UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
OR
For
the fiscal year ended
OR
For the transition period from to
OR
Commission
File No.:
(Exact name of registrant as specified in its charter)
Not Applicable
(Translation of Registrant’s name into English)
(Jurisdiction of incorporation or organization)
(Address of principal executive offices)
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act: None
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: INX Tokens
Indicate the number of outstanding shares
of each of the issuer’s classes of capital or common stock as of December 31, 2023:
Indicate
by check mark whether Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
If
this report is an annual or transition report, indicate by check mark if Registrant is not required to file reports pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934. Yes ☐
Indicate
by check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files). Yes ☐
Indicate by check mark whether Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “accelerated filer”, “large accelerated filer”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated Filer ☐ | Accelerated Filer ☐ | Emerging growth company |
If
an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant
has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant
to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant 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.
If
securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant
reflect the correction of an error to previously issued financial statements.
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark which basis of accounting the Registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ☐ | ☒ | Other ☐ |
If “Other” has been check in response to the previous question, by check mark which financial statement item Registrant has elected to follow. Item 17 ☐ Item 18 ☐
If
this is an annual report, indicate by check mark whether Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No
TABLE OF CONTENTS
i
ii
GENERAL INFORMATION
Unless indicated otherwise by the context, all references in this report to “INX Limited”, the “Company”, “our Company”, “we”, “us”, “our” or the “Registrant” are to INX Limited and its subsidiaries.
EMERGING GROWTH COMPANY
As a company with less than $1.235 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable to public companies that are not emerging growth companies. For example, we have elected to rely on the following exemptions:
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● | an exemption from complying with any requirement that may be adopted by the Public Company Accounting Oversight Board, or the PCAOB, regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis); and |
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● | an exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002; |
We may take advantage of the exemptions available for emerging growth companies for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.235 billion in annual revenue, have more than $700 million in market value of the ordinary shares held by non-affiliates, or issue more than $1.0 billion of non-convertible debt over a three-year period. We may choose to take advantage of some, but not all of these reduced burdens.
It should be noted that the JOBS Act permits an emerging growth company like us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We are choosing to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period is irrevocable.
PRESENTATION OF FINANCIAL INFORMATION
We have included in this report our audited consolidated financial statements as of December 31, 2023. Our consolidated financial statements appearing in this report are prepared in U.S. Dollars and in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IASB, and are audited in accordance with the standards of the PCAOB.
MARKET, INDUSTRY AND OTHER DATA
This report includes market and industry data and forecasts that were obtained from third-party sources, industry publications and publicly available information as well as industry data prepared by management on the basis of its knowledge of the industry in which INX operates (including management’s estimates and assumptions relating to the industry based on that knowledge). Management’s knowledge of the blockchain industry has been developed through its experience and participation in the industry. Management believes that its industry data is accurate and that its estimates and assumptions are reasonable, but there can be no assurance as to the accuracy or completeness of this data. Third-party sources generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to the accuracy or completeness of such information. Although management believes it to be reliable, INX has neither independently verified any of the data from management or third-party sources referred to in this report, nor analyzed or verified the underlying studies or surveys relied upon or referred to by such sources, or ascertained the underlying economic assumptions relied upon by such sources. In addition, assumptions and estimates of our and our industry’s future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in Item 3.D “Risk Factors” below.
Statements made in this report concerning the contents of any contract, agreement or other document are summaries of such contracts, agreements or documents and are not complete descriptions of all of their terms. If we filed any of these documents as an exhibit to this report, you may read the document itself for a complete description of its terms, and the summary included herein is qualified by reference to the full text of the document which is incorporated by reference into this report.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this annual report with respect to our business, financial condition and results of operations are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the Private Securities Litigation Reform Act of 1995, as amended, and other federal securities laws. All statements other than statements of historical fact are forward-looking statements. The use of the words “anticipate”, “believe”, “continue”, “could”, “estimate”, “expect”, “intends”, “may”, “might”, “plan”, “possible”, “potential”, “predict”, “project”, “should”, “would”, and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not a forward-looking statement. These statements involve known and unknown risks, uncertainties, and other factors that may cause actual results or events to differ materially from those anticipated or implied in such forward-looking statements. No assurance can be given that these expectations will prove to be correct and such forward-looking statements included in this annual report should not be unduly relied upon. Any forward-looking statements are qualified in their entirety by reference to the risk factors discussed throughout this annual report. Some of the risks, uncertainties and assumptions that could cause actual results to differ materially from estimates or projections contained in the forward-looking statements include but are not limited to:
● | our ability to continue to develop our trading platforms as contemplated; | |
● | the slowing or stopping of the development or acceptance of blockchain assets; | |
● | the limitations of blockchain technology, which remains largely novel and untested; | |
● | the legal framework of regulations applicable to blockchain technologies, cryptocurrencies, security tokens and token offerings; | |
● | changes in how we are taxed; | |
● | the lack of any existing marketplace for blockchain assets; | |
● | our lack of a long operating history; | |
● | the impact of competition and new technologies; | |
● | our ability to obtain government regulations and approvals; | |
● | industry developments affecting our business, financial condition and results of operations; | |
● | our ability to cooperate with third party collaborators, including contractors for the design, development and implementation of our trading platform infrastructure; | |
● | our operating performance and cash flow, or lack thereof; | |
● | global market, political, and economic conditions; and | |
● | those factors referred to in “Risk Factors,” “Business,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as in this report generally. |
These statements are only current predictions and are subject to known and unknown risks, uncertainties, and other factors that may cause our or our industry’s actual results, levels of activity, performance, or achievements to be materially different from those anticipated by the forward-looking statements. We discuss many of these risks in this report in greater detail under the heading “Risk Factors” and elsewhere in this report. You should not rely upon forward-looking statements as predictions of future events.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as required by law, we are under no duty to update or revise any of the forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this report.
The foregoing list sets forth some, but not all, of the factors that could affect our ability to achieve results described in any forward-looking statements. You should read this annual report and the documents that we reference herein and have filed as exhibits to the annual report completely and with the understanding that our actual future results may be materially different from what we expect. You should assume that the information appearing in this annual report is accurate as of the date hereof. Because the risk factors referred to in Item 3.D. “Risk Factors” of this annual report, could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of the information presented in this annual report, and particularly our forward-looking statements, by these cautionary statements.
iv
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. [RESERVED].
B. Capitalization and Indebtedness.
Not applicable.
C. Reasons for the Offer and Use of Proceeds.
Not applicable.
D. Risk Factors.
You should carefully consider the risks described below, together with all of the other information in this Annual Report on Form 20-F. The risks and uncertainties described below are those significant risk factors, currently known and specific to us, that we believe are relevant to an investment in our securities. Additional risks and uncertainties not currently known to us or that we now deem immaterial may also harm us. If any of these risks materialize our business, results of operations or financial condition could suffer, and the price of our ordinary shares could decline substantially.
Investing in INX Tokens or indirectly in the Company by way of purchasing shares of our sole shareholder, The INX Digital Company, Inc. (the “Parent Shares” and the “Parent” or “TIDCI”, respectively) involves a high degree of risk. Our businesses face significant risks and uncertainties. You should carefully consider the risks we describe below, along with all of the other information set forth in this annual report, including the section entitled “Cautionary Note Regarding Forward-Looking Statements” and our financial statements and the related notes beginning on page F-1, before deciding to purchase INX Tokens or Parent Shares. The risks and uncertainties described below are those significant risk factors, currently known and specific to us, that we believe are relevant to initiating or maintaining an investment in any INXS or the Parent Shares. If any of these risks materialize, our business, results of operations or financial condition could suffer, the price of INXS or Parent Shares could decline substantially and you could lose part or all of your investment. Additional risks and uncertainties not currently known to us or that we now deem immaterial may also harm us and adversely affect your investment in INXS or the Parent Shares.
You may lose all monies that you spend initiating or maintaining an investment in INXS or indirectly investing in the Company, by purchasing the Parent Shares. If you are uncertain as to our business and operations or you are not prepared to lose all monies that you spend purchasing INX Tokens or investing in the Company, we strongly urge you not to purchase any INX Tokens nor invest in the Company. We recommend you consult legal, financial, tax and other professional advisors or experts for further guidance before participating in the offering of our INX Token as further detailed in this report. Further, we recommend you consult independent legal advice in respect of the legality of your participation in the INX Token sale.
We do not recommend that you purchase INX Tokens unless you have prior experience with cryptographic tokens, blockchain-based software and distributed ledger technology and unless you have received independent professional advice.
Summary Risk Factors
Our business is subject to numerous risks, as more fully described in the section titled “Risk Factors” immediately following this summary. You should read and carefully consider these risks and all of the other information in this report, including the financial statements and the related notes included elsewhere in this report, before deciding whether to invest in INX Tokens. In particular, such risks include, but are not limited to, the following:
● | We may face cyber-attacks and other cyber security risks. |
● | We face the risk of operating as an unregistered exchange, unregistered broker-dealer or unregistered clearing agency in the U.S. |
● | The crypto market was negatively impacted by the growth in crypto-related frauds, layoffs, and the ongoing liquidity crisis that led to bankruptcies by leading crypto companies. |
● | We may not be able to continue development of the INX Digital, Inc. (“INXD”) and INXS trading platforms as contemplated, or at all, or continue to receive the regulatory approvals necessary to operate our business as currently contemplated. |
● | Blockchain networks represent a new and rapidly changing industry and there remains relatively limited use of blockchain networks and assets. |
1
● | The prospect of INX Token holders receiving any distributions of our cumulative Adjusted Operating Cash Flow is highly uncertain. |
● | Blockchain technology is an emerging technology that is novel and untested. |
● | The legal framework of regulations applicable to blockchain technologies, cryptocurrencies, security tokens and token offerings is uncertain and evolving quickly. |
● | Tax authorities may disagree with our tax positions with regard to the Company, its business and the INX Token and may ask us to revise these positions in a manner that could adversely affect you or the Company. |
● | The prices of blockchain assets are extremely volatile and fluctuations in the price of blockchain assets could materially affect our profits. |
● | The price of INX Tokens is subject to substantial volatility. |
● | The market for trading blockchain assets is still in the early stages of development and we expect to face intense competition from both regulated and unregulated blockchain asset trading platforms. |
● | We may not be able to prevent illegal activity from occurring over our platform, which could subject us to disciplinary action, including fines. |
● | Our securities business and related clearing operations expose us to material default and liquidity risk. |
● | Systems failures or capacity constraints could materially harm our ability to conduct our operations and execute our business strategy. |
● | Blockchain assets and blockchain trading platforms remain susceptible to security breaches and cybercrime and the INX Token, the Company or our trading platforms may be a target of cyber security breaches or theft. |
● | Company private keys that allow the unilateral transfer or “freezing” of INX Tokens may be compromised. |
● | The tax characterization of INX Tokens is uncertain and you must seek your own tax advice in connection with purchasing INX Tokens. |
Risks Related to Our Financial Position and Need for Additional Capital
We have incurred significant losses and negative cash flows from operations since inception
We have incurred operating losses since our inception. As of December 31, 2023, we had an accumulated deficit of $48.6 million. In addition to the accumulated deficit, we have entered into contractual arrangements committing us to future expenses. Our proposed operations are subject to all business risks associated with a new enterprise. The likelihood of our continuation of a viable business must be considered in light of the problems, expenses, difficulties, complications, and delays frequently encountered in connection with the inception of a business operating in a relatively new, highly competitive, and developing industry. There can be no assurance that we will ever generate operating profits or develop and operate the business as planned. If we are unsuccessful at executing on our business plan, our business, prospects, and results of operations may be materially adversely affected and investors may lose all or a substantial portion of their investment.
We may need additional funding, which may not be available to us on acceptable terms or at all. If we are unable to raise capital when needed, it may impair our growth or adversely impact our operations.
We may need to raise additional capital to continue to expand our operations, pursue our growth strategies, fund needed capital expenditures, and to respond to competitive pressures. We may not be able to obtain additional debt or equity financing on favorable terms, if at all, which could impair our growth and adversely affect our operations. We may be required to accept terms that restrict our ability to incur additional indebtedness or require us to maintain specified liquidity or other financial ratios or other terms that may not be in the best interests of our stockholders. The failure to obtain additional debt or equity financing on satisfactory terms could materially and adversely affect our financial condition, results of operations and business plans.
Risk of increased losses or impairments in our investments could have an adverse effect on our financial condition.
We hold significant investments in marketable debt securities such as corporate and municipal bonds and notes. The fair value of these financial instruments may be negatively affected by multiple factors including a downgrade of the credit rating or negative publicity of the issuer, market conditions, fiscal policy, geopolitical restrictions and sanctions, among others. Decrease in the fair value of these investments or distressed sale prior to the maturity may negatively impact our shareholders’ equity and the Company’s financial position.
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Risks Related to Regulation, Information Systems and Privacy Matters
We face the risk of operating as an unregistered exchange, unregistered broker-dealer or unregistered clearing agency in the U.S.
Any platform that brings together purchasers and sellers of digital assets that are characterized as securities in the U.S. is generally subject to registration as a national securities exchange, or must qualify for an exemption, such as by being operated by a registered broker-dealer as an alternative trading system (or “ATS”).
The INX Securities trading platform is a registered broker-dealer and FINRA member that operates an SEC-registered alternative trading system, and the INX Digital trading platform is licensed, or otherwise qualified, to operate as a money transmitter in 46 U.S. states, plus Washington D.C. and Puerto Rico. We may seek to obtain money transmitter licenses or otherwise become qualified to operate in additional U.S. states. In addition, if in the future we determine to proceed with the establishment of a platform for the trading of cryptocurrency-based derivatives, we would be required to seek registrations with other regulatory bodies, such as the CFTC. However, there can be no assurance that our platform will qualify for additional registrations that we may seek in the future, with the SEC, FINRA, U.S. state regulators and various other regulatory bodies, both in the U.S. and in other countries.
While we take precautionary actions to prevent unauthorized access to our platform in the U.S. states in which we are not licensed to operate as a money transmitter, such as the use of geofencing in our system (which disallows sign in if an individual is located in a state in which we are not registered) and a review by our customer support team to verify the location of the user, in the event that an individual in a jurisdiction in which we are not licensed to operate is able to access the INX Digital trading platform, we could be deemed to have facilitated a transaction in a jurisdiction which we are not licensed to operate. If such an event occurs, we could be subject to significant monetary penalties, censure or other actions, which could have a material and adverse effect on us.
In addition, while we do not believe that the INX Digital trading platform is a securities exchange or ATS or is part of an unregistered exchange mechanism, regulators may determine that this is the case, and we would then be required to register as a securities exchange or qualify and register as an ATS. Any determination that we operate or have operated an unregistered exchange, unregistered broker-dealer or unregulated clearing agency could have a material adverse effect on us.
We obtain and process sensitive customer data. Any real or perceived improper use of, disclosure of, or access to such data could harm our reputation, as well as have an adverse effect on our business.
Various local, state, federal laws and regulations apply to our collection, use, retention, protection, disclosure, transfer, and processing of personal data. These data protection and privacy laws and regulations are subject to uncertainty and continue to evolve in ways that could adversely impact our business.
In the United States, state and federal lawmakers and regulatory authorities have increased their attention on the collection and use of user data. In the United States, non-sensitive user data generally may be used under current rules and regulations, subject to certain restrictions, so long as the person does not affirmatively “opt-out” of the collection or use of such data. If an “opt-in” model or additional required “opt-outs” were to be adopted in the United States, less data may be available, and the cost of data likely would increase.
As supervisory authorities continue to issue further guidance on personal data, we could suffer additional costs, complaints, regulatory investigations or fines, and if we are otherwise unable to transfer personal data between and among countries and regions in which we operate, it could affect the manner in which we provide our services, the geographical location or segregation of our relevant systems and operations and could adversely affect our financial results.
We obtain and process sensitive data, including personal data related to our customers and their transactions, such as their names, addresses, social security numbers, visa information, copies of government-issued identification, facial recognition data (from scanning of photographs for identity verification), trading data, tax identification, and bank account information. We face risks, including to our reputation, in the handling and protection of this data, and these risks will increase as our business continues to expand, including through our acquisition of, and investment in, other companies and technologies. Federal, state, and international laws and regulations governing privacy, data protection, and e-commerce transactions require us to safeguard our customers’, employees’, and service providers’ personal data. All data that is collected is stored and retained in conjunction with applicable state laws and SEC recordkeeping requirements under SEC Rule 17a-4.
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We have administrative, technical, and physical security measures and controls in place and maintain a robust information security program. However, our security measures, or the security measures of companies we acquire, may be inadequate or breached as a result of third-party action, employee or service provider error, malfeasance, malware, phishing, hacking attacks, system error, trickery, advances in computer capabilities, new discoveries in the field of cryptography, inadequate facility security or otherwise, and, as a result, someone may be able to obtain unauthorized access to sensitive information, including personal data, on our systems. We could be the target of a cybersecurity incident, which could result in harm to our reputation and financial losses. Additionally, our customers have been and could be targeted in cybersecurity incidents like an account takeover, which could result in harm to our reputation and financial losses. Additionally, privacy and data protection laws are evolving, and these laws may be interpreted and applied in a manner that is inconsistent with our data handling safeguards and practices that could result in fines, lawsuits, and other penalties, and significant changes to our or our third-party partners’ business practices and products and service offerings. Our future success depends on the reliability and security of our platform. To the extent that the measures we, any companies we acquire, or our third-party business partners have taken prove to be insufficient or inadequate, or to the extent we discover a security breach suffered by a company we acquire following the closing of such acquisition, we may become subject to litigation, breach notification obligations, or regulatory or administrative sanctions, which could result in significant fines, penalties, damages, harm to our reputation, or loss of customers. If our own confidential business information or sensitive customer information were improperly disclosed, our business could be adversely affected. Additionally, a party who circumvents our security measures could, among other effects, appropriate customer information or other proprietary data, cause interruptions in our operations, or expose customers to hacks, viruses, and other disruptions.
Depending on the nature of the information compromised, in the event of a data breach or other unauthorized access to our customer data, we may also have obligations to notify customers and regulators about the incident, and we may need to provide some form of remedy, such as a subscription to credit monitoring services, pay significant fines to one or more regulators, or pay compensation in connection with a class-action settlement. Such breach notification laws continue to evolve and may be inconsistent from one jurisdiction to another. Complying with these obligations could cause us to incur substantial costs and could increase negative publicity surrounding any incident that compromises customer data. Additionally, the financial exposure from the events referenced above could either not be insured against or not be fully covered through any insurance that we may maintain, and there can be no assurance that the limitations of liability in any of our contracts would be enforceable or adequate or would otherwise protect us from liabilities or damages as a result of the events referenced above. Any of the foregoing could have an adverse effect on our business, reputation, operating results, and financial condition.
Furthermore, we may be required to disclose personal data pursuant to demands from individuals, regulators, government agencies, and law enforcement agencies in various jurisdictions with conflicting privacy and security laws, which could result in a breach of privacy and data protection policies, notices, laws, rules, court orders, and regulations. Additionally, changes in the laws and regulations that govern our collection, use, and disclosure of customer data could impose additional requirements with respect to the retention and security of customer data, could limit our marketing activities, and have an adverse effect on our business, operating results, and financial condition.
The Company’s policies or procedures for conducting due diligence for anti-money laundering, know your customer, and/or compliance with the Office of Foreign Assets Control related requirements
The Company conducts KYC and anti-money laundering (“AML”) for every user it onboards onto its platform, regardless of whether that customer wishes to trade cryptocurrencies or security tokens. As part of that onboarding process, the Company uses a third-party provider to check the user against numerous lists, including the OFAC sanctions list. User due diligence is performed at the time of onboarding before the account is opened and before funds or assets are deposited into the user’s account on the trading platform. When a potential customer wants to open an account with the Company, he or she completes the online investor application and submits this information for review. Upon submission, the customer’s data is entered into our third-party service provider for verification against various sanctions lists like OFAC sanctions list and software-defined networking (“SDN”) for AML purposes. In addition, there is also a physical review of all the information by a customer specialist to confirm compliance with KYC checks and verifications. Upon successfully passing the AML/KYC process, and acknowledging applicable agreements, the account would be deemed approved and eligible for trading.
To the extent reasonable and practicable, we ensure that we have a reasonable belief that we know the true identity of our customers by using risk-based procedures to verify and document the accuracy of the information we receive about our customers. Using manual and/or automated tools, our team analyzes the information obtained to determine whether the information is sufficient to form a reasonable belief that we know the true identity of the customer.
