities and industry analysts and may never obtain such research coverage. If securities or industry
analysts do not commence or maintain coverage of MICT, the trading price for its Common Stock might be negatively affected. In the event
such securities or industry analyst coverage is obtained, if one or more of the analysts who covers MICT or will cover MICT downgrades
its securities, the price of Common Stock would likely decline. If one or more of these analysts ceases to cover MICT or fails to publish
regular reports on it, interest in the purchase of Common Stock could decrease, which could cause the price of Common Stock and trading
volume to decline.
If we fail to continue to meet all applicable
Nasdaq requirements, Nasdaq may delist our common stock, which could have an adverse impact on the liquidity and market price of our common
stock.
MICT’s common stock
is currently listed on Nasdaq, which has qualitative and quantitative listing criteria. If MICT continues to be unable to comply with
Nasdaq listing requirements, including, for example, if the closing bid price for MICT common stock continues to fall below $1.00 per
share, in breach of Nasdaq Listing Rule 5550(a)(2), Nasdaq could determine to delist the MICT common stock which could adversely affect
its market liquidity market price. In that regard, on January 27, 2022, MICT received written notice from Nasdaq indicating that it was
not in compliance with Nasdaq Listing Rule 5550(a)(2), as the closing bid price of its common stock had been below $1.00 per share. Nasdaq’s
letter advised the Company that, based upon the closing bid price during the period from December 21, 2021 to January 26, 2022, the Company
no longer meets this test. MICT was able to regain compliance by maintaining a minimum closing bid price of at least $1.00 for a minimum
of 10 consecutive trading days; however there can be no assurance that MICT will be able to maintain compliance with the Nasdaq listing
requirements, or that the common stock will not be delisted from Nasdaq in the future. Such delisting could adversely affect the ability
to obtain financing for the continuation of MICT’s operations or prevent us from completing the Acquisition or any other alternative
transaction, and could result in the loss of confidence by investors, customers and employees and cause our shareholders to incur substantial
losses.
If Nasdaq delists MICT’s securities from trading on its exchange
and MICT is not able to list its securities on another national securities exchange, MICT expects its securities could be quoted on an
over-the-counter market. If this were to occur, MICT could face significant material adverse consequences, including:
| ● | a
limited availability of market quotations for its securities; |
| ● | reduced
liquidity for its securities; |
| ● | a
determination that the MICT’s common stock is a “penny stock” which will require brokers trading in the MICT’s
common stock to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market
for MICT’s securities; |
| ● | a
limited amount of news and analyst coverage; and |
| ● | a
decreased ability to issue additional securities or obtain additional financing in the future. |
MICT’s stockholders may not realize
a benefit from the Company’s mergers commensurate with the ownership dilution they will experience in connection with the mergers.
If MICT is unable to realize the full strategic and financial benefits
anticipated from its merger with Tingo, MICT’s stockholders will have experienced substantial dilution of their ownership interests
in MICT without receiving any commensurate benefit, or only receiving part of the commensurate benefit to the extent MICT is able to realize
only part of the strategic and financial benefits anticipated from the mergers.
Intermediate
may be subject to new or different statutory and regulatory requirements in the British Virgin Islands (“BVI”).
As
the global regulatory and tax environment evolves, Intermediate may be subject to new or different statutory and regulatory requirements
(for example, on January 1, 2019 the Economic Substance (Companies and Limited Partnerships) Act, 2018 of the British Virgin Islands
came into force). It is difficult to predict what impact the adoption of these laws or regulations, or changes in the interpretation
of existing laws or regulations could have on Intermediate, however, compliance with various additional obligations may create significant
additional costs that may be borne by Intermediate or otherwise affect the management and operation of Intermediate.
The COVID-19 pandemic, or any other pandemic,
epidemic or outbreak of an infectious disease, may materially and adversely affect MICT’s business and operations.
The outbreak of COVID-19 originated
in Wuhan, China, in December 2019 and has since spread to multiple countries, including the United States, Israel and many European
countries and affected the each of the Company’s subsidiaries business as set hereunder. On March 11, 2020, the World Health Organization
declared the outbreak a pandemic. While COVID-19 is still spreading and the final implications of the pandemic are difficult to estimate
at this stage, it is clear that it has affected the lives of a large portion of the global population. At this time, the pandemic has
caused states of emergency to be declared in various countries, travel restrictions imposed globally, quarantines established in certain
jurisdictions and various institutions and companies being closed. MICT is actively monitoring the pandemic in order to respond the changing
business and market conditions accordingly.
Management has considered
the consequences of COVID-19 and other events and conditions, and it has determined that they do not create a material uncertainty that
casts significant doubt upon the entity’s ability to continue as a going concern.
The impact of COVID-19 on
future performance and therefore on the measurement of some assets and liabilities or on liquidity might be significant and might therefore
require disclosure in the financial statements, but management has determined that they do not create a material uncertainty that casts
significant doubt upon the entity’s ability to continue as a going concern.
MICT’s operations and business have experienced disruptions due
to the unprecedented conditions surrounding the spread of COVID-19 throughout China, North America, Israel and the world. The COVID-19
pandemic and both public and private measures taken to contain it have negatively affected MICT’s business, results of operations,
financial condition, and liquidity, all of which may continue or worsen. The following are some of the issues that MICT continues to face:
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Prolonged recessionary concerns. The COVID-19 pandemic has resulted in a significant reduction of economic activity in the U.S., and the markets in which the Company operates as stated above as well as a significant increase in unemployment, which could lead to a prolonged economic recession; |
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Actual and potential delays in customer payments, defaults on the MICT’s customer credit arrangements; or other failures by third parties such as suppliers, and distributors to meet their obligations to MICT due to their economic circumstances. The financial markets have also been adversely impacted by the COVID-19 pandemic, potentially causing operational cash flow issues for MICT, and potentially causing similar issues for MICT’s customers, including, but not limited to, affecting their ability to meet their payment obligations to us; and |
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Interruptions in manufacturing or distribution of MICT’s products. Outbreaks in the communities in which MICT operates could affect its ability to operate its manufacturing or distribution activities, and MICT’s suppliers could experience similar interruptions. |
Due to the uncertainty surrounding
the COVID-19 pandemic, MICT will continue to assess the situation, including government-imposed restrictions, market by market. It is
not possible at this time to estimate the full impact that the COVID-19 pandemic could have on MICT’s business, the continued spread
of COVID-19, and any additional measures taken by governments, health officials or by MICT in response to such spread, could have on MICT’s
business, results of operations and financial condition. The COVID-19 pandemic and mitigation measures have also negatively impacted global
economic conditions, which, in turn, could adversely affect MICT’s business, results of operations and financial condition. The
extent to which the COVID-19 outbreak continues to impact MICT’s financial condition will depend on future developments that are
highly uncertain and cannot be predicted, including new government actions or restrictions, new information that may emerge concerning
the severity, longevity and impact of the COVID-19 pandemic on economic activity.
Even after COVID-19 has
subsided, MICT may continue to experience materially adverse impacts to its business as a result of its global economic impact,
including any recession that has occurred or may occur in the future. There are no comparable recent events which may provide
guidance as to the effect of the spread of COVID-19, and, as a result, the ultimate impact of COVID-19, or a similar health epidemic
or pandemic, is highly uncertain and subject to change. While MICT continues to monitor the business metrics that it has
historically used to predict its financial performance, it is uncertain as to whether these metrics will continue to function as
they have in the past. COVID-19 cause shut downs of cities and may happen again and we were not able to file on time and may happen
again in the future.
The COVID-19 pandemic, or any other pandemic,
epidemic or outbreak of an infectious disease, may materially and adversely affect Intermediate’s and Micronet’s business
and thereby have a material adverse effect on MICT’s investment in Intermediate and Micronet.
MICT may not realize the benefits of its investment in Intermediate
and Micronet if as a result of, among other things, COVID-19, Intermediate’s and Micronet’s business and operations suffer
a material adverse effect. During the COVID-19 pandemic, Micronet has suffered a material adverse impact on its business and operations,
results of operations and financial condition due to, among other things, a delay in receiving customers’ orders and the general
negative economic climate that has resulted from COVID-19. In addition, the COVID-19 pandemic has resulted in a material adverse change
in the general business and economic atmosphere in the world and in Israel and a negative sentiment in both the business and capital markets,
which includes a substantial and significant decrease in demand for the products offered by Micronet, leading to a slowdown in production
and delivery, as well as the cancellation of orders by its customers or rejection of development by manufacturers and suppliers.
Moreover,
government restrictions imposed in China impacted Micronet’s manufacturing and subcontracting operations in China were affected
for a certain period of time due to COVID-19. Similarly, GFH’s business and operations in China have been impacted by COVID-19
as well. In addition, activities related to the development of various components of Micronet’s products have not yet returned
to regular levels. Although the facilities overseeing a portion of these activities have returned to operation, GFH and Micronet do not
know if limitations that were previously lifted will be reinstated or whether limitations that are still in effect will be lifted in
the near term. As such, Micronet’s management believes that there will be a delay in launching its new products to the market and
they will not be completed before first quarter of 2021.
We
have issued and may issue additional preferred stock in the future, and the terms of the preferred stock may reduce the value of our
Common Stock.
We
are authorized to issue up to 15,000,000 shares of preferred stock in one or more series. Our board of directors may determine the terms
of future preferred stock offerings without further action by our stockholders. If we issue shares of preferred stock, it could affect
stockholder rights or reduce the market value of our outstanding Common Stock. In particular, specific rights granted to future holders
of preferred stock may include voting rights, preferences as to dividends and liquidation, conversion and redemption rights, sinking
fund provisions, and restrictions on our ability to merge with or sell our assets to a third party.
MICT may be subject to litigation and regulatory
investigations and proceedings, and may not always be successful in defending itself against such claims or proceedings.
MICT’s business operations
entail substantial litigation and regulatory risks, including the risk of lawsuits and other legal actions relating to, among other matters,
breach of contract, information disclosure, client onboarding procedures, sales practices, product design, fraud and misconduct, and control
procedures deficiencies, as well as the protection of personal and confidential information of MICT’s or Intermediate’s or
Micronet’s clients. MICT or its subsidiaries may be subject to arbitration claims and lawsuits in the ordinary course of its business.
MICT or its subsidiaries may also be subject to inquiries, inspections, investigations and proceedings by regulatory and other governmental
agencies. MICT and its subsidiaries will be subject to extensive and evolving regulatory requirements, non-compliance with which, may
result in penalties, limitations and prohibitions on its future business activities or suspension or revocation of its licenses and trading
rights, and consequently may materially and adversely affect its business, financial condition, operations and prospects.
Additionally, the Merger and the transactions contemplated thereby,
as well as certain private placements completed by the Company, may give rise to litigation and/or other legal disputes. As previously
disclosed, in March 2017, MICT entered into an Investment Banking Agreement (the “Sunrise Agreement”) with Sunrise Securities
LLC and Trump Securities LLC (collectively, “Sunrise”) through Sunrise’s principal, Amnon Mandelbaum, pursuant to which
Sunrise agreed to assist MICT in identifying, analyzing, structuring, and negotiating suitable business opportunities, such as a sale
of stock or assets, merger, tender offer, joint venture, financing arrangement, private placement, or any similar transaction or combination
thereof. The parties had disagreements about, among other things, the applicability of the Sunrise Agreement, and the Company received
demand letters and other correspondences from Sunrise threatening litigation in connection therewith. As of the date hereof, the parties
have executed a settlement and release agreement for the release and waiver of the above claims however, MICT was not able to timely file
a registration statement to register the shares, and shares underlying the warrants per the settlement agreement. The Sunrise parties
notified MICT that it has breached the settlement agreement. MICT has made a significant offer to the Sunrise parties to settle such
matter and is negotiating with the Sunrise parties to resolve this issue immediately. For further details see “Legal Proceedings”
below.
Actions
brought against MICT or its subsidiaries may result in settlements, injunctions, fines, penalties, suspension or revocation of licenses,
reprimands or other results adverse to it that could harm its reputation. Even if MICT is successful in defending itself against these
actions, the costs of such defense may be significant. In market downturns, the number of legal claims and the amount of damages sought
in legal proceedings may increase.
In addition, MICT may face
arbitration claims and lawsuits brought by its or tis subsidiaries’ users and clients who use its services and find them unsatisfactory.
MICT may also encounter complaints alleging misrepresentation with regard to its platforms and/or services. Actions brought against MICT
may result in settlements, awards, injunctions, fines, penalties or other results adverse to it including harm to its reputation. Even
if MICT is successful in defending against these actions, the defense of such matters may result in its incurring significant expenses.
Predicting the outcome of such matters is inherently difficult, particularly where claimants seek substantial or unspecified damages,
or when arbitration or legal proceedings are at an early stage. A significant judgement or regulatory action against MICT or a material
disruption in Intermediate’s stock trading platform business arising from adverse adjudications in proceedings against the directors,
officers or employees would have a material adverse effect on MICT’s liquidity, business, financial condition, results of operations
and prospects.
Because almost all of MICT’s officers
and directors are located in non-U.S. jurisdictions, you may have no effective recourse against management for misconduct.
Currently, a majority of MICT’s
directors and officers are or will be nationals and/or residents of countries other than the United States, and all or a substantial
portion of their assets are located outside the United States. As a result, it may be difficult for investors to enforce within the
United States any judgments obtained against such officers or directors, including judgments predicated upon the civil liability
provisions of the securities laws of the United States or any U.S. state. Additionally, it may be difficult to enforce civil liabilities
under U.S. securities law in original actions instituted in Israel, the UK or PRC. UK, PRC or Israeli courts may refuse to hear a claim
based on a violation of U.S. securities laws because such jurisdictions are not the most appropriate forum to bring such a claim. In addition,
even if such courts agree to hear a claim, they may determine that Israeli, UK or PRC law, as applicable, and not U.S. law is applicable
to hear the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact, which can be a
time-consuming and costly process. Certain matters of procedure may also be governed by UK, PRC or Israeli law.
MICT’s financial results may be negatively
affected by foreign exchange rate fluctuations.
MICT’s revenues are
mainly denominated in U.S. Dollars and prior to the Merger, costs were mainly denominated in New Israeli Shekels (“NIS”).
Where possible, MICT matches sales and purchases in these and other currencies to achieve a natural hedge. Currently, Micronet does not
have a policy with respect to the use of derivative instruments for hedging purposes, except that Micronet will consider engaging in such
hedging activities on a case-by-case basis. To the extent MICT is unable to fully match sales and purchases in different currencies, its
business will be exposed to fluctuations in foreign exchange rates. Following the Merger, Intermediate’s revenue and expenses have
been and are expected to continue to be primarily denominated in RMB and we are exposed to the risks associated with the fluctuation in
the currency exchange rate of RMB. Should RMB appreciate against other currencies, the value of the proceeds from this offering and any
future financings, which are to be converted from U.S. dollar or other currencies into RMB, would be reduced and might accordingly hinder
our business development due to the lessened amount of funds raised. Substantial fluctuation in the currency exchange rate of RMB may
have a material adverse effect on Intermediate’s business, operations and financial position and the value of your investment in
the Units.
We have identified a material weakness
in our internal control over financial reporting as of December 31, 2021.
We conducted an evaluation under the supervision of our Chief Executive
Officer and Chief Financial Officer (our Principal Executive Officer and Principal Financial Officer, respectively), regarding the effectiveness
of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December
31, 2021 and management concluded that they were not effective. The five material weaknesses related to information technology and one
material weakness related to engaging enough qualified employees knowledgeable in U.S. GAAP were directly related to our rapid growth,
inability to timely integrate various information technology systems from all of its acquired businesses, the ongoing effects of COVID-19
and PRC regulations related thereto. See Item 9A Controls and Procedures for a further description of the identified material weaknesses.
If we are unable to maintain an effective system of internal control over financial reporting, we may not be able to accurately report
our financial results in a timely manner, which may adversely affect investor confidence in us and materially and adversely affect our
business and operating results;
Risk
Factors Relating to Intermediate’s Business
Intermediate’s
trading platforms have no operating history, which makes it difficult to evaluate Intermediate’s future prospects.
Intermediate is focused on developing its various trading platforms
and technology infrastructure, which have not launched. As Intermediate’s platforms will be built on technology and a significant
portion of Intermediate’s staff come from Internet and technology companies, Intermediate has limited experience in most aspects
of its trading platform business operation. Any aspect of Intermediate’s business model that does not achieve expected results may
have a material and adverse impact on Intermediate’s financial condition and results of operations. It is therefore difficult to
effectively assess MICT’s future prospects.
Intermediate’s targeted
markets may not develop as expected. Intermediate’s users and clients of Intermediate’s services may not be familiar with
the development of these markets and may have difficulty distinguishing Intermediate’s services from those of Intermediate’s
competitors. Convincing users and clients of the value of using Intermediate’s services will be critical to increasing the number
of transactions on Intermediate’s platforms and to the success of Intermediate businesses.
You
should consider Intermediate’s businesses in light of the risks and challenges it encounters or may encounter given the rapidly
evolving markets in which it operates and its lack of operating history. These risks and challenges include our ability to, among other
things:
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manage the launch of its trading platforms and its
future growth; |
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navigate a complex and evolving regulatory environment; |
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offer personalized and competitive services; |
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increase the utilization of its services by users and
clients; |
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maintain and enhance its relationships with its business
partners; |
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enhance its technology infrastructure to support the
growth of its business and maintain the security of its systems and the confidentiality of the information provided and utilized
across its systems; |
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improve its operational efficiency; |
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attract, retain and motivate talented employees to
support its business growth; |
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navigate economic condition and fluctuation; |
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defend itself against legal and regulatory actions,
such as actions involving intellectual property or privacy claims; and |
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obtain any and all licenses necessary for the operation
of its business. |
Intermediate
may not be able to manage its expansion effectively.
Intermediate’s
current and planned personnel, systems, resources and controls may not be adequate to support and effectively manage its future operations.
Intermediate’s plans for continuous expansion may increase the complexity of its business and may place a strain on its management,
operations, technical systems, financial resources and internal control functions. Intermediate intends to upgrade its systems from time
to time to cater to the need of launching new services, and the process of upgrading its systems may disrupt its ability to timely and
accurately process information, which could adversely affect its results of operations and cause harm to its business.
If
Intermediate is unable to attract and retain clients, or if it fails to offer services to address the needs of its clients as it evolves,
Intermediate’s business and results of operations may be materially and adversely affected.
If
there is insufficient demand for Intermediate’s services, it might not be able to achieve and increase its transaction volume and
revenues as it expects, and its and MICT’s business and results of operations may be adversely affected.
Intermediate’s success
will depend largely on its ability to attract and retain clients, in particular those that have highly frequent transactions. Failure
to deliver services in a timely manner at competitive prices with satisfactory experience will cause clients to lose confidence in Intermediate
and use its platforms less frequently or even stop using its platforms altogether, which in turn will materially and adversely affect
Intermediate’s business. Even if Intermediate is able to provide high-quality and satisfactory services on its platforms in a timely
manner and at favorable price terms, MICT cannot assure you that Intermediate will be able to attract and retain clients, encourage repeat
and increase trading transactions due to reasons out of its control, such as Intermediate’s clients’ personal financial reasons
or the deterioration of the market conditions.
If Intermediate is unable
to generate clients and increase its client retention rates in a cost-effective manner, Intermediate’s business, financial condition
and results of operations are likely to be adversely affected. Although MICT expects to spend significant financial resources on marketing
expenses, these efforts may not be cost-effective to attract clients to Intermediate. MICT cannot assure its investors that Intermediate
will be able to gain, maintain, or grow a client base in a cost-effective way, if at all.
MICT will depend on Intermediate’s
proprietary technology, and its future results may be impacted if it cannot maintain technological superiority in its industry.
MICT’s potential success
depends on Intermediate’s sophisticated proprietary technology to empower the efficient operations of its platforms. If Intermediate’s
technology becomes more widely available to its current or future competitors for any reason, its operating results may be adversely affected.
Additionally, to keep pace
with changing technologies and client demands, Intermediate must correctly interpret and address market trends and enhance the features
and functionality of its technology in response to these trends, which may lead to significant research and development costs. Intermediate
may be unable to accurately determine the needs of its users and clients or the trends of the various industries it anticipates to enter
or to design and implement the appropriate features and functionality of its technology in a timely and cost-effective manner, which could
result in decreased demand for its services and a corresponding decrease in its revenue. Also, any adoption or development of similar
or more advanced technologies by its competitors may require that MICT devotes substantial resources to the development of more advanced
technology at Intermediate to remain competitive. The markets in which Intermediate competes are characterized by rapidly changing technology,
evolving industry standards and changing trading systems, practices and techniques. Intermediate may not be able to keep up with these
rapid changes in the future, develop new technology, realize a return on amounts invested in developing new technologies or remain competitive
in the future.
In addition, Intermediate must protect its systems against physical
damage from fire, earthquakes, power loss, telecommunications failures, computer viruses, hacker attacks, physical break-ins and similar
events. Any software or hardware damage or failure that causes interruption or an increase in response time of its proprietary technology
could reduce client satisfaction and decrease usage of its services.
Unexpected
network interruptions, security breaches or computer virus attacks and failures in Intermediate’s information technology
systems could have a material adverse effect on its business, financial condition and results of operations.
Intermediate’s
information technology systems will support all phases of its operations and will be an essential part of its technology infrastructure.
If Intermediate’s systems fail to perform, it could experience disruptions in operations, slower response time or decreased customer
satisfaction. Intermediate must be able to process, record and monitor a large number of transactions and its operations are highly dependent
on the integrity of its technology systems and its ability to make timely enhancements and additions to its systems. System interruptions,
errors or downtime can result from a variety of causes, including unexpected interruptions to the Internet infrastructure, technological
failures, changes to Intermediate’s systems, changes in customer usage patterns, linkages with third-party systems and power failures.
Intermediate’s systems will also be vulnerable to disruptions from human error, execution errors, errors in models such as those
used for risk management and compliance, employee misconduct, unauthorized trading, external fraud, distributed denial of service attacks,
computer viruses or cyberattacks, terrorist attacks, natural disaster, power outage, capacity constraints, software flaws, events impacting
Intermediate’s key business partners and vendors, and other similar events.
Intermediate’s
Internet-based businesses depend on the performance and reliability of the Internet infrastructure. Intermediate cannot assure its investors
that the Internet infrastructure it depends on will remain sufficiently reliable for its needs. Any failure to maintain the performance,
reliability, security or availability of Intermediate’s network infrastructure may cause significant damage to its ability to attract
and retain users and clients. Major risks involving Intermediate’s network infrastructure include:
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breakdowns or system failures resulting in a prolonged
shutdown of its servers; |
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disruption or failure in the national backbone networks
in the PRC, which would make it impossible for users and clients to access its platforms; |
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damage from natural disasters or other catastrophic
events such as typhoon, volcanic eruption, earthquake, flood, telecommunications failure, or other similar events; and |
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any infection by or spread of computer viruses or other
system failures. |
Any
network interruption or inadequacy that causes interruptions in the availability of Intermediate’s platforms or deterioration in
the quality of access to its platforms could reduce user and client satisfaction and result in a reduction in the activity level of its
users and clients as well as the number of clients making trading transactions on its platforms. Furthermore, increases in the volume
of traffic on Intermediate’s platforms could strain the capacity of its computer systems and bandwidth, which could lead to slower
response times or system failures. This could cause a disruption or suspension in Intermediate’s service delivery, which could
hurt its brand and reputation. Intermediate may need to incur additional costs to upgrade its technology infrastructure and computer
systems in order to accommodate increased demand if it anticipates that its systems cannot handle higher volumes of traffic and transaction
in the future. In addition, it could take an extended period of time to restore full functionality to its technology or other operating
systems in the event of an unforeseen occurrence, which could affect its ability to process and settle client transactions. Despite Intermediate’s
efforts to identify areas of risk, oversee operational areas involving risks, and implement policies and procedures designed to manage
these risks, there can be no assurance that it will not suffer unexpected losses, reputational damage or regulatory actions due to technology
or other operational failures or errors, including those of its vendors or other third parties.
Failure
or poor performance of third-party software, infrastructure or systems on which Intermediate relies could adversely affect its business.
Intermediate
will rely on third parties to provide and maintain certain infrastructure that will be critical to its business. For example, a strategic
partner provides services to Intermediate in connection with various aspects of Intermediate’s operations and systems. If such
services become limited, restricted, curtailed or less effective or more expensive in any way or become unavailable to Intermediate for
any reason, its business may be materially and adversely affected. The infrastructure of Intermediate’s third-party service providers
may malfunction or fail due to events out of its control, which could disrupt its operations and have a material adverse effect on its
business, financial condition, results of operations and cash flows. Any failure to maintain and renew Intermediate’s relationships
with these third parties on commercially favorable terms, or to enter into similar relationships in the future, could have a material
adverse effect on its business, financial condition, results of operations and cash flows.
Intermediate
also relies on certain third-party software, computer systems and service providers. Any interruption in these third-party services or
software, deterioration in their performance, or other improper operation could interfere with its trading activities, cause losses due
to erroneous or delayed responses, or otherwise be disruptive to its business. If Intermediate’s arrangements with any third party
are terminated, it may not be able to find an alternative source of software or systems support on a timely basis or on commercially
reasonable terms. This could also have a material adverse effect on Intermediate’s business, financial condition, results of operations
and cash flows.
If
Intermediate fails to protect its platform or the confidential information of its users and clients, whether due to cyber-attacks, computer
viruses, physical or electronic break-ins or other reasons, it may be subject to liabilities imposed by relevant laws and regulations,
and its reputation and business may be materially and adversely affected.
MICT’s and Intermediate’s
computer system, the networks it uses, the networks and online trading platforms of the exchanges and other third parties with whom it
interacts, are potentially vulnerable to physical or electronic computer break-ins, viruses and similar disruptive problems or security
breaches. A party that is able to circumvent MICT’s or Intermediate’s security measures could misappropriate proprietary information
or customer information, jeopardize the confidential nature of the information MICT or Intermediate transmits over the Internet and mobile
network or cause interruptions in its operations. MICT, Intermediate or its respective service providers may be required to invest significant
resources to protect against the threat of security breaches or to alleviate problems caused by any breaches.
In addition, MICT and Intermediate
will collect, store and process certain personal and other sensitive data from its users and clients, which makes MICT and Intermediate
potentially vulnerable targets to cyber-attacks, computer viruses, physical or electronic break-ins or similar disruptions. While MICT
and Intermediate will take steps to protect the confidential information that it expects to have access to, its security measures could
be breached. Because the techniques used to sabotage or obtain unauthorized access to systems change frequently and generally are not
recognized until they are launched against a target, MICT and Intermediate may not be able to anticipate these techniques or implement
adequate preventative measures. Any accidental or willful security breaches or other unauthorized access to MICT’s or Intermediate’s
system could cause confidential user and client information to be stolen and used for criminal purposes. Security breaches or unauthorized
access to confidential information could also expose MICT and Intermediate to liability related to the loss of the information, time-consuming
and expensive litigation and negative publicity. If security measures are breached because of third-party action, employee error, malfeasance
or otherwise, or if design flaws in MICT’s or Intermediate’s technology infrastructure are exposed and exploited, its relationships
with users and clients could be severely damaged, it could incur significant liability and its stock trading platform business and operations
could be adversely affected. Furthermore, Intermediate’s corporate clients may utilize its technology to serve their own employees
and customers. Any failure or perceived failure by MICT or Intermediate to prevent information security breaches or to comply with privacy
policies or privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of personally
identifiable information or other customer data, could cause Intermediate’s clients to lose trust in it and could expose Intermediate
to legal claims.
