| Significant Accounting Policies |
| (3) | Significant Accounting Policies |
The following is a summary of significant accounting policies followed by the Company in the preparation of our financial statements: Consolidation—In accordance with Article 6 of Regulation S-X under the Securities Act of 1933, we do not consolidate equity interests we hold in other entities. Under the investment company rules and regulations pursuant to the American Institute of Certified Public Accountants (“AICPA”) Audit and Accounting Guide for Investment Companies, codified in ASC 946, we are precluded from consolidating any entity other than another investment company, except that ASC 946 provides for the consolidation of a controlled operating company that provides substantially all of its services to the investment company or its consolidated subsidiaries. Valuation of Our Holdings in TIO—In connection with the sale of Tingo Mobile to TIO, we received shares of TIO common stock and two series of convertible preferred stock of TIO, one of which series which has since been converted into TIO common stock. The shares of TIO common stock are traded on the Nasdaq Capital Market under the symbol ‘TIO’. Because, at December 31, 2022 and June 30, 2023, more than 40% of the value of our unconsolidated assets consists of ‘investment securities’ (as such term is defined pursuant to the Investment Company Act of 1940, as amended (the “1940 Act”), we are considered an ‘investment company’ under the 1940 Act and, as a result, we are required to assess the fair value of our holding in TIO. Fair Value Measurement. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and sets out a fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Inputs are broadly defined as assumptions market participants would use in pricing an asset or liability. The three levels of the fair value hierarchy are described below: | ● | Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. |
| ● | Level 2—Inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly; and fair value is determined through the use of models or other valuation methodologies. |
| ● | Level 3—Inputs are unobservable for the asset or liability and include situations where there is little, if any, market activity for the asset or liability. The inputs into the determination of fair value are based upon the best information under the circumstances and may require significant management judgment or estimation. |
Management Considerations. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an asset’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset. In the case of Tingo, we assessed the nature of our holding of common and convertible Preferred Stock in TIO and considered certain factors which, in management’s view, made this holding a Level 2 asset, including the following: | ● | the lack of institutional trading in TIO common stock; and |
| ● | the conditions associated with conversion of the TIO Preferred Stock into TIO common stock. |
With respect to the last point above, we consider it significant that, should conversion of our Series B Preferred Stock not occur by September 30, 2023, we can require TIO to redeem these shares in exchange for (1) a cash payment obligation of $667 million or, in the alternative, (2) 35% ownership in TGH valued at $667 million, which imputes an underlying equity value of Tingo Mobile that is substantially higher than the TIO common and TIO Preferred stock on an as-converted basis. Determination of Fair Value. In view of the foregoing analysis and in accordance with ASC 820 and ASC 805, we calculated a fair value of the consideration we received in connection with the Merger at $1,215,241,000. ASC 820 requires that fair value to maximize objective evidence and be determined using assumptions that a market participant would use, and when level 1 inputs exist, it should be used unless determined to be not representative. That would have meant using the unadjusted TIO quoted price at the time of completion of the Merger. We are of the opinion however, that the TIO market value per share price as quoted on Nasdaq as of the closing date of the Merger was not representative of the fair value and should not be used to determine the merger consideration. Using market value per share of TIO would have led to a significant realized loss as well as other valuation anomalies that it created. Hence, and in accordance with ASC 805-30-30-5, we reassessed the determination of the consideration transferred and determined that the use of the quoted price of our Class A common stock on the OTC at market close is more appropriate in determining the consideration fair value.. Use of Estimates—The preparation of financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Although we believe the estimates and assumptions used in preparing these financial statements and related notes are reasonable in light of known facts and circumstances, actual results could differ from those estimates. Earnings Per Share— Basic and diluted per share calculations are computed utilizing the weighted-average number of shares of common stock outstanding for the period. Pursuant to our 2021 Equity Incentive Plan, the unvested shares of restricted stock awarded pursuant to our equity compensation plans are participating securities and, therefore, are included in the basic earnings per share calculation. Share-Based Compensation—We account for share-based compensation using the fair value method, as prescribed by ASC 718, Compensation-Stock Compensation. Accordingly, for restricted stock awards, we measure the grant date fair value based upon the market price of our common stock on the date of the grant and amortize the fair value of the awards as share-based compensation expense over the requisite service period, which is generally the vesting term. For all share-based awards that are not subject to vesting, we recognize expense associated with the award during the period in which the award is granted, in an amount equal to the number of shares granted, multiplied by the closing trading price of the shares on the relevant grant date. Determining the appropriate fair value of share-based awards requires the use of subjective assumptions, particularly given that the Company’s common stock is not actively traded. The assumptions used in calculating the fair value of share-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, share-based