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As stated above, the Company verifies user identity through proof of identification and proof of address documentation, with the intention of forming a reasonable belief that we know the identity of the customer and that they are who they say they are. The Company uses a third-party provider, Sardine, to process identity checks and verify their validity. The Sardine identity document check is done via API and looks at various databases and other proprietary tools in order to check KYC and AML information. In addition, the firm uses a third party provider called ShuftiPro, which analyzes identification documents to verify that they are valid. Sardine also identifies whether the identification document has been recorded as lost, stolen or compromised (i.e., through tampering, forgery and fraud). The Company may ask for further documentation from users as part of an enhanced due diligence process based on the risk rating derived from the AML and KYC checks done via Sardine in order to comply with its regulatory requirements.
The Company collects information about each individual such that we can reasonably determine who the customer is and the nature of their business with the Company. Such information is collected during the onboarding process where the applicant is requested to complete the “Personal Profile” section, which includes questions in relation to their:
● | Employment: for example, applicants are required to declare, among other things, if they are a politically exposed person; |
● | Financials: for example, applicants are required to declare, among other things, their net income and net worth; and |
● | Investment experience: for example, applicants are required to declare, among other things, their risk tolerance and investment goals. |
Additionally, all users are subject to screening as part of the onboarding process. Screening is currently done via API by Sardine. Sardine uses the customer information provided during the onboarding process, such as proof of identification, to perform screenings, including OFAC, FATF, and adverse media checks, which are integrated by Sardine. Sardine gathers data from diverse government sources, international regulators and law enforcement agencies and watchlists. All users are scanned against these lists on an ongoing basis for known or suspected entities and individuals who are associated with money laundering, terrorism, financial fraud, arms proliferation, drug trafficking or are politically exposed persons. Depending on the Sardine risk rating results, the INX team will perform the necessary reviews and escalate any high risk users as per our defined written procedures and processes.
A person who tries to initiate the onboarding process from a restricted jurisdiction, due to unauthorized location, sanctioned country or otherwise identified through geofencing, will not be allowed to continue the onboarding process and will get a notification explaining that the person applied cannot invest with the Company and cannot open an account on the platform.
Risks Related to Blockchain Assets
Blockchain is a nascent and rapidly changing technology and there remains relatively small use of blockchain networks and blockchain assets in the retail and commercial marketplace. The slowing or stopping of the development or acceptance of blockchain networks may adversely affect an investment in INX Tokens or in our Company.
The development of blockchain networks is a new and rapidly evolving industry that is subject to a high degree of uncertainty. Factors affecting the further development of the blockchain industry include:
● | continued worldwide growth in the adoption and use of blockchain networks and assets; |
● | the maintenance and development of the open-source software protocol of blockchain networks; |
● | changes in consumer demographics and public tastes and preferences; |
● | the popularity or acceptance of the Bitcoin or Ethereum networks; |
● | the availability and popularity of other forms or methods of buying and selling goods and services, including new means of using fiat currencies; |
● | government and quasi-government regulation of blockchain networks and assets, including any restrictions on access, operation and use of blockchain networks and assets; and |
● | the general economic environment and conditions relating to blockchain networks and assets. |
Our business model is dependent on continued investment in and development of the blockchain industry and related technologies. If investments in the blockchain industry become less attractive to investors or innovators and developers, or if blockchain networks and assets do not gain public acceptance or are not adopted and used by a substantial number of individuals, companies and other entities, it could have a material adverse impact on our prospects and our operations.
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The application of distributed ledger technology is novel and untested and may contain inherent flaws or limitations.
Blockchain is an emerging technology that offers new capabilities which are not fully proven in use. There are limited examples of the application of distributed ledger technology. In most cases, software used by blockchain asset issuing entities will be in an early development stage and still unproven. As with other novel software products, the computer code underpinning the INX Tokens and Ethereum blockchain may contain errors, or function in unexpected ways. Insufficient testing of smart contract code, as well as the use of external code libraries, may cause the software to break or function incorrectly. Any error or unexpected functionality may cause a decline in value of the INX Token and result in substantial losses to purchasers of INX Tokens.
If we discover errors or unexpected functionalities in the INX Token smart contract, we may make a determination that the INX Token smart contract is defective and that its use should be discontinued. Although we intend to replace the INX Token and the INX Token smart contract with a new token using a new smart contract in that situation, we may be required to take certain measures, such as freezing digital wallet addresses so that such wallets cannot transfer INX Tokens, which may disrupt trading in the INX Tokens. Such a determination and our subsequent deployment of a new smart contract and replacement token could have a material effect on the value of any investment in the INX Token or our business.
The creation and operation of digital platforms for the public trading of blockchain assets will be subject to potential technical, legal and regulatory constraints. There is no warranty that the process for receiving, use and ownership of blockchain assets will be uninterrupted or error-free and there is an inherent risk that the software, network, blockchain assets and related technologies and theories could contain undiscovered technical flaws or weaknesses, the cryptographic security measures that authenticate transactions and the distributed ledger could be compromised, and breakdowns and trading halts could cause the partial or complete inability to use or loss of blockchain assets.
Risks associated with the distributed ledger technology could affect our business directly or the market for blockchain assets generally. In either case, the occurrence of these events could have a materially adverse effect on an investment in INX Tokens or the Company.
The open-source structure of blockchain software means that blockchain networks may be susceptible to malicious cyber-attacks or may contain exploitable flaws, which may result in security breaches and the loss or theft of blockchain assets.
Most blockchain networks operate based on some form of open-source software. An open source project is not represented, maintained or monitored by an official organization or authority. Because of the nature of open-source software projects, it may be easier for third parties not affiliated with the issuer to introduce weaknesses or bugs into the core infrastructure elements of the blockchain network. This could result in the corruption of the open-source code which may result in the loss or theft of blockchain assets.
Blockchain networks may be the target of malicious attacks seeking to identify and exploit weaknesses in the software. Such events may result in a loss of trust in the security and operation of blockchain networks and a decline in user activity which could have a negative impact on the Company.
Each blockchain network, including the Ethereum network, is dependent upon its users and contributors, and actions taken, or not taken, by the users or contributors of a blockchain network could damage its reputation and the reputation of blockchain networks generally.
Developers and other contributors to blockchain network protocols generally maintain or develop those blockchain networks, including the verification of transactions on such networks. Because the networks are decentralized, these contributors are generally not directly compensated for their actions. Therefore, most blockchain networks provide that such contributors receive awards and transfer fees for recording transactions and otherwise maintaining the blockchain network. Such fees are generally paid in the blockchain asset of that network.
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The security and integrity of blockchain assets, including the value ascribed to blockchain assets, relies on the integrity of the underlying blockchain networks. We have issued the INX Token, an ERC-1404 blockchain asset that is programmed using a smart contract that is compatible with the Ethereum blockchain.
The INX Token operates on the ERC-1404 blockchain standard, a modified version of ERC-20 that introduces two additional functions:
1. Detect Transfer Restrictions: This feature allows for the identification of transfer restrictions, providing enhanced security and compliance; and
2. Human-Readable Error Messages: ERC-1404 enhances user experience by offering clear and understandable error messages when a transfer is likely to fail.
Furthermore, ERC-1404’s compatibility with existing wallets and exchanges designed for ERC-20 simplifies integration, making it convenient for a wide range of users and platforms.
If the awards and fees paid for maintenance of a network are not sufficiently high to incentivize miners, miners may respond in a way that reduces confidence in the blockchain network. To the extent that any miners cease to record transactions in solved blocks, transactions that do not include the payment of a transfer fee will not be recorded on the blockchain until a block is solved by a miner who does not require the payment of transfer fees. Any widespread delays in the recording of transactions could result in a loss of confidence in the blockchain network and its assets. To the extent that this occurs with regard to blockchain networks that underlie the blockchain assets traded on our platforms, including the Ethereum network, it could have a materially adverse effect on an investment in the Company. To the extent that this occurs with regard to the Ethereum network, it could have a materially adverse effect on an investment in the INX Token.
The prices of blockchain assets are extremely volatile. Fluctuations in the price of Bitcoin, Ether and/or other blockchain assets could materially and adversely affect the Company.
The prices of blockchain assets such as Bitcoin and Ether have historically been subject to dramatic fluctuations and are highly volatile. As relatively new products and technologies, blockchain assets have only recently become accepted as a means of payment for goods and services, and such acceptance and use remains limited. Conversely, a significant portion of demand for blockchain assets is generated by speculators and investors seeking to profit from the short- or long-term holding of blockchain assets.
In addition, some blockchain industry participants have reported that a significant percentage of blockchain asset trading activity is artificial or non-economic in nature and may represent attempts to manipulate the price of certain blockchain assets. For example, Deloitte, in its April 2024 report titled “Emerging Trends in Digital Assets Manipulation and Surveillance’’ noted that “a prominent vendor recently uncovered $2 billion worth of wash trades on decentralized exchanges.” As a result, trading platforms or blockchain assets may seek to inflate demand for specific blockchain assets, or blockchain assets generally, which could increase the volatility of that asset or blockchain asset trading prices generally.
The market price of these blockchain assets, as well as other blockchain assets that may be developed in the future, may continue to be highly volatile. A lack of expansion, or a contraction of adoption and use of blockchain assets, may result in increased volatility or a reduction in the price of blockchain assets.
Several additional factors may influence the market price of blockchain assets, including, but not limited to:
● | Global blockchain asset supply; | |
● | Global blockchain asset demand, which can be influenced by the growth of retail merchants’ and commercial businesses’ acceptance of blockchain assets like cryptocurrencies as payment for goods and services, the security of online blockchain asset trading platforms and digital wallets that hold blockchain assets, the perception that the use and holding of blockchain assets is safe and secure, and the regulatory restrictions on their use; | |
● | Changes in the software, software requirements or hardware requirements underlying the blockchain networks; | |
● | Changes in the rights, obligations, incentives, or rewards for the various participants in blockchain networks; | |
● | The cost of trading and transaction in blockchain assets, and whether such costs may become fixed or standardized; | |
● | Investors’ expectations with respect to the rate of inflation; | |
● | Interest rates; |
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● | Currency exchange rates, including the rates at which blockchain assets may be exchanged for fiat currencies; | |
● | Fiat currency withdrawal and deposit policies of blockchain asset trading platforms and liquidity on such platforms; | |
● | Interruptions in service or other failures of major blockchain asset trading platforms; | |
● | Investment and trading activities of large investors, including private and registered funds, that may directly or indirectly invest in blockchain networks or blockchain assets; | |
● | Monetary policies of governments, trade restrictions, currency devaluations and revaluations; | |
● | Regulatory measures, if any, that affect the use of blockchain assets; | |
● | The maintenance and development of the open-source software utilized in blockchain networks; | |
● | Global or regional political, economic or financial events and situations; and | |
● | Expectations among blockchain network participants that the value of such blockchain assets will soon change. |
A decrease in the price of a single blockchain asset may cause volatility in the entire blockchain industry and may affect other blockchain assets. For example, a security breach that affects investor or user confidence in Ether or Bitcoin may affect the industry as a whole and may also cause the price of other blockchain assets to fluctuate.
The value of blockchain assets and fluctuations in the price of blockchain assets could materially and adversely affect our business and investment in INX Tokens or the Company.
The U.S. regulatory regimes governing blockchain technologies, blockchain assets and the purchase and sale of blockchain assets are uncertain, and new regulations or policies may materially adversely affect the development of blockchain networks and the use of blockchain assets.
INX Securities, LLC (“INXS”) is registered with FINRA and the Securities and Exchange Commission (“SEC”) as a broker-dealer authorized to operate as an ATS that is allowed to facilitate the trading of security tokens in compliance with the SEC’s “Three-Step Process.” Additionally, INXS is registered in all 50 U.S. states, the District of Columbia, and Puerto Rico, and is also permitted to act as the broker-dealer of record in primary offerings for traditional and digital securities. As such, the Company has implemented policies, processes, rules and procedures that govern the issuance and trading of security tokens on the INXS ATS.
However, there is still significant uncertainty regarding the application of federal and state laws to the issuance and trading of crypto assets, including regulations governing the conduct of market intermediaries to the trading of crypto assets that are securities.
In addition, various legislative and executive bodies in the United States and in other countries have shown that they intend to adopt legislation to regulate the sale and use of blockchain assets. Such legislation may vary significantly among jurisdictions, which may subject participants in the blockchain trading marketplace to different and perhaps contradictory requirements.
Also, as firms in the financial services industry have experienced increased scrutiny in recent years, such regulatory or other actions may lead to penalties, fines, disbarment and other sanctions which could place restrictions or limitations on our operations and otherwise have a material adverse effect on our businesses. We could be exposed to substantial liability under federal and state laws and court decisions, as well as rules and regulations promulgated and/or direct actions brought by the SEC, state securities regulators and other U.S. regulatory agencies.
If we fail to qualify with any of these authorities, we may be unable to execute on, or be forced to cease operations contemplated under, our business plan as a provider of financial services. This would have a broad impact on us and could have a material adverse effect on our businesses, financial condition, results of operations and prospects and, as a result, investors could lose all or most of their investment. In addition, any such action could also cause us significant reputational harm, which, in turn, could seriously harm the Company.
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New or changing laws and regulations or interpretations of existing laws and regulations, in the United States and elsewhere, may materially and adversely impact the development and growth of blockchain networks and the adoption and use of blockchain assets. This is even more so due to market conditions and recent growth in crypto-related frauds, layoffs, and the ongoing liquidity crisis that led to bankruptcies by leading crypto companies. The imposition of restrictions on all blockchain assets, or certain blockchain assets, could affect the value, liquidity and market price of blockchain assets subject to heighten regulation, by limiting access to marketplaces or exchanges on which to trade such blockchain assets, or imposing restrictions on the structure, rights and transferability of such blockchain assets. Some governments may seek to ban transactions in blockchain assets altogether. See “Item 1.B Business Overview — Regulatory Oversight of Blockchain Assets.”
The Company may be prevented from entering, or it may be required to cease operations in, a jurisdiction that makes it illegal or commercially unviable or undesirable to operate in such jurisdiction. Enforcement, or the threat of enforcement, may also drive a critical mass of participants and trading activity away from regulated markets, such as those provided by INX Trading Solutions, (“INX Trading Solutions” means the business conducted by the Company in the United States, which includes the INX Digital, Inc. (“INXD”) trading platform, the INXS trading platform, and other related business activities), and toward unregulated exchanges. Although it is impossible to predict the positions that will be taken by certain governments, any regulatory changes affecting blockchain assets could be substantial and materially adverse to the development and growth of our business and investment in INX Tokens and the Company.
We may be deemed an underwriter under the Securities Act with regard to our role and involvement with respect to any initial offerings of securities on the INXS ATS, and our failure to comply with applicable federal securities laws may expose us to legal liability. We may be subject to disputes regarding the quality of trade execution, the settlement of trades or other matters relating to our services. We may become subject to these claims as a result of any failures or malfunctions of our systems and services we provide.
We could incur significant legal expenses defending claims, even those without merit. In addition, an adverse resolution of any future lawsuit or claim against us could have a material adverse effect on our business and reputation. To the extent we are found to have failed to fulfill our regulatory obligations, we could lose our authorizations or licenses or become subject to conditions that could make future operations more costly and impair our profitability.
We are subject to an extensive and highly-evolving regulatory landscape world-wide and any adverse changes to, or our failure to comply with, any laws and regulations could adversely affect our brand, reputation, business, operating results, and financial condition.
The markets for digital securities and cryptocurrencies are still new and rapidly emerging. As such, the Company is subject to an extensive and highly evolving regulatory landscape. The Company’s business is subject to extensive laws, rules, regulations, policies, orders, determinations, directives, treaties, and legal and regulatory interpretations and guidance in the markets in which it operates, including those governing financial services and banking, federal government contractors, trust companies, securities, derivative transactions and markets, broker-dealers and alternative trading systems (“ATS”), crypto asset custody, exchange, and transfer, cross-border and domestic money and crypto asset transmission, foreign currency exchange, privacy, data governance, data protection, cybersecurity, fraud detection, payment services (including payment processing and settlement services), retail protection, competition, bankruptcy, tax, anti-bribery, economic and trade sanctions, anti-money laundering, counter-terrorist financing and others.
Many of these legal and regulatory regimes were adopted prior to currently available advanced technologies. As a result, some applicable laws and regulations world-wide do not contemplate or address unique issues associated with the digital securities and cryptocurrencies, and are subject to significant uncertainty, and vary widely across U.S. federal, state, and international jurisdictions. These legal and regulatory regimes, including the laws, rules, and regulations thereunder, evolve frequently and may be modified, interpreted, and applied in an inconsistent manner from one jurisdiction to another, and may conflict with one another.
This complexity and evolving nature of the Company’s business and the significant uncertainty surrounding the regulation of the digital securities and cryptocurrencies requires us to exercise our best judgment as to whether certain laws, rules, and regulations apply to the Company’s business, and it is possible that governmental bodies and regulators may disagree with our conclusions. To the extent we have misinterpreted any such laws, rules, and regulations, we could be subject to significant fines, revocation of licenses, limitations on our products and services, reputational harm, and other regulatory consequences, each of which may be significant and could adversely affect the Company’s business, operating results, and financial condition.
In addition to existing laws and regulations, various governmental and regulatory bodies, including legislative and executive bodies, in the United States and in other countries, may adopt new laws and regulations not yet in existence. For example, legislation imposing additional regulatory requirements in relation to crypto-related activities is possible in the near to intermediate term which, among other things, may impose new or additional regulatory requirements on both crypto service providers and issuers of certain crypto assets, which may impact our operations in the countries in which legislation is advanced.
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Furthermore, new interpretations of existing laws and regulations may be issued by such bodies or the judiciary, which may adversely impact the development of the digital securities and cryptocurrencies economy as a whole and our legal and regulatory status in particular by changing how we operate our business, how our products and services are regulated, and what products or services we and our competitors can offer, requiring changes to our compliance and risk mitigation measures, imposing new licensing requirements, or imposing a total ban on certain crypto asset transactions, as has occurred in certain jurisdictions in the past. Those new laws, regulations, or interpretations may result in litigation, regulatory investigations, and enforcement or other actions, including preventing or delaying the Company from offering certain products or services offered by its competitors or could impact how the Company offers such products and services. Adverse changes to, or our failure to comply with, any laws and regulations may have an adverse effect on our reputation and brand and our business, operating results, and financial condition.
In addition to existing laws and regulations, various governmental and regulatory bodies, including legislative and executive bodies, in the United States and in other countries, may adopt new laws and regulations not yet in existence. Furthermore, new interpretations of existing laws and regulations may be issued by such bodies or the judiciary, which may adversely impact the development of the digital securities and cryptocurrencies economy as a whole and our legal and regulatory status in particular by changing how we operate our business, how our products and services are regulated, and what products or services we and our competitors can offer, requiring changes to our compliance and risk mitigation measures, imposing new licensing requirements, or imposing a total ban on certain crypto asset transactions, as has occurred in certain jurisdictions in the past. Those new laws, regulations, or interpretations may result in litigation, regulatory investigations, and enforcement or other actions, including preventing or delaying the Company from offering certain products or services offered by its competitors or could impact how the Company offers such products and services. Adverse changes to, or our failure to comply with, any laws and regulations may have an adverse effect on our reputation and brand and our business, operating results, and financial condition.
Blockchain assets also face an uncertain regulatory landscape in many foreign jurisdictions. On September 4, 2017, the People’s Bank of China labeled blockchain asset sales as “illegal and disruptive to economic and financial stability.” Previously, China had issued a notice that classified bitcoin as legal and “virtual commodities;” however, the same notice restricted the banking and payment industries from using bitcoin, creating uncertainty and limiting the ability of Bitcoin Exchanges to operate in the then-second largest bitcoin market. In 2021, it was reported that China banned all cryptocurrency trading and mining; however, in reality cryptocurrency trading activity still occurs there.
South Korea’s Financial Services Commission likewise prohibited all forms of tokens on September 29, 2017. In 2023, South Korea advanced legislation with an aim to regulate cryptocurrencies under specific laws and regulations starting in July 2024. Japan has enacted a law regulating virtual currencies which has brought Bitcoin exchanges under know-your-customer and anti-money laundering rules and resulted in the categorization of Bitcoin as a kind of prepaid payment instrument. The law puts in place capital requirements for exchanges as well as cybersecurity and operational stipulations. In addition, those exchanges are also required to conduct employee training programs and submit to annual audits. Cryptocurrency exchanges in Japan must register with the government and have the requisite licensing. In November 2017, the Monetary Authority of Singapore (“MAS”) issued a statement that tokens sold through the blockchain funding model may be considered securities under certain circumstances under Singapore law and provided case studies as examples of tokens that do and do not constitute securities. Previously, the MAS had stated that other laws may apply to token sales, such as money laundering and terrorism financing laws. In 2023, Singapore finalized rules for regulating stablecoins and their issuers.