There are uncertainties as
to the interpretation and application of laws in one jurisdiction which may be interpreted and applied in a manner inconsistent to another
jurisdiction and may conflict with MICT’s or Intermediate’s policies and practices or require changes to the features of its
system. MICT and Intermediate cannot assure that its user information protection system and technical measures will be considered sufficient
under applicable laws and regulations. If MICT or Intermediate is unable to address any information protection concerns, any compromise
of security that results unauthorized disclosure or transfer of personal data, or to comply with the then applicable laws and regulations,
it may incur additional costs and liability and result in governmental enforcement actions, litigation, fines and penalties or adverse
publicity and could cause its users and clients to lose trust in us, which could have a material adverse effect on its stock trading platform
business, results of operations, financial condition and prospects. MICT and Intermediate may also be subject to new laws, regulations
or standards or new interpretations of existing laws, regulations or standards, including those in the areas of data security and data
privacy, which could require MICT or Intermediate to incur additional costs and restrict its stock trading platform business operations.
Our
business and reputation may be harmed by changes in business, economic or political conditions that impact global financial markets,
or by a systemic market event.
As
the Company offers financial services, our business, results of operations and reputation are directly affected by elements beyond our
control, such as economic and political conditions, changes in the volatility in financial markets (including volatility as a result
of the COVID-19 pandemic), significant increases in the volatility or trading volume of particular securities, broad trends in business
and finance, changes in volume of securities trading generally, changes in the markets in which such transactions occur and changes in
how such transactions are processed. These elements can arise suddenly and the full impact of such conditions can remain uncertain. A
prolonged weakness in equity markets, such as a slowdown causing reduction in trading volume in securities, derivatives or cryptocurrency
markets, may result in reduced revenues and would have an adverse effect on our business, financial condition and results of operations.
Significant downturns in the securities markets or in general economic and political conditions may also cause individuals to be reluctant
to make their own investment decisions and thus decrease the demand for our products and services and could also result in our customers
reducing their engagement with our platform. Conversely, significant upturns in the securities markets or in general economic and political
conditions may cause individuals to be less proactive in seeking ways to improve the returns on their trading or investment decisions
and, thus, decrease the demand for our products and services. Any of these changes could cause our future performance to be uncertain
or unpredictable, and could have an adverse effect on our business, financial condition and results of operations.
In
addition, some market participants could be overleveraged. In case of sudden, large price movements, such market participants may not
be able to meet their obligations to their respective brokers who, in turn, may not be able to meet their obligations to their counterparties.
As a result, the financial system or a portion thereof could suffer, and the impact of such an event could have an adverse effect on
our business, financial condition and results of operations.
In
addition, a prolonged weakness in the U.S. equity markets or a general economic downturn could cause our customers to incur losses, which
in turn could cause our brand and reputation to suffer. If our reputation is harmed, the willingness of our existing customers, and potential
new customers, to do business with us could be negatively impacted, which would adversely affect our business, financial condition and
results of operations.
We
operate in highly competitive markets, and many of our competitors have greater resources than we do and may have products and services
that may be more appealing than ours to our current or potential customers.
The
markets in which we compete are evolving and highly competitive, with multiple participants competing for the same customers. Our current
and potential future competition principally comes from incumbent discount brokerages, established financial technology companies, venture-backed
financial technology firms, banks, cryptocurrency exchanges, asset management firms and technology platforms. The majority of our competitors
have longer operating histories and greater capital resources than we have and offer a wider range of products and services. The impact
of competitors with superior name recognition, greater market acceptance, larger customer bases or stronger capital positions could adversely
affect our results of operations and customer acquisition and retention. Our competitors may also be able to respond more quickly to
new or changing opportunities and demands and withstand changing market conditions better than we can, especially larger competitors
that may benefit from more diversified product and customer bases. For example, some of our competitors have quickly adopted, or are
seeking to adopt, some of our key offerings and services, including commission-free trading, fractional share trading and no account
minimums, since their introduction on our platform to compete with us. In addition, competitors may conduct extensive promotional activities,
offer better terms or offer differentiating products and services that could attract our current and prospective customers and potentially
result in intensified competition within our markets. We continue to experience aggressive price competition in our markets and we may
not be able to match the marketing efforts or prices of our competitors. We may also be subject to increased competition as our competitors
enter into business combinations or partnerships, or established companies in other market segments expand to become competitive with
our business.
In
addition, we compete in a technology-intensive market characterized by rapid innovation. Some of our competitors in this market, including
new and emerging competitors, are not subject to the same regulatory requirements or scrutiny to which we are subject, which could place
us at a competitive disadvantage, in particular in the development of new technology platforms or the ability to rapidly innovate. We
may be unable to effectively use new technologies, adapt our products and services to emerging market standards or develop or introduce
and market enhanced or new products and services. If we are not able to update or adapt our products and services to take advantage of
the latest technologies and standards, or are otherwise unable to tailor the delivery of our services to the latest personal and mobile
computing devices preferred by our customers or to provide products or services that are of a quality preferred by our customers, it
could have an adverse effect on our business, financial position and results of operations.
Our
ability to compete successfully in the financial services market depends on a number of factors, including, among other things:
| ● | providing
easy-to-use, innovative and attractive products and services, as well as effective customer support; |
| ● | maintaining
and expanding our market position; |
| ● | attracting
and retaining customers; |
| ● | our
reputation and the market perception of our brand and overall value; |
| ● | maintaining
our relationships with our counterparties; |
| ● | maintaining
competitive pricing; |
| ● | competing
in a competitive landscape, including in the provision of products and services that have until recently been available only from our
bank competitors; |
| ● | the
effectiveness, reliability and stability of our technology (including the success of our outage prevention efforts and our cybersecurity
measures and defenses), products and services; |
| ● | innovating
effectively in launching new or enhanced products and services; |
| ● | adjusting
to a dynamic regulatory environment; |
| ● | the
differences in regulatory oversight regimes to which we and our competitors are subject; and |
| ● | general
economic and market trends, including customer demand for financial products and services. |
Our
competitive position within our markets could be adversely affected if we are unable to adequately address these factors, which could
have an adverse effect on our business, financial condition and results of operations.
If
we fail to retain existing customers or attract new customers, or if our customers decrease their use of our products and services, our
growth could be slower than we expect and our business may be harmed.
Our
continued business and revenue growth is dependent on our ability to attract new customers, retain existing customers, increase the amount
that our customers use our products and services and sell our premium services, and we cannot be sure that we will be successful in these
efforts. There are a number of factors that could lead to a decline in our number of customers or their usage of our products and services,
or that could prevent us from increasing our number of customers, including:
| ● | our
failure to introduce new products or services, or our introduction of new products or services, or changes in our existing products or
services, that are not favorably received; |
| ● | pricing
for our products and services; |
| ● | harm
to our brand and reputation, or decreases in the perceived quality, reliability or usefulness of our products and services; |
| ● | our
customers engaging with competitive products and services; |
| ● | our
customers having difficulty installing, updating or otherwise accessing the our app on mobile devices as a result of actions by us or
third parties that we rely on to distribute our app; |
| ● | our
customers experiencing security breaches, account intrusions or other unauthorized access as a result of actions by us or our business
partners, including third parties that we rely on to distribute the application; |
| ● | our
failure to provide adequate customer service to our customers; |
| ● | a
cybersecurity attack, data breach or other security incident resulting in loss in customer confidence; |
| ● | our
inability to manage network or service outages, interruptions and internet disruptions, including during times of high trading activity,
or other performance or technical problems that prevent our customers from accessing and managing their accounts or assets in a rapid
and reliable manner; |
| ● | changes
in our customers’ investment strategies or level of interest in investing; |
| ● | the
enactment of proposed legislation that would impose taxes on certain financial transactions; |
| ● | changes
mandated by legislation, regulatory authorities or litigation that adversely affect our products and services, or our ability to provide
them to our customers; |
| ● | any
restrictions on trading that we impose on our platform as a result of the capital requirements and cash deposit and collateral requirements
to; and |
| ● | deteriorating
general economic conditions, including as a result of the COVID-19 pandemic or a general downturn in the equity markets. |
As
we expand our business operations and enter new markets, new challenges in attracting and retaining customers will arise that we may
not successfully address. Our success, and our ability to increase revenues and operate profitably, depends in part on our ability to
cost-effectively acquire new customers, to retain existing customers and to keep existing customers engaged so that they continue to
use our products and services. Our customers may choose to cease using our platform, products and services at any time, and may choose
to transfer their accounts to another broker-dealer.
Many
of our customers could be first-time investors and our trading volumes and revenues could be reduced if these customers stop trading
altogether or stop using our platform for their investing activities.
Our
platform focuses on making the financial markets accessible to a broad demographic of retail investors. Our success, and our ability
to increase revenues and operate profitably, depends in part on such customers continuing to utilize our platform, even as global
social and economic conditions shift. However, our customers do not have long-term contractual arrangements with us and can utilize
our platform on a transaction-by-transaction basis and may also cease to use our platforms at any time. We may face particular
challenges in retaining these investors as customers, for example as a result of a return to pre-COVID-19 behaviors, increased
volatility in the financial markets or increasing availability of competing products that seek to target the same demographic. In
particular, a broad decline in the equity or other financial markets could result in some of these investors exiting the markets and
leaving our platform. Any significant loss of customers or a significant reduction in their use of our platform could have a
material impact on our trading volumes and revenues, and materially adversely affect our business, financial condition and results
of operations.
Our
introduction of new products and services, or changes to existing products and services, could fail to attract or retain customers or
generate growth and revenue.
Our
ability to attract, engage and retain our customers and to increase our revenue depends heavily on our ability to continue to maintain
and evolve our existing products and services and to create successful new products and services. We may introduce significant changes
to our existing products and services or acquire or introduce new and unproven products and services, including using technologies with
which we have little or no prior development or operating experience. We continue to incur substantial costs, and we may not be successful
in continuing to generate profits, in connection with these efforts. In addition, the introduction of new products and services, or changes
to existing products and services, may result in new or enhanced governmental or regulatory scrutiny or other complications that could
adversely affect our business and results of operations. If our new or enhanced products and services fail to attract customers, or if
our business plans are unsuccessful, we may fail to attract or retain customers or to generate sufficient revenue, operating margin or
other value to justify our investments, and our business may be adversely affected.
If
we do not keep pace with industry and technological changes and continue to provide new and innovative products and services, our business
may become less competitive and our business may be adversely impacted.
Rapid
and significant technological changes continue to confront the financial services industry, including developments in the methods in
which securities are traded. If we fail to innovate and deliver products and services with market fit and differentiation, or fail to
do so quickly enough as compared to our competitors, we may not be able to keep pace with industry and technological changes in our industry
and we may face difficulty in competing within our market, which could harm our business.
We
expect new technologies, products, services and industry norms to continue to emerge and evolve, and we cannot predict the effects of
technological changes or industry practices on our business. Further, new technologies introduced in our markets may be superior to,
or render obsolete, the technologies we currently use in our products and services. Incorporating new technologies into our products
and services may require substantial expenditures and take considerable time, and we may not be successful in realizing a return on these
development efforts in a timely manner or at all. Our ability to successfully adopt new products and services and to develop and incorporate
new technologies may be inhibited by industry-wide standards, changes to laws and regulations, changing customer expectations, demands
and preferences or third-party intellectual property rights. If we are unable to enhance our products and services or to innovate or
to develop new products and services that achieve market acceptance or that keep pace with rapid technological developments and evolving
industry standards or practices, our business could be adversely affected.
We
will need to continuously modify, enhance and improve our products and services to keep pace with changes in internet-related hardware,
mobile operating systems such as iOS and other software, communication, browser and database technologies. We may not be successful in
either developing these modifications, enhancements and improvements or in bringing them to market quickly or cost-effectively in response
to market demands. Furthermore, uncertainties about the timing and nature of new network platforms or technologies, or modifications
to existing platforms or technologies, could increase our research and development expenses. Any failure of our products and services
to keep pace with technological changes or to innovate or to operate effectively with future network platforms and technologies, or to
do so in a timely and cost-effective manner, could reduce the demand for our products and services, result in customer dissatisfaction
and negative publicity, reduce our competitive advantage and harm our business and reputation.
Our
products and internal systems rely on software that is highly technical, and if these systems contain errors, bugs or vulnerabilities,
or if we are unsuccessful in addressing or mitigating technical limitations or vulnerabilities in our systems, our business could be
adversely affected.
Our
trading platform relies on software, including software developed or maintained internally and by third parties, that is highly technical
and complex. In addition, our platform and our internal systems depend on the ability of such software, which includes machine learning
models, to collect, store, retrieve, transmit, manage and otherwise process immense amounts of data. The software on which we rely may
contain errors, bugs or vulnerabilities, and our systems are subject to certain technical limitations that may compromise our ability
to meet our objectives. Some errors, bugs or vulnerabilities inherently may be difficult to detect and may only be discovered after code
has been released for external or internal use. Errors, bugs, vulnerabilities, design defects or technical limitations within the software
on which we rely may lead to negative customer experiences (including the communication of inaccurate information to customers), compromised
ability of our products to perform in a manner consistent with customer expectations, delayed product introductions, compromised ability
to protect the data (including personal data) of our customers and our intellectual property or an inability to provide some or all of
our services. Such errors, bugs, vulnerabilities or defects could also be exploited by malicious actors and result in exposure of data
of customers on our platform, or otherwise result in a security breach or other security incident. We may need to expend significant
financial and development resources to analyze, correct, eliminate, or work around errors or defects or to address and eliminate vulnerabilities.
Any failure to timely and effectively resolve any such errors, bugs, vulnerabilities or defects in the software on which we rely, and
any associated degradations or interruptions of service, could result in damage to our reputation, loss of customers, loss of revenue,
regulatory or governmental inquiries, civil litigation, or liability for damages, any of which could have an adverse effect on our business,
financial condition and results of operations.
Our
success depends in part upon effective operation with mobile operating systems, networks, technologies, products, hardware and standards
that we do not control.
A substantial majority of our
customers’ activity on our platform occurs on mobile devices. There is no guarantee that popular mobile devices will continue to
feature our app, or that mobile device customers will continue to use our products and services rather than those of our competitors.
We are dependent on the interoperability of our app with popular mobile operating systems, networks, technologies, products, hardware
and standards that we do not control, such as mobile device operating systems. Any changes, bugs or technical issues in such systems or
changes in our relationships with mobile operating system partners, device manufacturers or mobile carriers, or in their terms of service
or policies that degrade the functionality of our app, reduce or eliminate our ability to distribute applications, give preferential treatment
to competitive products, limit our ability to target or measure the effectiveness of applications, or impose fees or other charges related
to our delivery of our application could adversely affect customer usage of our app. Further, we are subject to the standard policies
and terms of service of these operating systems, as well as policies and terms of service of the various application stores that make
our application and experiences available to our developers, creators and customers. These policies and terms of service govern the availability,
promotion, distribution, content and operation generally of applications and experiences on such operating systems and stores. Each provider
of these operating systems and stores has broad discretion to change and interpret its terms of service and policies with respect to our
platform and those changes may be unfavorable to us and our developers’, creators’ and customers’ use of our platform.
If we were to violate, or an operating system provider or application store believes that we have violated, its terms of service or policies,
that operating system provider or application store could limit or discontinue our access to its operating system or store. In some cases,
these requirements may not be clear or our interpretation of the requirements may not align with the interpretation of the operating system
provider or application store, which could lead to inconsistent enforcement of these terms of service or policies against us, and could
also result in the operating system provider or application store limiting or discontinuing access to its operating system or store. Any
limitation or discontinuation of our access to any third-party platform or application store could adversely affect our business, financial
condition or results of operations.
Additionally,
in order to deliver a high-quality mobile experience for our customers, it is important that our products and services work well with
a range of mobile technologies, products, systems, networks, hardware and standards that we do not control, and that we have good relationships
with mobile operating system partners, device manufacturers and mobile carriers. We may not be successful in maintaining or developing
relationships with key participants in the mobile ecosystem or in developing products that operate effectively with these technologies,
products, systems, networks or standards. In the event that it is more difficult for our customers to access and use our app, or if our
customers choose not to access or use our app on their mobile devices or use mobile products that do not offer access to our app, our
customer growth and engagement could be harmed. In the event that our customers are adversely affected by these actions or if our relationships
with such third parties deteriorate, our customer growth and engagement could be adversely affected and our business could be harmed.
Employee misconduct could expose the Company to significant legal
liability and reputational harm.
Intermediate’s
platforms will operate in industries in which integrity and the confidence of its users and clients are of critical importance. During
Intermediate’s daily operations, it will be subject to the risks of errors and misconduct by its employees, which include:
|
● |
engaging in misrepresentation
or fraudulent activities when marketing or performing services to users and clients; |
|
|
|
|
● |
improperly using or disclosing
confidential information of its users and clients or other parties; |
|
|
|
|
● |
concealing unauthorized
or unsuccessful activities; or |
|
|
|
|
● |
otherwise not complying
with applicable laws and regulations or its internal policies or procedures. |
If
any of Intermediate’s employees engages in illegal or suspicious activities or other misconduct, it could suffer serious harm to
its reputation, financial condition, client relationships and ability to attract new clients and even be subject to regulatory sanctions
and significant legal liability. Intermediate may also be subject to negative publicity from the sanction that would adversely affect
its brand, public image and reputation, as well as potential challenges, suspicions, investigations or alleged claims against us. It
is not always possible to deter misconduct by its employees or senior management during the operations of its business or uncover any
misconduct occurred in their past employment, and the precautions Intermediate takes to detect and prevent any misconduct may not always
be effective. Misconduct by Intermediate’s employees, or even unsubstantiated allegations of misconduct, could result in a material
adverse effect on its reputation and its business.
MICT anticipates that its operating costs and expenses will increase.
MICT anticipates that its
operating costs and expenses will increase in the foreseeable future as it endeavors to launch and grow Intermediate’s business,
attract users and clients, enhance and develop its service offerings, enhance its technology capabilities, and increase its brand recognition.
These efforts may prove more costly than MICT anticipates, and it may not succeed in generating revenues sufficiently to offset these
higher expenses. There are other external and internal factors that could negatively affect MICT’s financial condition. For example,
the transaction volume achieved on Intermediate’s platforms may be lower than expected, which may lead to lower than expected revenues.
Furthermore, MICT has adopted a share incentive plan in the past and may adopt new share incentive plans in the future, which have caused,
and will result in, significant share-based compensation expenses to us. As a result of the foregoing and other factors, MICT may incur
net losses in the future.
If there is any negative publicity with
respect to MICT, its industry peers or its industries in general, MICT’s business and results of operations may be materially
and adversely affected.
MICT’s reputation and
brand recognition plays an important role in earning and maintaining the trust and confidence of its current and potential users and clients.
MICT’s reputation and brand are vulnerable to many threats that can be difficult or impossible to control, and costly or impossible
to remediate. Regulatory inquiries or investigations, lawsuits initiated by clients or other third parties, employee misconduct, perceptions
of conflicts of interest and rumors, among other things, could substantially damage MICT’s reputation, even if they are baseless
or satisfactorily addressed. In addition, any perception that the quality of its services may not be the same as or better than that of
other companies can also damage its reputation. Moreover, any negative media publicity about the industries in general or product or service
quality problems of other firms in these industries, including MICT’s competitors, may also negatively impact MICT’s reputation
and brand. If MICT is unable to maintain a good reputation or further enhance its brand recognition, its ability to attract and retain
users, clients, third-party partners and key employees could be harmed and, as a result, its business and revenues would be materially
and adversely affected.
MICT may not succeed in promoting and sustaining
its brand, which could have an adverse effect on its future growth and business.
A critical component of MICT’s
launch and growth will be its ability to promote and sustain its brand. Promoting and positioning MICT’s brand and platforms will
depend largely on the success of its marketing efforts, its ability to attract users and clients cost-efficiently and its ability to consistently
provide high-quality services and a superior experience. MICT expects to incur significant expenses related to advertising and other marketing
efforts, which may not be effective and may adversely affect its net margins.
In addition, to provide a
high-quality user and client experience, MICT expects to invest substantial amounts of resources in the development and functionality
of Intermediate’s platforms, websites, technology infrastructure and client service operations. Intermediate’s ability to
provide a high-quality user and client experience will also be highly dependent on external factors over which it may have little or no
control, including, without limitation, the reliability and performance of software vendors and business partners. Failure to provide
Intermediate’s users and clients with high quality services and experience for any reason could substantially harm its reputation
and adversely impact its efforts to develop a trusted brand, which could have a material adverse effect on its stock trading platform
business, results of operations, financial condition and prospects.
Intermediate’s
platform and internal systems rely on software and technological infrastructure that is highly technical, and if they contain undetected
errors, its business could be adversely affected.
Intermediate’s
platforms and internal systems rely on software that is highly technical and complex. In addition, Intermediate’s platforms and
internal systems depend on the ability of the software to store, retrieve, process and manage immense amounts of data. The software may
now or in the future contain, undetected errors or bugs. Some errors may only be discovered after the code has been released for external
or internal use. Errors or other design defects within the software on which Intermediate relies may result in a negative experience
for users and clients, delay introductions of new features or enhancements, result in errors or compromise Intermediate’s ability
to protect data or its intellectual property. Any errors, bugs or defects discovered in the software on which it relies could result
in harm to Intermediate’s reputation, loss of users or financial service providers or liability for damages, any of which could
adversely affect its business, results of operations and financial conditions.
Any
failure to protect Intermediate’s intellectual property could harm its business and competitive position.
Intermediate expects to rely
primarily on trade secret, contract, copyright, trademark and patent law to protect its proprietary technology. It is possible that third
parties may copy or otherwise obtain and use Intermediate’s proprietary technology without authorization or otherwise infringe on
its rights. Intermediate may not be able to successfully pursue claims for infringement that interfere with its ability to use its technology,
website or other relevant intellectual property or have adverse impact on its brand. Intermediate cannot assure MICT’s investors
that any of its intellectual property rights would not be challenged, invalidated or circumvented, or such intellectual property will
be sufficient to provide Intermediate with competitive advantages. In addition, other parties may misappropriate its intellectual property
rights, which would cause it to suffer economic or reputational damages. Because of the rapid pace of technological change, MICT cannot
assure you that all of Intermediate’s proprietary technologies and similar intellectual property will be patented in a timely or
cost-effective manner, or at all. Furthermore, parts of Intermediate’s business rely on technologies developed or licensed by other
parties, or co-developed with other parties, and Intermediate may not be able to obtain or continue to obtain licenses and technologies
from these other parties on reasonable terms, or at all.
Any
claims or litigation could cause Intermediate and us to incur significant expenses and, if successfully asserted against Intermediate
or us, could require that we pay substantial damages or ongoing royalty payments, restrict Intermediate or us from conducting our business
or require that we or Intermediate comply with other unfavorable terms. We and Intermediate may also be obligated to indemnify parties
or pay substantial settlement costs, including royalty payments, in connection with any such claim or litigation and to obtain licenses,
modify applications or refund fees, which could be costly. Even if we and Intermediate were to prevail in such a dispute, any litigation
regarding Intermediate’s intellectual property could be costly and time-consuming and divert the attention of our management from
Intermediate and our business operations.
From time-to-time MICT may evaluate and potentially
consummate investments and acquisitions or enter into alliances, which may require significant management attention, disrupt Intermediate’s
stock trading platform business and adversely affect its financial results.
MICT may evaluate and consider
strategic investments, combinations, acquisitions or alliances to further increase the value of Intermediate’s platforms and better
serve Intermediate’s users and clients. These transactions could be material to its financial condition and results of operations
if consummated. MICT may not have the financial resources necessary to consummate any acquisitions in the future or the ability to obtain
the necessary funds on satisfactory terms. Any future acquisitions may result in significant transaction expenses and risks associated
with entering new markets in addition to integration and consolidation risks. MICT may not have sufficient management, financial and other
resources to integrate any such future acquisitions or to successfully operate new businesses, and it may be unable to profitably operate
its expanded company.
Internet-related
issues may reduce or slow the growth in the use of our services in the future. In particular, our future growth depends on the further
acceptance of the Internet in China and particularly the mobile Internet as an effective platform for assessing trading and other financial
services and content.
Critical
issues concerning the commercial use of the Internet, such as ease of access, security, privacy, reliability, cost, and quality of service,
remain unresolved and may adversely impact the growth of Internet use. If Internet usage continues to increase rapidly, the Internet
infrastructure may not be able to support the demands placed on it by this growth, and its performance and reliability may decline. Continuous
rapid growth in Internet traffic may cause decreased performance, outages and delays. Our ability to increase the speed with which we
provide services to users and clients and to increase the scope and quality of such services is limited by and dependent upon the speed
and reliability of Intermediate’s users’ and clients’ access to the Internet, which is beyond our control. If periods
of decreased performance, outages or delays on the Internet occur frequently or other critical issues concerning the Internet are not
resolved, overall Internet usage or usage of our web-based services could increase more slowly or decline, which would cause Intermediate’s
stock trading platform business, results of operations and financial condition to be materially and adversely affected.
Intermediate faces risks related to natural
disasters, health epidemics and other outbreaks, which could significantly disrupt its operations.
Intermediate’s
stock trading platform business could be materially and adversely affected by natural disasters, health epidemics or other public safety
concerns. Natural disasters may give rise to server interruptions, breakdowns, system failures, technology platform failures or Internet
failures, which could cause the loss or corruption of data or malfunctions of software or hardware as well as adversely affect its ability
to operate its platform and provide services and solutions. Intermediate’s stock trading platform business could also be adversely
affected if its employees are affected by health epidemics. In addition, Intermediates’ results of operations could be adversely
affected to the extent that any health epidemic harms the economy in general. If any natural disasters, health epidemics or other public
safety concerns were to affect the locations where Intermediate operates, its operation may experience material disruptions, which may
materially and adversely affect its stock trading platform business, financial condition and results of operations.
Risks
Related to Doing Business in China
Changes
in China’s economic, political or social conditions or government policies could have a material adverse effect on our business
and operations.
Intermediate division’s
principal executive office and operations, through its operating subsidiaries, are located in China. We also plan to launch various platforms
which are being built initially in China. Accordingly, MICT’s business, financial condition, results of operations and prospects
may be influenced to a significant degree by political, economic, social conditions and government policies in China generally. The Chinese
economy differs from the economies of most developed countries in many respects, including the level of government involvement, level
of development, growth rate, control of foreign exchange and allocation of resources. Although the PRC 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 improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government.
In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies.
The PRC government also exercises significant control over China’s economic growth through allocating resources, controlling payment
of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or
companies.
While the Chinese economy
has experienced significant growth over the past decades, such growth has been uneven, both geographically and among various sectors of
the economy, and the rate of growth has been slowing since 2012. Any adverse changes in economic conditions in China, in the policies
of the PRC government or in the laws and regulations in China, could have a material adverse effect on the overall economic growth of
China. Such developments could adversely affect MICT’s business and operating results, lead to reduction in demand for MICT’s
services and adversely affect MICT’s competitive position. COVID-19 had a severe and negative impact on Chinese and global economy
in the past few years. Whether this will lead to a prolonged downturn in the economy is still unknown. The PRC government has implemented
various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall Chinese
economy, but may have a negative effect on us. For example, our Intermediate division’s financial condition and results of operations
may be adversely affected by government control over capital investments or changes in tax regulations. In addition, in the past the PRC
government has implemented certain measures, including interest rate adjustment, to control the pace of economic growth. These measures
may cause decreased economic activity in China, which may adversely affect our Intermediate division’s business and operating results.
The PRC legal system embodies uncertainties which could limit
the legal protections available to us.
PRC laws and the PRC legal system in general may
have a significant impact on our business operations in China. Although China’s legal system has developed over the last several
decades, PRC laws, regulations and legal requirements remain underdeveloped relative to the United States of America. Moreover, PRC
laws and regulations change frequently and their interpretation and enforcement involve uncertainties. For example, the interpretation
or enforcement of PRC laws and regulations may be subject to government rules or policies, some of which are not published on a timely
basis or at all. In addition, the relative inexperience of China’s judiciary system in some cases may create uncertainty as to the
outcome of litigation. These uncertainties could limit our ability to enforce certain legal or contractual rights or otherwise adversely
affect our business and operations.