compensation expense could be materially different for future awards. Classes of Common Stock—The Company has two classes of common stock. Each share of Class A common stock is entitled to one (1) vote, and is entitled to receive dividends when and if declared by the board of directors out of assets legally available therefore. Each share of Class B common stock is entitled to ten (10) votes, but carries no dividend, distribution, liquidation, conversion, or economic rights of any kind. Retained Earnings— The components that make up distributable earnings for the Successor Period and the Predecessor Period on the Company’s Balance Sheet as of June 30, 2023 and 2022 are as follows: | | | | | | | | | | Successor Period | | | Predecessor Period | | | Six Months Ended | | | Six Months Ended | | | June 30, 2023 | | | June 30, 2022 | | | | | | | | | Net income (loss) for period | | $ | (30,126,128) | | | $ | 105,202,833 | Retained Earnings - beginning of period | | | 818,796,244 | | | | 416,095,565 | Retained Earnings | | $ | 788,670,116 | | | $ | 521,298,398 |
Accounts Receivable—The Company had no accounts receivable during the six months ended June 30, 2023. During the Predecessor Period, the total value of the twelve-month mobile leasing contract was recognized under accounts receivable at the outset. The balance is due and payable and is credited as receipts are received from the customers. Management reviews accounts receivable periodically to determine if any receivables will potentially be uncollectible. Management’s evaluation includes several factors including the aging of the accounts receivable balances, a review of significant past due accounts, economic conditions, and our historical write-off experience, net of recoveries. Tingo Mobile includes any accounts receivable balances that are determined to be uncollectible, along with a general reserve, in its allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Given the manner in which Tingo Mobile bundles its services with its branded phones, it does not typically incur a substantial amount of bad debt. Accordingly, during the six months ended June 30, 2022, we made a general allowance of 3% of all accounts receivable and recognized bad debt expense of approximately $47,000 for such period. Impairment of Long-Lived Assets—The Company assesses the recoverability of the carrying value of its long-lived assets when events occur that indicate an impairment in value may exist. An impairment loss is indicated if the sum of the expected undiscounted future net cash flows is less than the carrying amount of the assets. If this occurs, an impairment loss is recognized for the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. There was no impairment of long-lived assets for the six months ended June 30, 2023 and 2022. Income Taxes—The Company uses the liability method of accounting for income taxes under which deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the accounting bases and the tax bases of the Company’s assets and liabilities. The deferred tax assets are computed using enacted tax rates in effect for the year in which the temporary differences are expected to reverse. The Company has adopted ASC guidance regarding accounting for uncertainty in income taxes. This guidance clarifies the accounting for income taxes by prescribing the minimum recognition threshold an income tax position is required to meet before being recognized in the consolidated financial statements and applies to all income tax positions. Each income tax position is assessed using a two-step process. A determination is first made as to whether it is more likely than not that the income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected to meet the more likely than not criteria, the benefit recorded in the consolidated financial statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement. As of June 30, 2023 and 2022, there were no uncertain tax positions that required accrual. The reconciliation of income tax benefit at the U.S. statutory rate of 25% to the Company’s effective tax rate for the six months ended June 30, 2023 and 2022 is as follows: | | | | | | | | | | | | | | Six Months Ended June 30, | | | | 2023 | | Percent | | 2022 | | Percent | | Income tax benefit | | $ | (5,175,613) | | 25.0 | % | $ | (25,305,997) | | 25.0 | % | Valuation allowance against net deferred tax assets | | | 5,175,613 | | 25.0 | % | | 25,305,997 | | 25.0 | % | Effective Rate | | $ | — | | 0.00 | % | $ | — | | 0.00 | % |
The tax effects of temporary differences that give rise to the Company’s net deferred tax assets for the six months ended June 30, 2023 and 2022 are as follows: | | | | | | | Deferred Tax Assets | | June 30, 2023 | | June 30, 2022 | | | | | | | | Beginning of period | | $ | — | | $ | — | Net operating losses | | | 100,856,938 | | | 90,505,713 | Valuation allowance | | | (100,856,938) | | | (90,505,713) | Net Deferred Tax Assets | | $ | — | | $ | — |
The income of a foreign subsidiary is not necessarily subject to U.S. tax, provided the income is from the active conduct of a trade or business within the non-U.S. jurisdiction. However, earnings of the foreign subsidiary, to the extent reinvested in the U.S. or distributed to the U.S. parent as a dividend, may be subject to U.S. tax. In addition, the Internal Revenue Code requires that transfer pricing between a U.S. parent and a foreign subsidiary be made on an arms’ length basis. Tingo Mobile, our sole operating subsidiary during the Predecessor Period, did not issue any dividends during such period. In our Statements of Operations, as consolidated for the Predecessor Period, we have deducted taxes payable in connection with our former operations in Nigeria. However, inasmuch as the U.S. and Nigeria do not have a tax treaty, we do not receive a corresponding credit in the U.S. for tax paid in Nigeria by Tingo Mobile, then our wholly-owned subsidiary. In addition, our parent company has incurred operating losses on an unconsolidated basis, largely due to non-cash expenses associated with stock awards made pursuant to our 2021 Equity Incentive Plan. Our ability to utilize tax losses associated with the operations of our parent company is restricted, however, due to limitations on the deductibility of certain share compensation to our executive officers and directors that may be deemed ‘excess compensation’ pursuant to Section 162(m) of the Internal Revenue Code. Subject to any such disallowances pursuant to Code Section 162(m), the Company has approximately $98.2 million of net operating losses carried forward to offset taxable income, if any, in future years which expire commencing in fiscal year 2037. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on this assessment, management has established a full valuation allowance against all of the deferred tax asset relating to NOL’s because it is more likely than not that all of the deferred tax asset will not be realized as the parent company is not presently income producing. Operating Segments—We have examined our operating business for the six months ended June 30, 2022 in the Predecessor Period and the six months ended June 30, 2023 in the Successor Period pursuant to the guidance of ASC 280, Segment Reporting, which establishes standards for reporting information about operating segments. It also establishes standards for related disclosures about customers, products and geographic areas. Operating segments are defined as components of an enterprise that engage in business activities that earn revenues, incur expenses and prepare separate financial information that is evaluated regularly by our Chief Operating Decision Maker (“CODM”) in order to allocate resources and assess performance. Resources are allocated and performance is assessed by the CODM. Based on the provisions of ASC 280, we evaluated our former operating business and considered various factors associated therewith, including the concentration of our business in one country and the integration of our leasing business with the use of our agri-fintech platform that utilizes software embedded within the leased device. Accordingly, this evaluation resulted in one reportable segment. Leased Assets— The Company has entered into leasing arrangements principally for the provision of the offices and related facilities. The rental contracts for offices are on a month-to-month basis. A lease conveys the right to direct the use and obtain substantially all of the economic benefits of an identified asset for a period of time in exchange for consideration. Measurement and Recognition of Leases as a Lessee— During the Predecessor Period, at lease commencement date, Tingo Mobile recognized a right-of-use asset and a lease liability on the balance sheet. The right-of-use asset is measured at cost, which is made up of the initial measurement of the lease liability, any initial direct expenses incurred by the company, an estimate of any expenses to dismantle and remove the asset at the end of the lease, and any lease payments made in advance of the lease commencement date (net of any incentives received). Tingo Mobile depreciates the right-of-use assets on a straight-line basis from the lease commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. Tingo Mobile also assesses the right-of-use asset for impairment when such indicators exist. Also during the Predecessor Period, at the commencement date, Tingo Mobile measures the lease liability at the present value of the lease payments unpaid at that date, discounted using the interest rate implicit in the lease if that rate is readily available or the incremental borrowing rate. The incremental borrowing rate is the estimated rate that Tingo Mobile would have to pay to borrow the same amount over a similar term, and with similar security to obtain an asset of equivalent value. This rate is adjusted should the lessee entity have a different risk profile to that of Tingo Mobile. Lease payments included in the measurement of the lease liability are made up of fixed payments (including in substance fixed), variable payments based on an index or rate, amounts expected to be payable under a residual value guarantee and payments arising from options reasonably certain to be exercised. Subsequent to initial measurement, the liability will be reduced by lease payments that are allocated between repayments of principal and finance expenses. The finance cost is the amount that produces a constant periodic rate of interest on the remaining balance of the lease liability. The lease liability is reassessed when there is a change in the lease payments. Changes in lease payments arising from a change in the lease term or a change in the assessment of an option to purchase a leased asset. The revised lease payments are discounted using the incremental borrowing rate at the date of reassessment when the rate implicit in the lease cannot be readily determined. The amount of the remeasurement of the lease liability is reflected as an adjustment to the carrying amount of the right-of-use asset. The exception being when the carrying amount of the right-of-use asset has been reduced to zero then any excess is recognized in profit or loss. Payments under leases can also change when there is either a change in the amounts expected to be paid under residual value guarantees or when future payments change through an index or a rate used to determine those payments, including changes in market rental rates following a market rent review. The lease liability is remeasured only when the adjustment to lease payments takes effect and the revised contractual payments for the remainder of the lease term are discounted using an unchanged discount rate. Except for where the change in lease payments results from a change in floating interest rates, in which case the discount rate is amended to reflect the change in interest rates. The remeasurement of the lease liability is dealt with by a reduction in the carrying amount of the right-of use asset to reflect the full or partial termination of the lease for lease modifications that reduce the scope of the lease. Any gain or loss relating to the partial or full termination of the lease is recognized in profit or loss. The right-of-use asset is adjusted for all other lease modifications. Tingo Mobile has elected to account for short-term leases and leases of low-value assets using the practical expedients. These leases relate to the use of residential houses for a one-year period by traveling Tingo Mobile executives. Instead of recognizing a right-of-use asset and lease liability, the payments in relation to these are recognized as an expense on a straight-line basis over the lease term.
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