Other jurisdictions are still researching the subject. The United Kingdom has pending stablecoin legislation that is expected to advance in 2024. Other cryptocurrency legislation in the country isn’t expected to be finalized and implemented until 2025. In 2023, the United Arab Emirates opened a “free zone” with minimal rules to attract companies in digital assets to the country. Further developments in the country are expected in 2024. For additional information see “Item 1.B Business Overview — Regulatory Oversight of Blockchain Assets.”
Moreover, we offer and may in the future offer products and services whose functionality or value depends in part on our management of token transaction smart contracts, asset tracking, or other applications that provide novel forms of customer engagement and interaction delivered via blockchain protocols. We may also offer products and services whose functionality or value depends on our ability to develop, integrate, or otherwise interact with such applications within the bounds of our legal and compliance obligations. The legal and regulatory landscape for such products, including the law governing the rights and obligations between and among smart contract developers and users and the extent to which such relationships entail regulated activity is uncertain and rapidly evolving. Our interaction with those applications, and the interaction of other blockchain users with any smart contracts or assets we may generate or control, could present legal, operational, reputational, and regulatory risks for our business.
Because we have offered and will continue to offer a variety of innovative products and services to our customers, many of our offerings are subject to significant regulatory uncertainty that we try to mitigate by adopting measures that do not necessarily apply to the Company’s current business operation (see for example segregation of assets). There are substantial uncertainties on how these requirements would apply in practice, and we may face substantial compliance costs to operationalize and comply with these rules. Certain products and services offered by us that we believe are not subject to regulatory oversight or are only subject to certain regulatory regimes.
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It may be illegal now, or in the future, to acquire, own, hold, sell or use INX Tokens in one or more countries, and ownership of, holding or trading in our Company’s securities may also be considered illegal and subject to sanction. The regulation of blockchain assets remains uncertain or undefined in many jurisdictions. Although we anticipate treating the INX Tokens as securities under the laws of all foreign jurisdictions and adhering to such laws with regard to the offering and sale of INX Tokens abroad, one or more foreign governmental authorities, such as those in China or Russia, may take regulatory action in the future that severely restricts the right to acquire, own, hold, sell or use blockchain assets or to exchange blockchain assets for fiat currency. Such an action may result in the restriction of ownership, holding or trading in the INX Token and other securities. Such restrictions may adversely affect the business or operations of the Company.
While we have implemented policies and procedures designed to help monitor for and ensure compliance with existing and new laws and regulations, there can be no assurance that we and our employees, contractors, and agents will not violate or otherwise fail to comply with such laws and regulations. To the extent that we or our employees, contractors, or agents are deemed or alleged to have violated or failed to comply with any laws or regulations, including related interpretations, orders, determinations, directives, or guidance, we or they could be subject to a litany of civil, criminal, and administrative fines, penalties, orders and actions, including being required to suspend or terminate the offering of certain products and services.
Adverse changes to, or our failure to comply with, any laws and regulations have had, and may continue to have, an adverse effect on our reputation and brand and our business, operating results, and financial condition.
We cannot assure that our policies and procedures in place to comply with applicable complex and evolving laws, regulations, and rules will always be effective, which could have a negative impact on our business operations.
Our ability to comply with applicable complex and evolving laws, regulations, and rules is largely dependent on the establishment, maintenance, and scaling of our compliance, audit, and reporting systems to continuously keep pace with our customer activity and transaction volume, as well as our ability to attract and retain qualified compliance and other risk management personnel. While we have devoted significant resources to develop policies and procedures to identify, monitor, and manage our risks, and expect to continue to do so in the future, we cannot assure you that our policies and procedures are and will always be effective or that we have been and will always be successful in monitoring or evaluating the risks to which we are or may be exposed in all market environments or against all types of risks, including unidentified or unanticipated risks. Our risk management policies and procedures rely on a combination of technical and human controls and supervision that are subject to error and failure. Some of our methods for managing risk are discretionary by nature and are based on internally developed controls and observed historical market behavior, and also involve reliance on standard industry practices. These methods may not adequately prevent losses, particularly as they relate to extreme market movements, which may be significantly greater than historical fluctuations in the market. Our risk management policies and procedures also may not adequately prevent losses due to technical errors if our testing and quality control practices are not effective in preventing failures. In addition, we may elect to adjust our risk management policies and procedures to allow for an increase in risk tolerance, which could expose us to the risk of greater losses.
Certain crypto assets in which we may in the future facilitate trading may be subject to regulatory authority by the CFTC. Any fraudulent or manipulative activity in a crypto asset occurring on our platform could subject us to increased regulatory scrutiny, regulatory enforcement, and litigation.
The CFTC has stated and judicial decisions involving CFTC enforcement actions have confirmed that certain crypto assets may fall within the definition of a “commodity” under the Commodity Exchange Act (“CEA”). As a result, the CFTC would have general enforcement authority to police against manipulation and fraud in at least some crypto asset markets. From time to time, manipulation, fraud, and other forms of improper trading by market participants have resulted in, and may in the future result in, CFTC investigations, inquiries, enforcement action, and similar actions by other regulators, government agencies, and civil litigation. Such investigations, inquiries, enforcement actions, and litigation may cause us to incur substantial costs and could result in negative publicity.
Certain transactions in crypto assets may constitute “retail commodity transactions” subject to regulation by the CFTC as futures contracts. If crypto asset transactions we facilitate are deemed to be such retail commodity transactions, we would be subject to additional regulatory requirements, licenses and approvals, and potentially face regulatory enforcement, civil liability, and significant increased compliance and operational costs.
Any transaction in a commodity, including a crypto asset, entered into with or offered to retail investors using leverage, margin, or other financing arrangements (a “retail commodity transaction”) is subject to CFTC regulation as a futures contract unless such transaction results in actual delivery within 28 days. The meaning of “actual delivery” has been the subject of commentary and litigation, and in 2021, the CFTC adopted interpretive guidance addressing the “actual delivery” of a crypto asset. To the extent that crypto asset transactions that we facilitate or facilitated are deemed retail commodity transactions, including pursuant to current or subsequent rulemaking or guidance by the CFTC, we may be subject to additional regulatory requirements and oversight, and we could be subject to judicial or administrative sanctions if we do not or did not at a relevant time possess appropriate registrations. The CFTC has previously brought enforcement actions against entities engaged in retail commodity transactions without appropriate registrations.
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Particular crypto assets or transactions therein could be deemed “commodity interests” (e.g., futures, options, swaps) or security-based swaps subject to regulation by the CFTC or SEC, respectively. If a crypto asset that we facilitate trading in is deemed a commodity interest or a security-based swap, we would be subject to additional regulatory requirements, registrations and approvals, and potentially face regulatory enforcement, civil liability, and significant increased compliance and operational costs.
Commodity interests, as such term is defined by the CEA and CFTC rules and regulations, are subject to more extensive supervisory oversight by the CFTC, including registrations of entities engaged in, and platforms offering commodity interest transactions. This CFTC authority extends to crypto asset futures contracts and swaps, including transactions that are based on current and future prices of crypto assets and indices of crypto assets. To the extent that a crypto asset in which we facilitate or facilitated trading or transactions in a crypto asset which we facilitate or facilitated are deemed to fall within the definition of a commodity interest, including pursuant to subsequent rulemaking or guidance by the CFTC, we may be subject to additional regulatory requirements and oversight and could be subject to judicial or administrative sanctions if we do not or did not at a relevant time possess appropriate registrations as an exchange (for example, as a designated contract market for trading futures or options on futures, or as a swaps execution facility for trading swaps) or as a registered intermediary (for example, as a futures commission merchant or introducing broker). Such actions could result in injunctions, cease and desist orders, as well as civil monetary penalties, fines, and disgorgement, as well as reputational harm. The CFTC has previously brought enforcement actions against entities engaged in crypto asset activities for failure to obtain appropriate exchange, execution facility and intermediary registrations.
Furthermore, the CFTC and the SEC have jointly adopted regulations defining “security-based swaps,” which include swaps based on single securities and narrow-based indices of securities. If a crypto asset is deemed to be a security, certain transactions referencing that crypto asset could constitute a security-based swap. A crypto asset or transaction therein that is based on or references a security or index of securities, whether or not such securities are themselves crypto assets, could also constitute a security-based swap. To the extent that a crypto asset in which we facilitate or have facilitated trading or transactions in a crypto asset which we facilitate or have facilitated are deemed to fall within the definition of a security-based swap, including pursuant to subsequent rulemaking or guidance by the CFTC or SEC, we may be subject to additional regulatory requirements and oversight by the SEC and could be subject to judicial or administrative sanctions if we do not or did not a relevant time possess appropriate registrations as an exchange (for example, as a security-based swaps execution facility) or as a registered intermediary (for example, as a security-based swap dealer or broker-dealer). This could result in injunctions, cease and desist orders, as well as civil monetary penalties, fines, and disgorgement, as well as reputational harm.
If the Company fails to properly characterize a digital asset listed for trading under applicable securities laws, it may be subject to regulatory scrutiny, inquiries, investigations, fines, and other penalties, which may adversely affect the business, operating results, and its financial condition.
The SEC and its staff have taken the position that many digital assets fall within the definition of a “security” under the U.S. federal securities laws. The SEC has stated that the characterization of a digital asset as a security or non-security should be made by application of the Howey test, which provides a multi-factor analysis for determining whether a digital asset is a security, as well as other case law and reports, orders and statements issued by the SEC which provide guidance on when a digital asset should be treated as a security for purposes of US federal securities laws.
Several foreign jurisdictions have taken a broad-based approach to classifying crypto assets as “securities,” while other foreign jurisdictions, such as Switzerland, Malta, and Singapore, have adopted a narrower approach. As a result, certain crypto assets may be deemed to be a “security” under the laws of some jurisdictions but not others. Various foreign jurisdictions may, in the future, adopt additional laws, regulations, or directives that affect the characterization of crypto assets as “securities.”
The classification of a crypto asset as a security under applicable law has wide-ranging implications for the regulatory obligations that flow from the offer, sale, trading, and clearing of such assets. For example, a crypto asset that is a security in the United States may generally only be offered or sold in the United States pursuant to a registration statement filed with the SEC or in an offering that qualifies for an exemption from registration.
The Company has developed specific criteria and follows its policies and procedures to analyze whether a digital asset could be deemed a “security” under applicable laws prior to listing such asset on the INXD trading platform. The Company’s policies and procedures do not constitute a legal standard, but rather represent the Company-developed model, which it uses to make a risk-based assessment regarding the likelihood that a particular crypto asset could be deemed a “security” under applicable laws. Regardless of the conclusions, the Company could be subject to legal or regulatory action in the event the SEC, a state or foreign regulatory authority, or a court were to determine that a supported crypto asset currently traded on our INXD platform is a “security” under applicable laws.
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The policy reviews a variety of factors for each listing, including applying such review as it relates to the Howey test. The policy considers, among other things, the use, purpose, and specific features of each crypto asset being considered. Once all of these assessments are completed and internally approved by the relevant members of Company management, the assessment is reviewed and approved by the INXD Board of Directors.
The Company will only approve a listing that it reasonably determines is not used to circumvent laws and regulations or that may facilitate the obfuscation or concealment of a customer’s or counterparty’s identity. Additionally, the Company will only approve cryptocurrencies that it reasonably determines, using the above-described procedures, are not crypto assets that fall under the jurisdiction of securities regulations in the U.S. and may seek the guidance of outside legal counsel in this determination. The Company will only permit the trading of a crypto asset consistent with relevant consumer protection standards and that do not jeopardize INXD’s safety and soundness as a going concern.
The Company believes that its process reflects a comprehensive and thoughtful analysis and is reasonably designed to facilitate consistent application of available legal guidance. However, it recognizes that the application of securities laws to the specific facts and circumstances of crypto assets may be complex, and that a listing determination does not guarantee any conclusion under the U.S. federal securities laws.
With respect to the Company’s INXD platform, if the Company fails to properly characterize a digital asset listed for trading under applicable securities laws, it may be subject to regulatory scrutiny, inquiries, investigations, fines, and other penalties, which may adversely affect the business, operating results, and its financial condition.
There can be no assurances that we have properly characterized in the past, or that we will properly characterize in the future, any given crypto asset as a security or non-security for purposes of determining whether our platform will support trading of the crypto asset, or that the SEC, foreign regulatory authority, or a court, if the question was presented to it, would agree with our assessment. If an applicable regulatory authority or a court, having final determinative authority on the subject, were to determine that a supported crypto asset that was previously offered, sold, or traded on our INX Digital platform, or that is currently offered, sold, or traded on our INX Digital platform, is a security, we could be subject to judicial or administrative sanctions for failing to offer or sell the crypto asset in compliance with the registration or exemption requirements. Such an action could result in injunctions, cease and desist orders, as well as civil monetary penalties, fines, and disgorgement, criminal liability, and reputational harm. Customers that traded such supported crypto assets on our platform and suffered trading losses could also seek to rescind a transaction that we facilitated on the basis that it was conducted in violation of applicable law, which could subject us to significant liability. Furthermore, if we remove any crypto assets from trading on our platform for any reason, our decision may be unpopular with users and may reduce our ability to attract and retain customers, especially if such assets remain traded on unregulated exchanges, which includes many of our competitors.
Further, if Bitcoin, Ethereum, or any other crypto asset that we are either currently supporting, or that we supported in the past, is deemed to be a security under any U.S. federal, state, or foreign jurisdiction, or in a proceeding in a court of law or otherwise, it may have adverse consequences for such supported crypto asset. For instance, all transactions in such supported crypto assets would have to be registered with the SEC or other foreign authority, or conducted in accordance with an exemption from registration, which could severely limit its liquidity, usability and transactability. Moreover, the networks on which such supported crypto assets are utilized may be required to be regulated as securities intermediaries, and subject to applicable rules, which could effectively render the network impracticable for its existing purposes. Further, it could draw negative publicity and a decline in the general acceptance of the crypto asset. Also, it may make it difficult for such supported crypto assets to be traded, cleared, and held in custody as compared to other crypto assets that are not considered to be securities.
Adding crypto assets to, or removing from our platform
The Company has a policy and process in place for adding new crypto asset securities and cryptocurrencies for listing or trading on its platform. The Company’s legal and compliance teams, in cooperation with the Chief Compliance Officer, evaluate the legal, compliance, technology, cybersecurity, and operational risks with respect to listing a cryptocurrency. The evaluation is done in the form of a due diligence checklist, upon which the above parties have to signify approval, and once this is done, the checklist is then sent to the Board of Directors of INXD, for a final review and approval.
More specifically, the relevant risk areas that INXD takes into consideration regarding each cryptocurrency include the overview and history, roadmap, business purpose, usage, distribution and concentration, regulation, compliance obligations, Howey Test triggers, risk assessment, token type, white paper, blockchain type, engineering, security and code, prototype, consensus process, network, operating costs, supply, rewards and penalties, development team, and operations.
Additionally, the Company has established a proactive internal procedure for the delisting and removal of assets from its INXS platform. When a coin or token no longer meets our compliance and/or listing standards due to variety of reasons including, changes in the industry or other pertinent considerations, our compliance department, and the commercial team, to the extent required, undertake a comprehensive review, which may lead to the delisting of the relevant asset(s). We believe that this process reflects best practices and serves to safeguard both the Company and its users and customers.
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During the review conducted by the compliance department, several factors are taken into account. While this list is not exhaustive, it provides insight into some of the key considerations:
● | Commitment of the Team to the Project | |
● | Level and Quality of Development Activity | |
● | Trading Volume and Liquidity | |
● | Stability and Security of the Network Against Attacks | |
● | Network and Smart Contract Stability | |
● | Nature and Level of Public Communication | |
● | Responsiveness to Periodic Due Diligence Requests | |
● | Evidence of Unethical, Fraudulent Conduct, or Negligence | |
● | Contribution to a Healthy and Sustainable Crypto Ecosystem | |
● | Relevance to Recent Regulatory Developments |
During 2023, we decided to delist and cease trading the following tokens:
● | MATIC | |
● | LINK | |
● | MANA | |
● | YFI | |
● | COMP | |
● | SAND |
All relevant trading pairs, including those associated with the above-mentioned tokens, have been removed from our trading platform.
Adding the Millennium Sapphire, Compound and Aave Tokens to our platform
Regarding the listing of the Millennium Sapphire Security Token (“MSTO”) to our ATS for trading, MSTO first signed a listing agreement with INX and provided due diligence items requested by INXS, pursuant to INXS’ listing policy. Following review of all relevant documents submitted, INXS verified that the primary offering was done in compliance with the exemptions for registration under Regulation D and Regulation S of the Securities Act of 1933 which are specifically noted in the INXS Membership Agreement as valid primary exemptions for which INXS can provide secondary market trading services. INXS reviews and signs off on all due diligence and listing agreements, including those of MSTO. As part of additional due diligence, and since neither INXS, nor any of its affiliated entities, minted the security tokens, INXS integrated the ATS settlement flow with MSTO’s ownership record holder (the “Digital Registrar”). A Digital Registrar maintains books and records for security token issuers similar to the functions of a transfer agent in the United States. Once this integration was tested and implemented, the security token was made available for trading on the ATS.
As we continue to expand our business and customer base outside the United States, we may be vulnerable to risks related to unauthorized or impermissible customer access outside of the jurisdictions in which we operate, which may result in significant legal and financial exposure, damage to our reputation, and a loss of confidence in the services we provide
As we expand and localize our international activities, we have become increasingly obligated to comply with the laws, rules, regulations, policies, and legal interpretations of both the jurisdictions in which we operate and those into which we offer services on a cross-border basis. For instance, financial regulators outside the United States have increased scrutiny of crypto asset exchanges over time, such as by requiring crypto asset exchanges operating in their local jurisdictions to be regulated and licensed under local laws.
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Regulators worldwide frequently study each other’s approaches to the regulation of the crypto economy. Consequently, developments in one jurisdiction may influence other jurisdictions and any such development may be extended to additional services and other jurisdictions. As a result, risks created by any new law or regulation in one jurisdiction are magnified by the potential that they may be replicated, affecting our business in another jurisdiction or involving another service. Conversely, if regulations diverge worldwide, we may face difficulty and increased expenses adjusting our products, services, and other aspects of our business with the same effect. These risks are heightened as we face increased competitive pressure from other similarly situated businesses engaging in regulatory arbitrage to avoid the compliance costs associated with regulatory changes.
Although the Company monitors closely the above mentioned risks and takes proactive steps to mitigate them, any breach or unauthorized customer access to products and services outside jurisdictions in which we operate could result in significant legal and financial exposure, damage to our reputation, and a loss of confidence in the services we provide that could potentially have an adverse effect on our business, while resulting in regulatory penalties or the imposition of burdensome obligations by regulators.
Use of digital engagement practices (“DEP”) designed to engage with retail investors and provide educational tools
Our success depends on our ability to retain existing customers and attract new customers, including ecosystem partners, to increase engagement with our products, services, and platform. To do so, we must continue to offer leading technologies and ensure that our products and services are secure, reliable, and engaging. We must also expand our products and services, and offer competitive prices in an increasingly crowded and price-sensitive market. There is no assurance that we will be able to continue to do so, that we will be able to retain our current customers or attract new customers, or keep our customers engaged.
Used responsibly, DEPs provide significant benefits to retail investors, including enhanced access to customized products and services, lower costs, access to a broader range of products, better customer service, and improved compliance efforts leading to safer markets. Certain DEPs also raise potential risks, highlighting the need to ensure investor protection in connection with their use. The existing regulatory regime, however, addresses firms’ use of DEPs, preserving their well-documented benefits, while appropriately managing potential risks and conflicts.
Specifically, the primary intersection between DEPs and our current regulatory regime are in two discrete areas:
● | communications to retail investors (educational, informational, advertising, and marketing); and |
● | potential recommendations (i.e., personalized investment advice) to retail investors. |
FINRA’s communications (and related) rules and guidance cover the former, and the SEC’s Regulation Best Interest (“Reg BI”) covers the latter. The Company believes that the existing federal securities laws and regulations, and FINRA rules, are sufficient to fulfill the SEC’s investor protection and market integrity missions with respect to DEPs.