Furthermore, due to the existence
of unpublished rules and policies, and since newly issued PRC laws and regulations may have expected and unexpected retrospective effects,
we may not be aware of a violation of certain PRC laws, regulations, policies or rules until after the event.
The complexities, uncertainties and rapid changes in PRC regulation
of the Internet-related businesses and companies require significant resources for compliance.
The PRC government extensively regulates the Internet
industries, including foreign ownership of, and the licensing and permit requirements pertaining to, companies doing business in the Internet
industry. These laws and regulations are relatively new and evolving, and their interpretation and enforcement involve significant uncertainty.
As a result, in certain circumstances it may be difficult to determine what actions or omissions may be deemed to be in violation of applicable
laws and regulations. Issues, risks and uncertainties relating to PRC regulation of these businesses include, but are not limited to,
the following:
There are uncertainties relating to the regulation
of the Internet-related businesses in China, including evolving licensing practices. This means that certain of our permits, licenses
or operations may be subject to challenge, or we may fail to obtain permits or licenses that may be deemed necessary for operations.
New laws and regulations that
regulate Internet activities, including operating online platforms for insurance intermediary may be promulgated. If these new laws and
regulations are promulgated, additional licenses may be required for operations. If our operations do not comply with these new regulations
after they become effective, or if we fail to obtain any licenses required under these new laws and regulations, MICT or its subsidiaries
could be subject to penalties.
The principal regulation governing the operation of Internet insurance
business is the Measures for the Regulation of Internet Insurance Business, or Regulation of Internet Insurance Business, promulgated
by the CBIRC on December 7, 2020 and effective on February 1, 2021. There is no assurance that Intermediate would be able to meet all
the requirements set forth under the Regulation of Internet Insurance Business and effectively operate an online insurance brokerage business.
Please refer to “Regulation of Internet Insurance Businesses”.
The interpretation and application of existing
PRC laws, regulations and policies and any new laws, regulations or policies relating to the Internet-related industries have created
substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of companies
in these industries. We cannot assure you that Intermediate had obtained all the permits or licenses required for conducting its business
in China or will be able to maintain existing licenses or obtain any new licenses required under any new laws or regulations. There are
also risks associated with being found in violation of existing or future laws and regulations given the uncertainty and complexity of
China’s regulation of these businesses.
In addition, new laws and regulations applicable
to the Internet-related industries could be issued at the national or provincial level, or existing regulations could be interpreted more
strictly. No assurance can be given that business on these industries in general or our services in particular will not be adversely impacted
by further regulations. In particular, technical limitations on Internet use can also be developed or implemented. For example, restrictions
can be implemented on personal Internet use in the workplace in general or access to Intermediate’s sites in particular. All such
regulations, restrictions and limitations could lead to a reduction of user activities or a loss of users, and restrict the types of products
and services we may be able to offer in China, which in turn could have a material adverse effect on our financial condition and results
of operations in China.
The 2006 M&A Rules established complex procedures for some
acquisitions of Chinese companies by foreign investors, which could make it difficult to pursue growth through acquisitions in China.
On August 8, 2006, six PRC regulatory authorities
promulgated the Regulations on Mergers and Acquisitions of Domestics Enterprises by Foreign Investors (the “2006 M&A Rules”),
which were later amended on June 22, 2009. The 2006 M&A Rules and some other regulations and rules concerning mergers and acquisitions
established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time consuming
and complex, including requirements in some instances that the Ministry of Commerce, People’s Republic of China (“MOFCOM”)
be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. Moreover,
the Anti-Monopoly Law of China requires that the anti-monopoly law enforcement authority shall be notified in advance of any concentration
of undertaking if certain thresholds are triggered. In addition, the security review rules issued by the State Council that became effective
in September 2011 specify that mergers and acquisitions by foreign investors that raise “national defense and security”
concerns and mergers and acquisitions through which foreign investors may acquire de facto control over domestic enterprises that raise
“national security” concerns are subject to strict review by the MOFCOM, and the rules prohibit any activities attempting
to bypass a security review, including by structuring the transaction through a proxy or contractual control arrangement. In the future,
we may grow our business by acquiring complementary businesses. Complying with the requirements of the above-mentioned regulations and
other relevant rules to complete such transactions could be time consuming, and any required approval processes, including obtaining approval
from the MOFCOM or its local counterparts may delay or inhibit our ability to complete such transactions, which could affect our ability
to expand our business or maintain our market share.
Governmental control of currency conversion may affect the value
of business in China.
The PRC government imposes controls on the convertibility
of the RMB into foreign currencies and, in certain cases, the remittance of foreign currency out of China. Certain revenues may be received
in RMB. Shortages in the availability of foreign currency may restrict our or our partners’ ability in China to remit sufficient
foreign currency to pay dividends or other payments, or otherwise satisfy their foreign currency-denominated obligations. Under existing
PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments, expenditures from
trade related transactions and services-related foreign exchange transactions, can be made in foreign currencies without prior approval
from the State Administration of Foreign Exchange (“SAFE”) by complying with certain procedural requirements. However, approval
from SAFE or its local branch is required where RMB is to be converted into foreign currency and remitted out of China to pay capital
expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access
to foreign currencies for current account transactions in the future.
Fluctuations in exchange rates of the RMB could materially affect
financial results.
The exchange rates between the RMB and the U.S.
dollars and other foreign currencies are affected by, among other things, changes in China’s political and economic conditions.
The People’s Bank of China regularly intervenes in the foreign exchange market to limit fluctuations in RMB exchange rates and achieve
policy goals.
Regulation and censorship of information disseminated over the
Internet in China may adversely affect our business, and may cause liability for content that is displayed on any of its websites.
China has enacted laws and regulations governing
Internet access and the distribution of products, services, news, information, audio-video programs and other content through the Internet.
In the past, the PRC government has prohibited the distribution of information through the Internet that it deems to be in violation of
PRC laws and regulations. If any of Intermediate’s Internet information on its online platforms is deemed by the PRC government
to violate any content restrictions, we or our partners may not be able to continue to display such content and could become subject to
penalties, including confiscation of income, fines, suspension of business and revocation of required licenses, which could materially
and adversely affect our business, financial condition and results of operations. We or our partners may also be subjected to liability
for any unlawful actions of their customers or users of their websites or for content distributed by such subsidiaries or partners that
is deemed inappropriate. It may be difficult to determine the type of content that may result in liability.
It may be difficult for overseas regulators to conduct investigation
or collect evidence within China.
Shareholder claims or regulatory investigation
that are common in the United States generally are difficult to pursue as a matter of law or practicality in China. For example,
in China, there are significant legal and other obstacles to providing information needed for regulatory investigations or litigation
initiated outside China. Although the authorities in China may establish a regulatory cooperation mechanism with the securities regulatory
authorities of another country or region to implement cross-border supervision and administration, such cooperation with the securities
regulatory authorities in the Unities States may not be efficient in the absence of mutual and practical cooperation mechanism. Furthermore,
according to Article 177 of the PRC Securities Law, or Article 177, which became effective in March 2020, no overseas securities
regulator is allowed to directly conduct investigation or evidence collection activities within the territory of the PRC. While detailed
interpretation of or implementation rules under Article 177 have yet to be promulgated, the inability for an overseas securities regulator
to directly conduct investigation or evidence collection activities within China may further increase difficulties faced by you in protecting
your interests.
Under the enterprise income tax (“EIT”) Law, we may
be classified as a “resident enterprise” of China. Such classification would likely result in unfavorable tax consequences.
Under the EIT Law, which has been revised effective
as of December 29, 2018, and its implementation rules, (the “Implementation Rules”), which has been revised and effective
as April 23, 2019, an enterprise established outside of the PRC with “de facto management bodies” within the PRC is considered
a resident enterprise and is subject to enterprise income tax, or EIT, at the rate of 25% on its global income. The Implementation Rules
define the term “de facto management bodies” as “establishments that carry out substantial and overall management and
control over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise.” The State Administration
of Taxation issued the Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident
Enterprises on the Basis of De Facto Management Bodies, or Circular 82, on April 22, 2009. Circular 82 provides that a foreign enterprise
controlled by a PRC company or a PRC company group will be classified as a “resident enterprise” with its “de facto
management bodies” located within China if the following criteria are satisfied: (i) the place where the senior management
and core management departments that are in charge of its daily operations perform their duties is mainly located in the PRC; (ii) its
financial and human resources decisions are made by or are subject to approval by persons or bodies in the PRC; (iii) its major assets,
accounting books, company seals, and minutes and files of its board and shareholders’ meetings are located or kept in the PRC; and
(iv) more than half of the enterprise’s directors or senior management with voting rights frequently reside in the PRC.
Currently, we do not believe we meet all of the
criteria above. If the PRC authorities consider that we meet all of the criteria above and treat us as a resident enterprise, a 25% EIT
on global income could significantly increase our tax burden and materially and adversely affect its financial condition and results of
operations.
In addition, even if we are not deemed as a resident
enterprise by the PRC authorities, pursuant to the EIT Law, dividends generated after January 1, 2008 and payable by a foreign-invested
enterprise in China to its foreign investors will be subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction
of incorporation has a tax treaty with China that provides for a different withholding arrangement and provided that relevant tax authorities
approved the foreign investors as the beneficial owners of such dividends under applicable tax regulations.
We face uncertainty with respect to indirect transfers of equity
interests in PRC resident enterprises by non-PRC holding companies.
On February 3, 2015, the China State Administration
of Taxation (“SAT”) issued the Circular on issues of enterprise Income Tax on Indirect Transfer of Assets by Non-PRC Resident
Enterprise, or the SAT Circular 7, pursuant to which if a non-resident enterprise transfers the equity interests of a PRC resident enterprise
indirectly by transfer of the equity interests of an offshore holding company (other than the purchase and sale of shares in public securities
market) without a reasonable commercial purpose, the PRC tax authorities have the power to reassess the nature of the transaction and
the indirect equity transfer might be treated as a direct transfer. As a result, the gain derived from such transfer, which means the
equity transfer price minus the cost of equity, will be subject to the PRC withholding tax at a rate of up to 10%. SAT Circular 7 also
brings challenges to both foreign transferor and transferee (or other person who is obligated to pay for the transfer) of taxable assets.
Under the SAT Circular 7, the transfer which meets all of the following circumstances shall be deemed as having no reasonable commercial
purpose: (i) over 75% of the value of the equity interests of the offshore holding company are directly or indirectly derived from
PRC taxable properties; (ii) at any time during the year before the indirect transfer, over 90% of the total properties of the offshore
holding company are investments within PRC territory, or in the year before the indirect transfer, over 90% of the offshore holding company’s
total income is directly or indirectly derived from within PRC territory; (iii) the function performed and risks assumed by the offshore
holding company are insufficient to substantiate its corporate existence; or (iv) the foreign income tax imposed on the indirect
transfer is lower than the PRC tax imposed on the direct transfer of the PRC taxable properties. In October 2017, SAT issued the
Announcement of the State Administration of Taxation on Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source,
or SAT Circular 37, which came into effect on December 1, 2017 and was amended on June 15, 2018. The SAT Circular 37 further clarifies
the practice and procedure of the withholding of nonresident enterprise income tax. Where a non-resident enterprise transfers taxable
assets indirectly by disposing of the equity interests of an overseas holding company, which is an indirect transfer, the non-resident
enterprise as either transferor or transferee, or the PRC entity that directly owns the taxable assets, may report such indirect transfer
to the relevant tax authority. Using a “substance over form” principle, the PRC tax authority may disregard the existence
of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding
or deferring PRC tax.
We face uncertainties as to the reporting and other
implications of certain past and future transactions that involve PRC taxable assets, such as offshore restructuring, sale of the shares
in our offshore subsidiaries and investments. We may be subject to filing obligations or taxed if we are transferors in such transactions,
and may be subject to withholding obligations if we are transferees in such transactions, under SAT Circular 7 or SAT Circular 37, or
both.
The enforcement of the PRC Labor Contract
Law and other labor-related regulations in the PRC may adversely affect MICT’s business and results of operations.
The Standing Committee of the National People’s
Congress enacted the Labor Contract Law in 2008 and amended it on December 28, 2012. The Labor Contract Law introduced specific provisions
related to fixed-term employment contracts, part-time employment, probationary periods, consultation with labor unions and employee assemblies,
employment without a written contract, dismissal of employees, severance, and collective bargaining to enhance previous PRC labor laws.
Under the Labor Contract Law, an employer is obligated to sign an unlimited-term labor contract with any employee who has worked for the
employer for ten consecutive years. Further, if an employee requests or agrees to renew a fixed-term labor contract that has already been
entered into twice consecutively, the resulting contract, with certain exceptions, must have an unlimited term, subject to certain exceptions.
With certain exceptions, an employer must pay severance to an employee where a labor contract is terminated or expires. In the case of
retrenching 20 or more employees or where the number of employees to be retrenched is less than 20 but comprises 10% or more of the total
number of employees of such employer under certain circumstances, the employer shall explain the situation to the labor union or all staff
30 days in advance and seek the opinion of the labor union or the employees, the employer may carry out the retrenchment exercise
upon reporting the retrenchment scheme to the labor administrative authorities. In addition, the PRC governmental authorities have continued
to introduce various new labor-related regulations since the effectiveness of the Labor Contract Law.
Under the PRC Social Insurance Law and the Administrative
Measures on Housing Fund, employees are required to participate in pension insurance, work-related injury insurance, medical insurance,
unemployment insurance, maternity insurance, and housing funds and employers are required, together with their employees or separately,
to pay the social insurance premiums and housing funds for their employees. If we fail to make adequate social insurance and housing fund
contributions, or fail to withhold individual income tax adequately, we may be subject to fines and legal sanctions, and our business,
financial conditions and results of operations may be adversely affected.
These laws designed to enhance labor protection
tend to increase our labor costs. In addition, as the interpretation and implementation of these regulations are still evolving, our employment
practices may not be at all times be deemed in compliance with the regulations. As a result, we could be subject to penalties or incur
significant liabilities in connection with labor disputes or investigations.
PRC regulations relating to investments in offshore companies
by PRC residents may subject our PRC-resident beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to
inject capital into our PRC subsidiaries or limit our PRC subsidiaries’ ability to increase their registered capital or distribute
profits.
SAFE promulgated the SAFE Circular 37 on July 4,
2014, which replaced the former circular commonly known as “SAFE Circular 75” promulgated by SAFE on October 21, 2005. SAFE
Circular 37 and its implementing rules require PRC residents to register with banks designated by local branches of SAFE in connection
with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with
the PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to
in SAFE Circular 37 as a “special purpose vehicle.”
We notified substantial beneficial owners of ordinary
shares who we know are PRC residents of their filing obligation, and pursuant to the former SAFE Circular 75, we filed the above-mentioned
foreign exchange registration on behalf of certain employee shareholders who we know are PRC residents. However, we may not be aware of
the identities of all of our beneficial owners who are PRC residents. We do not have control over our beneficial owners, and there can
be no assurance that all of our PRC-resident beneficial owners will comply with relevant SAFE regulations. The failure of our beneficial
owners who are PRC residents to register or amend their SAFE registrations in a timely manner or the failure of future beneficial owners
of our company who are PRC residents to comply with the registration procedures set forth in SAFE Circular 37 and subsequent implementation
rules, may subject the beneficial owners or our PRC subsidiaries to fines and legal sanctions.
Furthermore, since it is unclear how those SAFE
regulations, and any future regulation concerning offshore or cross-border transactions, will be further interpreted, amended and implemented
by the relevant PRC government authorities, we cannot predict how these regulations will affect our business operations or future strategy.
Failure to register or comply with relevant requirements may also limit our ability to contribute additional capital to our PRC subsidiaries
and limit our PRC subsidiaries’ ability to distribute dividends to our company. These risks may have a material adverse effect on
our business, financial condition and results of operations.
Any failure to comply with PRC regulations regarding our employee
equity incentive plans may subject the PRC participants in the plans, us or our overseas and PRC subsidiaries to fines and other legal
or administrative sanctions.
Pursuant to SAFE Circular 37, PRC residents who
participate in share incentive plans in overseas non-publicly-listed companies may, prior to the exercise of an option, submit applications
to SAFE or its local branches for the foreign exchange registration with respect to offshore special purpose companies. In the meantime,
our directors, executive officers and other employees who are PRC citizens or who are non-PRC citizens residing in the PRC for a continuous
period of not less than one year, subject to limited exceptions, and whom we or our overseas listed subsidiaries have granted restricted
share units, or RSUs, options or restricted shares, may follow the Notice on Issues Concerning the Foreign Exchange Administration for
Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly Listed Company, issued by SAFE in February 2012,
to apply for the foreign exchange registration. According to those regulations, employees, directors and other management members participating
in any stock incentive plan of an overseas publicly listed company who are PRC citizens or who are non-PRC citizens residing in China
for a continuous period of not less than one year, subject to limited exceptions, are required to register with SAFE through a domestic
qualified agent, which may be a PRC subsidiary of the overseas listed company, and complete certain other procedures. Failure to complete
the SAFE registrations may subject them to fines and legal sanctions and may also limit their ability to make payment under the relevant
equity incentive plans or receive dividends or sales proceeds related thereto in foreign currencies, or our ability to contribute additional
capital into our domestic subsidiaries in China and limit our domestic subsidiaries’ ability to distribute dividends to us. We also
face regulatory uncertainties under PRC law that could restrict our ability or the ability of our overseas listed subsidiaries to adopt
additional equity incentive plans for our directors and employees who are PRC citizens or who are non-PRC citizens residing in the PRC
for a continuous period of not less than one year, subject to limited exceptions.
In addition, the STA has issued circulars concerning
employee RSUs, share options or restricted shares. Under these circulars, employees working in the PRC whose RSUs or restricted shares
vest, or who exercise share options, will be subject to PRC individual income tax. The PRC subsidiaries of an overseas listed company
have obligations to file documents related to employee RSUs, share options or restricted shares with relevant tax authorities and to withhold
individual income taxes of those employees related to their RSUs, share options or restricted shares. Although we and our overseas listed
subsidiaries currently withhold individual income tax from our PRC employees in connection with the vesting of their RSUs and restricted
shares and their exercise of options, if the employees fail to pay, or the PRC subsidiaries fail to withhold, their individual income
taxes according to relevant laws, rules and regulations, the PRC subsidiaries may face sanctions imposed by the tax authorities.
If our auditor is sanctioned or otherwise penalized
by the Public Company Accounting Oversight Board (“PCAOB”) or the SEC as a result of failure to comply with inspection or
investigation requirements, our financial statements could be determined to be not in compliance with the requirements of the Exchange
Act or other laws or rules in the United States, which could ultimately result in our Common Stock being delisted from The Nasdaq
Capital Market.
Our auditor Friedman LLP is
not subject to the December 16, 2021 determination of the Holding Foreign Companies Accountable Act (“HFCAA”)and Friedman
LLP is being inspected by PCAOB on a regular basis. Our auditor is located in USA and has been inspected and continues to be subject to
PCAOB inspection. However, without approval from the Chinese government authorities, the PCAOB is currently unable to conduct inspections
of the audit work and practices of PCAOB-registered audit firms within the PRC on a basis comparable to other non-U.S. jurisdictions.
Since we have substantial operations in the PRC, if we utilize the services of our auditor’s China based firm or various other auditors
located in China, such auditors and their audit work are currently not fully inspected by the PCAOB.
Inspections of other auditors conducted by the
PCAOB outside of China have at times identified deficiencies in those auditors’ audit procedures and quality control procedures,
which may be addressed as part of the inspection process to improve future audit quality. The inability of the PCAOB to conduct full inspections
of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control
procedures as compared to auditors outside of China that are subject to PCAOB inspections.
The SEC previously instituted proceedings against
mainland Chinese affiliates of the numerous accounting firms, including the affiliate of our auditor, for failing to produce audit work
papers under Section 106 of the Sarbanes-Oxley Act because of restrictions under PRC law. Each of the “big four” accounting
firms in mainland China agreed to a censure and to pay a fine to the SEC to settle the dispute and stay the proceedings for four years,
until the proceedings were deemed dismissed with prejudice on February 6, 2019. It remains unclear whether the SEC will commence a new
administrative proceeding against the four mainland China-based accounting firms. Any such new proceedings or similar action against our
audit firm for failure to provide access to audit work papers could result in the imposition of penalties, such as suspension of our auditor’s
ability to practice before the SEC. If our independent registered public accounting firm, or its affiliate, was denied, even temporarily,
the ability to practice before the SEC, and it was determined that our financial statements or audit reports were not in compliance with
the requirements of the Exchange Act, we could be at risk of delisting or become subject to other penalties that would adversely affect
our ability to remain listed on The Nasdaq Capital Market.
In recent years, U.S. regulators have continued
to express their concerns about challenges in their oversight of financial statement audits of U.S.-listed companies with significant
operations in China. More recently, as part of increased regulatory focus in the U.S. on access to audit information, on May 20, 2020,
the U.S. Senate passed the Holding Foreign Companies Accountable Act, or the HFCA Act, which includes requirements for the SEC to identify
issuers whose audit reports are prepared by auditors that the PCAOB is unable to inspect or investigate completely because of a restriction
imposed by a non-U.S. authority in the auditor’s local jurisdiction. While we understand that there has been dialogue among the
CSRC, the SEC and the PCAOB regarding the inspection of PCAOB-registered accounting firms in China, there can be no assurance that our
auditor or us will be able to comply with requirements imposed by U.S. regulators.
Furthermore, on June 4, 2020, the U.S. President
issued a memorandum ordering the President’s Working Group on Financial Markets to submit a report to the President within 60 days
of the memorandum that includes recommendations for actions that can be taken by the executive branch, the SEC, the PCAOB or other federal
agencies and departments with respect to Chinese companies listed on U.S. stock exchanges and their audit firms, in an effort to protect
investors in the United States. The recommendations are to include actions that could be taken under current laws and rules as well
as possible new rulemaking recommendations.
On May 20, 2020, the HFCAA
passed the United States Senate by unanimous consent. On December 2, 2020, the US House of Representatives passed by voice vote the Holding
Foreign Companies Accountable Act (HFCAA), which would require auditors of foreign public companies to allow the Public Company Accounting
Oversight Board (PCAOB) to inspect their audit work papers for audits of non-US operations as required by the Sarbanes-Oxley Act of 2002
(Sarbanes-Oxley). If a company’s auditors fail to comply for three consecutive years, then the Company’s shares would be prohibited
from trading in the United States. The legislation passed the Senate in May. The HFCAA was signed into law on December 18, 2020. Furthermore,
on June 22, 2021. the U.S. Senate passed. and the US house of representative on February 4, 2022 passed the Accelerating Holding Foreign
Companies Accountable Act (the “AHFCAA”), which, if signed into law, would amend the HFCAA and require the SEC to prohibit
an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive
years instead of three consecutive years.
The HFCAA aims to address restrictions China has
placed on the PCAOB’s ability to inspect or investigate PCAOB-registered public accounting firms in connection with their audits
of Chinese companies. Sarbanes-Oxley created the PCAOB “to oversee the audit of public companies that are subject to the securities
laws, and related matters, in order to protect the interests of investors and further the public interest in the preparation of informative,
accurate, and independent audit reports for companies the securities of which are sold to, and held by and for, public investors.”
Specifically, the PCAOB is responsible for registering public accounting firms, establishing standards applicable to the preparation of
audit reports for companies, conducting inspections and investigations of public accounting firms to ensure they are complying with those
standards, and bringing enforcement actions when they are not.
The HFCAA could adversely affect the listing and
compliance status of China-based issuers listed in the United States, such as our company, and may have a material and adverse impact
on the trading prices of the securities of such issuers, including our Common Stock, and substantially reduce or effectively terminate
the trading of our Common Stock in the United States.
Risk Factors Related to our insurance business
Results in our insurance brokerage segment
may be adversely affected by a general decline in economic activity.
Demand for many types of insurance
and reinsurance generally rises or falls as economic growth expands or slows. This is especially the case with our automobile insurance
which is dependent upon the ability of persons to own and operate an automobile. This dynamic affects the level of commissions and fees
generated by our VIEs. To the extent our customers become adversely affected by declining business conditions, they may choose to limit
their purchases of insurance and reinsurance coverage, as applicable, which would inhibit our ability to generate commission revenue and
other revenue based on premiums placed by us. Also, the insurance they seek to obtain through us may be impacted by changes in their assets,
property values, sales or number of employees, which may reduce our commission revenue, and they may decide not to purchase our risk advisory
or other services, which would inhibit our ability to generate fee revenue. Moreover, insolvencies and combinations associated with an
economic downturn, especially insolvencies and combinations in the insurance industry, could adversely affect our brokerage business through
the loss of customers or by limiting our ability to place insurance and reinsurance business, as well as our revenues from insurers. We
are especially susceptible to this risk given the limited number of insurance company clients and reinsurers in the marketplace.
Volatility or declines in premiums and other
market trends may significantly impede our ability to grow revenues and profitability.
A significant portion of our
insurance brokerage revenue consists of commissions paid to us out of the premiums that insurers and reinsurers charge our clients for
coverage. We do not determine the insurance premiums on which our commissions are generally based. Our revenues and profitability are
subject to change to the extent that premium rates fluctuate or trend in a particular direction. The potential for changes in premium
rates is significant, due to the normal cycles of pricing in the commercial insurance and reinsurance markets.
As traditional insurance companies
continue to rely on non-affiliated brokers or agents to generate premium, those insurance companies may seek to reduce their expenses
by lowering their commission rates. The reduction of these commission rates, along with general volatility or declines in premiums, may
significantly affect our revenue and profitability. Because we do not determine the timing or extent of premium pricing changes, it is
difficult to accurately forecast our commission revenues, including whether they will significantly decline. As a result, we may have
to adjust our plans for future acquisitions, capital expenditures, dividend payments, loan repayments and other expenditures to account
for unexpected changes in revenues, and any decreases in premium rates may adversely affect the results of our operations.
In addition to movements in
premium rates, our ability to generate premium-based commission revenue may be challenged by disintermediation and the growing availability
of alternative methods for clients to meet their risk-protection needs. This trend includes a greater willingness on the part of corporations
to self-insure, the use of captive insurers, and the presence of capital markets-based solutions for traditional insurance and reinsurance
needs. Further, the profitability of our insurance brokerage segment depends in part on our ability to be compensated for the analytical
services and other advice that we provide, including the consulting and analytics services that we provide to insurers. If we are unable
to achieve and maintain adequate billing rates for all of our services, our margins and profitability could decline. Furthermore, the
insurance business in China where we operate is maturing and developing and if we do not compete efficiently and keep current with the
trends in the market, our business may decline.
Our business may be harmed by any negative
developments that may occur in the insurance industry or if we fail to maintain good relationships with insurance carriers.
Our businesses are heavily
dependent on the insurance industry. Any negative developments that occur in the insurance industry may have a material adverse effect
on our business and our results of operations. In addition, if we fail to maintain good relationships with insurance carriers, it may
have a material adverse effect on our business and results of operations. The termination, amendment or consolidation of our relationships
with our insurance carriers could harm our business, results of operations and financial condition.
We could incur significant liability or
our reputation could be damaged if our information systems are breached or we otherwise fail to protect customer or Company data or information
systems.
In operating our business
and providing services and solutions to customers, we collect, use, store, transmit and otherwise process certain electronic information,
including personal, confidential, proprietary and sensitive data such as information related to financial records, health care and personal
data of our customers, colleagues and vendors. We rely on the efficient, uninterrupted and secure operation of complex information technology
systems and networks to operate our business and securely process, transmit and store electronic information. In the normal course of
business, we also share electronic information with our vendors and other third parties. This electronic information comprises sensitive
and confidential data, including information related to financial records, health care and customers’ personal data. Our information
technology systems and safety control systems, and those of our numerous third-party providers, as well as the control systems of critical
infrastructure they rely on are potentially vulnerable to unauthorized access, damage or interruption from a variety of external threats,
including cyberattacks, computer viruses and other malware, ransomware and other types of data and systems-related modes of attack. Our
systems are also subject to compromise from internal threats such as improper action by employees, vendors and other third parties with
otherwise legitimate access to our systems. We could experience significant financial and reputational harm if our information systems
are breached, sensitive customer or our data are compromised, surreptitiously modified, rendered inaccessible for any period of time or
maliciously made public, or if we fail to make adequate or timely disclosures to the public or law enforcement agencies following any
such event, whether due to delayed discovery or a failure to follow existing protocols.
Cyberattacks are increasing
in frequency and evolving in nature. We are at risk of attack by a variety of adversaries, including state-sponsored organizations, organized
crime, hackers, through use of increasingly sophisticated methods of attack. In particular, we are at increased risk of a cyberattack
when geopolitical tensions are high, as diplomatic events and economic policies may trigger espionage or retaliatory cyber incidents.
In addition, remote work arrangements in response to COVID-19 have increased the risk of phishing and other cybersecurity attacks or unauthorized
dissemination of personal, confidential, proprietary or sensitive data.
Our information systems must
be continually updated, patched, and upgraded to protect against known vulnerabilities. The volume of new software vulnerabilities has
increased markedly, as has the criticality of patches and other remedial measures. In addition to remediating newly identified vulnerabilities,
previously identified vulnerabilities must also be continuously addressed. Accordingly, we are at risk that cyberattacks exploit these
known vulnerabilities before they have been communicated by vendors or addressed. Any failure related to these activities could have a
material adverse effect on our business.
We have numerous vendors and
other third parties who receive personal information from us in connection with the services we offer our customers. We also use tens
of IT vendors and software providers to maintain and secure our global information systems infrastructure. In addition, we have migrated
certain data, and may increasingly migrate data, to the cloud hosted by third-party providers. Some of these vendors and third parties
also have direct access to our systems. We are at risk of a cyberattack involving a vendor or other third party, which could result in
a breakdown of such third party’s data protection processes or the cyberattacks gaining access to our infrastructure through a supply
chain attack.
We have a history of making
acquisitions and investments within the insurance market. The process of integrating the information systems of any businesses we acquire
is complex and exposes us to additional risk. For instance, we may not adequately identify weaknesses and vulnerabilities in an acquired
entity’s information systems, either before or after the acquisition, which could affect the value we are able to derive from the
acquisition, expose us to unexpected liabilities or make our own systems more vulnerable to a cyberattack. In addition, if we discover
a historical compromise, security breach or other cyber incident related to the target’s information systems following the close
of the acquisition, we may be liable and exposed to significant costs and other unforeseen liabilities. We may also be unable to integrate
the systems of the businesses we acquire into our environment in a timely manner, which could further increase these risks until such
integration takes place.
The costs to comply with, or our failure
to comply with laws related to privacy, data security and data protection could adversely affect our financial condition, operating results
and our reputation.
Improper collection, use disclosure,
cross border transfer, and retention of confidential, personal, or proprietary data could result in regulatory scrutiny, legal and financial
liability, or harm to our reputation. In operating our business and providing services and solutions to clients, we store and transfer
sensitive employee and client data, including personal data, in and across multiple jurisdictions. We collect data from client and individuals
located all over the world and leverage systems and teams to process it. As a result, we are subject to a variety of laws and regulations
regarding privacy, data protection, data security and cyber-security. These laws and regulations are continuously evolving and developing.
Some of these laws and regulations are increasing the level of data handling restrictions, including rules on data localization, all of
which could affect our operations and result in regulatory liability and high fines. In particular, high-profile security breaches at
major companies continue to be disclosed regularly, which is leading to even greater regulatory scrutiny and fines at the highest levels
they have ever been.
The scope and interpretation
of the laws that are or may be applicable to us are often uncertain and may be conflicting. Given the breadth and depth of changes in
data protection obligations, including classifying data and committing to a range of administrative, technical and physical controls to
protect data, our compliance with laws will continue to require time, resources and review of the technology and systems we use.
We expect competition in the Chinese insurance
industry to increase, which may materially and adversely affect the growth of our business.
We face competitive pressures
from both domestic and foreign-invested insurance brokerage companies operating in China, which may compete with our insurance businesses,
and other financial institutions that sell other financial investment products in competition with ours. If we are not able to adapt to
these increasingly competitive pressures in the future, our growth rate may decline, which could materially and adversely affect our earnings.
Further development of regulations in China
may impose additional costs or restrictions on our activities.
We operate in a highly regulated
industry. The CBIRC supervises and administers the insurance industry in China. In exercising its authority, it is given certain discretion
to administer the law. China’s insurance regulatory regime is undergoing significant changes toward a more transparent regulatory
process and a convergent movement toward international standards. Some of these changes may result in additional costs or restrictions
on our activities. For example, in November 2020, the Insurance Association of China issued a notice on revising the definition of critical
illnesses, including revisions to the applicable scope and principles of critical illnesses as well as relevant provisions on insurance
clauses for critical illnesses. From February 1, 2021, insurers may not continue to sell critical illness insurance products which
were developed based on previous rules. The CBIRC in the same month also issued a notice stipulating that Critical Illness Morbidity Table
in the Chinese Personal Insurance Industry (2020) promulgated by the China Association of Actuaries will serve as the evaluation
table and pricing reference table for statutory liability reserve of life insurance products that include critical illness insurance liability.
The notice also imposed restrictions on the applicable scope, evaluation of statutory reserves and pricing of the products. These new
requirements apply to a number of key products sold by us. Although these new requirements are consistent with our long-term development
strategy, making adjustments to relevant products during a short period of time may increase our operating costs and may adversely affect
our business, results of operations and financial condition.
In addition, because the terms
of our products are subject to regulations, changes in regulations may affect our profitability on the policies and contracts we issue.
Any actions by the Chinese government, including
any decision to influence our operations or to exert more oversight and control over any offering of securities conducted overseas and/or
foreign investment in China-based issuers, may cause us to make material changes to our operations and could significantly limit or completely
hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline
or be worthless.
The Chinese government has
exercised and continues to exercise significant oversight and regulation over almost every sector of the Chinese economy, including the
insurance industry, and has discretion over many aspects in which it exercises such authority. Our operations are subject to various regulatory
requirements. The Chinese government may also impose new and stricter regulations or impose new interpretations of existing regulations
and take other actions that may influence our operations. These government actions, including changes in laws and regulations, particularly
those relating to insurance, overseas listing, taxation, land use rights, foreign investment limitations, may result in a material change
in our operations and the value of our securities.
On December 24, 2021,
CSRC published proposed tightening rules governing Chinese companies listing abroad, which require an offshore IPO application to be filed
with the CSRC. The proposed rules reflect the continued efforts and plan of the Chinese government to scrutinize and exert more oversight
and control over capital market activities including offshore listings. We believe that we are currently not required to file with or
obtain permissions from the CSRC to maintain our listing in U.S., but the CSRC or any other PRC regulatory authorities may issue any laws
or rules that would require us to file with or obtain approvals from the CSRC or other governmental agencies, and may also take actions
imposing restrictions on our continued listing in the U.S. Any such actions could significantly limit or completely hinder our ability
to continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless.
Our insurance business is exposed to various
catastrophic events in which multiple losses can occur and affect multiple lines of business in any calendar year.
Natural disasters, such as
hurricanes, earthquakes and other catastrophes, have the potential to adversely affect our operating results. Other risks, such as man-made
catastrophes or pandemic disease, could also adversely affect our business and operating results to the extent they are covered by our
insurance products. Concentration of exposure in certain industries or geographies may cause us to suffer disproportionate losses.
Catastrophic events, and any
relevant regulations, could result in losses in any business in which we operate, and could expose us to:
| ● | widespread
claim costs associated with property, workers’ compensation, accident and health, travel, business interruption and mortality and
morbidity claims; |
| ● | loss
resulting from a decline in the value of our invested assets; |
| ● | limitations
on our ability to recover deferred tax assets; |
| ● | loss
resulting from actual policy experience that is adverse compared to the assumptions made in product pricing; |
| ● | revenue
loss due to decline in customer base; |
| ● | declines
in value and/or losses with respect to companies and other entities whose securities we hold and counterparties we transact business
with and have credit exposure to, including insurers and reinsurers; and |
| ● | significant
disruptions to our physical infrastructure, systems and operations. |
Catastrophes
will require us to pay out on many insurance claims including weather related natural disasters. The possibilities that the insurance
companies that we write policies for cannot pay for the insurance claim could have a material adverse effect on our results of
operations, cash flows and liquidity and we may be held liable for the unpaid insurance claims.
Risks Related to Our Corporate Structure
If the PRC government deems that the VIE
Agreements do not comply with PRC regulatory restrictions on foreign investment in the relevant industries or other laws or regulations
of the PRC, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe
penalties or be forced to relinquish our interests in those operations, which may therefore materially reduce the value of our ordinary
shares.
We are a holding company.
As a holding company with no material operations of our own, we conduct a substantial majority of our operations through our VIEs in the
PRC. We receive the economic benefits of our VIE’s business operations through certain contractual arrangements; however, our rights
under the VIEs Agreements do not provide us with an equity interest in our VIEs and is not the same as actual ownership.
Our PRC subsidiary has entered
into the VIE Agreements with our consolidated VIEs and their shareholders, which enable us to (i) exercise effective control over
the consolidated VIE, (ii) receive substantially all of the economic benefits of the consolidated VIEs, and (iii) have an exclusive
option to purchase all or part of the equity interests and assets in the consolidated VIEs when and to the extent permitted by PRC law.
As a result of these contractual arrangements, we have control over and are the primary beneficiary of the consolidated VIE and hence
consolidate its financial results as our consolidated VIE under U.S. GAAP.
We believe that our corporate
structure and contractual arrangements comply with the current applicable PRC laws and regulations. Our PRC legal counsel, Global Law
Office, based on its understanding of the relevant laws and regulations, is of the opinion that each of the contracts among our wholly-owned
PRC subsidiary, our consolidated VIE and its shareholders is valid, binding and enforceable in accordance with its terms. However, there
are substantial uncertainties regarding the interpretation and application of current and future PRC laws and regulations. Thus, the PRC
governmental authorities may take a view contrary to the opinion of our PRC legal counsel. It is uncertain whether any new PRC laws or
regulations relating to variable interest entity structure will be adopted or if adopted, what they would provide. PRC laws and regulations
governing the validity of these contractual arrangements are uncertain and the relevant government authorities have broad discretion in
interpreting these laws and regulations.
If our corporate structure
and contractual arrangements are deemed by the relevant regulators that have competent authority, to be illegal, either in whole or in
part, we may lose control of our consolidated VIEs, which holds significant assets and accounts for significant revenue, and has to modify
such structure to comply with regulatory requirements. However, there can be no assurance that we can achieve this without material disruption
to our business. Further, if our corporate structure and contractual arrangements are found to be in violation of any existing or future
PRC laws or regulations, the relevant regulatory authorities would have broad discretion in dealing with such violations, including:
| ● | revoking our business and operating
licenses; |
| ● | confiscating any of our income
that they deem to be obtained through illegal operations; |
| ● | shutting down our services; |
| ● | discontinuing or restricting
our operations in China; |
| ● | imposing conditions or requirements
with which we may not be able to comply; |
| ● | requiring us to change our corporate
structure and contractual arrangements; |
| ● | restricting or prohibiting our
use of the proceeds from overseas offering to finance our consolidated VIE’s business and operations; and |
| ● | taking other regulatory or enforcement
actions that could be harmful to our business. |
Furthermore, new PRC laws,
rules and regulations may be introduced to impose additional requirements that may be applicable to our corporate structure and contractual
arrangements. Occurrence of any of these events could materially and adversely affect our business, financial condition and results of
operations and the market price of our ordinary shares. In addition, if the imposition of any of these penalties or requirement to restructure
our corporate structure causes us to lose the rights to direct the activities of our consolidated VIE or our right to receive their economic
benefits, we would no longer be able to consolidate the financial results of such VIE in our consolidated financial statements, which
may cause the value of our securities to significantly decline or even become worthless. However, we do not believe that such actions
would result in the liquidation or dissolution of our company, our wholly-owned subsidiary in China or our consolidated VIE.
Our current corporate structure and business
operations and the market price of our ordinary shares may be affected by the newly enacted Foreign Investment Law which does not explicitly
classify whether VIE that are controlled through contractual arrangements would be deemed as foreign-invested enterprises if they are
ultimately “controlled” by foreign investors.
The VIE structure has been
adopted by many Chinese-based companies, including us, to obtain necessary licenses and permits in the industries that are currently subject
to foreign investment restrictions in China. On March 15, 2019, the National People’s Congress, China’s national legislative
body (the “NPC”) approved the Foreign Investment Law, which took effect on January 1, 2020. On December 26, 2019, the
PRC State Council approved the Implementation Rules of the Foreign Investment Law, which came into effect on January 1, 2020. Since they
are relatively new, uncertainties exist in relation to their interpretation. The Foreign Investment Law does not explicitly classify whether
variable interest entities that are controlled through contractual arrangements would be deemed as foreign-invested enterprises if
they are ultimately “controlled” by foreign investors. However, it has a catch-all provision under definition of “foreign
investment” that includes investments made by foreign investors in China through other means as provided by laws, administrative
regulations or the State Council. Therefore, it still leaves leeway for future laws, administrative regulations or provisions of the State
Council to provide for contractual arrangements being viewed as a form of foreign investment. Therefore, there can be no assurance that
our control over our consolidated VIE through contractual arrangements will not be deemed as foreign investment in the future.
Furthermore, if future laws,
administrative regulations or provisions mandate further actions to be taken by companies with respect to existing contractual arrangements,
we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure to take timely
and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely affect our
current corporate structure and business operations and the market price of our ordinary shares.
We conduct a significant portion of our
operations through our VIEs, which is established in the PRC, and we rely on contractual arrangements with our consolidated VIEs and its
shareholders to operate our business, which may not be as effective as direct ownership in providing operational control and otherwise
have a material adverse effect as to our business.
We rely on contractual arrangements
with our consolidated VIEs and its shareholders. A substantial majority of our revenue is generated by and a significant percentage of
our consolidated assets are owned by the VIEs, whose financial statements are consolidated with ours. These contractual arrangements do
not give us an equity interest in the VIEs and may not be as effective as direct ownership in providing us with control over our consolidated
VIEs. If our consolidated VIEs or its shareholders fail to perform their respective obligations under these contractual arrangements,
our recourse to the assets held by our consolidated VIEs is indirect and we may have to incur substantial costs and expend significant
resources to enforce such arrangements in reliance on legal remedies under PRC law. These remedies may not always be effective, particularly
in light of uncertainties in the PRC legal system. Furthermore, in connection with litigation, arbitration or other judicial or dispute
resolution proceedings, assets under the name of any of record holder of equity interest in our consolidated VIEs, including such equity
interest, may be put under court custody. As a consequence, we cannot be certain that the equity interest will be disposed pursuant to
the contractual arrangement or ownership by the record holder of the equity interest.
All of these contractual arrangements
are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would
be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. The legal environment
in the PRC is not as developed as in other jurisdictions, such as the U.S. As a result, uncertainties in the PRC legal system could limit
our ability to enforce these contractual arrangements. In the event that we are unable to enforce these contractual arrangements, or if
we suffer significant time delays or other obstacles in the process of enforcing these contractual arrangements, it would be very difficult
to exert effective control over our consolidated VIEs, and our ability to conduct our business and our financial condition and results
of operations may be materially and adversely affected.
Any failure by our consolidated VIEs or
its shareholders to perform their contractual obligations would have a material adverse effect on our business and the market price of
our ordinary shares.
Our wholly foreign-owned enterprise
in the PRC, has entered into the VIEs Agreements with our consolidated VIEs and its shareholders. If our consolidated VIEs or its shareholders
fail to perform their respective obligations under these contractual arrangements, we may incur substantial costs and expend additional
resources seeking to enforce such arrangements. We may also have to rely on legal remedies under PRC laws, including seeking specific
performance or injunctive relief, and claiming damages, which we cannot assure you will be effective under PRC laws. For example, if the
shareholders of our consolidated VIEs were to refuse to transfer their equity interests in the consolidated VIEs to our WFOE or its designee
when our WFOE exercises the purchase option pursuant to these contractual arrangements, or if the shareholders of the VIEs were otherwise
to act in bad faith toward MICT or our WFOE, then our WFOE may have to take legal actions to compel them to perform their contractual
obligations.
All of the VIEs Agreements
are governed by PRC laws and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts would be
interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures, but an arbitration
proceeding is not as formal as a court proceeding and the arbitrator may apply PRC law in a manner different from a court. The legal system
in the PRC is not as developed as in some other jurisdictions, such as the U.S., and the arbitrator may render a decision which is in
conflict with our understanding of the laws of the PRC and we may have little if any recourse. As a result, uncertainties in the PRC legal
system and the arbitration procedure could limit the ability of our WFOE to enforce these contractual arrangements. Meanwhile, there are
very few precedents and formal guidelines as to how contractual arrangements in the context of a VIEs should be interpreted or enforced
under PRC laws. There remain significant uncertainties regarding the ultimate outcome of such arbitration should it become necessary.
In addition, under PRC laws, rulings by arbitrators are final and parties cannot appeal arbitration results in court unless such rulings
are revoked or determined unenforceable by a competent court. If the losing parties fail to carry out the arbitration awards within a
prescribed time limit, the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition
proceedings, which would require additional expenses and delay. In the event that our WFOE is unable to enforce these contractual arrangements,
or if our WFOE suffers significant delay or other obstacles in the process of enforcing these contractual arrangements, MICT may not be
able to exert effective control over our consolidated VIEs, in which event we may lose the value of the VIEs Agreements and the relevant
rights and licenses held by the VIEs which MICT requires in order to operate its business, and its ability to conduct its business may
be negatively affected. Any delay in effecting enforcement of our WFOE’s rights under the VIEs Agreements could materially and adversely
affect our consolidated financial condition, the results of our operations, our prospects, our ability to continue in business and the
market for and market price of our ordinary shares. If our WFOE is not able to enforce its rights, we may not be able to include the VIE’sfinancial
statements with MICT, which could cause our ordinary shares to lose most, if not all, of their value.
The arbitration provisions
under the VIEs Agreements have no effect on the rights of our shareholders to pursue claims against us under the United States federal
securities laws, although any such actions would have no effect on our WFOE’s ability to enforce its rights under the VIEs Agreements.
The shareholders of our consolidated VIEs
may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition and the
value of our ordinary shares.
The interests of the shareholders
of our consolidated VIEs in their capacities as such shareholders may differ from the interests of our company as a whole, as what is
in the best interests of our consolidated VIEs, including matters such as whether to distribute dividends or to make other distributions
to fund our offshore requirement to the extent that such funding is permitted under PRC laws, may not be in our best interests. There
can be no assurance that when conflicts of interest arise, any or all of these shareholders will act in our best interests of or that
any conflicts of interest will be resolved in our favor. In addition, these shareholders may breach or cause our consolidated VIEs and
its subsidiaries to breach or refuse to renew the existing contractual arrangements with us.
Our WFOE, however, could,
at all times, exercise its option under the exclusive option agreement to cause the VIEs shareholders to transfer all of their equity
ownership in our consolidated VIEs to a PRC entity or individual designated by our WFOE as permitted by the then applicable PRC laws.
In addition, if such conflicts of interest arise, our WFOE could also, in the capacity of attorney-in-fact of the shareholders of our
consolidated VIEs as provided under the power of attorney, directly appoint new directors of our consolidated VIEs. We rely on the shareholders
of our consolidated VIEs to comply with PRC laws and regulations, which protect contracts and provide that directors and executive officers
owe a duty of loyalty to our company and require them to avoid conflicts of interest and not to take advantage of their positions for
personal gains, and the laws of the Cayman Islands, which provide that directors have a duty of care and a duty to act honestly in good
faith with a view to our best interests. However, the legal frameworks of both China and the Cayman Islands do not provide guidelines
on resolving conflicts with other corporate governance regimes. If our WFOE cannot resolve any conflicts of interest or disputes between
our WFOE and the shareholders of our consolidated VIEs, MICT would have to rely on the arbitration provisions of the VIEs Agreements,
which, as discussed in the previous risk factor, could result in the disruption of our business and subject us to substantial uncertainty
as to the outcome of any such. As a result, in the event that the shareholders of the VIEs do not comply with their obligations under
the VIEs Agreements, our WFOE may not be able to enforce its rights, in which event we may not be able to include the VIEs financial statements
with MICT’s which could cause our ordinary shares to lose most, if not all, of their value.
Contractual arrangements in relation to
our consolidated VIEs may be subject to scrutiny by the PRC tax authorities who may determine that our consolidated VIEs owes additional
taxes, which could negatively affect our financial condition and the value of your investment.
Under applicable PRC laws
and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities.
The PRC Enterprise Income Tax Law, or the EIT Law, requires every enterprise in China to submit its annual enterprise income tax return
together with a report on transactions with its related parties to the relevant tax authorities. The tax authorities may impose reasonable
adjustments on taxation if they have identified any related party transactions that are inconsistent with the arm’s length principles.
We may face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements among our wholly-owned
PRC subsidiary, our consolidated VIEs and its shareholders were not entered into on an arm’s length basis in such a way as to result
in an impermissible reduction in taxes under applicable PRC laws, regulations and rules, and adjust their income in the form of a transfer
pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by our
wholly-owned PRC subsidiary or consolidated VIEs for PRC tax purposes, which could in turn increase their tax liabilities without reducing
their tax expenses. Furthermore, the PRC tax authorities may impose late payment fees and other penalties on our PRC subsidiary and consolidated
VIEs for adjusted but unpaid taxes according to applicable regulations. Our financial position could be materially and adversely affected
if the tax liabilities of our PRC subsidiary and consolidated VIEs increase, or if they are required to pay late payment fees and other
penalties.
We may lose the ability to use and enjoy
assets held by our consolidated VIEs that are material to the operation of our business if the entity goes bankrupt or becomes subject
to a dissolution or liquidation proceeding.
Our consolidated VIEs holds
substantially all of our assets. Under the contractual arrangements, our consolidated VIEs may not and its shareholders may not cause
it to, in any manner, sell, transfer, mortgage or dispose of its assets or its legal or beneficial interests in the business without our
WFOE’s prior consent. However, in the event that the shareholders of our consolidated VIEs breach these contractual arrangements
and voluntarily liquidate our consolidated VIEs, or our consolidated VIEs declares bankruptcy and all or part of its assets become subject
to liens or rights of third-party creditors, or are otherwise disposed of without our WFOE’s consent, we may be unable to continue
some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations.
If our consolidated VIEs undergoes a voluntary or involuntary liquidation proceeding, independent third-party creditors may claim rights
to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our
business, financial condition and results of operations.
Risk Factors Relating to Micronet’s Business and Industry
Potential political, economic and military instability in Israel
could adversely affect operations.
Certain of MICT and Micronet’s
principal offices and operating facilities are located in Israel. Accordingly, with respect to such Israeli facilities, political, economic
and military conditions in Israel directly affect the operations of MICT and Micronet. Since the establishment of the State of Israel
in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors. A state of hostility varying in degree and
intensity has led to security and economic problems for Israel. Since October 2000, there has been an increase in hostilities between
Israel and Palestinians, which has adversely affected the peace process and has negatively influenced Israel’s relationship with
its Arab citizens and several Arab countries, including the Gaza Strip, the West Bank, Lebanon and Syria. Such ongoing hostilities may
hinder Israel’s international trade relations and may limit the geographic markets where Micronet can sell its products and solutions.
Hostilities involving or threatening Israel, or the interruption or curtailment of trade between Israel and its present trading partners,
could materially and adversely affect operations.
In addition, Israel-based companies and companies
doing business with Israel have been subject to an economic boycott by members of the Arab League and certain other predominantly Muslim
countries since Israel’s establishment, along with other private organizations around the world. Although Israel has entered into
various agreements with certain Arab countries and the Palestinian Authority, and various declarations have been signed in connection
with efforts to resolve some of the economic and political problems in the Middle East, whether or in what manner these problems will
be resolved is unpredictable. Wars and acts of terrorism have resulted in significant damage to the Israeli economy, including reducing
the level of foreign and local investment.
Substantial costs as a result of litigation
or other proceedings relating to intellectual property rights may be incurred, which would have an adverse effect on the value of MICT’s
equity interest in Micronet.
Third parties may challenge
the validity of Micronet’s intellectual property rights or bring claims regarding Micronet’s infringement of a third party’s
intellectual property rights. This may result in costly litigation or other time-consuming and expensive judicial or administrative proceedings,
which could deprive Micronet of valuable rights, cause them to incur substantial expenses and cause a diversion for technical and management
personnel. An adverse determination may subject Micronet to significant liabilities or require it to seek licenses that may not be available
from third parties on commercially favorable terms, if at all. Further, if such claims are proven valid, through litigation or otherwise,
Micronet may be required to pay substantial financial damages or be required to discontinue or significantly delay the development, marketing,
sale or licensing of the affected products and intellectual property rights. The occurrence of any of the foregoing could have an adverse
effect on the value of MICT’s equity interest in Micronet.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2. Properties.
BI Intermediate (Hong Kong)
Limited, a Hong Kong company (“BI Intermediate”) currently maintains a single office space in unit 1602-1603 Hong Kong. The
BI Intermediate lease is a month-to-month lease with a term of three years, expiring in February 29, 2024. The rent is $12,206 (HKD 95,200)
per month. The office facility in Hong Kong occupies approximately 1,680 square feet and is used for the headquarters and sales support.
Magpie Securities Limited,
a Hong Kong company (“Magpie”) currently maintains two offices space in unit 1601 Hong Kong and in unit 2502-2503 Hong Kong.
The Magpie lease is a month-to-month lease with a term of two years nine months & two years four months, respectively expiring in
February 29, 2024. The rent is $6,462 (HKD 50,400) per month and $12,744 (HKD 99,400) per month, respectively. The office facility in
Hong Kong occupies approximately 840 square feet, the second office space occupies approximately 1680 square feet. They are used for the
headquarters, sales support, marketing, finance and operating groups.
Beijing Magpie Securities Consulting
Services CO., LTD. (“Beijing Magpie”) a wholly owned subsidiary of Magpie currently maintains office space in room 3-112,
Wework, 3/F Gong Xiao Guo JI, Beijing China. The Beijing Magpie lease is a month-to-month lease for one year expiring in January 31, 2022
The rent is $6,277 (RMB 40,000) per month. The office facility in China occupies approximately 400 square feet and is used for the sales
support and operating groups.
Shenzhen Magpie Information Consulting
Technology CO., LTD, (“Shenzhen Magpie”) a wholly owned subsidiary of BI Intermediate currently maintains office space
in room 4304, Tower 1, Hg business center China. The Shenzhen Magpie lease is a month-to-month lease expiring in May 4, 2022. The rent
is $2,615 (RMB 50,000 per quarter) per month.
Bokefa Petroleum and Gas Co.
Ltd, a wholly-owned subsidiary of BI Intermediate, currently has office space in Ningbo, Zhejiang Province. The lease is payable on a
monthly basis for three years at an annual rent of US$20,395.37. The office facility in Zhejiang Province occupies and is used for sales
support, marketing and finance. The company expiring in insurance biasness.