The genesis and growth of DEPs in the securities industry today reflect the manner in which retail investors increasingly engage in every aspect of their lives, that is, digitally, online, and interactively, using the latest technologies and platforms. It is also driven, in part, by the manner in which many retail investors now choose to transact and invest, that is, on a self-directed basis (distinct from the model of receiving recommendations from a dedicated financial advisor). Many retail investors want to make their own investment decisions and manage their own investment risks, including market risks, product complexity, leverage, margin, and trading frequency. Regardless, for all retail investors, DEPs provide the latest technologies, tools, information, data, and education to facilitate and enhance their investment experience. DEPs can also offer retail investors a simplified, easily understandable path to effective financial planning and financial literacy at their digital fingertips. Firms’ use of DEPs helps meet the demand of retail investors to engage and transact in the manner of their choosing. In meeting that demand, DEPs not only strengthen existing client relationships, but also have been appropriately credited with improving investor access and opportunity on the latest investment platforms, resulting in a significant, well-documented increase in retail investor participation in the capital markets.
In fact, DEPs are providing new useful channels for delivering investor education tools and resources to retail investors. Retail investors are better educating themselves about the risks and features of prospective products and services, and ultimately, transacting in a manner that is consistent with their investment goals and risk tolerance. Relevant studies support the view that effective DEP communications can help retail investors make more responsible decisions and ultimately improve their financial outcomes.
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Investor protection is paramount to our retail customers. Accordingly, the Company is cognizant of the potential risks associated with certain DEPs and the need to ensure investor protection in connection with their use. While DEPs have the potential to encourage beneficial investor behavior, certain DEPs may have the potential to encourage retail investors to transact in a manner that may be inconsistent with their investment goals or risk tolerance. As the Commission notes, some have also expressed concerns that certain DEPs may encourage frequent trading, options trading, trading on margin, and trading in complex securities products. The Company is not involved with any of the foregoing practices.
To date, the Company does not have any sophisticated digital engagement processes to engage retail customers. The Company allows pop-ups on its website, and utilizes email marketing and social media posts to bring attention to potential users on the Company platform. The Company provides FAQs with videos and tutorials to develop and provides investment education tools.
INX acknowledges the need to address these potential conflicts. DEPs should never mislead clients and should always present information in a manner that is fair and balanced. It is important to note, however, that these potential conflicts are not new to the industry. In fact, they are the same potential conflicts that arise in connection with any medium or form of firm communication or engagement with a client. DEPs are merely a different medium or form. And, as discussed further below, DEPs are already subject to the same compliance and regulatory obligations that the firm owes with respect to every other communication or engagement with a client, including full disclosure of all relevant risks. Preserving individual retail investors’ interest in autonomy, preference, choice, and access to new investment opportunities, which DEPs may facilitate, is essential to ensuring that these investors have the means to effectively manage their short- and long-term financial objectives, and their wealth generally.
As discussed further below, assuming firms are meeting their compliance and regulatory obligations with respect to DEP use under the current regulatory regime, there is no new or different regulatory interest in preventing or limiting firms from using DEPs to facilitate the trading activities and investment experiences in which these retail investors have chosen to engage.
For broker-dealers, these provisions include, without limitation:
● | The anti-fraud provisions of the federal securities laws and FINRA rules; |
● | Account opening, KYC, and other due diligence approval obligations; |
● | Standard of conduct; |
● | Disclosure obligations; |
● | Reporting and other financial responsibility requirements; |
● | Communications with the public rules; |
● | Supervision obligations and insider trading procedures; |
● | Recordkeeping obligations; |
● | Customer complaints; and |
● | Privacy and cybersecurity. |
The foregoing overview of select rules and regulations, as well as additional regulatory obligations, demonstrate the comprehensive nature of broker-dealer regulation generally, as well as the specific regulations relevant to the use of DEPs and related tools and methods today.
With respect to educational and informational communications to retail investors, as noted above, INX provides FAQs with videos and tutorials to develop and provide investment education tools. The Company published “The INX Way,” which provides insight to retail investors regarding security tokens and the basic concepts and foundations of this new innovative financial product.
As discussed above, retail investors derive significant benefits from tools that deliver education and information about financial services and products. All educational and informational communications, like all communications generally, must be fair, balanced, and not misleading under our existing regulatory regime. Retail investors are already well protected by these laws and rules.
With respect to advertising and marketing communications to retail investors, such communications are likewise already addressed by the existing ruleset. FINRA’s communications rules already apply to all forms of electronic, hard copy, and other means of advertising and marketing communication, and readily cover DEPs. DEP-related advertising and marketing communications should continue to be subject to, and regulated by these well-established, existing regulatory standards.
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Our use of DEPs may be impacted by current and potential future regulations, which may adversely affect our business, operating results and financial condition.
Our success depends on our ability to retain existing customers and attract new customers, including ecosystem partners, to increase engagement with our products, services, and platform, which is done in part by the use of DEPs. While DEPs have the potential to encourage beneficial investor behavior, certain DEPs may have the potential to encourage retail investors to transact in a manner that may be inconsistent with their investment goals or risk tolerance.
The genesis and growth of DEPs in the securities industry today has led to increased SEC scrutiny in the way companies utilize DEPs, including the risk that certain DEPs may encourage frequent trading, options trading, trading on margin, and trading in complex securities products. Current and future regulations regarding the use of DEPs may subject us to audits, inquiries, whistleblower complaints, adverse media coverage, investigations, severe criminal, or civil sanctions, damage our reputation, or result in fines or proceedings by governmental agencies and private claims and litigation, any of which could adversely affect our business, operating results, and financial condition.
There is a risk that, as we expand, we may assume liabilities for breaches experienced by any companies we acquire. Additionally, there are potentially inconsistent world-wide government regulations pertaining to data protection and privacy. Despite our efforts to comply with applicable laws, regulations and other obligations relating to privacy, data protection, and information security, it is possible that our practices, offerings, or platform could fail, or be alleged to fail, to meet applicable requirements. For instance, the overall regulatory framework governing the application of privacy laws to blockchain technology is still highly undeveloped and likely to evolve. Our failure, or the failure by our third-party providers or partners, to comply with applicable laws or regulations and to prevent unauthorized access to, or use or release of personal data, or the perception that any of the foregoing types of failure has occurred, even if unfounded, could subject us to audits, inquiries, whistleblower complaints, adverse media coverage, investigations, severe criminal, or civil sanctions, damage our reputation, or result in fines or proceedings by governmental agencies and private claims and litigation, any of which could adversely affect our business, operating results, and financial condition.
Our ability to continue to develop our trading platforms faces operational, technological and regulatory challenges and we may not be able to continue to develop this business as contemplated.
We may not be able to continue to develop the platforms as contemplated by our business model. In addition, a number of factors could materially adversely affect our ability to commercialize and generate any profits from our business.
The structuring and maintenance and further development of our trading platforms could lead to unanticipated and substantial costs, delays or other operational or financial difficulties. Our platforms are complex and their maintenance and further development requires the integration of multiple technologies and the development of software.
There can be no assurance that our platforms will gain the acceptance of customers or other market participants. Because blockchain asset trading is still in its early stages, it is difficult to predict the preferences and requirements of blockchain asset traders and our platform design and technology may be incompatible with new or emerging forms of blockchain assets or related technologies. Failure to achieve acceptance would impede our ability to develop and sustain a commercial business.
While the trading platform of INXS is a registered broker-dealer and FINRA member that operates an SEC- recognized alternative trading system and the INXD trading platform is licensed as a money transmitter in certain states, there can be no assurance our platform will qualify for additional registrations that we are seeking or we plan to seek with the SEC, FINRA, U.S. state regulators and various other regulatory bodies both in the U.S. and in other countries, including Israel. We are licensed or otherwise qualified to operate as a money transmitter in 46 U.S. states plus Washington D.C. and Puerto Rico. We intend to obtain money transmitter licenses or otherwise become qualified to operate in more U.S. states by the end of 2024. In addition, if in the future we determine to proceed with the establishment of a platform for the trading of cryptocurrency-based derivatives, we would be required to seek registrations with other regulatory bodies, such as the CFTC.
We may fail to qualify for registrations under any of these authorities or we may be required to alter our business model as currently contemplated in order to meet the requirements of these regulatory authorities. Either of these results would have a broad impact on us and could have a material adverse effect on our businesses, financial condition, results of operations and prospects and, as a result, investors could lose all or most of their investment.
Because distributions to the INX Token holders are dependent on our cash flow, our failure to continue to develop the Company platforms, failure of the platforms to gain regulatory approvals or failure of the platforms to gain acceptance may prevent us from paying a distribution to the INX Token holders. Such adverse effects would impact the utility, liquidity, and the trading price of INX Tokens and potentially render INX Tokens worthless.
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Firms in the financial services industry have experienced increased scrutiny in recent years. Such regulatory or other actions may lead to penalties, fines, disbarment and other sanctions which could place restrictions or limitations on our operations and otherwise have a material adverse effect on our businesses.
We expect to face intense competition from other companies and, if we are not able to successfully compete, our business, financial condition and operating results will be materially harmed.
The digital assets industry is highly innovative and rapidly evolving, with frequent introductions of new products and services, and subject to uncertain and evolving industry and regulatory requirements. Although we strongly believe that our key competitive advantage is the ability to offer digital assets and security tokens on a single trading platform and within a regulated and fully transparent environment as a public company, we expect competition to further intensify in the future as existing and new competitors introduce new products or enhance existing service offerings. We compete against a number of companies that focus on traditional financial services and those that focus on blockchain-based services.
We expect to encounter competition in all aspects of our business, including from entities having substantially greater capital and resources, offering a wide range of products and services and in some cases operating under a different and possibly less stringent regulatory regime.
We will face competition from other securities, futures and securities option exchanges; over-the-counter markets (OTC); clearing organizations; large industry participants; swap execution facilities; alternative trade execution facilities; technology firms, including electronic trading system developers, and others. New entrants may enter the market with alternative methods of providing trade execution and related services, and existing competitors may launch new initiatives.
Our main competitors fall into the following categories:
● | traditional financial technology and brokerage firms that have entered the crypto asset market in recent years and offer overlapping features targeted at our customers; and |
● | companies focused on the crypto asset market, some of whom adhere to local regulations and directly compete with our platform, and many who choose to operate outside of local rules and regulations or in jurisdictions with less stringent local rules and regulations and are potentially able to more quickly adapt to trends, support a greater number of crypto assets, and develop new crypto-based products and services due to a different standard of regulatory scrutiny. |
Many of these competitors have greater financial, marketing, technological and personnel resources than we do. In addition, many of our competitors may offer a wider range of bundled services, have broader name recognition, and have larger customer bases than we do.
Due to our regulated status in several jurisdictions and our commitment to legal and regulatory compliance, we have not been able to offer many popular products and services, including products and services that our unregulated or less regulated competitors are able to offer to a group that includes many of our customers, which may adversely impact our business, financial condition, and results of operations.
In recent years, our commitment to compliance and the attendant customer-facing requirements, including customer due diligence requirements, have resulted in our customers transferring significant funds and crypto assets to unregulated or less regulated competitors. We also have expended significant managerial, operational, and compliance costs to meet the legal and regulatory requirements applicable to us in the United States and other jurisdictions in which we operate, and expect to continue to incur significant costs to comply with these requirements, which unregulated or less regulated competitors have not had to incur.
Many innovative start-up companies and larger traditional financial services companies have made, and continue to make, significant investments in research and development, and we expect these companies to continue to develop similar or superior products and technologies that compete with our products. Further, more traditional financial and non-financial services businesses may choose to offer blockchain-based services in the future as the industry gains adoption.
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Our existing competitors have, and our potential competitors are expected to have, various competitive advantages over us, such as:
● | the ability to trade crypto assets and offer products and services that we do not support or offer on our platform (due to constraints from regulatory authorities, our banking partners, and other factors) such as tokens that constitute securities or derivative instruments under U.S. or foreign laws; |
● | greater name recognition, longer operating histories, larger customer bases, and larger market shares; |
● | larger sales and marketing budgets and organizations; |
● | greater resources to make acquisitions; |
● | larger and more mature intellectual property portfolios; |
● | established core business models outside of the trading of crypto assets, allowing them to operate on lesser margins or at a loss; |
● | operations in certain jurisdictions with lower compliance costs and greater flexibility to explore new product offerings; and |
● | substantially greater financial, technical, and other resources. |
Our ability to develop competitive advantages will require continued enhancements to our products, investment in the development of our services, additional marketing activities and enhanced customer support services. There can be no assurance that we will have resources to make sufficient investments in the development of our services, that our competitors will not devote significantly more resources to competing services or that we will otherwise be successful in developing market share. If competitors offer superior services, our market share could be affected and this would adversely impact our business and results of operations.
Failure to keep up with rapid changes in industry-leading technology, products and services could negatively impact our results of operations.
The financial services industry is subject to rapid technological change and evolving industry standards. User demands become greater and more sophisticated as the dissemination of products and information to customers increases. If we are unable to anticipate and respond to the demand for new services, products and technologies, innovate in a timely and cost-effective manner and adapt to technological advancements and changing standards, we may be unable to compete effectively, which could have a material adverse effect on our business. Many of our competitors have significantly greater resources than we do to fund research and development initiatives. Moreover, the development of technology-based services is a complex and time-consuming process. New products and enhancements to existing products can require long development and testing periods. Significant delays in new product releases, failure to meet key deadlines, or significant problems in creating new products could negatively impact our revenues and profits.
The extent to which blockchain assets are used to fund criminal or terrorist enterprises or launder the proceeds of illegal activities could materially impact our business.
The potential, or perceived potential, for anonymity in transfers of bitcoin and similar blockchain assets, as well as the decentralized nature of blockchain networks, has led some terrorist groups and other criminals to solicit bitcoins and other blockchain assets for capital raising purposes. As blockchain assets have grown in both popularity and market size, the U.S. Congress and a number of U.S. federal and state agencies have been examining the operations of blockchain assets, their users and exchanges, concerning the use of blockchain assets for the purpose of laundering the proceeds of illegal activities or funding criminal or terrorist enterprises.
In addition to the current market, new blockchain networks or similar technologies may be developed to provide more anonymity and less traceability. There is also the potential that other blockchain asset trading platforms may court such illicit activity by not adhering to know-your-customer and anti-money laundering practices.
We may not be able to prevent illegal activity from occurring over our platforms. We may be unable to detect the unauthorized use of a KYC/AML vetted account on one of our platforms. Further, we may be unable to verify whether private keys for wallets containing INX Tokens have been transferred to third parties who have not completed our KYC/AML process. Although we have implemented procedures that will ensure that we remain in compliance with our KYC/AML obligations, we may not be successful in deterring or identifying illegal activity.
The use of blockchain assets for illegal purposes, or the perception of such use, over our platforms or on other trading platforms could result in significant legal and financial exposure, damage to our reputation, damage to the reputation of blockchain assets and a loss of confidence in the services provided by our platforms and the blockchain asset community as a whole. Our failure to meet our KYC/AML requirements could result in regulatory penalties which could have a materially adverse effect on our business.
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We may not have sufficient cash flow from operating activities, cash on hand and the ability to obtain borrowing capacity to finance required capital expenditures, fund strategic initiatives and meet our other cash needs. These obligations require a significant amount of cash, and we may need additional funds, which may not be readily available.
The viability of our business is dependent on the availability of adequate capital to develop and maintain our business and meet our regulatory capital requirements. We will need to continue to invest in our operations for the foreseeable future to carry out our business plan. If our business does not attract clients and does not achieve the expected operating results, we will need to seek additional financing or revise our business plan. Our ability to borrow additional funds may be impacted by financial lending institutions’ ability or willingness to lend to us on commercially acceptable terms.
Low levels of operating cash flow together with limited access to capital or credit in the future could have an impact on our ability to meet our regulatory capital requirements, invest in our software and infrastructure, engage in strategic initiatives, make acquisitions or strategic investments in other companies, react to changing economic and business conditions, repay our outstanding debt, or make dividend payments. Such outcomes could have an adverse effect on our business, financial condition and operating results.
Our securities business exposes us to capital requirements and regulatory risk.
Broker-dealers are also subject to regulatory capital requirements promulgated by the applicable regulatory and exchange authorities of the countries in which they operate. The failure to maintain required regulatory capital may lead to suspension or revocation of a broker-dealer registration and suspension or expulsion by a regulatory body. If existing cash together with cash from operations are not sufficient, we may need to reject orders from clients and we may ultimately breach regulatory capital requirements.
Furthermore, if our broker-dealer subsidiaries are subject to new or modified regulatory capital rules or requirements, or fines, penalties or sanctions due to increased or more stringent enforcement, it could materially limit or reduce the liquidity we may need to expand or even maintain our then-present levels of business, which could have a material adverse effect on our business, results of operations and financial condition.
The Company is not affiliated with any other registered broker-dealer other than INX Securities, LLC.
We may be unable to maintain minimum net capital that meets regulatory requirements. Further, our commitment to maintain the Cash Fund or other regulatory reserves may limit our ability to invest in our future growth.
As a broker-dealer, we must maintain minimum net capital that satisfies the requirements under Rule 15c3-1 under the Exchange Act. Depending upon our future business activities, we may become subject to additional capital requirements in the United States or other foreign jurisdictions in which we may conduct business in the future.
In the U.S. we have obtained licenses or are otherwise qualified to operate as money transmitters (or the equivalent in the states where such licenses or equivalent are required to conduct our business) in 46 U.S. states as well as in the District of Columbia and Puerto Rico. As a licensed money transmitter, we are subject to, among other things, capital requirements including the net worth of our subsidiary, INXD.
Current and future regulations may require us to accumulate capital reserves in our subsidiaries which could limit our ability to carry on or expand our operations or may result in higher than anticipated costs for financing our operations.
In addition, we have established a Cash Fund, as defined below, by reserving 75% of the gross proceeds less payments to underwriters from our initial public offering in excess of $25 million to be available to cover customer and Company losses, if any, that result from cybersecurity breaches or theft, errors in execution of the trading platform or its technology, and counterparty defaults, including instances where counterparties lack sufficient collateral to cover losses. We refer to this amount as our “Cash Fund” or “Reserve Fund.” The Cash Fund is intended to provide additional protection to our customers and maintain the financial stability of the Company.
In addition, we invest a significant level of resources in the continued development and operation of our trading platform and the development of our service offering. We cannot guarantee that we will have or will maintain sufficient funding to continue investing in our business and successfully execute our business plan.
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If our reserves are insufficient to cover our future liabilities, we may be required to raise additional capital. Any one or all of these outcomes may have a material effect on our business.
There can be no assurance that we will have sufficient assets or that we will be able to obtain and maintain liability insurance on acceptable terms or with adequate coverage to cover our liabilities.
If our platform or the INX Token is alleged to have a flaw or is hacked such that our customers suffer significant losses, we may be subject to significant liability claims or regulatory action. To mitigate this risk, we have established a Cash Fund by reserving 75% of the gross proceeds less payments to underwriters from our initial public offering in excess of $25 million to be available to cover customer and Company losses, if any, that result from cybersecurity breaches or theft, errors in execution of the trading platform or its technology, and counterparty defaults, including instances where counterparties lack sufficient collateral to cover losses. The Company utilizes the Cash Fund only in response to these events. However, the Cash Fund may be insufficient to cover all losses associated with significant liability claims. Further, the Company does not plan to replenish the Cash Fund after our initial public offering and after it has been used for these purposes.
Further, insurance coverage against such losses is expensive and may not be available in the future on acceptable terms, or at all. Available insurance coverage may be subject to unfavorable terms and conditions and require payments of significant deductibles, or it may not be sufficient to cover all losses in the case of a claim. The inability to obtain sufficient insurance coverage on reasonable terms or to otherwise protect against potential liability claims could result in us becoming subject to significant liabilities that are uninsured.
Risks to customers’ assets in the event of insolvency or bankruptcy of any INX entity
Customer custodial assets represent restricted funds maintained in segregated accounts that are held in accounts for the exclusive benefit of customers. The Company holds liquid assets, as defined by applicable regulatory requirements equal to at least 100% of the aggregate amount of all customers custodial liabilities. All customer funds are held in their original currency one-to-one at the firm’s digital assets custodian as well as at a specifically designated U.S. bank account. The firm does not hypothecate, invest or use customer funds for any other purpose.
The Company places great importance on safeguarding customers’ crypto assets. During 2023, the Company implemented segregation of customer funds following the CFTC segregation model under the CEA Rule 1.20, Futures customer funds to be segregated and separately accounted for, to the extent feasible and available. We achieved this protection by amending contractual agreements with our custodian and banks holding customer funds. Such amendments, among other related provisions, include the addition of a written segregation acknowledgement letter issued by our custodian and banks acknowledging certain accounts to be specifically designated as holding customer funds and prohibit the right of offset between customer and house assets deposited by INX and held by such custodians and banks. The key objective of the contractual revisions is to separate assets held in specifically designated customer accounts from the Company’s general estate, thus making them bankruptcy remote and not subject to claims of general creditors, a required practice under CFTC rules, and a framework that we believe can be similarly applied by digital assets intermediaries. Pursuant to this segregation mechanism, the Company modified its services agreements with the custodian holding digital assets in specifically designated, and titled as such, custodial accounts on a segregated basis for the sole benefit of the Company’s customers. Under such agreements, assets held in segregated accounts are intended to be recognized as customer property and in the event that the Company becomes subject to either a voluntary or involuntary petition for relief under the U.S. Bankruptcy Code, under the segregation acknowledgement terms between the Company and the bank or the custodian, the Company believes that the bank or the custodian would have no obligation to release customer funds and digital assets held in the custodial accounts, except upon instructions of the trustee in bankruptcy or pursuant to a bankruptcy court order. Moreover, the segregation requirement prohibits the right of offset between customer and proprietary assets held by the bank or the custodian.