Tianjing Bokefa Technology
Ltd. (“Tianjin Bokefa”) is a wholly-owned subsidiary of Bokefa Petroleum and Gas Co. Ltd and currently has office space in
Beijing and Tianjin. The lease is payable on an annual and quarterly basis for an average of two years at an annual rent of US$216,133.95.
The office facility in Beijing occupies and is used for the headquarters, sales support, marketing, finance and operating groups. The
company expiring in insurance biasness.
Beijing Fucheng Insurance Brokerage Co. Ltd (“Fucheng”)
is a wholly owned subsidiary of Beijing YibaoTech and currently has office space in Shanghai, Guangxi and other provincial capital cities.
Leases are paid quarterly or monthly, with an average lease term of 1.25 years and an annual rent of $182,793.11. The office facility
in Shanghai and Guangxi occupies and is used for sales support, marketing, finance and operations. The company expiring in insurance biasness.
Guangxi Zhongtong Insurance
Agency Co Ltd is a 60% owned subsidiary of Beijing Yibao Technology Co., Ltd. and currently has office space in various cities in Guangxi
Province. Leases are paid semi-annually, quarterly or monthly for an average of two years at an annual rent of $146,396.32. The office
facility in Guangxi occupies and is used for headquarters, sales support, marketing, finance and operations. The company expiring in insurance
biasness.
All Weather Insurance Agency,
Inc. (“All Weather”) is a VIE controlled subsidiary and currently has office spaces in Beijing and other different cities
in China. Leases are payable annually, semi-annually, quarterly or monthly, with an average lease term of 2.76 years and an annual rent
of $303,369.95. The office facility in Beijing and other cities occupies and is used for headquarters, sales support, marketing, finance
and operations. The company expiring in insurance biasness.
MICT Telematics (“Telematics”),
an Israeli company a wholly owned subsidiary of MICT, Inc. currently maintains office space in Petach- Tikva, Israel. Telematics’
lease agreement is a month-to-month lease, is paid on a quarterly basis, occupies approximately 315 square feet and has a monthly rent
obligation $5,830.
Item 3. Legal Proceedings.
From time to time, MICT may become subject to litigation
incidental to its business.
In March 2017, MICT entered
into a merger agreement (“Merger Agreement” or “Merger”) with Sunrise Securities LLC (“Sunrise”) through
Sunrise’s principal, Amnon Mandelbaum, pursuant to which Sunrise agreed to assist MICT in identifying, analyzing, structuring, and
negotiating suitable business opportunities. These opportunities included: a sale of stock or assets, merger, tender offer, joint venture,
financing arrangement, private placement, or any similar transaction or combination thereof. The parties initially disagreed on the fee
amount that would be payable upon the closing of the transactions contemplated by the Merger Agreement. There were also questions about
whether or not Sunrise was owed any transaction fee upon the closing of the Merger. In order to resolve this matter, the parties executed
a settlement and release agreement (“Settlement Agreement”) for the release and waiver of the above claims in consideration
for the issuance of freely tradable shares of common stock of MICT worth no less than $1,500,000 (the “Settlement Shares”
or “Shares”), which Settlement Shares were delivered as follows: (i) 67.5% of the Settlement Shares to Amnon Mandelbaum, (ii)
7.5% of the Settlement Shares to INTE Securities LLC, and (iii) 25% of the Settlement Shares to Amini LLC. In addition, no later than
February 16, 2021, MICT issued 200,000 purchase warrants (“Warrants”) to purchase 200,000 freely tradable registered shares
of Common Stock of MICT and deliver original copies of such Warrants within five business days of the date of issuance of the Warrants.
The Shares issuable upon exercise of the Warrants were to be registered via a registration statement on Form S-1. 150,000 Warrants were
issued to Amnon Mandelbaum, 50,000 Warrants were issued to Amini LLC, or its designee as named in writing. Each Warrant is exercisable
into one share of registered common stock of MICT until one year after the date of the Warrants issuance, at an exercise price of $1.01
per Share. In all other respects, these Warrants contain the same material terms and conditions as are applicable to MICT’s current
outstanding Warrants including, but not limited to, cashless exercise at all times from the date of issuance of the Warrants. The expiration
dates of the Warrants, certain exercise price adjustments, and other terms as are no less favorable than MICT’s recently issued
common stock purchase warrant agreements. MICT was not able to timely file a registration statement to register the Shares, and the Shares
underlying the Warrants per the Settlement Agreement. Sunrise notified MICT that we were in breach of the Settlement Agreement. Subsequently,
on March 30, 2021, MICT and Sunrise signed an amended settlement agreement (the “Amended Settlement Agreement”) whereby MICT
was required to make a $1,000,000 payment to Sunrise by March 31, 2021 and the settlement share dollar amount set forth above was reduced
from $1,500,000 to $500,000. Furthermore, if MICT was not able to file a registration statement with the Securities and Exchange Commission
for the Settlement Shares by June 4, 2021, we were required to make a $600,000 payment to settle the matter in full and Sunrise would
not receive any the Settlement Shares. On July 1, 2021, MICT made the $600,000 payment as there was a disagreement as to whether or not
the registration statement was timely filed. The matter with Sunrise is fully settled.
On September 22, 2020, the
Company entered into a settlement and release agreement (“Release Agreement”) with Craig Marshak, (“Marshak”),
in connection with a claim filed by Marshak against the Company and additional defendants. Pursuant to the Release Agreement, MICT agreed
to pay Marshak a sum of $125,000 in cash. On January 15, 2021 the parties executed an amendment to the Release Agreement whereby MICT
agreed to pay Marshak a sum of $315,000 in cash by February 23, 2021. Marshak has dismissed his claim and this matter is fully settled.
In March 2017, Micronet received
notice from a previous customer, (the “Complainant”) relating to tests performed by the Complainant which allegedly revealed
a defect in the materials included in the battery integrated into a certain product of Micronet. The Complainant then filed a complaint
(“Complaint”) with the United States National Highway Traffic Safety Administration (the “Regulator”). The Complaint
referred to an old product of Micronet. The Complainant had similar problems with the specific product named in the Complaint, which were
covered under the product’s warranty. MICT resolved the problem, changed the battery and updated the software. Independent tests
to examine the Complainant’s issues (including addressing the issue with the battery manufacturer) did not demonstrate any significant
evidence supporting the Claim. Micronet engaged in discussion with the Regulator and as of the date hereof, Micronet has not received
any demand or formal response from the Regulator. Currently, the Complainant has refused any payment from MICT, and each party as reserved
its claims in this matter.
In February 2020, a former
employee of Micronet filed a claim against Micronet in the Israeli Labor Court for a total amount of USD $150,000. He alleged that he
was entitled to receive various salary payments and social benefits which were not previously paid to him. In response to the claim, Micronet
filed its defense. The claim is currently being litigated, and the parties are currently submitting their affidavits in connection with
the claim.
In June 2020, the previous
Chief Executive Officer (“CEO”) of Micronet’s subsidiary in the U.S. sent a demand letter, addressed to Micronet, claiming
he was owed compensation and severance due to Micronet’s breach of his employment agreement. He demanded a sum of USD $230,000 as
a severance payment. On February 17, 2021, the parties executed a settlement and release agreement in consideration for the payment of
USD $90,000 by Micronet to the previous CEO and each signed a mutual waiver and release of claims. This matter is fully settled.
Enertec Systems
On December 31, 2017, MICT,
Enertec Systems 2001 Ltd., (“Enertec Systems”), a previously wholly-owned subsidiary, and Enertec Management Ltd., (“Enertec
Management”) entered into a share purchase agreement (the “Share Agreement”), with Coolisys Technologies Inc., (“Coolisys”),
a subsidiary of DPW Holdings, Inc. (“DPW”). Per the Share Agreement, Coolisys agreed to pay, at the closing of the transaction,
a purchase price of $5,250,000 and assume up to $4,000,000 of Enertec Systems’ debt. On May 22, 2018, MICT closed on the sale of
all of the outstanding equity of Enertec Systems.
Upon Closing, MICT received
gross proceeds of approximately $4,700,000, of which 10% was to be held in escrow (“Escrow Amount”) for up to 14 months after
the Closing in order to satisfy any potential indemnification claims. The final consideration amount was adjusted based on Enertec Systems’
debt at the Closing. In addition, Coolisys also assumed approximately $4,000,000 of Enertec Systems’ debt.
In conjunction with, and as a
condition to, the Closing, the Company, Enertec Systems, Coolisys, DPW and Mr. David Lucatz, our former Chief Executive Officer and director,
executed a consulting agreement, (“Consulting Agreement”). Pursuant to the Consulting Agreement, we, via Mr. Lucatz, provided
Enertec Systems with certain consulting and transitional services over a 3-year period as necessary (but in no event did the services
exceed 20% of Mr. Lucatz’s time). Coolisys (via Enertec Systems) was obligated to pay us an annual consulting fee of $150,000 and
to issue to us 150,000 restricted shares of DPW Class A common stock, (the “DPW Shares”). The DPW Shares were to be issued
in three equal installments, with the initial installment vesting the day after the Closing and the remaining installments vesting on
each of the first two (2) anniversaries of the Closing.
Coolisys alleged the Company
was in breach of the Share Agreement, and the Escrow Amount remained in escrow. On July 21, 2020, MICT management and MICT (the “Seller
Parties”) received a statement of claim filed in the District Court of Tel Aviv (the “Court”) by Coolisys against the
Seller Parties and its board members in the amount of approximately $2,500,000, (the “Claim”). Pursuant to the Claim, Coolisys
alleged that certain misrepresentations in the Share Agreement resulted in losses to Coolisys and requested, among other things, that
the Court instruct the release of the Escrow Amount held by the escrow agent to Coolisys.
The Company filed its defense
to the Claim on December 15, 2020. On September 14, 2021 the Court adopted a verdict giving effect to the parties settlement agreement
pursuant to which the Claim was rejected. The parties have fully released and waived all claims against the other and in consideration
for the aforementioned, the Escrow Amount was released to the Coolisys. This matter is fully settled.
Item 4. Mine Safety Disclosures.
Not applicable.
The following table provides a reconciliation of cash and restricted
cash reported within the statement of financial position that sum to the total of the same amounts shown in the statement of cash flows:
Appendix C: Deconsolidation of Micronet Ltd.
The accompanying notes are an integral part of
the consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except Share and Par Value data)
NOTE 1 — DESCRIPTION OF BUSINESS
Overview
MICT, Inc. (“MICT”,
the “Company”, “We”, “us”, “our”) was formed as a Delaware corporation on January 31,
2002. On March 14, 2013, we changed our corporate name from Lapis Technologies, Inc. to Micronet Enertec Technologies, Inc. On July 13,
2018, following the sale of our former subsidiary Enertec Systems Ltd., we changed our name from Micronet Enertec Technologies, Inc. to
MICT. Our shares have been listed for trading on The Nasdaq Capital Market under the symbol “MICT” since April 29, 2013.
MICT Telematics Ltd (“MICT
Telematics”) is a wholly-owned holding company, established in Israel on December 31, 1991. On October 22, 1993, MICT Telematics
established a wholly-owned holding company headquartered in Israel, MICT Management Ltd.
On February 1, 2019, BI Intermediate
(Hong Kong) Limited (“BI Intermediate”) was incorporated in Hong Kong as a wholly-owned holding company of GFH Intermediate
Holdings Ltd. (“GFHI” or “Intermediate”).
On December 11, 2019, Bokefa
Petroleum and Gas Co., Ltd (“Bokefa Petroleum” ) was incorporated in Hong Kong as a holding company, and is the wholly-owned
subsidiary of BI Intermediate. On October 22, 2020 and March 8, 2021, Bokefa Petroleum established two additional holding companies, Shanghai
Zheng Zhong Energy Technologies Co., Ltd (“Shanghai Zheng Zhong”) and Tianjin Bokefa Technology Co., Ltd. (“Bokefa”).
On June 10, 2020, MICT Telematics
purchased 5,999,996 ordinary shares of Micronet Ltd. (“Micronet”) for aggregate proceeds of New Israeli Shekel (“NIS”)
1,800 (or $515) through tender offer issued by MICT Telematics. As a result, 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 a public offering consummated by Micronet on the Tel Aviv Stock Exchange (the “TASE”), 10,334,000
of Micronet’s ordinary shares for total consideration of NIS 3,100 (or $887). 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 once the offering was consummated. MICT recognized a $665 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 (or $1,417). Following Micronet’s offering, including the purchase of Micronet shares, the exercise
of our stock options and the 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 further 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
of GFHI 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 (“Merger Sub”), as amended and restated on April 15,
2020 (the “Restated Merger Agreement” or “Merger”). MICT is a holding company conducting financial technology
business through its subsidiaries and entities controlled through various VIEs arrangements 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 increase its capabilities and its 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.
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except Share and Par Value data)
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 $3,000 (the “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 (the “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 remained subject
to SFC approval, the loan will be cancelled, and BI Intermediate will 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 have been guaranteed
by its majority shareholder. 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 (reflecting the net asset value of Magpie estimated at $2,034 recorded as a working
capital, and a premium $902 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 platform with Magpie’s
licensed trading assets.
Upon completion of the acquisition
of 100% of the equity interest in Magpie, 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 Hong Kong regulator
of our intended launch date. Our initial plan is to launch the online stock trading platform in Hong Kong.
On January 1, 2021, we
entered into a transaction through our wholly-owned subsidiary, Bokefa, with the shareholders of Guangxi 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 the Guangxi Zhongtong shareholders through a frame work loan (the “GZ Frame
Work Loan”) the amount of up to RMB 40,000 (approximately $6,125) (“GZ Frame Work Loan Amount”) which is
designated, if exercised, to be used as a working capital loan for Guangxi Zhongtong. As of December 31, 2021, only RMB 8,010
(approximately $1,243) was drawn down from the GZ Frame Work Loan for working capital and approximately $919
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 issued and outstanding common 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 of Guangxi Zhongtong in the shareholder’s
equity interest in Guangxi Zhongtong (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.
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except Share and Par Value data)
This transaction was structured pursuant to a Variable Interest Entity
(“VIE”) Structure (in which we do not hold the shares). As such, and 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 of Guangxi
Zhongtong 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 of Guangxi Zhongtong in accordance with U.S. GAAP. Beijing
Fucheng Lianbao Technology Co., Ltd (“Beijing Fucheng”) is an entity incorporated on December 29, 2020, in which Bokefa owns
24% equity interest with the remaining 76% controlled by Bokefa through VIE agreements. On February 10, 2021, Beijing Fucheng acquired
all of the shares of Beijing Yibao Technology Co., Ltd., (“Beijing Yibao”) which holds 100% of the equity interest in Beijing
Fucheng Insurance Brokerage Co., Ltd. (“Fucheng Insurance”). Fucheng Insurance is a Chinese insurance brokerage agency and
a nation-wide licensed entity which offers insurance brokerage services for a broad range of insurance products. Fucheng Insurance, 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 the onboarding of new agents onto our platforms all throughout China. It also creates the opportunity
to promote our business through some of China’s biggest online portals, which will provide business-to-business-to-consumer (B2B2C)
as well as business-to-consumer (B2C) channels. When Fucheng Insurance initiates its nationwide rollout of its mobile application, it
will facilitate access to those portals’ large customer bases which will also offer MICT’S full suite of insurance products.
Beijing Fucheng shares were acquired for approximately $5,700, and funded through MICT. For further information please refer to Note 13.
On June 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 of NIS 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 of NIS 26,864 (approximately $8,290) in the offering. The Company did not participate in the offering,
and, as a result, the Company owned 36.8% of the outstanding ordinary shares of Micronet and 26.56% on a fully diluted basis as of December
31, 2021.
On July 1, 2021, Bokefa entered
into a transaction with the shareholders of All 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 to RMB 30,000 (approximately $4,700) (the “AW Frame Work Loan Amount”) which, if utilized, will be
used for working capital purposes 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
was structured as 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 the primary beneficiary
of All Weather’s business. On October 27, 2021, the entire AW Frame Work Loan Amount was utilized by the All Weather shareholders
and the AW Frame Work Loan Amount was transferred to All Weather for purposes of working capital. In addition, as of December
31, 2021, the Company granted All Weather shareholders an additional loan in the sum of approximately $776 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 purchase by MICT of such equity interests in All Weather on such commercial and other terms to be agreed by the parties.
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except Share and Par Value data)
All Weather Appraisal Co., Ltd. (All Weather Appraisal) is a subsidiary
of All Weather Insurance Agency Co., Ltd, which holds 99.6% equity in All Weather Appraisal. All Weather Appraisal is a nationwide company
and is approved by the China Banking and Insurance Regulatory Commission, specializing in the appraisal, evaluation, inspection and damage
assessment of subjects of Insurance.
On August 23, 2021, Beijing Yibao Technology Co., Ltd, Guangxi Zhongtong
Insurance Agency Co., Ltd, and two shareholders of Guangxi Zhongtong entered into a capital increase agreement pursuant to which Beijing
Yibao will invest approximately RMB30,000 ($4,700) into Guangxi Zhongtong. On October 21, 2021, Beijing Yibao transferred the
funds separately and the transaction closed. As a result of the transaction, Beijing Yibao 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 on
January 1, 2021 per the GZ Frame Work Loan became null and void, and the loan should be repaid by the shareholders before December
31, 2022.
From January through September
2021, Shenzhen Bokefa Technology Co., Ltd (“Shenzhen Bokefa”) and Tianjin Dibao Technology Co., Ltd (“Tianjin Dibao”)
were established under BI Intermediate as holding companies to further develop the Company’s insurance business in China. As
of December 31, 2021, no substantial operations conducted in those two entities.
Our current business, following
the completion of the acquisition of GFHI, is primarily comprised and focused on the growth and development of the GFHI financial technology
offerings and the marketplace in China. 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 GFHI, we are positioned to establish ourselves, through our operating subsidiaries and VIEs, 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 in China 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.
We implemented our plans by
capitalizing on Intermediate’s experience with local markets in China, as well as with the Company’s operating subsidiaries,
which have begun to secure material contracts in fast growing market segments in China.
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 |
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except Share and Par Value data)
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.
The following diagram illustrates
the Company’s corporate structure, including its subsidiaries, and variable interest entities (“VIEs”), as of December
31, 2021:
VIE agreements with Guangxi Zhongtong:
On January 1, 2021, Bokefa,
our wholly foreign-owned enterprise (“WFOE”), Guangxi Zhongtong, and nominee shareholders of Guangxi Zhongtong entered into
six agreements, described below, pursuant to which Bokefa is deemed to have controlling financial interest and be the primary beneficiary
of Guangxi Zhogntong. Therefore, Guangxi Zhongtong is deemed a VIE of Bokefa:
Loan Agreement
Pursuant to this agreement,
Bokefa agreed to provide loans to the registered shareholders of Guangxi Zhongtong. The term of the loan shall start from the date when
the loan is actually paid, until the date on which the loan is repaid in full. 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 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 to Guangxi Zhongtong’s
business operation.
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except Share and Par Value data)
Equity Pledge Agreement
The agreement will be terminated
upon such date when the other agreements have been terminated. Pursuant to the agreement, the nominee shareholders pledged all their equity
interest in Guangxi Zhongtong to Bokefa as security for the obligations in 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.
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 of Guangxi 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.
On August 23, 2021, Beijing
Yibao Technology Co., Ltd, Guangxi Zhongtong Insurance Agency Co., Ltd, and two shareholders of Guangxi Zhongtong entered into a capital
increase agreement pursuant to which Beijing Yibao will invest approximately RMB30,000 ($4,700) into Guangxi Zhongtong. On October 21,
2021, Beijing Yibao transferred the funds separately and the transaction closed. As a result of the transaction, Beijing Yibao 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 on January 1, 2021 per the GZ Frame Work Loan became null and void, and the loan should be repaid
by the shareholders before December 31, 2022.
VIE agreements with Beijing Fucheng:
On December 31, 2020, as amended
on August 25, 2021, Bokefa, Beijing Fucheng Lianbao Technology Co., Ltd. (“Beijing Fucheng”), and the 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
on December 29, 2020 and had no assets or liabilities as of December 31, 2020.
Loan Agreement
Pursuant to this agreement, Bokefa agreed to provide
loans to the registered shareholders of Beijing Fucheng. The term of the loan under this agreement shall start from the date when the
loan is actually paid and shall continue until the shareholders repay all the loan in accordance with this agreement. The agreement shall
terminate 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 for their obligations under the 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. 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.
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except Share and Par Value data)
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.
Entrustment and Power of Attorney Agreement
The shareholders of Beijing
Fucheng agreed to entrust all the rights to exercise their voting power and any other rights as shareholders of Beijing Fucheng to Bokefa.
The shareholders of Beijing Fucheng 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 Beijing Fucheng.
VIE agreements with All Weather:
On July 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 loans to the shareholders of All Weather. The term of the loan is one year and shall start from the
date when the loan is actually paid. 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.
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except Share and Par Value data)
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.
The assets and liabilities
of the Company’s VIEs (All Weather and Beijing Fucheng) included in the Company’s consolidated financial statements as of
December 31, 2021 are as follows:
| |
December 31, 2021 | |
| |
USD
in thousands | |
| |
| |
Current assets: | |
| |
Cash | |
$ | 1,260 | |
Trade accounts receivable, net | |
| 2,462 | |
Other current assets | |
| 4,550 | |
Total current assets | |
| 8,272 | |
| |
| | |
Property and equipment, net | |
| 208 | |
Intangible assets | |
| 5,718 | |
Long-term prepaid expenses | |
| 48 | |
Right of use assets | |
| 530 | |
Restricted cash | |
| 1,632 | |
Deferred tax assets | |
| 369 | |
Total long-term assets | |
| 8,505 | |
| |
| | |
Total assets | |
$ | 16,777 | |
| |
| | |
Current liabilities: | |
| | |
Short term loan from others | |
$ | 1,155 | |
Trade accounts payable | |
| 697 | |
Lease liability | |
| 4,583 | |
Other current liabilities | |
| 2,401 | |
Total current liabilities | |
| 8,836 | |
| |
| | |
| |
| | |
Long-term liabilities: | |
| | |
Lease liability | |
| 106 | |
Deferred tax liability | |
| 224 | |
Total long-term liabilities | |
| 330 | |
| |
| | |
Total liabilities | |
$ | 9,166 | |
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except Share and Par Value data)
Net revenues, loss from operations
and net loss of the VIEs that were included in the Company’s consolidated financial statements for the year ended December 31, 2021
are as follows:
| |
For the year Ended | |
| |
December 31, | |
| |
2021 | |
| |
| USD in thousands | |
| |
| | |
Net revenues | |
$ | 19,683 | |
Loss from operations | |
$ | (1,883 | ) |
Net loss | |
$ | (526 | ) |
Liquidity
The Company has been incurring
losses in 2020 and 2021. Accumulated deficit from operations were US$37,896 and US$16,579 as of December 31, 2021 and 2020,
respectively. The net cash used in operating activities was US$8,300 and US$33,025 for the years ended December 31, 2020 and 2021,
respectively.
The Company’s liquidity is based on its ability to generate cash
from operating activities, obtain capital financing from equity interest investors and borrow funds on favorable economic terms to fund
its general operations and capital expansion needs. The Company’s ability to continue as a going concern is dependent on management’s
ability to successfully execute its business plan, which includes increasing revenue while controlling operating cost and expenses to
generate positive operating cash flows and obtaining funds from outside sources of financing to generate positive financing cash flows.
As of December 31, 2020 and 2021, the Company’s balance of cash and cash equivalents was $29,049 and $94,930.
Based on cash flow projections
from operating and financing activities and existing balance of cash and cash equivalents, management believes that there is no substantial
doubt as to whether existing cash will be sufficient to fund its operations within one year from the date the consolidated financial statements
are issued.
The Company plans to continue
to fund its losses from operations through cash, as well as through future equity offerings, debt financings, other third-party funding,
and new business developments to generate profitable operations. Therefore, the accompanying consolidated financial statements have been
prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and settlement of liabilities
in the normal course of business, and do not include any adjustments for the recovery and classification of assets or the amounts and
classification of liabilities that might be necessary should the Company be unable to continue as a going concern. However, there can
be no assurance that additional funds will be available when needed from any source or, if available, on terms that are acceptable to
the Company.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements
are prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP).
The Company’s operations
and business may still be subject to adverse effect due to the unprecedented conditions surrounding the spread of COVID-19 throughout
North America, Israel, China and the world. Although currently the COVID-19 (due to the measures implemented to reduce the spread of the
virus) have not had a material adverse effect on the Company consolidated financial reports; there can be no assurance that Company’s
financial reports will not be affected in the future from COVID-19 or resulting from restrictions and other government actions.
Principle of Consolidation
The consolidated financial statements include the financial statements
of the Company and its subsidiaries and variable interest entities. All significant inter-company transactions and balances among the
Company and its subsidiaries are eliminated upon consolidation.
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except Share
and Par Value data)
Foreign currency translation and transaction
The reporting currency of
the Company is the U.S. dollar. The Companies in China conducts their businesses in the local currency, Renminbi (RMB), as its functional
currency. The Companies in Israel conducts their businesses in the local currency, New Israeli Shekel (NIS), as its functional currency.
The Companies in Hong Kong conducts their businesses in the local currency, Hong Kong Dollar (HKD), as its functional currency.
Assets and liabilities are translated
at the noon buying rate in the City of New York for cable transfers of RMB, NIS and HKD as certified for customs purposes by the Federal
Reserve Bank of New York at the end of the period. The statement of operations accounts is translated at the average translation rates
and the equity accounts are translated at historical rates. Translation adjustments resulting from this process are included in accumulated
other comprehensive income (loss). Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated
in a currency other than the functional currency are included in the results of operations as incurred.
As of December 31, 2021 and 2020, substantially all of the Company’s
subsidiaries operating activities and major assets and liabilities, are denominated in foreign currency. All foreign exchange transactions
take place through either the authorized financial institutions at exchange rates quoted by People’s Bank of China (“PBOC”)
or by Bank of Israel. The value of foreign currency is subject to change in central government policies and international economic and
political developments affecting supply. When there is a significant change in value of foreign currency, the gains and losses resulting
from translation of financial statements of a foreign subsidiary will be significant affected.
RMB was changed from 6.3726
RMB into US$1.00 at December 31, 2021 to 6.525 RMB into US$1.00 at December 31, 2020, and the average rate for the twelve month
ended December 31, 2021 were 6.4508 RMB.
ILS was changed from 3.11
ILS into US$1.00 at December 31, 2021 to 3.215 ILS into US$1.00 at December 31, 2020, and the average rate for the twelve month
ended December 31, 2021 were 3.229 ILS.
HKD was changed from 7.7996
HKD into US$1.00 at December 31, 2021 to 7.754 HKD into US$1.00 at December 31, 2020, and the average rate for the twelve month
ended December 31, 2021 were 7.773 HKD.
Use of Estimates
The preparation of consolidated
financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the periods presented. Significant accounting estimates reflected in our consolidated
financial statements include the useful lives of plant and equipment and intangible assets, impairment of long-lived assets, goodwill,
intangible assets, allowance for doubtful accounts, revenue recognition, allowance for deferred tax assets and uncertain tax position.
Actual results could differ from these estimates.
Cash
Cash consists of cash on hand,
demand deposits and time deposits placed with banks or other financial institutions and have original maturities of less than three months.
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except Share and Par Value data)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Accounts receivable, net
Accounts
receivable include trade accounts due from customers. Accounts are considered overdue after thirty (30) days from payment due date. In
establishing the required allowance for doubtful accounts, management considers historical collection experience, aging of the receivables,
the economic environment, industry trend analysis, and the credit history and financial conditions of the customers. Management reviews
its receivables on a regular basis to determine if the bad debt allowance is adequate, and adjusts the allowance when necessary. Delinquent
account balances are written off against allowance for doubtful accounts after management has determined that the likelihood of collection
is not probable. As of December 31, 2021 and December 31, 2020, allowance for doubtful accounts amounted to $2,606 and approximately
$5, respectively.