Accordingly, the Company believes that a court would not treat customers’ crypto assets as part of the Company’s general estate; however, due to the novelty of crypto assets, there can be no assurance that a bankruptcy court would not determine to include these customer assets as part of our bankruptcy estate in the event of our insolvency or bankruptcy.
Our failure to safeguard and manage our customers’ fiat currencies and crypto assets could adversely impact our business, operating results, and financial condition.
As of December 31, 2023, our customer funds in fiat were held with our partnering banks, Byline Bank and Evolve Bank and Trust, which are not affiliated with INX. All customer assets for clients trading digital assets are held at Byline Bank under a specifically designated custodial account. Customer funds for clients trading security tokens are held at Evolve Bank and Trust under individual accounts for each client.
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Supported crypto assets are not insured or guaranteed by any government or government agency. The ability to manage and accurately safeguard customer assets requires a high level of internal controls. As our business continues to grow and we expand our product and service offerings, we must continue to strengthen our associated internal controls and ensure that our partners do the same. Our success and the success of our offerings requires significant public confidence in our and our partners’ ability to properly manage customers’ balances and handle large and growing transaction volumes and amounts of customer funds. In addition, we are dependent on our partners’ operations, liquidity, and financial condition for the proper maintenance, use, and safekeeping of these customer assets. Any failure by us or our partners to maintain the necessary controls or to manage customer crypto assets and funds appropriately and in compliance with applicable regulatory requirements could result in reputational harm, litigation, regulatory enforcement actions, significant financial losses, lead customers to discontinue or reduce their use of our services, and result in significant penalties and fines and additional restrictions, which could adversely impact our business, operating results, and financial condition.
Moreover, because custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors. This may result in customers finding our custodial services more risky and less attractive and any failure to increase our customer base, discontinuation or reduction in use of our platform and products by existing customers as a result could adversely impact our business, operating results, and financial condition.
Our security technology is designed to prevent, detect, and mitigate inappropriate access to our systems, by internal or external threats. We believe we have developed and maintained administrative, technical, and physical safeguards designed to comply with applicable legal requirements and industry standards. However, it is nevertheless possible that hackers, employees or service providers acting contrary to our policies, or others could circumvent these safeguards to improperly access our systems or documents, or the systems or documents of our business partners, agents, or service providers, and improperly access, obtain, misuse customer crypto assets and funds. The methods used to obtain unauthorized access, disable, or degrade service or sabotage systems are also constantly changing and evolving and may be difficult to anticipate or detect for long periods of time.
Any loss of customer cash or crypto assets could result in a substantial business disruption, adverse reputational impact, inability to compete with our competitors, and regulatory investigations, inquiries, or actions. Also, any security incident resulting in a compromise of customer assets could result in substantial costs to us and require us to notify impacted individuals, and in some cases regulators, of a possible or actual incident, expose us to regulatory enforcement actions, including substantial fines, limit our ability to provide services, subject us to litigation, significant financial losses, damage our reputation, and adversely affect our business, operating results, financial condition, and cash flows.
We may experience systems failures or capacity constraints that could materially harm our ability to conduct our operations and execute our business strategy.
We are heavily dependent on the capacity, reliability and security of the computer and communications systems and software supporting our operations. We receive and/or process a large portion of our trade orders through electronic means, such as through public and private communications networks. Our systems, or those of our third party providers, may fail or be shut down or, due to capacity constraints, may operate slowly, causing one or more of the following to occur:
● | unanticipated disruptions in service to our customers; |
● | slower response times and delays in our customers’ trade execution and processing; |
● | failed settlement of trades; |
● | incomplete or inaccurate accounting, recording or processing of trades; |
● | financial losses; |
● | security breaches; |
● | litigation or other customer claims; |
● | loss of customers; and |
● | regulatory sanctions. |
If any of our systems do not operate properly, are compromised or are disabled, including as a result of system failure, employee or customer error or misuse of our systems, we could suffer financial loss, liability to customers, regulatory intervention or reputational damage that could affect demand by current and potential users of our market.
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We will need to continue to upgrade, expand and increase the capacity of our systems as our business grows and as we execute our business strategy. Although many of our systems are designed to accommodate additional volume and products and services without redesign or replacement, we will need to continue to make significant investments in additional hardware and software to accommodate the increases in volume of transactions and order transaction traffic and to provide processing services to third parties. If we cannot increase the capacity and capabilities of our systems to accommodate an increasing volume of transactions and to execute our business strategy, our ability to maintain or expand our businesses would be adversely affected.
We may face cyber-attack and other cyber security risks.
We regard the secure transmission of confidential information and the ability to continuously transact and clear on our electronic trading platforms as critical elements of our operations. Our technology, systems, networks, products, services and people, and those of our third party service providers and customers, may be vulnerable to targeted attacks, unauthorized access, fraud, computer viruses, denial of service attacks, malware, ransomware, social engineering attacks, phishing attacks, human error, employee theft, terrorism, firewall or encryption failures and other security problems. Attackers may seek to steal information about our technology, financial data or user information or take other actions that would be damaging to the Company and/or holders of INX Tokens.
The Company regularly faces attempts by possible malicious parties to try to gain unauthorized access to our systems, or to introduce malicious software to our systems. This will likely continue on a regular basis in the future. Our networks or data centers or those of our customers or third-party vendors may be subject to the same kind of attacks. Further, we may also be subject to increasing risks in connection with global conflicts; for example, the Israel-Hamas conflict, of a nature similar to those discussed above. To date, no cyber attacks or attempts by third parties have resulted in any material impact to our business or operations.
While the Company will continue to attempt to prevent such attacks and other threats against our systems, products, and networks, there is no guarantee that we will continue to be able to avoid material impacts to our business. We remain at risk of suffering an attack or intrusion that could affect the Company’s reputation or cause monetary loss. Additionally, such attacks could result in government inquiries, investigations, or other proceedings. Such actions could result in significant penalties or costs, including legal costs to defend such inquiries or investigations.
While we maintain a Cash Fund, as defined above, to be available to cover customer and Company losses, if any, that result from cybersecurity breaches or theft, errors in execution of the trading platform or its technology, and counterparty defaults, including instances where counterparties lack sufficient collateral to cover losses, there is no guarantee that the damages resulting from the attacks described above won’t exceed the available balance of the Cash Fund.
In addition, as the regulatory environment related to information security, data collection and use, and privacy becomes increasingly rigorous, with new and constantly changing requirements applicable to our business, compliance with those requirements could also result in additional costs.
The INX Token Distributed Ledger is publicly available. The misuse or theft of this information may give rise to breaches of privacy laws, fines and sanctions.
For many blockchain assets, distributed ledgers are used to record transfers of ownership of the asset. Information regarding ownership is most commonly represented by ledger balances and an owner’s public wallet address. Such information includes the complete transfer history from the inception of the respective blockchain asset and such information regarding ownership of the assets, including the public wallet address, is generally available to the public. For many blockchain assets, personal identifying information that is used to associate a public wallet address with its owner is typically maintained in a separate database that is not exposed to the public.
There are a number of data protection, security, privacy and other government- and industry-specific requirements that are implicated by utilizing a distributed ledger. If blockchain networks are unable to satisfy data protection, security, privacy, and other government-and industry-specific requirements, their growth could be harmed.
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Security attacks against the Company could result in a loss of the Company’s blockchain assets, including the INX Tokens, theft of personal information of our customers or damage to our reputation and our brand, each of which could adversely affect an investment in INX Tokens or the Company. We could be required to incur significant expense to protect our systems and/or investigate any alleged attack.
Security breaches, computer malware and computer hacking attacks have been a prevalent concern since the launch of blockchain networks. According to a Crystal Blockchain study published in March 2023, $16.7 billion in crypto assets were stolen from 2011 up to that date. Additionally, 2023 saw 600+ major hacks in the crypto space, resulting in ~$2.61 billion in losses, with $674.9 million recovered. Our security system and operational infrastructure may be breached due to the actions of outside parties, error or malfeasance of an employee of ours, or otherwise. Techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may be designed to remain dormant until a predetermined event. Outside parties may also attempt to fraudulently induce employees of ours to disclose sensitive information in order to gain access to our infrastructure. Furthermore, we believe that, as our assets grow, the Company may become a more appealing target for security threats such as hackers and malware.
In addition, the Company holds private keys that allow it or its transfer agent, as applicable, the ability to “freeze” or automatically reject any digital wallet address from participating in transfers of INX Tokens, or unilaterally transfer INX Tokens out of a third-party digital wallet. If such private keys are compromised, all owners of INX Tokens are at risk of losing the ability to transfer their INX Token out of their digital wallet or they may have their INX Token transferred out of their digital wallet without their permission.
Our security measures may prove insufficient depending upon the attack or threat posed. We may be unable to anticipate these techniques or implement adequate preventative measures. As a result, an unauthorized party may obtain access to our private keys, company and customer data or blockchain assets.
Any such breach or unauthorized access could result in significant legal and financial exposure, damage to our reputation, and a loss of confidence in the services we provide that could potentially have an adverse effect on our business, while resulting in regulatory penalties or the imposition of burdensome obligations by regulators. In the event of a security breach, we may be forced to cease operations, or suffer a reduction in assets, the occurrence of each of which could adversely affect an investment in the Company.
We are subject to risks in using third-party service providers, including custodians and other agents.
We depend on the services of custodians and other agents and third-party service providers to carry out certain transactions and other business functions (including without limitation, Bitgo Trust, our custodian). Errors and mistakes made by these third parties may be attributed to us and subject us to reputational damage, penalties or losses. We may be unsuccessful in seeking reimbursement or indemnification from these third-party service providers.
Furthermore, in the event of the insolvency of a custodian, we may be unable to recover equivalent assets in full as we may rank among the custodian’s unsecured creditors in relation to its assets. In addition, a custodian may not segregate our cash (including funds of our customers) from its own cash, and therefore we may rank as unsecured creditors in relation to that cash. The inability to recover assets from the custodian could have a material adverse effect on our results of operations, financial condition and cash flow.
The counterparty to one or more of our contractual arrangements could default on its obligations under the contract. Default risk may arise from events or circumstances that are difficult to detect, foresee or evaluate. In addition, the default by large market participants that the market experienced led to significant liquidity problems for other market participants, which could in turn expose us to significant losses. If a counterparty defaults, we may be unable to take action to cover the exposure and could incur material losses and legal and reputational damages. We may not accurately anticipate the impact of market stress or counterparty financial condition and, as a result, we could take insufficient action to reduce these risks effectively, which, if left unmitigated, could have a material adverse effect on our results of operations, financial condition and cash flow.
We are not restricted from dealing with any particular counterparty or from concentrating any or all of our transactions with one counterparty. The consolidation and elimination of counterparties may increase our concentration of counterparty risk.
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The loss of key personnel could have a material adverse effect on us.
Our success depends solely on the continued services of key personnel, particularly senior management and officers of the company, who have extensive market knowledge and long-standing industry relationships. In particular, our reputation among and our relationships with key blockchain industry leaders are the direct result of a significant investment of time and effort by our senior management to build credibility in a highly specialized industry. The loss of services of any member of senior management could diminish our business and growth opportunities and our relationships with key leaders in the blockchain industry and could have a material adverse effect on us.
Our business will be adversely affected if we are unable to attract and retain talented employees, including sales, technology, operations and development professionals.
Our business operations will require highly specialized knowledge of the financial industry and of technological innovation as it applies to the financial industry. If we are unable to hire or retain the services of talented employees, including executive officers, other key management and sales, technology, operations and development professionals, we would be at a competitive disadvantage. In addition, recruitment and retention of qualified staff could result in substantial additional costs. The loss of the services of one or more of our executive officers or other key professionals or our inability to attract, retain and motivate qualified personnel, could have a material adverse effect on our ability to operate our business.
We have not identified all the persons that we will need to hire to provide services and functions critical to the development of the business and no assurance can be given that we will be able to hire the necessary persons on acceptable terms, if at all.
Our business has not identified all the persons that we will need to hire to provide services and functions critical to the continued development of the business. If we are unable to hire persons with the necessary expertise on terms acceptable to us then we will not be able to continue to develop our business as contemplated. Further, even if we are able to hire such service providers, they might be unable to meet our specifications and requirements, which could have a material adverse effect on our ability to develop and evolve our business plan.
The size, nature and complexity of the Company’s business could make it susceptible legal proceedings which may have an adverse effect on our reputation and brand and our business, operating results, and financial condition
The size, nature and complexity of the Company’s business could make it susceptible to various claims, both in litigation and binding arbitration proceedings, legal proceedings, and government investigations, due to the heightened regulatory scrutiny following the recent disruptions in the crypto asset markets. The Company believes that since the digital asset industry generally is a relatively new business sector, it is more likely subject to government investigation and regulatory determination, particularly following the recent cryptocurrency market participant bankruptcies. Any claims, regulatory proceedings or litigation that could arise in the course of the Company’s business could have a material adverse effect on the Company, its business or operations, or the industry as a whole.
The scope, determination, and impact of claims, lawsuits, government and regulatory investigations, enforcement actions, disputes, and proceedings to which we are subject cannot be predicted with certainty, and may result in:
● | substantial payments to satisfy judgments, fines, or penalties; |
● | substantial outside counsel, advisor, and consultant fees and costs; |
● | substantial administrative costs, including arbitration fees; |
● | additional compliance and licensure requirements; |
● | loss or non-renewal of existing licenses or authorizations, or prohibition from or delays in obtaining additional licenses or authorizations, required for our business; |
● | loss of productivity and high demands on employee time; |
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● | criminal sanctions or consent decrees; |
● | termination of certain employees, including members of our executive team; |
● | barring of certain employees from participating in our business in whole or in part; |
● | orders that restrict our business or prevent us from offering certain products or services; |
● | changes to our business model and practices; |
● | delays to planned transactions, product launches or improvements; and |
● | damage to our brand and reputation. |
Further, we believe increasingly strict legal and regulatory requirements and additional regulatory investigations and enforcement, any of which could occur or intensify, may result in changes to our business, as well as increased costs, and supervision and examination for ourselves, our affiliates, and service providers. Moreover, new laws, regulations, or interpretations may result in additional litigation, regulatory investigations, and enforcement or other actions, including preventing or delaying us from offering certain products or services offered by our competitors or could impact how we offer such products and services. Adverse changes to, or our failure to comply with, any laws and regulations have had, and may continue to have, an adverse effect on our reputation and brand and our business, operating results, and financial condition.
As of this date, the Company is not aware of any legal proceedings or government investigations, pending or known to be threatened, in the United States or in other jurisdictions against the Company or its affiliates. However, the Company may be subject to regulatory oversight by numerous state, federal, and foreign regulators and we may become subject to various legal proceedings, inquiries, investigations, and demand letters that arise in the course of our business.
As a financial services provider, we might be subjected to significant litigation risk and potential commodity and securities law liability.
Many aspects of our business involve substantial litigation risks. We could be exposed to substantial liability under federal and state laws and court decisions, as well as rules and regulations promulgated and/or direct actions brought by the SEC, state securities regulators and other U.S. regulatory agencies.
These risks include, among others, potential liability from disputes over terms of a trade, the claim that a system failure or delay caused monetary losses to a customer, that we entered into an unauthorized transaction, that we provided materially false or misleading statements in connection with a transaction or that we failed to effectively fulfill our regulatory oversight responsibilities. We may be deemed an underwriter under the Securities Act with regard to our role and involvement with respect to any initial offerings of securities on the INXS trading platform, and our failure to comply with applicable federal securities laws may expose us to legal liability. We may be subject to disputes regarding the quality of trade execution, the settlement of trades or other matters relating to our services. We may become subject to these claims as a result of failures or malfunctions of our systems and services we provide.
We could incur significant legal expenses defending claims, even those without merit. In addition, an adverse resolution of any future lawsuit or claim against us could have a material adverse effect on our business and our reputation. To the extent we are found to have failed to fulfill our regulatory obligations, we could lose our authorizations or licenses or become subject to conditions that could make future operations more costly and impairing our profitability.
Our compliance and risk management programs might not be effective and may result in outcomes that could adversely affect our reputation, financial condition and operating results.
Our ability to comply with applicable laws and rules is largely dependent on our establishment and maintenance of compliance, review and reporting systems, as well as our ability to attract and retain qualified compliance and other risk management personnel. We face the risk of significant intervention by regulatory authorities, including extensive examination and surveillance activity.
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While we have devoted significant resources to develop our compliance policies and procedures and expect to continue to do so in the future, we cannot assure you that our compliance policies and procedures will always be effective or that we will always be successful in monitoring or evaluating our risks. In the case of alleged non-compliance with applicable laws or regulations, we could be subject to investigations and judicial or administrative proceedings that may result in substantial penalties or civil lawsuits, including by customers, for damages, which could be significant. Any of these outcomes may adversely affect our reputation, financial condition and operating results.
Operational risks, such as misconduct and errors of our employees or entities with which we do business, are difficult to detect and deter and could cause us reputational and financial harm.
Our employees and agents could engage in misconduct which may include conducting and concealing unauthorized activities, improper use or unauthorized disclosure of confidential information. We are at risk that our employees may engage in insider trading of the digital assets listed on one of our platforms which may lead to corporate actions, such as a suspension of trading, and legal actions that could have an adverse effect on the Company.
Further, our employees could make errors in recording or executing transactions for customers which would cause us to enter into transactions that customers may disavow and refuse to settle.
It is not always possible to deter misconduct by our employees, and the precautions we take to prevent and detect this activity may not be effective in all cases. Our ability to detect and prevent errors or misconduct by entities with which we do business may be even more limited. Such misconduct could subject us to financial losses or regulatory sanctions and materially harm our reputation, financial condition and operating results.
Our operations of businesses outside of the United States and our acceptance of currencies other than the U.S. Dollar will subject us to currency fluctuation risk.
We intend to expand globally and portions of our revenues and expenses will be denominated in currencies other than the U.S. dollar. Because our financial statements are presented in U.S. dollars, we must translate non-U.S. dollar denominated revenues, income and expenses, as well as assets and liabilities, into U.S. dollars at exchange rates in effect during or at the end of each reporting period. These fluctuations may materially impact the translation of our non-U.S. results of operations and financial condition.
Increases or decreases in the value of the U.S. dollar against these other currencies may affect our operating results and the value of assets and liabilities denominated in foreign currencies.
We accept certain cryptocurrencies as fees for services. Our holding of these cryptocurrencies will subject us to risks due to fluctuations in the value of these cryptocurrencies.
We accept certain cryptocurrencies as payment fees for services. These cryptocurrencies will be held until sold. Proceeds from the sale of such cryptocurrencies will be dependent on the U.S. dollar trading value for the respective cryptocurrency based on the relevant market or markets for that cryptocurrency. Decreases in the trading value of a cryptocurrency while it is held by us will result in a decrease in the operating results of the Company.
For trading securities on the Company’s ATS, fees are charged exclusively in US Dollars, and no crypto assets can be used as payment for these services. However, on the digital crypto platform, fees are paid in the same currency as the currency a customer receives from the trade itself. The crypto assets the Company accepts as a payment for fees depends on the crypto assets listed for trading on the platform which are as follows:
AAVE
AVAXC
BTC
CRV
ETH
FTM
LTC
UNI
USDC
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Crypto assets as payment fees for crypto and security token services.
With regards to trading of digital assets, a transaction fee is charged and deducted from the customer account at the time of the order execution. The transaction fee is set as a percentage of the transaction value based on the fee schedule published on the Company’s website (https://www.inx.co/fee-schedules/) and is charged in the currency of the consideration paid by the customer. For example, if a customer buys BTC with USD, the transaction fee would be charged in USD. The same process is followed with regards to transactions where one digital asset is purchased for another, for example, BTC is purchased with ETH. In this example, the transaction fee would be charged in ETH.
These cryptocurrencies are held until sold. Proceeds from the sale of such cryptocurrencies are dependent on the U.S. dollar trading value for the respective cryptocurrency based on the relevant market or markets for that cryptocurrency. Decreases in the fair value of a cryptocurrency while it is held by us will result in a decrease in the operating results of the Company.