Restricted Cash
The Company as an insurance
broker is required to reserve 10% of its registered capital in cash held in an escrow bank account pursuant to the China Insurance Regulatory
Commission (“CIRC”) rules and regulations. As of December 31, 2021 and 2020, restricted cash amounted to $2,417 and $0 respectively.
Warrants
The Company accounts for warrants
as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable
authoritative guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The
assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability
pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether
the warrants are indexed to the Company’s own common stock and whether the warrant holders could potentially require “net
cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification. This
assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly
period end date while the warrants are outstanding.
For issued or modified warrants
that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in
capital at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants
are required to be recorded at their initial fair value on the date of issuance, and each balance sheet date thereafter. Changes in the
estimated fair value of the warrants are recognized as a non-cash gain or loss on the statements of operations.
Inventories
Inventories of raw materials
are stated at the lower of cost (first-in, first-out basis) or realizable value. Cost of work in process is comprised of direct materials,
direct production costs and an allocation of production overheads based on normal operating capacity.
Property and Equipment
Property and equipment are
stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization is calculated by the straight-line method
over their estimated useful lives. Annual rates of depreciation are as follows:
Category |
|
Useful Life |
Machinery and equipment |
|
3-7 years |
Furniture and fixtures |
|
3-14 years |
Transportation equipment |
|
4-7 years |
Leasehold improvements |
|
Over the shorter of lease term or life of the assets |
Computer equipment |
|
3 years |
Stock Based Compensation
The Company accounts for stock-based
compensation under the fair market value method under which compensation cost is measured at the grant date based on the value of the
award and is recognized over the service period, which is usually the vesting period. For stock options, fair value is determined using
an option-pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option,
the volatility of the underlying stock, the expected dividends on it, and the risk-free interest rate over the expected life of the option.
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except Share and Par Value data)
Research and Development Costs
Research and development costs
are charged to statements of operations as incurred net of grants from the Israel Innovation Authority (formerly known as the Israel Office
of the Chief Scientist of the Ministry of Economy), or IIA, and also from our Hong Kong (“HK”) online stock trading platform
segment.
Earnings (Loss) per Share
Net loss per share is computed
by dividing the net loss by the weighted average number of shares of common stock outstanding. The calculation of the basic and diluted
earnings per share is the same for all periods presented, as the effect of the potential common shares equivalents is anti-dilutive due
to the Company’s net loss position for all periods presented.
Segment reporting
ASC Topic 280, “Segment
Reporting”, establishes standards for reporting information about operating segments on a basis consistent with the Company’s
internal organizational structure as well as information about geographical areas, business segments and major customers in financial
statements for detailing the Company’s business segments. Operating segments are reported in a manner consistent with the internal
reporting provided to the chief operating decision maker (the “CODM”), which is comprised of certain members of the Company’s
management team.
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.
The Company recognized no
impairment of ROU assets as of December 31, 2021 and December 31, 2020.
The operating lease is included
in right-of-use assets and lease liability on the consolidated balance sheets.
Investments
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except Share and Par Value data)
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.
As of December 31, 2021, the
Company owned 36.80% of shares in Micronet which was accounted for under equity method.
As of December 31, 2021, the
Company owned 24% of the shares in Beijing Fucheng and controlled the remaining 76% through contractual arrangements as discussed in Note
1. Beijing Fucheng was therefore 100% consolidated in the consolidated financial statements.
Fair value measurement
The accounting standard regarding
fair value of financial instruments and related fair value measurements defines financial instruments and requires disclosure of the fair
value of financial instruments held by the Company.
The accounting standards define
fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement and enhance disclosure requirements
for fair value measures. The three levels are defined as follow:
| ● | Level 1 inputs to the valuation
methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| ● | Level 2 inputs to the valuation
methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets
or liability, either directly or indirectly, for substantially the full term of the financial instruments. |
| ● | Level 3 inputs to the valuation
methodology are unobservable and significant to the fair value. |
Financial instruments included
in current assets and current liabilities are reported in the consolidated balance sheets at face value or cost, which approximate fair
value because of the short period of time between the origination of such instruments and their expected realization and their current
market rates of interest.
Intangible assets
The Company’s intangible
assets with definite useful lives primarily consist of licensed software, capitalized development costs, platform system, and land-use
rights. The Company amortizes its intangible assets with definite useful lives over their estimated useful lives and reviews these assets
for impairment. The Company typically amortizes its intangible assets with definite useful lives on a straight-line basis over the shorter
of the contractual terms or the estimated useful lives. The Company did not record any impairment of intangible assets as of December
31, 2021 and December 31, 2020.
Intangible assets are stated
at cost less accumulated amortization. Amortization is computed using the straight-line method over the estimated useful lives of the
assets. The estimated useful lives are as follows:
|
|
Useful Life |
License & software |
|
indefinite useful life and some of them for 10 years |
Technology know-how |
|
6 years |
Trade name/ trademarks |
|
indefinite useful life and some of them for 5 years |
Customer relationship |
|
5-10 years |
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except Share and Par Value data)
Goodwill
Goodwill represents the excess
of the purchase price over the estimated fair value of the net assets acquired in the acquisition of a business. We test goodwill for
impairment annually in the fourth quarter and when events or changes in circumstances indicate that the fair value of a reporting unit
with goodwill has been reduced below its carrying value. On January 26, 2017, the Financial Accounting Standards Board (“FASB”)
issued ASU 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The standard
simplifies the accounting for goodwill impairment by requiring a goodwill impairment to be measured using a single step impairment model,
whereby the impairment equals the difference between the carrying amount and the estimated fair value of the specified reporting units
in their entirety. This eliminated the second step of the previous impairment model that required companies to first estimate the fair
value of all assets in a reporting unit and measure impairments based on those estimated fair values and a residual measurement approach.
It also specifies that any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The Company
did not record any impairment of goodwill as of December 31, 2021 and December 31, 2020.
Revenue Recognition
We recognize our revenue
under ASC 606. ASC 606 establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and
cash flows arising from the entity’s contracts to provide goods or services to customers. The core principle requires an entity to recognize
revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled
to receive in exchange for those goods or services recognized as performance obligations are satisfied. It also requires us to identify
contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when
control of goods and services transfers to a customer.
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.
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.
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except Share and Par Value data)
With respect to Micronet applicable
revenue recognition U.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
from the insurance division 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 recognition U.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 at
point in time when the requested information is delivered to the customer.
The Company’s revenues
from the online stock trading platform are generated from stock trading commission income. Magpie provides trade execution to its customers.
Commission revenue is recognized when transfer of control occurs. Trade execution performance obligation generally occurs on the trade
date because that is when the underlying financial instrument (for a purchase) or purchaser (for a sale) is identified and the pricing
is agreed upon.
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.
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except Share and Par Value data)
Income Taxes
Deferred taxes are determined
utilizing the “asset and liability” method, whereby deferred tax asset and liability account balances are determined based
on differences between financial reporting and the tax basis of assets and liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, when it’s
more likely than not that deferred tax assets will not be realized in the foreseeable future.
The Company applied FASB ASC
Topic 740-10-25, “Income Taxes,” which provides guidance for recognizing and measuring uncertain tax positions and prescribes
a threshold condition that a tax position must meet for any of the benefits of the uncertain tax position to be recognized in the financial
statements. It also provides accounting guidance on derecognizing, classification and disclosure of these uncertain tax positions. The
Company’s policy on classification of all interest and penalties related to unrecognized income tax positions, if any, is to present
them as a component of income tax expense.
MICT and its subsidiaries
and VIEs within the jurisdiction of the United States, Israel and China are subject to a tax examination for the most recent three, four
and five years, respectively.
Stock-Based Compensation
Stock-based compensation granted
to the Company’s employees and consultants are measured at fair value on grant date and stock-based compensation expense is recognized
(i) immediately at the grant date if no vesting conditions are required, or (ii) using the accelerated attribution method, net of estimated
forfeitures, over the requisite service period. The fair value of restricted shares is determined with reference to the fair value of
the underlying shares.
At each date of measurement,
the Company reviews internal and external sources of information to assist in the estimation of various attributes to determine the fair
value of the share-based awards granted by the Company, including but not limited to the fair value of the underlying shares, expected
life, expected volatility and expected forfeiture rates. The Company is required to consider many factors and make certain assumptions
during this assessment. If any of the assumptions used to determine the fair value of the stock-based compensation changes significantly,
stock-based compensation expense may differ materially in the future from that recorded in the current reporting period.
Reclassification
Prior to the deconsolidation
of Micronet, Micronet had been taking active steps to sell its building within the year 2021. The company reclassified the related assets
which were previously included in property and equipment, net and intangible assets, net to held-for-sale as of December 31, 2020.
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except Share and Par Value data)
Impairment of Long-Lived Assets
Intangible assets that are not considered to have
an indefinite useful life are amortized using the straight-line basis over their estimated useful lives. The Company evaluates property
and equipment and purchased intangible assets with finite lives for impairment whenever events or changes in circumstances indicate the
carrying value of an asset may not be recoverable. The Company assesses the recoverability of the assets based on the undiscounted future
cash flow and recognizes an impairment loss when the estimated undiscounted future cash flow expected to result from the use of the asset
plus the net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When the Company
identifies an impairment, it reduces the carrying amount of the asset to its estimated fair value based on a discounted cash flow approach
or, when available and appropriate, to comparable market values. As of December 31, 2021, and 2020, no indicators of impairment have been
identified.
Comprehensive Income (Loss)
FASB ASC Topic 220-10, “Reporting Comprehensive
Income,” requires the Company to report in its consolidated financial statements, in addition to its net loss, comprehensive income
(loss), which includes all changes in equity during a period from non-owner sources including, as applicable, foreign currency items,
and other items.
The Company’s other comprehensive income
for all periods presented is related to the translation from functional currency to the presentation currency.
Financial Instruments
1. |
Concentration of credit risks: |
Financial instruments that have the
potential to expose the Company to credit risks are mainly cash and cash equivalents, bank deposit accounts.
The Company holds cash and cash equivalents, securities
and deposit accounts at large banks in Israel, thereby substantially reducing the risk of loss.
The Company performs ongoing credit evaluations of its loans
to related parties for the purpose of determining the appropriate allowance impairment and has a convection feature as a collateral. An
appropriate allowance for impairment is included in the accounts.
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except Share and Par Value data)
Statutory reserves
Pursuant to the laws applicable to the PRC, PRC
entities must make appropriations from after-tax profit to the non-distributable “statutory surplus reserve fund”.
Subject to certain cumulative limits, the “statutory surplus reserve fund” requires annual appropriations of 10% of after-tax profit
until the aggregated appropriations reach 50% of the registered capital (as determined under accounting principles generally accepted
in the PRC (“PRC GAAP”) at each year-end). For foreign invested enterprises and joint ventures in the PRC, annual appropriations
should be made to the “reserve fund”. For foreign invested enterprises, the annual appropriation for the “reserve fund”
cannot be less than 10% of after-tax profits until the aggregated appropriations reach 50% of the registered capital (as determined
under PRC GAAP at each year-end). If the Company has accumulated loss from prior periods, the Company is able to use the current period
net income after tax to offset against the accumulate loss.
Segment reporting
FASB ASC 280, Segment Reporting, establishes standards
for reporting information about operating segments on a basis consistent with the Company’s internal organizational structure as
well as information about geographical areas, business segments and major customers in financial statements for details on the Company’s
business segments.
The Company uses the management approach to determine reportable operating
segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision
maker (“CODM”) for making decisions, allocating resources, and assessing performance. The Company’s CODM has been identified
as the CEO, who reviews consolidated results when making decisions about allocating resources and assessing performance of the Company.
Based on management’s assessment, the Company
determined that it has two operating segments and therefore two reportable segments as defined by ASC 280, which are central processing
algorithm services and intelligent chips and services
Recently issued accounting pronouncements
In May 2019, the
FASB issued ASU 2019-05, which is an update to ASU Update No. 2016-13, Financial Instruments — Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments, which introduced the expected credit losses methodology for the measurement
of credit losses on financial assets measured at amortized cost basis, replacing the previous incurred loss methodology. The
amendments in Update 2016-13 added Topic 326, Financial Instruments — Credit Losses, and made several consequential
amendments to the Codification. Update 2016-13 also modified the accounting for available-for-sale debt securities, which
must be individually assessed for credit losses when fair value is less than the amortized cost basis, in accordance with Subtopic
326-30, Financial Instruments — Credit Losses — Available-for-Sale Debt Securities. The amendments in this Update
address those stakeholders’ concerns by providing an option to irrevocably elect the fair value option for certain financial
assets previously measured at amortized cost basis. For those entities, the targeted transition relief will increase comparability
of financial statement information by providing an option to align measurement methodologies for similar financial assets.
Furthermore, the targeted transition relief also may reduce the costs for some entities to comply with the amendments in Update
2016-13 while still providing financial statement users with decision-useful information. In November 2019, the FASB
issued ASU No. 2019-10, which to update the effective date of ASU No. 2016-02 for private companies,
not-for-profit organizations and certain smaller reporting companies applying for credit losses, leases, and hedging standard.
The new effective date for these preparers is for fiscal years beginning after December 15, 2022. The Company does not expect
the adoption of this ASU would have a material effect on the Company’s consolidated financial statements.
In October 2020, the
FASB issued ASU 2020-08, “Codification Improvements to Subtopic 310-20, Receivables—Non-refundable Fees and Other
Costs”. The amendments in this Update represent changes to clarify the Codification. The amendments make the Codification
easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. ASU 2020-08 is effective
for the Company for annual and interim reporting periods beginning July 1, 2021. Early application is not permitted. All
entities should apply the amendments in this Update on a prospective basis as of the beginning of the period of adoption for
existing or newly purchased callable debt securities. These amendments do not change the effective dates for Update 2017-08. The
Company is currently evaluating the impact of this new standard on the Company’s consolidated financial statements and related
disclosures.
In October 2020, the FASB issued ASU 2020-10,
“Codification Improvements”. The amendments in this Update represent changes to clarify the Codification or correct unintended
application of guidance that are not expected to have a significant effect on current accounting practice or create a significant administrative
cost to most entities. The amendments in this Update affect a wide variety of Topics in the Codification and apply to all reporting entities
within the scope of the affected accounting guidance. ASU 2020-10 is effective for annual periods beginning after December 15,
2020 for public business entities. Early application is permitted. The amendments in this Update should be applied retrospectively. The
adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In
Thousands, except Share and Par Value data)
In October 2021, the FASB issued ASU 2021-08,
“Business Combinations”. The amendments in this Update address how to determine whether a contract liability is recognized
by the acquirer in a business combination and resolve the inconsistency of measuring revenue contracts with customers acquired in a business
combination by providing specific guidance on how to recognize and measure acquired contract assets and contract liabilities from revenue
contracts in a business combination. The amendments in this Update apply to all entities that enter into a business combination within
the scope of Subtopic 805-10, Business Combination-Overalls. For public business entities, ASU 2021-08 is effective for fiscal years
beginning after December 15, 2022, including interim periods within those fiscal years. Early application is permitted. The amendments
in this Update should be applied prospectively to business combinations occurring on or after the effective date of the amendments. The
Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.
Except as mentioned above,
the Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material
effect on the Company’s consolidated balance sheets, consolidated statements of operations, comprehensive loss and cash flows.
Note 3 — Stockholders’
Equity
Common stock confers upon its holders the rights
to receive notice to participate and vote in general meetings of the Company, and the right to receive dividends if declared.
2012 plan. Our
2012 Stock Incentive Plan (the “2012 Incentive Plan”) was initially adopted by the Board on November 26, 2012 and approved
by our stockholders on January 7, 2013 and subsequently amended on September 30, 2014, October 26, 2015, November 15, 2017 and November
8, 2018. Under the 2012 Incentive Plan, as amended, up to 5,000,000 shares of our Common Stock, are currently authorized to be issued
pursuant to option awards granted thereunder, 3,044,782 shares of which have been issued or have been allocated to be issued as of November
30, 2020 and 1,955,218 shares remain available for future issuance as November 30, 2020. The 2012 Incentive Plan is intended as an incentive
to retain directors, officers, employees, consultants and advisors to the Company, persons of training, experience and ability, to attract
new employees, directors, consultants and advisors whose services are considered valuable, to encourage the sense of proprietorship and
to stimulate the active interest of such persons in the development and financial success of the Company, by granting to such persons
options to purchase shares of the Company’s Common Stock (“2012 Options”), shares of the Company’s stock, with
or without restrictions, or any other share-based award (“2012 Award(s)”). The Plan is intended as an incentive to retain
in the employ of, and as directors, consultants and advisors to MICT, Inc., a Delaware corporation (the “Company”), and its
subsidiaries (including any “employing company” under Section 102(a) of the Ordinance (as hereinafter defined) and any “subsidiary”
within the meaning of Section 424(f) of the United States Internal Revenue Code of 1986, as amended (the “Code”), collectively,
the “Subsidiaries”), persons of training, experience and ability, to attract new employees, directors, consultants and advisors
whose services are considered valuable, to encourage the sense of proprietorship and to stimulate the active interest of such persons
in the development and financial success of the Company and its Subsidiaries, by granting to such persons either (i) options to purchase
shares of the Company’s Stock, (the “Options”), (ii) shares of the Company’s Stock, with or without restrictions,
or (iii) any other Stock-based award, granted to a Grantee or an Optionee (as such terms are defined below hereunder) under the Plan and
any Stock issued pursuant to the exercise thereof. Stock awards and the grant of Options to purchase shares of Stock, or the issue of
each of the above under sub-sections (i) - (iii) shall be referred as the “Award(s).
2020 plan. The 2020 Incentive
Plan provides for the issuance of up to 20,000,000 shares of our common stock plus a number of additional shares issued upon the expiration
or cancellation of awards under our 2014 Incentive Plan, which was terminated when the 2020 Incentive Plan was approved by our stockholders.
Generally, shares of common stock reserved for awards under the 2020 Incentive Plan that lapse or are canceled (other than by exercise)
will be added back to the share reserve available for future awards. However, shares of common stock tendered in payment for an award
or shares of common stock withheld for taxes are not available again for future awards. In addition, Shares repurchased by the Company
with the proceeds of the option exercise price may not be reissued under the 2020 Incentive Plan.
The following table summarizes information about
stock options outstanding and exercisable as of December 31, 2021:
Options Outstanding | | |
Options Exercisable | |
Number Outstanding on December 31, 2021 | | |
Weighted Average Remaining Contractual Life | | |
Number Exercisable on December 31, 2021 | | |
Exercise Price | |
| | |
Years | | |
| | |
$ | |
| 38,000 | | |
| 0.25 | | |
| 38,000 | | |
| 4.30 | |
| 50,000 | | |
| 0.25 | | |
| 40,000 | | |
| 1.32 | |
| 30,000 | | |
| 0.25 | | |
| 30,000 | | |
| 1.4776 | |
| 825,000 | | |
| 0.25 | | |
| 825,000 | | |
| 1.41 | |
| 370,000 | | |
| 9.5 | | |
| 185,000 | | |
| 1.81 | |
| 245,000 | | |
| 9.5 | | |
| - | | |
| 2.49 | |
| 1,558,000 | | |
| | | |
| 1,118,000 | | |
| | |
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except Share and Par Value data)
B. |
Stock Option Plan - (continued): |
| |
2021 | | |
2020 | |
| |
Number of Options | | |
Weighted Average Exercise Price | | |
Number of Options | | |
Weighted Average Exercise Price | |
| |
| | |
$ | | |
| | |
$ | |
Options outstanding at the beginning of year: | |
| 1,158,000 | | |
| 2.24 | | |
| 1,167,000 | | |
| 2.34 | |
Changes during the year: | |
| | | |
| | | |
| | | |
| | |
Granted | |
| 740,000 | | |
| 1.97 | | |
| 1,300,000 | | |
| 1.32 | |
Exercised | |
| (60,000 | ) | |
| 1.35 | | |
| (1,198,000 | ) | |
| 1.97 | |
Forfeited | |
| (280,000 | ) | |
| 1.41 | | |
| (111,000 | ) | |
| 2.81 | |
| |
| | | |
| | | |
| | | |
| | |
Options outstanding at end of year | |
| 1,558,000 | | |
| 1.74 | | |
| 1,158,000 | | |
| 2.24 | |
Options exercisable at year-end | |
| 1,118,000 | | |
| 1.57 | | |
| 1,138,000 | | |
| 2.36 | |
The Company has warrants outstanding as
follows:
| |
Warrants Outstanding | |
|
Average Exercise Price | | |
Remaining Contractual Life | |
Balance, December 31, 2020 | |
| 12,994,545 | |
|
$ | 2.31 | | |
| 4 | |
Granted | |
| 54,863,876 | |
|
$ | 2.81 | | |
| 4.5 | |
Forfeited | |
| (2,544,055 | ) |
|
$ | 1.01 | | |
| - | |
Exercised | |
| (2,450,487 | ) |
|
$ | 1.01 | | |
| - | |
Balance, December 31, 2021 | |
| 62,863,879 | |
|
$ | 2.854 | | |
| 4.5 | |
Subject to, and upon closing of the Acquisition
Agreement, the securities issued upon the exercise or conversion of outstanding options will be in accordance with the terms on which
they were granted initially.
The fair value of each option granted is estimated
on the date of grant, using the Black-Scholes option-pricing model with the following weighted average assumptions: dividend yield of
0% for all years; expected volatility: 2020 -45.24% 2021-87.2%-100.4%; risk-free interest rate: 2020 – 0.39% 2021-0.99%-1.64%; and
expected life: 2020- 0.68 years 2021-6.5-10 years.
The Company is required to assume a dividend yield
as an input in the Black-Scholes model. The dividend yield assumption is based on the Company’s historical experience and expectation
of future dividends payouts and may be subject to change in the future.
The Company uses historical volatility in accordance
with FASB ASC Topic 718, “Compensation - stock compensation”. The computation of volatility uses historical volatility derived
from the Company’s exchange-traded shares.
The risk-free interest assumption is the implied
yield currently available on U.S. Treasury zero-coupon bonds, issued with a remaining term equal to the expected life term of the Company’s
options.
Pre-vesting rates forfeitures were zero based on
pre-vesting forfeiture experience.
The Company uses the simplified method to compute
the expected option term for options granted.
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except Share and Par Value data)
During 2020 the Company issued
1,943,182, shares of its common stock to its directors, employees and consultants and as a result recorded aggregate expenses of $2,750
in connection with such issuance
During 2020 the Company issued
200,000, shares of its common stock to Maxim Group LLC, or Maxim as part of a settlement agreement executed between the parties and as
a result of such issuance recorded aggregate expenses of $635.
During 2020 the Company issued
an aggregate of 1,198,000 shares of our common stock pursuant to the exercise of certain stock options previously issued to its employees,
directors and consultants. As a result of such issuance of common stock, the Company recorded an aggregate expenses of $2,365.
During 2020 the Company issued
an aggregate of 2,181,282 shares of its common stock pursuant to the exercise of certain warrants previously issued to various shareholders.
As a result of such issuance of such common stock, the Company recorded aggregate expenses of $1,611.
Pursuant to the April 21, 2020, and the July 8, 2020 Agreements entered
by MICT with various purchasers for the sale of certain convertible notes as described in the Description of Business above, MICT sold
convertible notes with an aggregate total principal amount of approximately $15,000 under such terms as described hereinabove. Based on
the terms included in the convertible notes, following receipt of the Company’s stockholders in September 2020, the Convertible
Notes were converted into 13,636,363 shares of common stock of the Company at a conversion price of $1.10 per share as set above.
On July 1, 2020, MICT completed
its acquisition (the “Acquisition”) of GFH Intermediate Holdings Ltd., pursuant to the previously announced Agreement and
Plan of Merger entered into on November 7, 2019 by and between MICT, GFHI, Global Fintech Holding Ltd., 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
(“Merger Sub”), as amended and restated on April 15, 2020 (the “Restated Merger Agreement”). As of the date hereof
pursuant to the Acquisition the Company issued to GFH 22,727,272 shares of common stock reflecting a price of $1.10 per each MICT share.
On September 8, 2020, the Company and all of the
holders (the “Holders”) of the Company’s Series A Convertible Preferred Stock, par value $0.001 per share (the “Series
A Preferred”), entered into a series of Series A Convertible Preferred Stock Exchange Agreements (each an Exchange Agreement and
together, the “Exchange Agreements”), pursuant to which the Holders exchanged an aggregate of 3,181,818 shares of the Series
A Preferred, on a 1-for-2 basis, for an aggregate of 6,363,636 shares of the Company’s common stock, par value $0.001 per share
(the “Common Stock”).
On September 10, 2020, the Company and the holder
(the “Holder”) of the Company’s Series B Convertible Preferred Stock, with a par value of $0.001 per share (the “Series
B Preferred”), entered into that certain Series B Convertible Preferred Stock Exchange Agreement (the “Exchange Agreement”)
in the form attached hereto as Exhibit 10.1, pursuant to which the Holder exchanged an aggregate of 1,818,181 shares of the Series B Preferred,
on a 1-for-1 basis, for an aggregate of 1,818,181 shares of the Company’s common stock, par value $0.001 per share (the “Common
Stock”).
On November 2, 2020 the Company entered into a Securities Purchase
Agreement (the “Purchase Agreement”) with certain investors for the purpose of raising $25,000 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 on November 4,
2020. By December 31, 2020, the Company had received a total of $22,325 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, were received by the Company on
March 1, 2021 and in consideration for such proceeds, the Company issued the remaining 2,400,000 units.
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except Share
and Par Value data)
On February 11, 2021, the Company announced that it had 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 $60,000. The Series A warrants will be
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 will be 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 $54,000 on February
16, 2021 after deducting the placement agent’s fees and other expenses.
On March 2, 2021, the Company
entered into a securities purchase agreement (the “March Purchase Agreement”) with certain investors for the purpose of raising
approximately $54,000 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 transaction consummated under the March Purchase Agreement was
on March 4, 2021. The Company received net proceeds of $48,690 on March 4, 2021, after deducting the placement agent’s fees and
other expenses.
On May 17, 2021, the Company’s
Board of Directors (the “Board”) unanimously approved a grant of fully vested 6,000,000 shares of common stock to Mr. Darren
Mercer, the Company’s Chief Executive Officer. The issuance of the shares was pursuant to the Company’s long term incentive
plan as previously approved by the stockholders and negotiated in connection with the Company’s acquisition of Global Fintech Holdings
Limited. The Board unanimously agreed to issue the shares in recognition of Mr. Mercer’s direct contribution to achieving numerous
key deliverables including: (i) the completion of several acquisitions, including those of Fucheng Insurance and Magpie; (ii) obtaining
regulatory approval from the Hong Kong SFC regarding the acquisition of Magpie; (iii) the execution of several major commercial contracts
and partnerships, including with a number of major insurance agents and one of China’s largest payment service providers; (iv) the
execution of an exclusive partnership with the Shanghai Petroleum and Natural Gas Trading Center to which allows MICT to provide financial
services to its customers; (v) the successful launch of the insurance business in December 2020 and the delivery of significant revenues
and revenue growth in Q1 2021; and (vi) the completion of capital raises totaling in excess of $140,000 and broadening the Company’s
institutional investor base.
On May 17, 2021, the Board
unanimously approved a grant of fully vested 300,000 shares of common stock of the Company to Richard Abrahams, Magpie’s Chief Executive
Officer.