To minimize market risk, the Company follows its policy on converting digital assets earned as transaction fees into U.S. dollars if such amounts exceed internally established limits.
We may not be able to successfully execute our business strategy if we are deemed to be an investment company under the Investment Company Act of 1940.
In general, under the Investment Company Act, a U.S. company that does not qualify to use one of the “private investment company” (or other specialized) exemptions from investment company status, that has made (or proposes to make) a public offering of its securities and that is, or hold itself out as being, engaged primarily in the business of investing, reinvesting or trading in securities must register, and is subject to regulation, as an investment company under that Act. In addition, in general, investment company status may apply (again, unless a specialized exemption is available) because a company owns “investment securities” (essentially, non-controlling interests in other companies’ securities or controlling interests in companies that have the characteristics of an investment company) constituting more than 40% of the value of the investing company’s unconsolidated assets (disregarding U.S. government securities and “cash items”). We intend that our future activities will not cause us to be considered an investment company.
Further, our subsidiaries, INXD and INXS, are engaged in the trading of cryptocurrencies and security tokens, respectively. INXS engages in trading security tokens that constitute securities. We believe that INXS qualifies to utilize an exemption from investment company status under Section 3(c)(2) of the Investment Company Act that applies to entities “primarily engaged in the business of underwriting and distributing securities issued by other persons, selling securities to customers, acting as broker, and acting as market intermediary, or any one or more of such activities, whose gross income normally is derived principally from such business and related activities.”
Accordingly, we believe that the cryptocurrencies that we or our subsidiaries own and trade in are not securities. In the case of trading in security tokens by a subsidiary that qualifies to use the Section 3(c)(2) exemption from investment company status, our ownership interest in that subsidiary will not constitute an “investment security” (as a result of the availability of the exemption). As a result, we believe we are not primarily engaged in the business of investing, reinvesting or trading in securities and that investment securities will not constitute more than 40% of the unconsolidated value of our total assets after eliminating holdings in U.S. government securities and cash items.
While we believe that our business activities do not cause us to be an investment company, if we were deemed to be, and were required to register as an investment company, we would be forced to comply with substantive requirements under the Investment Company Act, including limitations on our ability to borrow, limitations on our capital structure, limitations on our ability to issue additional common stock, restrictions on acquisitions of interests in associated companies, prohibitions on transactions with affiliates, restrictions on specific investments, and compliance with governance, reporting, record keeping, voting, proxy disclosure and other statutory requirements and related rules and regulations. If we were forced to comply with those requirements, we would be required to change our structure and future operations from our current plans, could be prevented from successfully executing our business strategy and could be required to cease business.
We need to implement strict finance and accounting systems, procedures and controls to operate our business.
We are required to comply with a variety of reporting, accounting and other rules and regulations. Compliance with these requirements is expensive. We need to implement strict finance and accounting systems, procedures and controls to satisfy our reporting requirements and these requirements may increase our costs and require additional management time and resources. However, as an “emerging growth company” as defined in the JOBS Act we may not be required to, among other things, provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act or comply with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis). We have not completed an assessment, nor have our auditors tested our systems of internal controls. For as long as we are an “emerging growth company” under the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal controls over financial reporting pursuant to Section 404. If our internal controls have undetected weaknesses or our internal control over financial reporting is determined to be ineffective, such failure could cause investors to lose confidence in our reported financial information, negatively affect the market price of the INX Token and adversely impact our business and financial condition.
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Negative publicity could damage our business.
Developing and maintaining our reputation is critical to attracting and retaining customers and investors and for maintaining our relationships with our regulators. Our success depends on our ability to complete development of, successfully implement, and maintain the electronic trading systems that have the functionality, performance, reliability and speed required by our customers.
Crypto asset platforms are still relatively new. Many of our competitors are unlicensed, unregulated, operate without supervision by any governmental authorities, and do not provide the public with significant information regarding their ownership structure, management team, corporate practices, cybersecurity, and regulatory compliance. As a result, customers and the general public may lose confidence in crypto asset platforms, including regulated platforms like ours.
Since the inception of the crypto economy, numerous crypto asset platforms have been sued, investigated, or shut down due to fraud, manipulative practices, business failure, and security breaches. In many of these instances, customers of these platforms were not compensated or made whole for their losses. Larger platforms like us are more appealing targets for hackers and malware, and may also be more likely to be targets of regulatory enforcement actions.
In addition, there have been reports that a significant amount of crypto asset trading volume on crypto asset platforms is fabricated and false in nature, with a specific focus on unregulated platforms located outside the United States. Such reports may indicate that the market for crypto asset platform activities is significantly smaller than otherwise understood.
Negative perception, a lack of stability and standardized regulation in the crypto economy, and the closure or temporary shutdown of crypto asset platforms due to fraud, business failure, hackers or malware, or government mandated regulation, and associated losses suffered by customers may reduce confidence in the crypto economy and result in greater volatility of the prices of assets, including significant depreciation in value. Any of these events could have an adverse impact on our business.
Additionally, although we are not directly connected to the recent crypto asset market events, we may still suffer reputational harm due to our association with the crypto asset industry in light of the recent disruption in the crypto asset markets. Ongoing and future regulation and regulatory actions could significantly restrict or eliminate the market for or uses of certain crypto assets and/or may adversely affect the Company’s business, reputation, financial condition and results of operations.
Negative publicity regarding our Company, INX Tokens, our key personnel or blockchain assets generally, whether based upon fact, allegation or perception and whether justified or not, could give rise to reputational risk which could significantly harm our business prospects.
Some of those risks include:
● | any significant disruption in our products and services, in our information technology systems, or in any of the blockchain networks we support, could result in a loss of customers or funds and adversely impact our brand and reputation and our business, operating results, and financial condition; |
● | cyberattacks and security breaches of our platform, or those impacting our customers or third parties, could adversely impact our brand and reputation and our business, operating results, and financial condition; |
● | we are subject to an extensive and highly-evolving regulatory landscape and any adverse changes to, or our failure to comply with, any laws and regulations could adversely affect our brand, reputation, business, operating results, and financial condition; |
● | security issues, bugs, and software errors have been identified with many crypto assets and their underlying blockchain networks, some of which have been exploited by malicious actors. There are also inherent security weaknesses in some crypto assets, such as when creators of certain crypto networks use procedures that could allow hackers to counterfeit tokens. Any weaknesses identified with a crypto asset could adversely affect its price, security, liquidity, and adoption. If a malicious actor or botnet (a volunteer or hacked collection of computers controlled by networked software coordinating the actions of the computers) obtains a majority of the compute or staking power on a crypto network, as has happened in the past, it may be able to manipulate transactions, which could cause financial losses to holders, damage the network’s reputation and security, and adversely affect its value. |
Our brand and reputation are key assets and a competitive advantage. Maintaining, protecting, and enhancing our brand depends largely on the success of our marketing efforts, ability to provide consistent, high-quality, and secure products, services, features, and support, and our ability to successfully secure, maintain, and defend our rights to use the “INX” trademark and other trademarks important to our brand. We believe that the importance of our brand will increase as competition further intensifies. Our brand and reputation could be harmed if we fail to achieve these objectives or if our public image were to be tarnished by negative publicity, unexpected events, or actions by third parties. Unfavorable publicity about us, including our products, services, technology, customer service, personnel, and crypto asset or crypto asset platforms generally could diminish confidence in, and the use of, our products and services. Moreover, to the extent that we acquire a company and maintain that acquired company’s separate brand, we could experience brand dilution or fail to retain positive impressions of our own brand to the extent such impressions are instead attributed to the acquired company’s brand.
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We, as well as many of our potential customers, engage with third party suppliers and service providers for certain important services. An interruption or cessation of an important supply or service by any third party could have a material adverse effect on our business, including revenues derived from our customers’ trading activity.
We are engaged with a number of suppliers, such as banking, clearing and settlement organizations, on-line service providers, data processors, and software and hardware vendors, for elements of our trading, clearing and other systems, as well as communications and networking equipment, computer hardware and software and related support and maintenance. We also engage with third parties to provide Internet, telecommunication and fiber optic network connectivity to our data centers. Many of our customers rely on third parties, such as independent software vendors, to provide them with front-end systems to access our platform and other back office systems for their trade processing and risk management needs.
We cannot guarantee that these service providers will make the necessary monetary and time investments to provide services for our INX Trading Solutions model and changes to our interfaces and functionality that occur as we develop our business. To the extent any of our service providers or the organizations that provide services to our customers in connection with their trading activities cease to provide these services in an efficient, cost-effective manner or fail to adequately expand their services to meet our needs and the needs of our customers, we could experience decreased trading volume, lower revenues and higher costs which could adversely affect an investment in the Company.
The price of crypto assets and associated demand for buying, selling, and trading crypto assets have historically been subject to significant volatility.
The price of crypto assets and associated demand for buying, selling, and trading crypto assets have historically been subject to significant volatility. For instance, in 2021, the value of certain crypto assets, including Bitcoin, experienced steep increases in value. The increases in value of certain crypto assets, including Bitcoin, from 2016 to 2017, and then again in 2021, were followed by a steep decline in 2018 and again in 2022. From January 2023 to February 2024, Bitcoin increased in value by over 200%.
According to The Block’s Annualized Bitcoin Volatility, defined as the standard deviation of the last 30 days’ daily percentage change in bitcoin’s price, annualized, between January 1, 2023, and December 31, 2023, volatility varied approximately from 15% to 81%. Other VIX indices are used for settlement prices of volatility futures contracts in traditional markets.
The price and trading volume of any crypto asset is subject to significant uncertainty and volatility, depending on a number of factors, including:
● | market conditions of, and overall sentiment towards, crypto assets; |
● | changes in liquidity, market-making volume, and trading activities; |
● | trading activities on other crypto platforms worldwide, many of which may be unregulated, and may include manipulative activities; |
● | investment and trading activities of highly active retail and institutional users, speculators, miners, and investors; |
● | the speed and rate at which crypto is able to gain adoption as a medium of exchange, utility, store of value, consumptive asset, security instrument, or other financial assets worldwide, if at all; |
● | decreased user and investor confidence in crypto assets and crypto platforms; |
● | negative publicity and events relating to the crypto economy; |
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● | unpredictable social media coverage or “trending” of, or other rumors and market speculation regarding crypto assets; |
● | the ability for crypto assets to meet user and investor demands; |
● | the functionality and utility of crypto assets and their associated ecosystems and networks, including crypto assets designed for use in various applications; |
● | retail user preferences and perceived value of crypto assets and crypto asset markets; |
● | increased competition from other payment services or other crypto assets that exhibit better speed, security, scalability, or other characteristics; |
● | regulatory or legislative changes and updates affecting the crypto economy; |
● | the characterization of crypto assets under the laws of various jurisdictions around the world; |
● | the adoption of unfavorable taxation policies on crypto asset investments by governmental entities; |
● | the maintenance, troubleshooting, and development of the blockchain networks underlying crypto assets, including by miners, validators, and developers worldwide; |
● | the ability for crypto networks to attract and retain miners or validators to secure and confirm transactions accurately and efficiently; |
● | legal and regulatory changes affecting the operations of miners and validators of blockchain networks, including limitations and prohibitions on mining activities, or new legislative or regulatory requirements as a result of growing environmental concerns around the use of energy in bitcoin and other proof-of-work mining activities; |
● | ongoing technological viability and security of crypto assets and their associated smart contracts, applications and networks, including vulnerabilities against hacks and scalability; |
● | fees and speed associated with processing crypto asset transactions, including on the underlying blockchain networks and on crypto platforms; |
● | financial strength of market participants; |
● | the availability and cost of funding and capital; |
● | the liquidity of crypto platforms; |
● | interruptions in service from or failures of major crypto platforms; |
● | availability of an active derivatives market for various crypto assets; |
● | availability of banking and payment services to support crypto-related projects; |
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● | level of interest rates and inflation; |
● | monetary policies of governments, trade restrictions, and fiat currency devaluations; and |
● | national and international economic and political conditions. |
There is no assurance that any supported crypto asset will maintain its value or that there will be meaningful levels of trading activities. In the event that the price of crypto assets or the demand for trading crypto assets decline, our business, operating results, and financial condition would be adversely affected.
New or changing laws and regulations or interpretations of existing laws and regulations, in the United States and elsewhere, may materially and adversely impact the development and growth of blockchain networks and the adoption and use of blockchain assets. The imposition of restrictions on all blockchain assets, or certain blockchain assets, could affect the value, liquidity and market price of blockchain assets subject to heighten regulation, by limiting access to marketplaces or exchanges on which to trade such blockchain assets, or imposing restrictions on the structure, rights and transferability of such blockchain assets. Some governments may seek to ban transactions in blockchain assets altogether.
The crypto asset market has been characterized by significant volatility and unexpected price movements. Certain crypto assets may become more volatile and less liquid in a very short period of time, resulting in market prices being subject to erratic and abrupt market movement, which could harm our business. For instance, abrupt changes in volatility or market movement can lead to extreme pressures on our platform and infrastructure that can lead to inadvertent suspension of services across parts of the platform or the entire platform.
Our revenues and profits will be substantially dependent on the trading volume in our markets. Our revenues and profits would be adversely affected if we are unable to develop and continually increase our trading volume on either of our trading platforms.
The success of our business depends, in part, on our ability to continually increase our trading volume; further develop and expand our product offerings or execution facilities; and attract and retain new customers. Our success also depends on our ability to offer competitive prices and services in an increasingly price-sensitive business.
We cannot provide assurances that we will be able to develop and expand product lines, that we will be able to attract and retain customers or that we will be able to modify our pricing structure to compete effectively.
Trading volumes on blockchain asset trading platforms have historically been volatile. Such volatility may be the result of various factors, including fluctuations in the price of blockchain assets or periods of rapid expansion and contraction of adoption and use of blockchain assets. Trading volume will also be directly affected by domestic and international factors that are beyond our control, including:
● | economic, political and geopolitical market conditions; |
● | legislative and regulatory changes, including any direct or indirect restrictions on or increased costs associated with trading in our markets; |
● | broad trends in the industry and financial markets; |
● | shifts in global or regional demand or supply in commodities underlying our products; |
● | competition; |
● | changes in government monetary policies, especially the regulation of tokens and the number of registered token offerings; |
● | availability of capital to our market participants and their appetite for risk-taking; |
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● | levels of assets under management; |
● | pandemics affecting our customer base or our ability to operate our markets; and |
● | consolidation in our customer base and within our industry. |
Any one or more of these factors may contribute to reduced activity in our markets.
Declines in trading volume may negatively impact market liquidity, which could lead to further loss of trading volume. Material decreases in trading volume would have a material adverse effect on our financial condition and operating results.
A significant amount of the trading volume on our platform is derived from a relatively small number of customers, and the loss of these customers, or a reduction in their trading volume, could have an adverse effect on our business, operating results, and financial condition.
A relatively small number of institutional and high-transaction volume retail customers account for a significant portion of the trading volume on our platform and the related net transactional revenue. For the year ended December 31, 2023, our top ten institutional and high-transaction volume retail customers accounted for, in the aggregate, approximately 35% of our total trading volume, and our top two customers accounted for approximately 28% of our trading volume.
We expect significant trading volume and net revenue attributable to these customers to continue for the foreseeable future. As a result, a loss of these customers, or a reduction in their trading volume, and our inability to replace these customers, could have an adverse effect on our business, operating results, and financial condition.
If we fail to retain existing customers or add new customers, or if our customers decrease their level of engagement with our products, services and platform, our business, operating results, and financial condition may be significantly harmed.
Any number of factors can negatively affect customer retention, growth, and engagement, including if:
● | customers increasingly engage with competing products and services, including products and services that we are unable to offer due to regulatory reasons; |
● | we fail to introduce new and improved products and services, or if we introduce new products or services that are not favorably received; |
● | we fail to support new and in-demand crypto assets or if we elect to support crypto assets with negative reputations; |
● | there are changes in sentiment about the quality or usefulness of our products and services or concerns related to privacy, security, or other factors; |
● | there are adverse changes in our products and services that are mandated by legislation, regulatory authorities, or litigation; |
● | customers perceive the crypto assets on our platform to be bad investments, or experience significant losses in investments made on our platform; |
● | technical or other problems prevent us from delivering our products and services with the speed, functionality, security, and reliability that our customers expect; |
● | cybersecurity incidents, employee or service provider misconduct, or other unforeseen activities cause losses to us or our customers, including losses to assets held by us on behalf of our customers; |
● | modifications to our pricing model or modifications by competitors to their pricing; |
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● | we fail to provide adequate customer service; |
● | regulatory and governmental bodies in countries that we target for expansion express negative views towards crypto asset trading platforms and, more broadly, the digital asset economy; or |
● | we or other companies in our industry are the subject of adverse media reports or other negative publicity. |
From time to time, certain of these factors have negatively affected customer retention, growth, and engagement to varying degrees. If we are unable to maintain or increase our customer base and customer engagement, our revenue and financial results may be adversely affected. Any decrease in user retention, growth, or engagement could render our products and services less attractive to customers, which may have an adverse impact on our revenue, business, operating results, and financial condition. If our customer growth rate slows or declines, we will become increasingly dependent on our ability to maintain or increase levels of user engagement and monetization in order to drive growth of revenue.
The revaluation of the INX Token liability to fair value for each reporting period may have a negative effect on our equity and our comprehensive income.
As more fully described in the notes to our financial statements, the INX Token is presented as a liability on our consolidated balance sheet, which is remeasured at each reporting period to fair value with changes in fair value recorded in profit or loss.
The fair market value of the INX Tokens, based on the quoted market price, is subject to fluctuations due to a number of factors, including fluctuations in the Company’s results of operations and macro-economic factors. Accordingly, the financial liability measured at fair market value also fluctuates.
The remeasurement of the INX Token liability to fair value in each reporting period may have a negative effect on our equity and our comprehensive income.
We have an evolving business model.
As blockchain assets and blockchain technologies become more widely available, we expect the services and products associated with them to evolve. As a result, to stay current with the industry, our business model may need to evolve as well. From time to time we may modify aspects of our business model relating to our product mix and service offerings. We cannot offer any assurance that these or any other modifications will be successful or will not result in harm to the business. We may not be able to manage growth effectively, which could damage our reputation, limit our growth and negatively affect our operating results.
We may have difficulty executing our growth strategy and maintaining our growth effectively.
Our growth requires additional investment in personnel, facilities, information technology infrastructure and financial and management systems and controls and may place a significant strain on our management and resources. Our growth strategy also may subject us to increased legal, compliance and regulatory obligations.
There is no guarantee that our efforts will be successful. We may not be able to implement important strategic initiatives in accordance with our expectations, including that the strategic initiatives could result in additional unanticipated costs, which may result in an adverse impact on our business and financial results. Unless our growth results in an increase in our revenues that is proportionate to the increase in our costs associated with our growth, our future profitability could be adversely affected.
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We intend to explore acquisitions, other investments and strategic alliances. We may not be successful in identifying opportunities or in integrating the acquired businesses. Any such transaction may not produce the results we anticipate, which could adversely affect our business and the price of INX Tokens.
We intend to explore and pursue acquisitions, strategic partnerships, joint ventures and other alliances to strengthen our business and grow our company.
The market for acquisitions and strategic opportunities is highly competitive, especially in light of recent merger and acquisition activity in our industry. In addition, these transactions entail numerous operational and financial risks, including but not limited to difficulties in valuing acquired businesses, combining personnel and firm cultures, integrating acquired products, services and operations, achieving anticipated synergies that were inherent in our valuation assumptions, exposure to unknown material liabilities, the potential loss of key vendors, clients or employees of acquired companies, incurrence of substantial debt or dilutive issuance of equity securities to pay for acquisitions, higher-than expected acquisition or integration costs, write-downs of assets or impairment charges, increased amortization expenses and decreased earnings, revenue or cash flow from dispositions.
We may be unable to identify strategic opportunities or we may be unable to negotiate or finance future transactions on terms favorable to us. To the extent we enter into joint ventures and alliances, we may experience difficulties in the development and expansion of the business of any newly formed ventures, in the exercise of influence over the activities of any ventures in which we do not have a controlling interest, as well as encounter potential conflicts with our joint venture or alliance partners.
We may not realize the anticipated growth and other benefits from our growth initiatives and investments, which may have an adverse impact on our financial condition and operating results.
The Company is dependent in part on the data center facilities of third parties.