Our 2012 Stock Incentive
Plan (the “2012 Incentive Plan”) was initially adopted by the Board on November 26, 2012 and approved by our
stockholders on January 7, 2013 and subsequently amended on September 30, 2014, October 26, 2015, November 15, 2017 and November 8,
2018. Under the 2012 Incentive Plan, as amended, up to 5,000,000 shares of our common stock, are currently authorized to be issued
pursuant to option awards granted thereunder. On May 17, 2021, May 23, 2021 and June 28, 2021, the Company granted an aggregate of
125,000, 370,000 and 245,000 respectively, options under the 2012 Incentive Plan, with an exercise price of $1.41, $1.81 and $2.49,
respectively, of which 310,000 options vested as of December 31, 2021. This resulted in a stock-based compensation expense of
approximately $708 recorded for the year ended December 31, 2021, based on a fair value determined using a Black-Scholes model.
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except Share
and Par Value data)
On March 22, 2021, 20,000
shares of common stock were issued to an employee who exercised their options at an exercise price of $1.41.
In September 2021, the Board
unanimously approved a grant of 87,000 fully vested shares of common stock of the Company to some of our employees.
On September 20, 2021, 40,000
shares of common stock were issued to an employee who exercised their options at an exercise price of $1.32.
On September 28, 2021, MICT
granted 823,020 shares of common stock of the Company to China Strategic Investments Limited.
NOTE 4 — FAIR VALUE MEASUREMENTS
Items carried at fair value on an ongoing basis
as of December 31, 2021 and 2020 are classified in the table below in one of the three categories described in Note 2.
| |
Fair value measurements | |
| |
December 31, 2020 | |
(USD in thousands) | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
Cash and cash equivalents | |
$ | 29,049 | | |
| - | | |
| - | | |
$ | 29,049 | |
Total | |
$ | 29,049 | | |
| - | | |
| - | | |
$ | 29,049 | |
| |
Fair value measurements | |
| |
December 31, 2021 | |
(USD in thousands) | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
Cash and cash equivalents | |
$ | 94,930 | | |
| - | | |
| - | | |
$ | 94,930 | |
Total | |
$ | 94,930 | | |
| - | | |
| - | | |
$ | 94,930 | |
NOTE 5 — INVENTORIES
Inventories are stated at the lower of cost or
net realizable value, computed using the first-in, first-out method. Inventories consist of the following:
| |
December 31, | |
(USD in thousands) | |
2021 | | |
2020 | |
Raw materials | |
$ | - | | |
$ | 1,639 | |
Work in process and finished product | |
| - | | |
| 363 | |
| |
$ | - | | |
$ | 2,002 | |
NOTE 6 — PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following
as of December 31, 2021 and 2020:
| |
December 31, | |
(USD in thousands) | |
2021 | | |
2020 | |
Building | |
$ | - | | |
$ | 29 | |
Computer equipment | |
| 309 | | |
| 90 | |
Dies | |
| - | | |
| 358 | |
Furniture and fixtures | |
| 122 | | |
| 33 | |
Machinery and equipment | |
| 153 | | |
| 40 | |
leasehold improvement | |
| 203 | | |
| - | |
Transportation equipment | |
| 415 | | |
| 73 | |
| |
| 1,202 | | |
| 623 | |
Less accumulated depreciation and amortization | |
| (525 | ) | |
| (206 | ) |
| |
$ | 677 | | |
$ | 417 | |
Depreciation and amortization
expenses totaled $163 and $122 for the years ended December 31, 2021 and 2020, respectively.
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except Share and Par Value data)
NOTE 7 — INTANGIBLE ASSETS, NET
Composition:
| |
Useful life | |
December 31, | | |
December 31, | |
(USD in thousands) | |
years | |
2021 | | |
2020 | |
Original amount: | |
| |
| | |
| |
Technology know-how | |
6 | |
$ | 11,490 | | |
$ | 13,070 | |
Trade name/ trademarks | |
Indefinite or 5 years | |
| 923 | | |
| 850 | |
Customer relationship | |
5-10 years | |
| 4,802 | | |
| 4,910 | |
License | |
Indefinite or 10 years | |
| 8,498 | | |
| - | |
Software | |
10 | |
| 172 | | |
| - | |
| |
| |
| 25,885 | | |
| 18,830 | |
Accumulated amortization: | |
| |
| | | |
| | |
Technology know-how | |
| |
| (2,873 | ) | |
| (1,116 | ) |
trade name/ trademarks | |
| |
| (174 | ) | |
| (71 | ) |
Customer related intangible assets | |
| |
| (1,355 | ) | |
| (484 | ) |
License | |
| |
| (39 | ) | |
| - | |
Software | |
| |
| (2 | ) | |
| - | |
| |
| |
| (4,443 | ) | |
| (1,671 | ) |
Net | |
| |
$ | 21,442 | | |
$ | 17,159 | |
The estimated future amortization of the intangible
assets (excluded of deferred tax assets) as of December 31, 2021 is as follows:
(USD in thousands)
2022 |
|
|
$ |
3,159 |
|
2023 |
|
|
|
3,154 |
|
2024 |
|
|
|
3,154 |
|
2025 onward |
|
|
|
4,896 |
|
Total |
|
|
$ |
14,363 |
|
NOTE 8 — SHORT-TERM LOANS FROM BANKS AND OTHERS:
Composition:
| |
| |
| | |
Total Short-term loan | |
| |
Interest rate | |
Linkage | | |
December 31, | |
(USD in thousands) | |
% | |
basis | | |
2021 | | |
2020 | |
Due to banks | |
Prime plus 2.5% Prime plus 3.5% | |
| NIS | | |
$ | - | | |
| 884 | |
| |
| |
| | | |
| | | |
| | |
Due to others | |
| |
| RMB | | |
$ | 1,657 | | |
| - | |
| |
| |
| | | |
$ | 1,657 | | |
| 884 | |
As of December 31, 2020, the Company had short-term
bank loans of $884 comprised as follows: $884 loans of Micronet that bear interest of prime plus 2.5% through prime plus 3.5% paid either
on a monthly or quarterly basis. All of Micronet’s loans were classified as short-term loans due to the fact that Micronet didn’t
meet with covenants.
As of December 31, 2021, the Company had short-term loans from others
of $1,657 comprised as follows: $1,155 loans of All Weather Insurance Agency bear interest of 0%, of which $1,088 will be
repaid on December 31, 2022 and $67 will be repaid on August 3, 2022. The $314 loans of Zhongtong Insurance that bear interest
of 10% has been repaid subsequently on January 11, 2022, and the remaining loans of Zhongtong Insurance in amount of $188 loans that bear
interest of 10% will be repaid before December 31, 2022.
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In
Thousands, except Share and Par Value data)
NOTE 9 — EQUITY INVESTMENT IN MICRONET
Micronet’s
net revenues and net loss are presented if the acquisition date had occurred at the beginning of the annual reporting period.
| |
Year ended | | |
Year ended | |
| |
December 31, | | |
December 31, | |
(USD in thousands) | |
2021 | | |
2020 | |
Revenues | |
$ | 60,007 | | |
$ | 2,262 | |
| |
| | | |
| | |
Net loss | |
$ | (36,175 | ) | |
$ | (26,419 | ) |
Management
engaged a third-party valuation firm to assist them with the valuation of the intangible assets that are detailed in the schedule below.
Purchased
identifiable intangible assets are amortized on a straight-line basis over their respective useful lives. The table set forth below summarizes
the estimates of the fair value of assets acquired and liabilities assumed and resulting gain on bargain purchase. In addition, the following
table summarizes the allocation of the preliminary purchase price as of the acquisition date on June 23, 2020:
Micronet Ltd. Purchase Price Allocation
(USD in thousands)
Total cash consideration | |
$ | 887 | |
Total Purchase Consideration | |
$ | 887 | |
| |
| | |
Less: | |
| | |
| |
| | |
Debt-free net working capital | |
$ | 788 | |
Property and equipment | |
| 661 | |
Right of use assets | |
| 310 | |
Other assets | |
| 26 | |
Borrowings | |
| (1,675 | ) |
Severance payable | |
| (95 | ) |
Lease liabilities | |
| (101 | ) |
Intangible assets - trade name/ trademarks | |
| 270 | |
Intangible assets - developed technology | |
| 1,580 | |
Intangible assets - customer relationship | |
| 410 | |
Intangible assets - ground | |
| 215 | |
Deferred Tax liability | |
| (362 | ) |
Fair value of net assets acquired | |
$ | 2,027 | |
| |
| | |
Noncontrolling interest | |
$ | (2,172 | ) |
Gain on equity interest | |
| (665 | ) |
Equity investment | |
| (921 | ) |
Change in investment | |
| (3,758 | ) |
| |
| | |
Goodwill value | |
$ | 2,618 | |
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except Share and Par Value data)
Loss of control of Micronet
As of March 31, 2021, the
Company held 50.31% of Micronet’s issued and outstanding shares. 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 the Company is no longer required to include Micronet’s
operating results in its financial statements. From May 9, 2021, the Company accounted for the investment in Micronet in accordance with
the equity method.
On June 16, 2021, Micronet
announced that it had completed a public equity offering on the TASE. Pursuant to the offering, Micronet sold an aggregate number of 18,400
securities units (the “Units”) at a price of 14.6 NIS 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 of 26,864 NIS (approximately $8,290) in the Offering. The Company did not participate
in the Offering, and, as a result, the Company owned 36.80% of the outstanding ordinary shares of Micronet and 26.56% on a fully diluted
basis as of December 31, 2021.
| |
May 9, 2021 | |
| |
USD in thousands | |
| |
| |
Micronet’s fair value as of May 9, 2021 | |
| 1,127 | |
Net assets | |
| (6,185 | ) |
Capital reserve from currency translation | |
| 134 | |
Non-controlling interests | |
| 2,990 | |
Net loss from loss of control | |
| (1,934 | ) |
NOTE 10 — LOAN TO MICRONET
On November 13, 2019, the
Company and Micronet executed a convertible loan agreement pursuant to which the Company agreed to loan to 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
to 0.38 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 of 0.60 NIS per share, exercisable for a period of 15 months. On July 5, 2020, the Company had a reverse split where
the price of the Convertible Loan changed from 0.08 NIS per Micronet share into 5.7 NIS per Micronet share. The option’s exercise
price changed from 0.6 NIS per share to 9 NIS per Micronet share.
On January 1, 2020, the Convertible
Loan was approved at a general meeting of the Micronet shareholders and as a result, the Convertible Loan and the transactions contemplated
thereby became effective. The loan was repaid on January 4, 2022. As of December 31, 2021, this balance, including principal and interest,
was presented as amount due from related party on the consolidated balance sheet.
On August 13, 2020, MICT Telematics
extended to Micronet an additional loan in the aggregate amount of $175,000 (the “Loan Sum”) which governed the existing outstanding
intercompany debt. The loan does not bear any interest and has a term of twelve months. The Loan Sum was granted for the purpose of supporting
Micronet’s working capital and general corporate needs. The loan was repaid on August 25, 2021.
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except Share and Par Value data)
NOTE 11 — GFH Intermediate
Holdings Ltd Acquisition
On
July 1, 2020, MICT completed its acquisition of GFHI pursuant to the previously announced agreement and plan of merger (the
“Merger Agreement”) entered into on November 7, 2019 by and between MICT, Micronet, GFHI, Global Fintech Holding Ltd, 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. As described in the Merger Agreement, upon
consummation of the acquisition, the outstanding share of GFHI were cancelled in exchange for a convertible promissory note in the
principal amount of $25,000 issued to GFH by MICT. This note has been converted into 22,727,273 shares of common stock of
MICT at a conversion price of $1.10 per share. As a result of the acquisition goodwill and intangible assets were
created.
GFHI’s
net revenues and net loss are presented as if the Company’s acquisition date had occurred at the beginning of the annual reporting
period.
| |
Year ended | |
| |
December 31, | |
(USD in thousands) | |
2020 | |
Revenues | |
$ | 1,173 | |
| |
| | |
Net loss | |
$ | (22,992 | ) |
As of the date of this annual
report, COVID-19 and the resulting government regulations enacted in China and elsewhere have not had a material adverse effect on GFHI
financial reports; however, there can be no assurance that GFHI financial reports will not be affected in the future from COVID-19 or
resulting government actions.
Purchased identifiable intangible
assets are amortized on a straight-line basis over their respective useful lives. The table set forth below summarizes the estimates of
the fair value of assets acquired and liabilities assumed and resulting gain on bargain purchase. In addition, the following table summarizes
the allocation of the preliminary purchase price as of the acquisition date:
GFH Intermediate Holdings LTD, Purchase Price Allocation
(USD in thousands)
Total share consideration (1) |
|
$ |
32,050 |
|
Total Purchase Consideration |
|
$ |
32,050 |
|
|
|
|
|
|
Less: |
|
|
|
|
|
|
|
|
|
Intangible assets - trade name/ trademarks |
|
$ |
580 |
|
Intangible assets - developed technology |
|
|
11,490 |
|
Intangible assets - Customer database (2) |
|
|
4,500 |
|
Deferred Tax liability (3) |
|
|
(4,308 |
) |
Fair value of net assets acquired |
|
$ |
12,262 |
|
|
|
|
|
|
Goodwill value (4) |
|
$ |
19,788 |
|
(1) | The purchase consideration represented
the fair value of the convertible promissory notes that were converted into common stock of MICT. |
(2) | The customer database value is based
on the cost to recreate, as indicated by management. |
(3) | Represents the income tax effect
of the difference between the accounting and income tax bases of the identified intangible assets, using an assumed statutory income
tax rate of 26%. |
(4) | The goodwill is not deductible
for tax purposes. |
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except Share and Par Value data)
NOTE 12 — BEIJING FUCHENG LIANBAO TECHNOLOGY CO., LTD TRANSACTION
On February 10, 2021, the
Company closed a transaction pursuant to which it acquired (via Beijing Fucheng in which it holds 24% and engaged in a VIE structure)
all of the shares of Beijing Yibao Technology Co., Ltd., and indirectly its fully owned subsidiary Beijing Fucheng Insurance Brokerage
Co., Ltd. (the “Fucheng Insurance Transaction”).
The table set forth below
summarizes the estimates of the fair value of assets acquired and liabilities assumed and resulting gain on bargain purchase. In addition,
the following table summarizes the allocation of the preliminary purchase price as of the acquisition date:
Beijing Fucheng Lianbao Technology Co.,
Ltd transaction, Purchase Price Allocation
(USD in thousands)
Total cash consideration | |
$ | 5,711 | |
Total Purchase Consideration | |
$ | 5,711 | |
| |
| | |
Less: | |
| | |
| |
| | |
Net working capital | |
$ | 926 | |
Property and equipment | |
| 26 | |
License | |
| 4,814 | |
Current liabilities | |
| (55 | ) |
Fair value of net assets acquired | |
$ | 5,711 | |
NOTE 13 — Guangxi
Zhongtong Insurance Agency Co., Ltd Acquisition
On January 1, 2021, we entered into a transaction through Bokefa, with
the shareholders of Guangxi 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 granted loans to Guangxi Zhongtong’s shareholders
through a frame work loan (the “GZ Frame Work Loan”) the amount of up to RMB 40,000 (approximately $6,125) (“GZ Frame
Work Loan Amount”) which is designated, if exercised, to be used as a working capital loan for Guangxi Zhongtong. As of December
31, 2021, only RMB 8,010 (approximately $1,243) was drawn down from the GZ Frame Work Loan for working capital and approximately
$919 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 issued and outstanding common 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
of Guangxi Zhongtong in the shareholder’s equity interest in Guangxi Zhongtong (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.
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except Share and Par Value data)
This transaction was structured
pursuant to a Variable Interest Entity, Structure (in which we do not hold the shares). As such, and 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
of Guangxi Zhongtong 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 of Guangxi Zhongtong in accordance with U.S.
GAAP. Beijing Fucheng Lianbao Technology Co., Ltd is an entity incorporated on December 29, 2020, in which Bokefa owns 24% equity
interest with the remaining 76% controlled by Bokefa through VIE agreements. On February 10, 2021, Beijing Fucheng acquired all of the
shares of Beijing Yibao Technology Co., Ltd., which holds 100% of the equity interest in Beijing Fucheng Insurance Brokerage Co., Ltd.
(“Fucheng Insurance”). Fucheng Insurance is a Chinese insurance brokerage agency and a nation-wide licensed entity which offers
insurance brokerage services for a broad range of insurance products. Fucheng Insurance, 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 the onboarding
of new agents onto our platforms all throughout China. It also creates the opportunity to promote our business through some of China’s
biggest online portals, which will provide business-to-business-to-consumer (B2B2C) as well as business-to-consumer (B2C) channels. When
Fucheng Insurance initiates its nationwide rollout of its mobile application, it will facilitate access to those portals’ large
customer bases which will also offer MICT’S full suite of insurance products. Beijing Fucheng shares were acquired for approximately
$5,700, and funded through MICT.
On October 21, 2021, Yibao
transferred such funds and the transaction closed. As a result of the transaction, Yibao 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 on January
1, 2021 per the Frame Work Loan became null and void.
Purchased identifiable intangible
assets are amortized on a straight-line basis over their respective useful lives. The table set forth below summarizes the estimates of
the fair value of assets acquired and liabilities assumed and resulting gain on bargain purchase. In addition, the following table summarizes
the allocation of the preliminary purchase price as of the acquisition date:
Guangxi Zhongtong
Insurance agency co., Ltd, Purchase Price Allocation
(USD in thousands)
Total cash consideration (1) | |
$ | - | |
Total Purchase Consideration | |
$ | - | |
| |
| | |
Less: | |
| | |
| |
| | |
Debt-free net working capital | |
$ | 613 | |
Property and equipment | |
| 13 | |
Intangible assets - Licenses | |
| 1,926 | |
Intangible assets - customer relationship (1) | |
| 248 | |
Deferred Tax liability (2) | |
| (544 | ) |
Fair value of net assets acquired | |
$ | 2,256 | |
| |
| | |
Noncontrolling interest | |
$ | (3,231 | ) |
Gain on equity interest | |
| 1,128 | |
Equity investment | |
| - | |
Change in investment | |
| (2,103 | ) |
| |
| | |
Goodwill value (3) | |
$ | (153 | ) |
(1) | The customer database value is based
on the cost to recreate, as indicated by management. |
(2) | Represents the income tax effect
of the difference between the accounting and income tax bases of the identified intangible assets, using an assumed statutory income
tax rate of 26%. |
(3) | The goodwill is not deductible for
tax purposes. |
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except Share and Par Value data)
NOTE 14 - ALL WEATHER
TRANSACTION
On July 1, 2021, we entered
into a transaction through Bokefa, with the shareholders of All Weather, a local Chinese entity with business and operations in the insurance
brokerage business. Pursuant to the transaction, we granted loans to All Weather’s shareholders through a frame work loan (the “AW
Frame Work Loan”) the amount of up to RMB 30,000 (approximately $4,700) (“AW Frame Work Loan Amount”) which is designated,
if exercised, to be used as a working capital loan for All Weather. As of December 31, 2021, RMB 30,000 (approximately $4,700) was drawn
down from the AW Frame Work Loan for working capital. 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 have pledged their shares for the benefit of Bokefa
in order to secure 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 therein (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 (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.
This transaction was structured pursuant to a Variable Interest Entity Structure (in which we do not hold the shares). As such,
and given 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. We have, therefore, consolidated the financial position and operating results
of All Weather into our consolidated financial statements, using the fair value of the assets and liabilities of All Weather in accordance
with U.S. GAAP.
Purchased identifiable intangible
assets are amortized on a straight-line basis over their respective useful lives. The table set forth below summarizes the estimates of
the fair value of assets acquired and liabilities assumed and resulting gain on bargain purchase. In addition, the following table summarizes
the allocation of the preliminary purchase price as of the acquisition date:
All Weather, Purchase Price Allocation
(USD in thousands)
Total cash consideration (1) |
|
$ |
- |
|
Total Purchase Consideration |
|
$ |
- |
|
|
|
|
|
|
Less: |
|
|
|
|
|
|
|
|
|
Debt-free net working capital |
|
$ |
(105 |
) |
Property and equipment |
|
|
153 |
|
Right of use assets |
|
|
208 |
|
Lease liabilities |
|
|
(258 |
) |
Intangible assets - licencs (1) |
|
|
849 |
|
Intangible assets - customer relationship (1) |
|
|
54 |
|
Deferred Tax liability (2) |
|
|
(226 |
) |
Fair value of net assets acquired |
|
$ |
675 |
|
|
|
|
|
|
Noncontrolling interest |
|
$ |
(675 |
) |
Change in investment |
|
|
(675 |
) |
|
|
|
|
|
Goodwill value (3) |
|
$ |
- |
|
| (1) | The
customer database value is based on the cost to recreate, as indicated by management. |
| (2) | Represents
the income tax effect of the difference between the accounting and income tax bases of the identified intangible assets, using an assumed
statutory income tax rate of 25%. |
| (3) | The
goodwill is not deductible for tax purposes. |
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except Share and Par Value data)
NOTE 15 — SEGMENTS
ASC 280, “Segment Reporting”,
establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organizational
structure as well as information about geographical areas, business segments and major customers in financial statements for detailing
the Company’s business segments.
Operating segments are based upon
our internal organization structure, the manner in which our operations are managed and the availability of separate financial information.
As a result of our acquisition of GFHI on July 1, 2020, we currently serve the marketplace, through our operating subsidiaries, as a financial
technology company (Fintech Industry) targeting the Chinese marketplace as well as other areas of the world. We have built and/or, are
in the process of building, various platforms to capitalize on business opportunities in a range of verticals and technology segments
including stock trading and wealth management and insurance brokerage services. We will continue to increase the capabilities of our platforms
through acquisition and/or the licensing of different technologies to support our efforts in the different market segments. 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. First, we have launched our insurance platform, operated by GFHI, for the Chinese
market and have been generating revenues in GFHI. While the revenues were not material in 2020, these revenues are building and we expect
these revenues to continue to grow as this business establishes itself in the market as a reputable service available to consumers Secondly,
we are currently in the process of launching our securities trading software platform and accelerating the development and business around
this segment. This is possible due to the recent completion of the acquisition of Magpie (formerly: Huapei) on February 26, 2021.
As a result of such acquisition,
we have obtained the necessary licenses and permits to operate our online platform in the Hong Kong stock exchange.
As we begin development of
our oil and gas trading platform, we are looking to partner with an established and reputable Chinese organization to build out our technology,
which will support two major elements of China’s energy sector.
During the period between
June 23, 2020, and May 9, 2021 we have held a controlling interest in Micronet, and we have presented our mobile resource management (“MRM”)
business operated by Micronet as a segment. As of May 9, 2021, the Company’s ownership interest was diluted and, as a result, we
no longer include Micronet’s operating results in our consolidated financial statements.
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except Share and Par Value data)
The following table summarizes the financial performance
of our operating segments:
|
|
Year ended December 31, 2021 |
|
(USD in thousands) |
|
Verticals
and
technology |
|
|
|
Mobile
resource
management |
|
|
Online
stock
trading |
|
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
54,932 |
|
|
|
|
726 |
|
|
|
18 |
|
|
$ |
55,676 |
|
Segment operating loss |
|
|
(9,604 |
) |
(1) |
|
|
(827) |
(2) |
|
|
(7,504 |
) |
|
|
(17,935 |
) |
Non allocated expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,961 |
) |
Finance expenses and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,053 |
) |
Consolidated loss before provision for income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(38,949 |
) |
(1) | Includes $2,931 of intangible assets
amortization, derived from GFHI acquisition. |
(2) | Includes $103 of intangible assets
amortization, derived from Micronet consolidation. |
| |
Year ended December 31, 2020 | |
(USD in thousands) | |
Verticals and technology | | |
Mobile
resource
management | | |
Consolidated | |
Revenues from external customers | |
$ | 299 | | |
$ | 874 | | |
$ | 1,173 | |
Segment operating loss | |
| (2,695 | )(1) | |
| (1,433 | )(2) | |
| (4,128 | ) |
Non allocated expenses | |
| | | |
| | | |
| (12,451 | ) |
Finance expenses and other | |
| | | |
| | | |
| (7,383 | ) |
Consolidated loss before provision for income taxes | |
| | | |
| | | |
$ | (23,962 | ) |
(1) | Includes $1,466 of intangible assets amortization, derived from GFHI acquisition. |
| |
(2) | Includes $206 of intangible assets amortization, derived from Micronet. |
The following table summarizes
the financial statements of our balance sheet accounts of the segments:
| |
As of December 31, 2021 | |
(USD in thousands) | |
Verticals and technology | | |
Mobile resource management | | |
Online stock trading | | |
Consolidated | |
| |
| | |
| | |
| | |
| |
Assets related to segments | |
$ | 86,474 | (1) | |
$ | - | | |
| 60,581 | (3) | |
$ | 147,055 | |
Non allocated Assets | |
| | | |
| - | | |
| | | |
| 30,756 | |
Liabilities related to segments | |
| (23,516 | )(2) | |
| - | | |
| (3,953 | ) | |
| (27,469 | ) |
Non allocated liabilities | |
| - | | |
| - | | |
| - | | |
| (2,620 | ) |
Total Equity | |
| | | |
| | | |
| | | |
$ | 147,722 | |
(1) | Includes $19,292 of intangible assets
and $19,788 goodwill, derived from GFHI’s acquisition. |
(2) | Includes $3,728 of deferred tax
liability, derived from GFHI acquisition. |
(3) | Includes $1,222 of intangible assets. |
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except Share and Par Value data)
| |
As of December 31, 2020 | |
(USD in thousands) | |
Verticals and technology | | |
Mobile resource management | | |
Online stock trading | | |
Consolidated | |
| |
| | |
| | |
| | |
| |
Assets related to segments | |
$ | 7,037 | | |
$ | 7,017 | | |
| - | | |
$ | 14,054 | |
Non allocated Assets | |
| - | | |
| - | | |
| - | | |
| 63,679 | |
Liabilities related to segments | |
| (638 | ) | |
| (2,861 | ) | |
| - | | |
| (3,499 | ) |
Non allocated liabilities | |
| - | | |
| - | | |
| - | | |
| (8,538 | ) |
Total Equity | |
| | | |
| | | |
| | | |
$ | 65,696 | |
NOTE 16 — TRADE ACCOUNTS RECEIVABLE, NET
For the year ended December 31, 2021 and the year
ended December 31, 2020, accounts receivable were comprised of the following:
| |
December 31, | | |
December 31, | |
| |
2021 | | |
2020 | |
(USD in thousands) | |
| | |
| |
Trade accounts receivable | |
$ | 20,485 | | |
$ | 528 | |
Allowance for doubtful accounts | |
| (2,606 | ) | |
| (5 | ) |
| |
$ | 17,879 | | |
$ | 523 | |
Movement of allowance for doubtful accounts for the fiscal year ended
December 31, 2021 and the fiscal year ended December 31, 2020 are as follows:
| |
December 31, | | |
December 31, | |
| |
2021 | | |
2020 | |
(USD in thousands) | |
| | |
| |
Beginning balance | |
$ | 5 | | |
$ | 116 | |
Provision (recovery) | |
| 2,574 | | |
| (111 | ) |
Exchange fluctuation | |
| 32 | | |
| | |
Decrease due to deconsolidation of Micronet | |
| (5 | ) | |
| - | |
| |
$ | 2,606 | | |
$ | 5 | |
NOTE 17 — SUPPLEMENTARY FINANCIAL STATEMENTS INFORMATION
| |
December 31, | | |
December 31, | |
| |
2021 | | |
2020 | |
(USD in thousands) | |
| | |
| |
Prepaid expenses | |
$ | 1,715 | | |
$ | 1,300 | |
Advance to suppliers | |
| 4,027 | | |
| 230 | |
Deposit | |
| 1,335 | | |
| - | |
Business advance to employee | |
| 1,444 | | |
| - | |
Other receivables | |
| 1,033 | | |
| 226 | |
| |
$ | 9,554 | | |
$ | 1,756 | |
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except Share and Par Value data)
B. |
Other Current Liabilities: |
|
|
December
31, |
|
(USD in
thousands) |
|
2021 |
|
|
2020 |
|
Employees and wage-related liabilities |
|
$ |
500 |
|
|
$ |
396 |
|
Government departments and agencies payable |
|
|
- |
|
|
|
56 |
|
Payment received by customers in advance |
|
|
73 |
|
|
|
260 |
|
Accrued expenses |
|
|
1,802 |
|
|
|
4,174 |
|
Income tax payable |
|
|
365 |
|
|
|
- |
|
Advance income |
|
|
- |
|
|
|
92 |
|
Other tax payable |
|
|
273 |
|
|
|
- |
|
Advances from employee |
|
|
990 |
|
|
|
- |
|
Deposit |
|
|
364 |
|
|
|
- |
|
Due to insurance companies |
|
|
142 |
|
|
|
- | |
Other |
|
|
405 |
|
|
|
17 |
|
|
|
$ |
4,914 |
|
|
$ |
4,995 |
|
NOTE 18 — RELATED PARTIES
Current assets – related parties
| |
December 31, | | |
December 31, | |
| |
2021 | | |
2020 | |
(USD in thousands) | |
| | |
| |
Shareholders of All Weather | |
$ | 3,680 | | |
$ | - | |
Convertible loan to Micronet (1) | |
| 535 | | |
| - | |
Shareholders of Guangxi Zhongtong | |
| 919 | | |
| - | |
| |
$ | 5,134 | | |
$ | - | |
| (1) | Micronet’s Convertible loan- as discussed in Note 10. |
Current liabilities – related parties
| |
December 31, | | |
December 31, | |
| |
2021 | | |
2020 | |
(USD in thousands) | |
| | |
| |
Yulan WU, legal representative of Beijing Fucheng | |
$ | - | | |
$ | 156 | |
Shareholders of All Weather | |
| 4 | | |
| - | |
Beijing Internet New Network Technology Development Co., Ltd | |
| - | | |
| 7 | |
| |
$ | 4 | | |
$ | 163 | |
Darren Mercer, our Chief Executive
Officer and a director, presently owns, with certain family members and related parties, approximately one third of the issued and outstanding
shares of GFH and is the sole officer and one of three directors of GFH. In addition, prior to the closing the transactions contemplated
by the agreement and plan of merger, entered into on November 7, 2019 and amended and restated on April 15, 2020 by and among MICT, GFH
Intermediate Holdings Ltd., a British Virgin Islands company (“Intermediate”), MICT Merger Subsidiary Inc., a British Virgin
Islands company and a wholly-owned subsidiary of MICT (“Merger Sub”) and GHF as the sole shareholder of Intermediate, pursuant
to which the Merger Sub merged with and into Intermediate, with Intermediate continuing as the surviving entity, as a result of which
GFH became a wholly owned subsidiary of MICT (the “Merger”). Mr. Mercer was the sole officer and director of Intermediate.