The Company’s infrastructure network may be established in whole or in part through servers which it owns and/or houses at the location facilities of third parties, and/or servers that it rents at data center facilities of third parties. If the Company is unable to secure or renew its data facility leases on commercially reasonable terms or at all, the Company may be required to transfer its servers to a new data center facility, and may incur significant costs and possible service interruption in connection with the relocation. These facilities are also vulnerable to damage or interruption from, among others, natural disasters, arson, terrorist attacks, power losses, and telecommunication failures. Additionally, the third party providers of such facilities may suffer a breach of security as a result of third party action, employee error, malfeasance or otherwise, and a third party may obtain unauthorized access to the data in such servers. The Company and the providers of such facilities may be unable to anticipate these techniques or to implement adequate preventive measures.
Our business may be adversely affected by the impact of coronavirus, other epidemics or pandemics, acts of God, wars, insurrections, riots, infrastructure failures, and other force majeure events.
Public health epidemics or outbreaks could adversely impact our business. In early 2021, an outbreak of the novel strain of a coronavirus, which causes a disease named COVID-19, spread worldwide, including to Israel and the United States. As a result of the coronavirus pandemic, governments and industries instituted drastic actions to contain the coronavirus or treat its impact. Such actions, including bans on international and domestic travel, quarantines, and prohibitions on accessing work sites, have caused significant disruptions to global and local economies and have led to dramatic volatility in the capital markets.
The extent to which the coronavirus pandemic, other epidemics or pandemics, acts of God, wars, insurrections, riots, infrastructure failures, and other force majeure events, impacts our operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence. Factors that may result in material delays and complications with respect to our business, financial condition and results of operation include the duration and severity of any outbreak, and the actions that may be required to contain the outbreak or treat its impact. In particular, the impact of any pandemic globally could adversely impact our operations, including the development of our platforms within our expected timeframes, our workforce, including the health and safety of our employees and our ability to complete recruitment for open positions on our team, and our ability to raise capital. In addition, a pandemic could affect the operations of key governmental agencies, such as the SEC and CFTC, which may delay the development and regulatory approval necessary to operate our platforms. Each of these factors could have an adverse impact on our business, financial condition and results of operation.
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General global market and economic conditions may have an adverse impact on the Company’s operating performance, results of operations and/or cash flow.
Weakness in the economy could have a negative effect on the Company’s business, operations and financial condition, including decreases in revenue and operating cash flow, and inability to attract future equity and/or debt financing on commercially reasonable terms. Additionally, in a down-cycle economic environment, the Company may experience the negative effects of a slowdown in trading and usage of the Company’s business platform and may delay or cancel the development, structuring, licensing and/or launch of any token functionality. Suppliers with which the Company engages for servers, bandwidth, location and other services could also be negatively impacted by economic conditions that, in turn, could have a negative impact on the Company’s operations or expenses. There can be no assurance, therefore, that current economic conditions or worsening economic conditions or a prolonged or recurring recession will not have a significant, adverse impact on the Company’s business, financial condition and results of operations, and hence, the Company’s business platform and/or the ability to develop, structure, license and/or launch any Token functionality. Any such circumstances may then correspondingly negatively impact the functionality, liquidity, and/or trading price of INX Tokens.
Several recent company failures and bankruptcies have adversely affected our industry.
In 2022, several companies in the broader digital asset space failed or filed for bankruptcy protection. At the time of this Annual Report on Form 20-F, several digital asset space bankruptcies are still pending closure. The Company’s business does not have a direct exposure to, and the Company is not a creditor of, any of the cryptocurrency market participants that recently filed for bankruptcy protection. At the time of this Annual Report on Form 20-F, we have no assets, material or otherwise, that may not be recovered due to these bankruptcies, and we have no direct exposure to any other counterparties, customers, custodians or other crypto asset market participants known to have (i) experienced excessive redemptions or suspended redemptions or withdrawal of crypto assets, (ii) their crypto assets of their customers unaccounted for, or (iii) experienced material corporate compliance failures. Our business, financial condition and results of operations may not be immune to unfavorable investor sentiment resulting from these recent developments in the broader cryptocurrency industry. Also, as circumstances develop, additional companies might find themselves in a similar unfavorable position that might have a direct effect on the Company.
Moreover, while the Company has not been directly affected by recent crypto market events, our business, financial condition and results of operations may still be adversely affected by recent industry-wide adverse developments beyond our control. The bankruptcy filings of crypto companies over the last several months and other developments in the broader cryptocurrency space will likely attract heightened regulatory scrutiny from U.S. regulatory agencies and others. Increasing regulation and regulatory scrutiny may result in new costs for the Company and Company’s management having to devote increased time and attention to regulatory matters, and potentially change aspects of the Company’s business. In addition, regulatory developments and/or the Company’s business activities may require the Company to comply with certain regulatory regimes. Increasingly strict legal and regulatory requirements and any regulatory investigations and enforcement may result in changes to our business, as well as increased costs, and supervision and examination for ourselves and our service providers. Moreover, new laws, regulations, or interpretations may result in additional litigation, regulatory investigations, and enforcement or other actions. Adverse changes to, or our failure to comply with, any laws and regulations, may have an adverse effect on our reputation and brand and our business, operating results, and financial condition.
Additionally, although we are not directly connected to the recent cryptocurrency market events, we may still suffer reputational harm due to our association with the cryptocurrency industry in light of the recent disruption in the crypto asset markets.
Access to banking is limited for crypto companies, and recent bank failures in the U.S. may adversely affect our business and the industry we operate in.
Access to banking is limited for crypto companies, and may impose risks of liquidity or operational challenges. In addition, during March 2023, the banking industry in the U.S. experienced disruptions, characterized by the failure of Silvergate Bank, Silicon Valley Bank, and Signature Bank. All three banks serviced the digital asset industry and provided services that facilitated the transmission of money across the industry and between industry participants. While the Company was not directly affected by the failure of these three banks and did not hold any Company or customer funds at these banks, our business, financial condition and results of operations may still be adversely affected by these developments. First, the operation and business activity of companies within the cryptocurrency space might be damaged or encumbered. Secondly, other banks may also encounter similar problems in the near future, that will result in their failure. For these reasons and others, the Company might be directly or indirectly affected.
Moreover, these bank failures attracted heightened regulatory scrutiny from U.S. regulatory agencies and others to the industry in general. Increasing regulation and regulatory scrutiny may result in new costs for the Company and Company’s management having to devote increased time and attention to regulatory matters, and potentially change aspects of the Company’s business. In addition, regulatory developments and/or the Company’s business activities may require the Company to comply with certain regulatory regimes. Increasingly strict legal and regulatory requirements and any regulatory investigations and enforcement may result in changes to our business, as well as increased costs, and supervision and examination for ourselves and our service providers. Moreover, new laws, regulations, or interpretations may result in additional litigation, regulatory investigations, and enforcement or other actions. Adverse changes to, or our failure to comply with, any laws and regulations, may have an adverse effect on our reputation and brand and our business, operating results, and financial condition. Further, these bank failures may hinder our ability to acquire bank accounts or payment services in the future. It is also unknown if additional bank failures will occur in the future.
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RISKS RELATED TO AN INVESTMENT IN OUR TOKENS
We have limited operating history and therefore valuation of the INX Token is difficult.
The value of the INX Token is influenced by the supply of the INX Token, the market’s perception of the INX Token’s value and the liquidity for Tokens on a secondary market. The original purchase price of the INX Token in our initial public offering has not been indicative of the market price of INX Tokens in the secondary market.
If our INX Token does not gain public acceptance or is not traded by a substantial number of individuals, companies and other entities, it could have a material adverse impact on the value of the INX Token.
The prospect of any holder of INX Tokens to receive any cash distributions from us is uncertain.
Under the INX Token Purchase Agreement, holders of INX Tokens as of March 31 of a year following a year end for which there was positive cumulative Adjusted Operating Cash Flow are entitled to receive a pro rata cash distribution equal to 40% of our cumulative Adjusted Operating Cash Flow. The pro rata distribution of our cumulative Adjusted Operating Cash Flow is not self-executing and requires that our board of directors approve the Company’s financial statements and calculate such distribution in good faith. Although such annual calculation is based on the cash flow from operating activities reflected in the consolidated statement of cash flow of our Company that is included in the audited consolidated financial statements of our Company and its subsidiaries, neither the calculation of the cumulative Adjusted Operating Cash Flow nor any pro rata distributions thereof to holders of INX Tokens will be audited at the time of any distribution. Further, the general public will not be able to independently verify the number of INX Tokens outstanding that are entitled to share in the distribution.
Further, as of December 31, 2023, cumulative Adjusted Operating Cash Flow was approximately negative $64.5 million. Because each INX Token holder’s right to a pro rata distribution is based on our cumulative Adjusted Operating Cash Flow, no distribution will be made to INX Token holders, if at all, until the Company generates positive Adjusted Operating Cash Flows that exceeds this deficit. Therefore, the token holders may not receive a pro rata distribution even in years in which we are profitable due to our historical losses.
In addition, we may elect to operate our business and pursue business strategies, such as acquisitions and the development of our products and services, which could adversely affect our ability to generate positive net operating cash flow. Our cumulative Adjusted Operating Cash Flow will increase or decrease based on the difference between our cash inflows and outflows. Although we may generate cash inflow from daily operations through trading fees and other services, such amounts will be reduced by cash outflows from our operations, including cash payments to our service providers, our employees, taxes, fees, and other operating expenses. To the extent that we engage in acquisitions, we may expend significant cash in order to integrate such businesses, products, technologies or personnel. As a result of our expenditures, we may never generate a positive cumulative Adjusted Operating Cash Flow and may never pay any cash distributions, which could adversely affect the value of INX Tokens. As a result, the prospect of any holder of INX Tokens to receive any cash distributions from us is uncertain.
Further, each INX Token holder’s right to the pro rata portion of the distribution for any given year is subject to charges related to banking fees, transaction fees and/or Ethereum gas fees required to be paid with respect to the transfer of funds or Ether to such holders. Thus, with respect to any year during which the amount to be distributed to an individual INX Token holder is less than the amount of fees relating to such transfer, no distribution will be made to that individual INX Token holder.
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The trading price of our INX Tokens is volatile.
The trading price of our INX Tokens is volatile. The INX Token is not issued by any central bank nor is it backed by any hard assets or other credit. Consequently, investors may not be able to liquidate their investment at a price that reflects the value of the business.
The trading volume of INX Tokens could affect their price volatility.
Although our Board of Directors approved repurchase of INX Tokens by the Company (up to a certain yearly amount) we do not have a token repurchase policy. Accordingly, nothing obligates us to repurchase any specific number of INX Tokens.
Further, the trading price of INX Tokens could be significantly affected by any number of factors including volatility in the broader market for blockchain assets, changes in analyst earnings estimates, fluctuations in our results of operations, shifting investor perceptions, dilution (in both monetary and percentage amounts) from future sales or issuances of INX Tokens by the Company, large purchases or sales by a significant INX Token holder or by the Company, the announcement of new products or the occurrence of any of the events described within this “Risk Factors” section.
Any of these factors could adversely affect the trading price of INX Tokens. Market volatility of the INX Token may affect the value of investment by token holders and could subject us to litigation. Securities litigation against us could result in substantial costs and divert our management’s attention from achieving business objectives, which could harm our business. We are currently not subject to any token holder litigation and continue to aggressively pursue our business objectives toward gaining profitability, which ultimately leads to fulfilling the purpose of the INX Token, which is to share in profitability of the Company by token holders.
Our decision to introduce or suspend promotional incentives for the use of INX Tokens to pay transaction fees on the INX.One trading platform or for holding INX Tokens could impact the trading price of INX Tokens (INX.One is not a separate platform but rather a solution designed to provide users with access to INX Digital and INXS platforms, creating a unified customer experience for trading both security tokens and digital assets).
This offer may entitle owners to, at a minimum, a ten percent (10%) discount as compared to fees paid using other currencies. From time to time, the Company or INXS may offer additional discounts for the use of INX Tokens as payment for INXS transaction fees such that the aggregate discount exceeds ten percent (10%). In addition, although the INX Tokens may not be used as payment for transaction fees on the INXD trading platform, we intend from time to time to offer promotional discounts on transaction fees on the INXD trading platform to record holders of INX Tokens. Such discounts, as well as discounts on the INXS Trading Platform in excess of 10%, are promotional incentives that are governed by the terms and conditions for use of the trading platform and are not rights granted to the holders of INX Tokens through the INX Token Purchase Agreement or otherwise. The value and percentage of any such discount is subject to change at the sole discretion of INX with reasonable notice to INX Token holders and participants on the INX.One trading Platform.
Decisions to set or change the transaction fees for trades executed on our trading platforms or to change the discount applied to transaction fees on our trading platform may impact the trading price of INX Tokens or may result in increased volatility in the price of INX Tokens, especially during periods surrounding the announcement to institute or terminate any fee discount. The decision to reverse or suspend any discounts could negatively impact the trading price of INX Tokens and, as a result, the trading price of INX Tokens may not accurately reflect the value of the public’s perception and acceptance of other rights and characteristics of the INX Tokens. Registered exchanges may decline to list INX Tokens if this feature violates applicable listing standards or ATSs may decide not to make INX Tokens available for trading.
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Prior to making decisions to set the rate for the transaction fees on our trading platform and the level of additional discounts, if any, offered to holders of INX Tokens, the Company will consider various factors such as the profitability of our trading platform, the effect of such changes on current holders of INX Tokens, and whether such changes will discourage investors from purchasing INX Tokens in the future.
Under the INX Token Purchase Agreement, holders of INX Tokens are entitled to receive a pro rata cash distribution equal to 40% of our cumulative Adjusted Operating Cash Flow. This means that the portion of any cash distribution allocated to each INX Token is in part determined by the number of outstanding INX Tokens that are not owned by the Company or any subsidiary of the Company.
We anticipate that users of the INX.One platform will be incentivized to hold INX Tokens to be entitled to transaction fees discounts on the platform.
Large swings in the use of INX Tokens as payment for transaction fees or future issuances of INX Tokens equity or convertible debt securities could cause INX Token holders to suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of our then-existing capital stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities. If we cannot raise additional funds when we need them, our business and prospects could fail or be materially and adversely affected.
INX Token holders may not have full or any recourse in the event that the Company enters into insolvency, liquidation, dissolution, reorganization or bankruptcy and the Company may incur debt that ranks equally with, or senior to, the rights of the INX Token holders.
Pursuant to the INX Token Purchase Agreement, if (i) the Company permanently discontinued all the activities of INX Trading Solutions and there is no successor conducting a substantially similar business that assumes the obligations of the Company with regard to the INX Tokens and (ii) an “Insolvency Event” (as defined in the INX Token Purchase Agreement) occurs, then the Company shall be deemed to be in default of its obligations under the INX Token Purchase Agreement, which breach shall create a claim in favor of INX Token holders that may be asserted by INX Token holders against the Company in any proceeding arising from such Insolvency Event. The claim amount will be determined by the liquidator, a court of competent jurisdiction overseeing the liquidation, or some other authority pursuant to applicable insolvency law.
The Company intends that the INX Token holders will be unsecured creditors of the Company and would therefore rank pari passu with all the other unsecured creditors of the Company and senior to the claims of holders of the Company’s shares. Further, the Company has caused its sole shareholder, TIDCI, and shall cause its future shareholders, to enter an agreement, pursuant to which such shareholders (a) irrevocably subordinate their rights to receive any distributions and payments from the Company prior to the payment in full by the Company of all distributions owed to INX Token holders, and (b) irrevocably waive and subordinate their rights, in the event of an Insolvency Event, to any cash held in the Cash Fund. However, the Cash Fund will not be held in an escrow or trust account, but rather, will be held in a separate bank or broker account controlled by the Company. In the case of an Insolvency Event, a liquidator, court or other applicable authority may determine that INX Token holders are not entitled to any payment from the Company’s assets or that the INX Token holders’ claims are not senior in right to claims or interests of the Company’s shareholders, in particular the shareholders who have not agreed to subordinate their rights to the claims of INX Token holders. In addition, the Company may incur debt (including secured debt) that ranks equally with, or senior to, the rights of INX Token holders, as well as holders of other preferential claims under relevant insolvency laws. In the case of an Insolvency Event, holders of debt instruments ranking senior to INX Tokens may be entitled to receive payment in full before INX Token holders receive any distribution, including distributions of Adjusted Operating Cash Flow and distributions from the Cash Fund.
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INX Token holders do not have a perfected security interest in either the Cash Fund, or their Pro Rata Portion of the Distributable Amount of the cumulative Adjusted Operating Cash Flow. There is no guarantee that an INX Token holder will receive any funds following an Insolvency Event.
After repaying such senior creditors, the Company may not have sufficient assets, if any, remaining for payment of any obligations that it owes to INX Token holders. Further, if it is determined that the Company’s obligations to INX Token holders rank equally with other debt, INX Token holders may share on an equal basis with other creditors. However, the Company may not have sufficient assets, if any, remaining for payment of obligations owed to INX Token holders.
The tax characterization of INX Tokens is uncertain. You must seek your own tax advice in connection with purchasing INX Tokens, which may result in adverse tax consequences to you, including withholding taxes, income taxes and tax reporting requirements.
The treatment of INX Tokens for U.S. federal income tax purposes is uncertain. Due to the new and evolving nature of digital currencies, tokens and blockchain assets, and a general absence of clearly controlling authority with respect to these assets, many significant aspects of the U.S. federal income tax treatment of digital currencies are uncertain. It is unclear what guidance on the treatment of tokens and blockchain for U.S. federal income tax purposes may be issued in the future. Future developments regarding the treatment of tokens or blockchain assets for U.S. federal income tax purposes could adversely affect an investment in INX Tokens.
The Company does not intend to request a ruling from the Internal Revenue Service (“IRS”) on these issues. The IRS has ruled on the tax treatment of bitcoin and other cryptocurrencies. In Notice 2014-21 (the “Notice”) the Service held that digital “currencies” are treated like property and that each transaction using these currencies is a separate taxable event. The IRS stated in the Notice that, for U.S. federal income tax purposes, (i) digital currency is “property” that is not currency and (ii) digital currency may be held as a capital asset. There can be no assurance that the IRS will not alter its position with respect to digital currency in the future or that a court would uphold the treatment set forth in the Notice.
The Notice does not address other significant aspects of the U.S. federal income tax treatment of tokens or blockchain assets, including: the tax characterization of tokens which possess other non-currency-like rights or powers (so called “utility” tokens) or tokens which provide a share of profits to holders. Moreover, there is no authority on the circumstances in which profit-sharing tokens such as INX Tokens may be treated as equity or stock in the Company for U.S. federal income tax (or other tax) purposes. If INX Tokens were characterized as equity interests in the Company for U.S. federal income purposes, U.S. holders of INX Tokens would be subject additional tax consequences and related reporting considerations applicable to holders of stock in a foreign company, including the possible application of rules relating to passive foreign investment companies (or “PFICs”) and controlled foreign corporations (“CFCs”).
The tax characterization of INX Tokens is uncertain. Token holders must seek their own tax advice in connection with purchasing Tokens, which may result in adverse tax consequences, including withholding taxes, income taxes and tax reporting requirements. Prospective investors are urged to consult their tax advisers regarding the uncertainty regarding tax consequences of an investment in INX Tokens and in blockchain assets in general.
INX Token holders are not afforded an opportunity to vote in the election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets, and may not realize any benefit from such transactions.
Although the INX Token is an equity security, as such term is defined in Section 3(a)(11) of the Exchange Act, the rights that attach to an INX Token are materially different from the rights that are typically associated with equity securities such as common shares. As holders of a non-voting security, INX Token holders have no influence over our corporate governance policies and affairs, and INX Token holders are not afforded an opportunity to vote on any matters affecting the Company, including the election of directors, related party transactions or significant corporate transactions such as a merger, or sale of the Company or its assets. INX Token holders are not afforded the same protections generally as shareholders of other publicly traded companies. Further, INX Token holders may not benefit from a sale of the Company or its assets in the same way that our shareholders will benefit, if at all. Your only opportunity to affect an investment decision regarding the Company, if at all, may be limited to selling your INX Tokens.
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The interests of our shareholders may conflict with the interests of INX Token holders.
Our directors are nominated and elected by a majority of our shareholders and their interests in our business may differ from the interests of INX Token holders. Our directors will have no fiduciary obligations to act in the interests of INX Token holders. Mr. Shy Datika, one of our founders, Chief Executive Officer (“CEO”) and a member of our Board of Directors, controls approximately 17% of the voting power of the share capital of our sole shareholder, TIDCI, and as such, Mr. Datika and the other shareholders of our sole shareholder have significant influence over management and affairs and all other matters of the Company, including significant corporate transactions, such as a merger or other sale of our Company or its assets.
The INX Tokens are not currently registered under the Exchange Act.