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except Share and Par Value data)
On April 2, 2020, Darren
Mercer, current board member of the Company, was appointed, the interim Chief Executive Officer of the Company and was given a fee
of $25 per month for his services to the Company. Effective on July 1, 2020 the board of directors approved the following
consideration for Darren Mercer: (i) An annual base fee will be $495 per year and, (ii) a signing bonus of $100 and, (iii) a
total annual bonus in accordance with the bonus program adopted by the Company from time-to-time with a target bonus opportunity
equal to 100% of the Base Fee, With respect to a Target Bonus for a given year, the Company shall award up to 40% of such Target
Bonus, as it so determines, on the basis of Mr. Mercer’s performance in the first six months of the year and up to the
remaining 60% of such Target Bonus on the basis of Mr. Mercer’s performance in the remaining 6 months of the
year. In addition, the Board of Directors may declare and grant a discretionary bonus for Mr. Mercer based on various
targets and performance criteria to be established by the Board of Directors. The evaluation of the performance of Mr. Mercer as
measured by the applicable targets and the awarding of applicable bonuses, if any, shall be at the sole discretion of the Board of
Directors. On December 21, 2020, the board of directors approve additional $200 bonus. The agreement shall end on the third
anniversary of the Start Date. The engagement above was formalized in the foam of independent contractor.
Effective on October
2021, the board of directors approve Darren Mercer (“Executive”) new employment terms as follows: (i) an annual base
salary fee will be $800 and, (ii) a total annual bonus in accordance with the bonus program adopted by the Company from
time-to-time. The Target Bonus amount for Executive’s work in the calendar year 2021 shall be $913. Executive’s
Target Bonus opportunities for his work in the calendar years 2022 and 2023 shall be $1,200. The annual bonus under this Section
3(b), if any, shall be payable at the discretion of the Company based on achievement of performance metrics to be established by the
Board for each year, including, for calendar years 2022 and 2023. Such metrics shall include goals based on revenue generated
Executive’s consulting businesses. Executive must be employed by the Company on the date of payment in order to earn and
receive any above, except in the event of termination without Cause or resignation for Good Reason (as such terms are include In the
Agreement). In addition, the Board may declare and grant a discretionary bonus for Executive based on various targets
and performance criteria to be established by the Board. The evaluation of the performance of Executive as measured by the
applicable targets and the awarding of applicable bonuses, if any, shall be at the sole discretion of the Board. In addition,
Executive shall be entitled to Health Insurance If available on commercially reasonable terms, based on a health insurance plan to
be determined in the Company’s discretion, Key Man Life Insurance (at the Company sole discretion), up to 35 (thirty-five)
days of paid vacation per year, subject to the Company’s vacation policies in effect from time-to-time and to those paid
public holidays set by the Company. Executive is also entitled to be reimbursed for reasonable and customary business expenses
incurred by Executive during employment subject to all terms and conditions of the Company’s expense policies in effect from
time to time and for an expense account of $300 for the purposes of: (i) funding an office and accommodations for use of Executive
and (ii) paying Executive additional compensation at the rate of $8.33 per month during the Term, as compensation for the additional
expense of living overseas for those months in which Executive works for the Company outside the United Kingdom for at least five
days.
As of December 31, 2021, Professor Yehezkel (Chezy) Ofir, held options to purchase 365,000 shares, 5,000 of which were granted on April 29, 2013 and 5,000 of which were granted on November 11, 2014, each exercisable at an exercise price of $4.30 per share. Such options vested within three years following the date of grant. In addition, options to purchase 10,000 shares were granted to each director listed above on June 6, 2018 at an exercise price of $1.32 per share and options to purchase 15,000 shares were granted to each director listed above on August 13, 2018 at an exercise price of $1.4776 per share. And options to purchase 300,000 shares were granted to each director above on March 9, 2020 at an exercise price of $1.41 per share. All of the options have vested. And options to purchase 30,000 shares were granted on May 23, 2021 at an exercise price of $1.81 per share. Out of which 350,000 of the options have vested.
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except Share and Par Value data)
As of December 31, 2021, Mr. Robert Benton, held options to purchase 80,000 shares, the options to purchase 80,000 shares were granted to him on May 23, 2021 at an exercise price of $1.81 per share. Out of which 40,000 of the options have vested.
As
of December 31, 2021, Mr. John McMillan Scott held options to purchase 260,000 shares, the options to purchase 100,000 shares were granted
to him on July 7, 2020 at an exercise price of $1.41 per share. And the options to purchase 160,000 shares were granted to him on May
23, 2021 at an exercise price of $1.81 per share. Out of which 180,000 of the options have vested.
Of the 20,000,000 new shares
of our common stock that will be reserved for issuance under the LTIP pursuant to the 2020 Incentive Plan, 13,000,000 of such shares shall
be reserved for awards to incentivize certain Company or its subsidiaries insiders including employees and officers) to meet critical
commercial milestones (collectively, the “Long Term Incentive Plan”, or the “LTIP”). Examples of such milestones
include: negotiation and entrance by MICT into certain material agreements in the recycled metal industry, negotiation and entrance by
MICT into certain material agreements in the oil and gas industry, negotiation and entrance by Micronet into certain transformative agreements
or other arrangements, certain significant acquisitions of other businesses, and stock price and overall performance of the Company. Individuals
contemplated to receive awards under the LTIP include Darren Mercer, the Chief Executive Officer, and certain individuals associated with
Intermediate before the completion of the Merger and who are now employed by or consultants of the Company. Awards granted under the LTIP
shall be subject to the satisfaction of certain performance vesting conditions.
On May 17, 2021, the Company’s
Board unanimously approved a grant of 6,000,000 fully vested shares of common stock of the Company to Mr. Darren Mercer, the Company’s
Chief Executive Officer. The issuance of the shares was pursuant to the Company’s long term incentive plan as previously approved
by the stockholders and negotiated in connection with the Company’s acquisition of Global Fintech Holdings Limited. The Board unanimously
agreed to issue the shares in recognition of Mr. Mercer’s direct contribution to achieving numerous key deliverables including:
(i) the completion of several acquisitions, including those of Fucheng Insurance and Magpie; (ii) obtaining regulatory approval from the
Hong Kong SFC regarding the acquisition of Magpie; (iii) the execution of several major commercial contracts and partnerships, including
with a number of major insurance agents and one of China’s largest payment service providers; (iv) the execution of an exclusive
partnership with the Shanghai Petroleum and Natural Gas Trading Center to which allows MICT to provide financial services to its customers;
(v) the successful launch of the insurance business in December 2020 and the delivery of significant revenues and revenue growth in Q1
2021; and (vi) the completion of capital raises totaling in excess of $140,000 and broadening the Company’s institutional investor
base.
On May 17, 2021, the Board
unanimously approved a grant of 300,000 fully vested shares of common stock of the Company to Richard Abrahams, Magpie’s Chief Executive
Officer.
Our 2012 Stock Incentive
Plan (the “2012 Incentive Plan”) was initially adopted by the Board on November 26, 2012 and approved by our
stockholders on January 7, 2013 and subsequently amended on September 30, 2014, October 26, 2015, November 15, 2017 and November 8,
2018. Under the 2012 Incentive Plan, as amended, up to 5,000,000 shares of our common stock, are currently authorized to be issued
pursuant to option awards granted thereunder. On May 17, 2021, May 23, 2021 and June 28, 2021, the Company granted 125,000, 370,000
and 245,000 options, with an exercise price of $1.41, $1.81 and $2.49, respectively, of which 310,000 options vested as of December
31, 2021. This resulted in a stock-based compensation expense of approximately $708 recorded for the twelve months ended December
31, 2021, based on a fair value determined using a Black-Scholes model.
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except Share and Par Value data)
NOTE 19 — OPERATING LEASES
The Company follows ASC No. 842, Leases. The
Company has operating leases for its office facilities. The Company’s leases have remaining terms of approximately 4 years. Leases
with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases
on a straight-line basis over the lease term. The Company does not separate non-lease components from the lease components to which they
relate, and instead accounts for each separate lease and non-lease component associated with that lease component as a single lease component
for all underlying asset classes.
The following table provides a summary of leases
by balance sheet location for the year ended December 31, 2021 and the year ended December 31, 2020:
Assets/liabilities | |
December 31, | | |
December 31, | |
(USD in thousands) | |
2021 | | |
2020 | |
Assets | |
| | |
| |
Right-of-use assets | |
$ | 1,921 | | |
$ | 291 | |
| |
| | | |
| | |
Liabilities | |
| | | |
| | |
Lease liabilities- current portion | |
$ | 1,298 | | |
$ | 107 | |
Lease liabilities- long term | |
| 691 | | |
| 164 | |
Total Lease liabilities | |
$ | 1,989 | | |
$ | 271 | |
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except Share and Par Value data)
The operating lease expenses for the year ended
December 31, 2021 and 2020 were as follows:
(USD in thousands) | |
Year ended December 31, | |
| |
2021 | | |
2020 | |
Operating lease cost | |
$ | 1,440 | | |
$ | 343 | |
Maturities of operating lease liabilities for
the year ended December 31, 2021 were as follows:
(USD in thousands) | |
Year ended December 31, | |
2022* | |
| 1,130 | |
2023 | |
| 704 | |
2024 | |
| 283 | |
2025 | |
| 18 | |
2026 | |
| 2 | |
Total lease payment | |
| 2,137 | |
Less: imputed interest | |
| (104 | ) |
Total | |
| 2,033 | |
* include operating leases with a term less than
one year.
Lease term and discount rate | |
December 31, 2021 | |
| |
| |
Weighted-average remaining lease term (years) – operating leases | |
| 2.17 | |
Weighted average discount rate – operating leases | |
| 4.89 | % |
NOTE 20 — PROVISION FOR INCOME TAXES
United States:
On December 22, 2017, the U.S. Tax Cuts and Jobs Act, or the Act, was
enacted, which significantly changed U.S. tax laws. The Act lowered the tax rate of the Company. The statutory federal income tax rate
was 21% in 2019 and in the year ended December 31, 2021 and 2020. As of December 31, 2021 the operating loss carry forward were $34,884,
among which there was $5,115 expiring from 2025 through 2037, and the remaining $29,768has no expiration date.
Israel:
The Company’s Israeli subsidiaries and associated are governed
by the tax laws of the state of Israel which had a general tax rate of 23% in the year ended December 31, 2021 and 2020. As of December
31, 2021 the operating loss carry forward were $5,874, which does not have an expiration date.
Mainland China:
The Company’s Chinese subsidiaries in the PRC are subject to
the PRC Corporate Income Tax Law (“CIT Law”) and are taxed at the statutory income tax rate of 25%. As of December 31,
2021 the operating loss carry forward was $6,174, which will expire from 2025 through 2026.
Hong Kong:
Our subsidiaries incorporated in Hong Kong, such as Magpie Securities
Limited, BI Intermediate Limited, are subject to Hong Kong profit tax on their profits arising from their business operations carried
out in Hong Kong. Hong Kong profits tax for a corporation from the year of assessment 2018/2019 onwards is generally 8.25% on assessable
profits up to HK$2,000; and 16.5% on any part of assessable profits over HK$2,000. Under the Hong Kong Inland Revenue Ordinance, profits
that we derive from sources outside of Hong Kong are generally not subject to Hong Kong profits tax.
As of December 31, 2021, the tax
loss carry forward was $8,198 for Magpie Securities Limited, and the operating loss carry forward was $2,934 for BI Intermediate
Limited. Tax losses can be carried forward indefinitely until utilized.
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except Share and Par
Value data)
Singapore:
Our subsidiaries incorporated in Singapore
are subject to an income tax rate of 17% for taxable income earned in Singapore. Singapore does not impose a withholding tax on dividends
for resident companies. In 2021, we did not incur any income tax as there was no estimated assessable profit that was subject to Singapore
income tax.
As of December 31, 2021, the
operating loss carry forward was $8.884 subject to qualifying conditions, trade losses can be carried
forward indefinitely while unutilized donations can be carried forward for up to 5 Years of Assessment.
(USD in
thousands) | |
Year
ended
December 31, | |
| |
2021 | | |
2020 | |
Current | |
| | |
| |
Domestic | |
$ | 81 | | |
$ | 5 | |
Foreign | |
| 484 | | |
| 83 | |
Total | |
$ | 565 | | |
| 88 | |
Deferred | |
| | | |
| | |
Domestic | |
$ | | |
| $ | |
Foreign | |
| (2,356 | ) | |
| (414 | ) |
Total | |
$ | (1,791 | ) | |
$ | (326 | ) |
C. |
Deferred Tax Assets and Liabilities |
Deferred tax reflects the net tax effects
of temporary differences between the carrying amounts of assets or liabilities for financial reporting purposes and the amounts used for
income tax purposes. For the year ended December 31, 2021 and December 31, 2020, deferred tax assets were included in long-term deposit
and prepaid expenses, and the Company’s deferred taxes were in respect of the following:
|
|
December 31, |
|
|
December 31, |
|
(USD in thousands) |
|
2021 |
|
|
2020 |
|
Deferred tax assets |
|
|
|
|
|
|
Provisions for employee rights and other temporary differences |
|
$ |
260 |
|
|
$ |
129 |
|
Provisions for bad debt |
|
|
696 |
|
|
|
|
|
Net operating loss carry forward |
|
|
12,034 |
|
|
|
9,564 |
|
Valuation allowance |
|
|
(11,226 |
) |
|
|
(9,564 |
) |
Deferred tax assets, net of valuation allowance |
|
|
1,764 |
|
|
|
129 |
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
Recognition of intangible assets arising from business combinations |
|
|
(3,952 |
) |
|
|
(4,256 |
) |
Deferred tax assets (liabilities), net |
|
$ |
(2,188 |
) |
|
$ |
(4,127 |
) |
D. |
The reconciliation of income tax at the U.S. statutory rate to the
Company’s effective tax rate as follows: |
| |
2021 | | |
2020 | |
U.S. federal statutory rate | |
| 21 | % | |
| 21 | % |
Change in valuation allowance | |
| (16 | )% | |
| (20 | )% |
Effective tax rate | |
| 5 | % | |
| 1 | % |
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except Share and Par Value data)
NOTE 21 — LEGAL PROCEEDINGS
In March 2017, MICT
entered into an agreement with Sunrise Securities LLC (“Sunrise”) through Sunrise’s principal, Amnon Mandelbaum
(the “Sunrise Agreement”), pursuant to which Sunrise agreed to assist MICT in identifying, analyzing, structuring, and
negotiating suitable business opportunities, such as a sale of stock or assets, merger, tender offer, joint venture, financing
arrangement, private placement, or any similar transaction or combination thereof. The parties initially disagreed as to the amount
of the fee that would be payable upon the closing of the transactions contemplated by the reinstated merger agreement. There were
also questions about the applicability of the Sunrise Agreement to the merger, and whether or not Sunrise was properly owed any
transaction fee upon the closing of the said merger. In order to resolve the matter, the parties have executed a settlement and
release agreement for the release and waiver of the above claims in consideration for the issuance of freely tradable shares of
common stock of MICT worth no less than $1,500 (the “Shares”), which Shares were delivered as follows: (i) 67.5% of the
Shares to Amnon Mandelbaum; (ii) 7.5% of the Shares to INTE Securities LLC; and (iii) 25% of the Shares to Amini LLC. In addition,
by no later than February 16, 2021, MICT would issue 200,000 warrants to purchase 200,000 freely tradable registered shares of
common stock of MICT and deliver original copies of such warrants within five business days of the date of issuance of the warrants.
The Shares issuable upon exercise of the warrants would be registered on a registration statement. 150,000 of these warrants were
issued to Amnon Mandelbaum and 50,000 of these warrants were issued to Amini LLC, or its designee as named in writing. Each warrant
was exercisable into one share of registered common stock of MICT until one year after the date of issuance of the warrants at an
exercise price of $1.01 per share, and in any other respects, on the same material terms and conditions as are applicable to
MICT’s current outstanding warrants including, but not limited to: (i) cashless exercise at all times from the date of
issuance of the warrants until to the expiration dates of the warrants, (ii) certain exercise price adjustments, and (iii) other
terms that are no less favorable to MICT’s recently issued common stock purchase warrant agreements. MICT was not able to
timely file a registration statement to register the Shares, and Shares underlying the warrants per the settlement agreement. The
Sunrise parties notified MICT that it has breached the settlement agreement. Subsequently, on March 30, 2021, MICT and the Sunrise
parties signed an amended settlement agreement whereby MICT was obligated to make a $1,000 payment by March 31, 2021 and the share
dollar amount set forth above was reduced from $1,500 to $500. MICT made the $1,000 payment. Furthermore, if MICT was not able to
file a registration statement with the Securities and Exchange Commission for the Shares by June 4, 2021, we were required to make a
$600 payment to settle the matter in full and Sunrise would not receive any MICT shares. On July 1, 2021, MICT made the $600 payment
since there was a disagreement as to whether or not the registration statement was timely filed. This matter with Sunrise is
now fully settled.
On September 22, 2020,
the Company entered into a settlement and release agreement with Craig Marshak, (“Marshak”), in connection with a claim
filed by Marshak against the Company and additional defendants. Pursuant to the settlement, and in consideration for a customary
release and waiver for the benefit of MICT, MICT agreed to pay Marshak a sum of $125 in cash. Marshak then dismissed such claim. On
January 15, 2021 the parties executed an amendment to the settlement and release agreement for the payment to Marshak of $315 in
exchange for the tender back of 60,000 of the Company’s shares that were promised to Marshak as part of the settlement and
release agreement. The $315 payment was made and this matter is settled in full.
On December 31, 2017, MICT,
Enertec Systems 2001 Ltd., (“Enertec Systems”), previously our wholly-owned subsidiary, and Enertec Management Ltd., (“Enertec
Management”) entered into a share purchase agreement (the “Share Agreement”), with Coolisys Technologies Inc., (“Coolisys”),
a subsidiary of DPW Holdings, Inc. (“DPW”). Per the Share Agreement, Coolisys agreed to pay, at the closing of the transaction,
a purchase price of $5,250 and assume up to $4,000 of Enertec Systems’ debt. On May 22, 2018, MICT closed on the sale of all of
the outstanding equity of Enertec Systems.
Upon Closing, MICT received
gross proceeds of approximately $4,700, of which 10% was to be held in escrow (“Escrow Amount’) for up to 14 months after
the Closing in order to satisfy any potential indemnification claims. The final consideration amount was adjusted due to Enertec Systems’
debts at the Closing. In addition, Coolisys also assumed approximately $4,000 of Enertec Systems’ debt.
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except Share
and Par Value data)
In conjunction with, and as a condition to, the Closing, the Company,
Enertec Systems, Coolisys, DPW and Mr. David Lucatz, our former Chief Executive Officer and director, executed a consulting agreement,
(the “Consulting Agreement”). Pursuant to the Consulting Agreement, we, via Mr. Lucatz, provided Enertec Systems with certain
consulting and transitional services over a 3-year period as necessary (but in no event did the services exceed 20% of Mr. Lucatz’s
time). Coolisys (via Enertec Systems) was obligated to pay us an annual consulting fee of $150 and to issue to us 150,000 restricted shares
of DPW Class A common stock, (the “DPW Shares”). The DPW Shares were to be issued in three equal installments, with the initial
installment vesting the day after the Closing and the remaining installments vesting on each of the first two (2) anniversaries of the
Closing. The rights and obligations under the Consulting Agreement were assigned to Mr. Lucatz along with the DPW Shares.
Coolisys alleged the Company was in breach of the Share Agreement,
and the Escrow Amount remained in escrow. On July 21, 2020, MICT management and MICT (the “Seller Parties”) received a statement
of claim filed in the District Court of Tel Aviv (the “Court”) by Coolisys against the Seller Parties and its Board members
for the approximate amount of $2,500, (the “Claim”). Pursuant to the Claim, Coolisys alleged that certain misrepresentations
in the Share Agreement resulted in losses to Coolisys and requested, among other things, that the Court instruct the release of the Escrow
Amount held by the escrow agent to Coolisys.
The Company filed its defense
to the Claim on December 15, 2020. On September 14, 2021, the Court adopted a verdict giving effect to the parties settlement agreement
pursuant to which the Claim was rejected. The parties have mutually released and waived all claims against the other and in consideration
for the aforementioned, the Escrow Amount was released to Coolisys.
NOTE 22 — ACCRUED SEVERANCE PAY, NET
|
The Company is liable for severance pay to its employees pursuant to the applicable local laws
prevailing in the respective countries of employment and employment agreements. For Israeli employees, the liability is partially
covered by individual managers’ insurance policies under the name of the employee, for which the Company makes monthly payments.
The Company may make withdrawals from the managers’ insurance policies only for the purpose of paying severance pay. |
|
The amounts accrued and the amounts funded with managers’ insurance
policies are as follows: |
|
|
December 31, |
|
(USD in thousands) |
|
2021 |
|
|
2020 |
|
Accrued severance pay |
|
$ |
56 |
|
|
$ |
157 |
|
Less - amount funded |
|
|
- |
|
|
|
4 |
|
|
|
$ |
56 |
|
|
$ |
153 |
|
MICT, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, except Share
and Par Value data)
NOTE 23 — LOSS PER SHARE:
Net loss per share is computed by dividing the
net loss by the weighted average number of common shares outstanding. The calculation of the basic and diluted earnings per share is
the same for all periods presented, as the effect of the potential common shares equivalents is anti-dilutive due to the Company’s
net loss position for all periods presented.
The following table sets forth the computation
of basic and diluted net earnings (losses) per share attributable to MICT Inc:
| |
Year ended December 31, | |
(USD in thousands) | |
2021 | | |
2020 | |
Numerator: | |
| | |
| |
Amount for basic loss per share | |
$ | (36,428 | ) | |
$ | (22,992 | ) |
Effect of dilutive instruments | |
| - | | |
| - | |
| |
| | | |
| | |
Amount for diluted loss per share | |
| (36,428 | ) | |
| (22,992 | ) |
| |
| | | |
| | |
Denominator: | |
| | | |
| | |
Denominator for basic earnings per share - weighted average of shares | |
| 112,562,199 | | |
| 27,623,175 | |
Loss per share attributable to MICT Inc.: | |
| | | |
| | |
Basic and diluted continued operation | |
$ | (0.32 | ) | |
$ | (0.83 | ) |
NOTE 24 — SUBSEQUENT EVENTS
On
May 10, 2022, Tingo, Inc., a Nevada corporation (“Tingo” or the “Seller”), entered into an Agreement and Plan
of Merger (the “Merger Agreement”) with MICT Merger Sub, Inc., a Nevada corporation and a wholly-owned subsidiary of MICT
(“Merger Sub”), and MICT, Inc., a Delaware corporation.
Pursuant
to the Merger Agreement, subject to the terms and conditions set forth therein, upon the consummation of the transactions contemplated
by the Merger Agreement (the “Closing”), Merger Sub will merge with and into Tingo (the “Merger” and, together
with the other transactions contemplated by the Merger Agreement, the “Transactions”), with the Seller continuing as the surviving
corporation in the Merger and a wholly-owned subsidiary of MICT.
As
a result of the Merger, all of the issued and outstanding capital stock of the Seller immediately prior to the Closing, shall no longer
be outstanding and shall automatically be cancelled and shall cease to exist, in exchange for the right for each Seller Stockholder to
receive its Pro Rata Share of the Merger Consideration, upon the terms and subject to the conditions set forth in the Merger Agreement.
As
consideration for the Merger, the Seller Security Holders collectively shall receive from MICT, in the aggregate, a number of shares of
MICT Common Stock equal to (the “Merger Consideration”) the product of (a) 3.44444 and (b) the number of shares of MICT Pre-Closing
Common Stock (the total portion of the Merger Consideration amount payable to all Seller Stockholders in accordance with the Merger Agreement).
This will result in Tingo shareholders receiving new MICT common shares in an amount equal to approximately 77.5% in the combined company,
and current MICT shareholders owning approximately 22.5% on a fully diluted basis following the closing, with a combined estimated group
value of $4.09 billion.
On
June 15, 2022, Tingo, Merger Sub and MICT entered into an Amended and Restated Agreement and Plan of Merger, following the completion
of extensive due diligence by MICT and its advisors. including financial due diligence, tax due diligence and quality of earnings analysis
by Ernst & Young, financial analysis by Houlihan Lokey, legal, operational, corporate and local due diligence by the Nigerian office
of Dentons and corporate due diligence and securities due diligence by Ellenoff Grossman & Schole.
In
accordance with US GAAP, upon Closing, which is subject to Tingo stock holder approval, MICT stock holder approval, the satisfaction
of regulatory requirements and the Registration Statement having been declared effective by the SEC, the Merger will be accounted for
by MICT in its consolidated financial statements as a reverse acquisition.
F-56
Reclassified – see note 2.
70000
Represents the income tax effect of the difference between the accounting and income tax bases of the identified intangible assets, using an assumed statutory income tax rate of 26%.
The purchase consideration represented the fair value of the convertible promissory notes that were converted into common stock of MICT.
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