The INX Token is an equity security as such term is defined in Section 3(a)(11) of the Exchange Act; however, The INX Tokens are not currently registered under the Exchange Act, however, the Company is currently required to file annual and other periodic reports pursuant to Section 15(d) of the Exchange Act, as required by a foreign private issuer.
The Company intends to register the INX Tokens in accordance with Section 12(g) of the Exchange Act at the same time or immediately after filing this report. However, if the Company does not continue to be subject to, or voluntarily comply with, the periodic reporting and other obligations of the Exchange Act, you may not be able to access regular publicly available reports about us and you will not be entitled to the same type of disclosure in relation to critical corporate events as if we were subject to the Exchange Act.
The INX Token Purchase Agreement includes exclusive venue and jurisdiction provisions. By purchasing INX Tokens, an investor is irrevocably consenting to these provisions regarding claims, suits, actions or proceedings, and submitting to the exclusive jurisdiction of Delaware courts. The INX Token Purchase Agreement also provides that the Company will not be responsible for any losses except those arising from the Company’s gross negligence, fraud or willful misconduct.
The INX Token Purchase Agreement is governed by Delaware law and includes exclusive venue and jurisdiction provisions designating Delaware courts as the exclusive venue for most claims, suits, actions and proceedings involving us or our officers, directors and employees.
By purchasing an INX Token, an investor is irrevocably consenting to these limitations and provisions regarding claims, suits, actions or proceedings and submitting to the exclusive jurisdiction of Delaware courts. If a dispute were to arise between an investor and us or our officers, directors or employees, the investor may be required to travel to Delaware in order to pursue its legal remedies and participate in any proceeding in Delaware courts which may be an inconvenient or distant location and which is considered to be a more corporate friendly environment. In addition, the choice of forum provision may limit an investor’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us. These provisions may have the effect of discouraging lawsuits and limiting an investors’ ability to obtain a favorable judicial forum for disputes against us and our directors and officers.
This provision does not, nor is intended to, apply to claims under the federal securities laws. By agreeing to this limitation of liability, investors will not be deemed to have waived the Company’s compliance with federal securities laws and the rules and regulations thereunder.
The INX Token Purchase Agreement also includes a provision limiting our liability, to the maximum extent permitted by applicable law, for any losses the investor may incur, except for such losses that arise from our gross negligence, fraud or willful misconduct. By purchasing an INX Token, an investor is agreeing to this limitation of liability which could reduce its ability to recover damages from us if we act in a manner that causes investors to incur losses.
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It may be illegal now, or in the future, to acquire, own, hold, sell or use INX Tokens in one or more countries, and ownership of, holding or trading in our Company’s securities may also be considered illegal and subject to sanction.
The regulation of blockchain assets remains uncertain or undefined in many jurisdictions. Although we anticipate treating the INX Tokens as securities under the laws of all foreign jurisdictions and adhering to such laws with regard to the offering and sale of INX Tokens abroad, one or more foreign governmental authorities, such as those in China, may take regulatory action in the future that severely restricts the right to acquire, own, hold, sell or use blockchain assets or to exchange blockchain assets for fiat currency. Such an action may result in the restriction of ownership, holding or trading in the INX Token and other securities. Such restrictions may adversely affect an investment in the Company.
RISKS RELATING TO INTELLECTUAL PROPERTY RIGHTS AND DISPUTES
We may be unable to protect our proprietary technology and to obtain trademark protection for our marks.
Our success depends to a significant degree upon the protection of our software and other proprietary intellectual property rights. We may be unable to bring enforcement actions under the laws of the US or other countries to protect our intellectual property rights, which could have a material adverse effect on our business. Further, we may not be able to secure protection for our service marks or trademarks in the United States or elsewhere as we expand internationally. Our competitors might adopt service marks or trademarks similar to our marks or might try to prevent us from using our marks. Any claim by another party against us or customer confusion related to our trademarks, or our failure to obtain trademark registration, could have a material adverse effect on our business.
We may not be able to enforce protection of our intellectual property rights under the laws of other countries.
We do business internationally and consequently we are subject to risks of doing business internationally, including uncertainty regarding liability for the listings and other content provided by our users, and differing intellectual property laws, which may provide insufficient protection for our intellectual property. Any such difficulties could have a material adverse effect on our business.
RISKS RELATED TO INCORPORATION IN GIBRALTAR
We are a “foreign private issuer” and we cannot be certain if the reduced reporting requirements applicable to foreign private issuers will make owning INX Tokens less attractive to investors.
As a foreign private issuer, we are not subject to the same requirements that are imposed upon U.S. domestic issuers by the SEC. Under the Securities Exchange Act of 1934, or the Exchange Act, we will be subject to reporting obligations that, in certain respects, are less detailed and less frequent than those of U.S. domestic reporting companies. For example, we will not be required to issue proxy statements that comply with the requirements applicable to U.S. domestic reporting companies. We will also have four months after the end of each fiscal year to file our annual reports with the SEC and will not be required to file current reports as frequently or promptly as U.S. domestic reporting companies. Furthermore, our officers, directors, and principal shareholders will be exempt from the requirements to report transactions in our equity securities and from the short-swing profit liability provisions contained in Section 16 of the Exchange Act. These exemptions and leniencies, along with other corporate governance exemptions resulting from our ability to rely on home country rules, will reduce the frequency and scope of information and protections to which you may otherwise have been eligible in relation to a U.S. domestic reporting company.
We would lose our foreign private issuer status if more than fifty percent of our outstanding voting securities are directly or indirectly owned of record by residents of the United States and any of the following three circumstances applies: (i) the majority of our executive officers or directors are U.S. citizens or residents; (ii) more than 50% of our assets are located in the U.S.; or (iii) our business is administered principally in the U.S. Since our Parent Shares are listed on the Cboe Canada exchange in Canada and given the level of our intended business contacts with the United States, we may lose our status as a foreign private issuer should more than fifty percent of our voting securities be held of record by residents of the United States. Although we have elected to comply with certain U.S. regulatory provisions, our loss of foreign private issuer status would make such provisions mandatory. The regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic reporting company may be significantly higher. If we are not a foreign private issuer, we will be required to file periodic reports and registration statements on U.S. domestic reporting company forms with the SEC, which are more detailed and extensive than the forms available to a foreign private issuer. We may also be required to modify certain of our policies to comply with accepted governance practices associated with U.S. domestic reporting companies. Such conversion and modifications will involve additional costs. In addition, we may lose our ability to rely upon exemptions from certain corporate governance requirements on U.S. stock exchanges that are available to foreign private issuers.
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It may be difficult to enforce a U.S. judgment against us, our officers and directors, and the experts named in this report, or to assert U.S. securities laws claims or serve process on our officers and directors and these experts.
We were incorporated in Gibraltar, and a significant part of our operations are currently located in the State of Israel. Therefore, it may be difficult to enforce a U.S. court judgment based upon the civil liability provisions of the U.S. federal securities laws against us or any of these persons in a U.S. or Gibraltar court, or to affect service of process upon these persons in the United States.
Additionally, it may be difficult for an investor, or any other person or entity, to assert U.S. securities law claims in original actions instituted in Gibraltar. This is for two principal reasons: 1) because the Gibraltar courts may regard the U.S. law in question to be a penal, revenue or public law and therefore, under Gibraltar law, not capable of direct or indirect enforcement in the Gibraltar courts, or 2) because the Gibraltar court may stay the claim on the grounds that Gibraltar is not an appropriate forum (“forum non conveniens”). If U.S. law is found to be applicable to a claim which the Gibraltar court can and is prepared to hear, the content of applicable U.S. law must be proved as a fact by expert witnesses, which can be a time-consuming and costly process. If proceedings were to be brought in Gibraltar, all procedural matters would be governed by Gibraltar law. There is little case law addressing the matters described above that would be binding case law in a Gibraltar court.
RISKS RELATED TO DOING BUSINESS IN ISRAEL
Potential political, economic, and military instability in the State of Israel, where some of our senior management and our research and development facilities are located, may adversely impact our results of operations.
Our offices and operations are currently located in the State of Israel and in the United States. In addition, certain of our employees, officers, and directors are residents of Israel. Accordingly, political, economic, and military conditions in Israel directly affect our business. Since the State of Israel was established in 1948, a number of armed conflicts have occurred between Israel and its neighboring countries. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners, or a significant downturn in the economic or financial condition of Israel, could adversely impact our operations.
An Israeli Government initiative to amend Israeli legislation concerning government, judiciary and administrative procedures may adversely impact our results of operations.
The Israeli government is advancing significant changes in Israeli legislation concerning judicial nomination and oversight. If such proposals are enacted by the Israeli government, they will change the current balance between the three branches of government in Israel in a manner that is expected to add significant power to the executive and the legislative branches.
Since the proposals have not yet been enacted as law, the uncertainty of their effect on the Company and its business may not be estimated at this time. During November 2023, the Israeli government stopped advancing the changes in Israeli legislation.
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Our operations may be disrupted by the obligations of personnel to perform military service.
Certain of our employees, officers and directors are based in Israel. Some of our employees and consultants may be called upon to perform up to 36 days (and in some cases more) of annual military reserve duty until they reach the age of 40 (and in some cases, up to 45 or older) and, in emergency circumstances, could be called to immediate and unlimited active duty. In the event of severe unrest or other conflict, individuals could be required to serve in the military for extended periods of time. Our operations could be disrupted by the absence of a significant number of our employees related to military service or the absence for extended periods of one or more of our key employees for military service. Such disruption could materially adversely affect our business and results of operations.
Israel – Hamas War - A significant portion of the Company’s operations and management is based in Israel. On October 7, 2023, Hamas launched an attack on Israel. As of the date of this filing, there has been no material interruption or adverse impact on the Company’s business activities resulting from the war. The Company maintains a comprehensive business continuity plan, and has taken the necessary steps in line with such plan, in an effort to ensure that operations and service to customers remains consistent. It is not possible to predict potential adverse results of the war and its effect on the Company’s business at this time.
ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company.
We are a Gibraltar private company limited by shares, incorporated on November 27, 2017 under the Gibraltar Companies Act. We were originally incorporated under the name “INX Holdings Ltd.” On December 17, 2017, we changed our name to our current name, INX Limited.
On February 16, 2021, we were registered as a foreign company in Israel with the Israeli Registrar of Companies.
On January 10, 2022, Valdy Investments Ltd. (“Valdy”), a company incorporated under the provincial Business Corporations Act (British Columbia), entered into a definitive securities exchange agreement with INX, whereby INX became a wholly owned subsidiary of Valdy (the “Parent Company”). The Transaction resulted in a reverse takeover transaction whereby current shareholders of INX (pre-transaction) became majority shareholders of the Parent Company. The combined entities (the “Resulting Issuer”) continues the business. Also, as a result of the transaction, Valdy changed its name to The INX Digital Company Inc.
The Company is engaged in the operation and development of a digital asset and a security token trading platform and other services and products related to the fully integrated and regulated solutions for trading of blockchain assets. In 2021, the Company completed a SEC registered initial public offering of the INX Token. The offering of the INX Token was registered under the United States Securities Act of 1933 and, in such registration, the INX Token is deemed to be an “equity security” under relevant SEC rules and regulations.
The Company, through one of the subsidiaries, also facilitates financial transactions between global banks and offers a full range of brokerage services to several leading banking institutions worldwide, mainly in foreign exchange and interest rate derivatives.
Subsidiaries
The Company operates through the following wholly-owned subsidiaries:
● | INX Digital, Inc. (“INXD”), a Delaware corporation, is licensed or otherwise cleared to operate in 46 U.S. states plus Washington D.C. and Puerto Rico as a money transmitter to operate a trading platform for cryptocurrencies. INXD launched a cryptocurrency trading platform on April 29, 2021, which was developed by INX Limited and is operated by INXD.
As of the date of this report, the following crypto assets are supported for trading on the INX Digital platform (identified by symbol):
AAVE AVAXC BTC CRV ETH FTM LTC UNI USDC |
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● | INX Securities, LLC (“INXS”) (formerly known as: Openfinance Securities, LLC), is a Pennsylvania limited liability company. INXS is recognized in the U.S. as a SEC registered Broker Dealer and is an SEC ATS. INXS was purchased by INX on May 10, 2021 as part of the Asset Purchase Agreement with Openfinance Holdings, Inc. and certain subsidiaries of Openfinance Holdings, Inc., dated January 12, 2021. After closing on the acquisition, the company’s name was changed from Openfinance Securities, LLC to INX Securities, LLC. INXS offers investment in primary offering and secondary market trading of security tokens previously registered with the SEC or offered under an applicable SEC exemption. |
● | I.L.S. Brokers Ltd. (“ILSB”), a company incorporated under the laws of the State of Israel, was purchased by INX, pursuant to the share purchase agreement between INX and the shareholders of ILSB, dated June 9, 2021, for the purchase of all of the issued outstanding shares of ILSB. ILSB is a multinational brokerage house, established in 2001, that facilitates financial transactions between banks and offers a full range of brokerage services to several leading banks worldwide. ILSB’s main field of operation is foreign exchange and interest rate derivatives services. ILSB’s activities are regulated by the Israeli Capital Market Authority, Insurance and Savings and are registered with the U.S. National Futures Association (“NFA”) (authorized by the U.S. Commodity Futures Trading Commission (“CFTC”)). ILSB holds the following license: Provider of Financial Services in Israel and an introducing broker (IB) license from NFA (CFTC) in the US. |
● | Midgard Technologies Ltd. (“Midgard”) is a company incorporated under the laws of the State of Israel. Midgard had served as the research and development arm of INX since November 1, 2020 and was acquired on April 1, 2021. Midgard provides software development, marketing and operations services for the group and holds certain intellectual property. |
● | INX Transfer Agent LLC (f/k/a Tokensoft Transfer Agent LLC) (“INX Transfer Agent”), a Delaware limited liability company. INX Transfer is a transfer agent registered with the SEC, acquired by the Company pursuant to a purchase agreement dated December 28, 2021. |
● | INX Solutions Limited is incorporated in Gibraltar as a private company limited by shares. INX Solutions Limited provided liquidity and risk management services to the group through the end of 2023. The entity is currently dormant. |
● | INX Digital Assets UK Limited (formerly known as: ILSB UK Limited) (“INX UK”), a company incorporated under the laws of England and Wales INX acquired and issued and outstanding shares of INX UK on July 13, 2021, from Mr. James Crossley, former board member of INX, in consideration for an inconsequential amount of cash. INX UK is currently a dormant entity. |
● | INX Services, Inc., a Delaware corporation, which currently is a dormant entity. |
● | INX EU Ltd. (“INX EU”), a company incorporated under the laws of Cyprus. INX EU is currently a dormant entity. |
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Securities Exchange Agreement
On January 10, 2022, Valdy Investments Ltd. (“Valdy”), a Capital Pool Company (CPC) incorporated under the laws of British Columbia, Canada, acquired all of the issued and outstanding securities of the Company (including all outstanding options and warrants) from the holders thereof by way of a securities exchange, in accordance with the terms and conditions of the Amended and Restated Security Exchange Agreement dated November 3, 2021, as amended (the “Security Exchange Agreement”), whereby, at the closing, then current holders of shares and options to purchase shares of the Company were issued an aggregate of 175,000,000 common shares of the combined entity and the Company became a wholly owned subsidiary of Valdy (the “Valdy Transaction”). The shareholders of Valdy received 5,124,740 common shares of the combined entity. Additional securities of the combined entity were issued to consultants of the Company and to principals of Valdy as set forth in the Security Exchange Agreement. Following the closing of the Valdy Transaction, Valdy changed its name to “The INX Digital Company, Inc.” For more information on the Security Exchange Agreement, see “Item 7, Part A – Major Shareholders and Related Party Transactions – Major Shareholders – Changes in Percentage Ownership by Major Shareholders – Security Exchange Agreement.”
Consolidation
Immediately prior to the completion of the Valdy Transaction, on January 10, 2022, Valdy completed a consolidation (the “Consolidation”) of the (pre-Valdy Transaction) issued and outstanding Valdy Shares, on the basis of one (1) post-Consolidation Valdy Share for each 2.7266667 pre-Consolidation Valdy Shares, such that the number of Valdy common shares outstanding immediately prior to the completion of the Valdy Transaction was 3,844,740 on a fully-diluted basis.
Concurrent Financing
In parallel with the Valdy Transaction, on April 1, 2021, the Company completed a private placement of 31,680,000 subscription receipts, at a price of CAD$1.25 per receipt (the “Concurrent Financing”). Each receipt entitled its holder to receive a unit (“INX Unit”) comprised of one ordinary share of the Company (“Ordinary Share”) and one half of one warrant to purchase one Ordinary Share (at a price of CAD$1.88 per share) (“each, an “INX Financing Warrant”). The Ordinary Shares and warrants issued pursuant to the subscription receipts were exchanged for comparable securities of Valdy on closing of the Valdy Transaction. The Company raised an aggregate amount of US$31.3 million pursuant to the Concurrent Financing. In consideration for their services to the Company, the Company’s financial advisors received cash compensation and options to purchase ordinary shares of Valdy.
Token Offering
As further detailed in this Annual Report on Form 20-F, the Company is the first company to successfully complete an SEC-registered IPO of a blockchain security token (the “INX Token”). On August 20, 2021, the public offering of the INX Token (the “Token Offering”) was registered under the United States Securities Act of 1933 and, in such registration, the INX Token is deemed to be an “equity security” under relevant SEC rules and regulations. On April 22, 2021, the Token Offering was completed.
Under the Token Offering, the Company raised $84.0 million, pursuant to the sale of 93,409,410 INX Tokens (excluding the sale of INX Tokens described below). Additionally, the Company raised $7,621,778, pursuant to the sale of 10,386,148 INX Tokens through private placements, which were subject to a 12-month lockup.
Under the Token Offering, INX Tokens were bought by more than 7,200 retail and institutional investors in 75 countries, with more than 61,000 investors expressing interest but unable to invest in the Token Offering, in part due to the U.S. blue sky restrictions. In June 2021, it came to the attention of the Company that during the course of the Token Offering as it related to Canada, the Company did not take all steps that may be required under Canadian securities laws. As a result, the Company elected to unwind the transactions forthwith by canceling the 1,948,483 INX Tokens that were sold to such purchasers and refunding US$1,753,635 representing the full purchase price of the INX Tokens sold.
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General
The ordinary shares of the Company (the “INX Shares”) have never been listed for public trading.
INX Limited’s registered office is located at 57/63 Line Wall Road, Gibraltar, GX11 1AA. INX Limited also has an office located in Israel.
The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. Our website is https://www.inx.co/. The reference to our website is an inactive textual reference only and information contained in, or that can be accessed through, our website is not part of this report.
B. Business Overview.
Background & Current Market
Blockchain Technology and Blockchain Assets
Blockchain technology is a digital record or ledger of transaction data that is permanently recorded in files called “blocks.” Each blockchain is founded upon software source code that establishes and governs its cryptographic system for verifying transactions.
In traditional blockchain networks, copies of the blockchain ledger are stored in a decentralized manner on computers across a peer-to-peer network. Users of the blockchain network maintain a copy of the ledger with all copies of the ledger synchronized through a consensus algorithm. Protocols included in the source code govern the rules, operations, and communications of the underlying blockchain network, including the validation of new blocks that contain an updated ledger reflecting new transactions.
This lack of a single point of data collection is believed to enhance the security of traditional blockchain networks and blockchain assets. Nonetheless, blockchain assets and blockchain trading platforms remain susceptible to security breaches and cybercrime. According to a Crystal Blockchain study published in March 2023, $16.7 billion in crypto assets had been stolen from 2011 up to that point. Additionally, 2023 saw 600+ major hacks in the crypto space, resulting in ~$2.61 billion in losses, with $674.9 million recovered. Variations on traditional blockchain networks include “permissioned” blockchains, in which a limited number of pre-selected users monitor and validate transactions (or add “blocks” to the chain). In a fully centralized blockchain, one organization monitors and validates transactions. Such blockchain ledgers may be viewable by the public or viewing ledger information may be restricted.
Blockchain assets are assets that utilize blockchain ledgers to record their creation, ownership, and transfer of ownership. Blockchain assets have generally been created and used in two broad contexts: within blockchain protocol layers and within application layers. Blockchain assets used at the protocol layer are generally intended to create financial incentives that drive the underlying blockchain network to verify and authorize the creation of a new block to update the ledger of ownership. Network participants may receive a fee, generally paid in the protocol’s native blockchain asset, for validating the authenticity of a new block. A blockchain asset used at the application layer is not designed to incentivize validation of new blocks on the blockchain. However, the ledger of ownership of an application blockchain asset, including the record of transfers of such blockchain assets, is recorded on blocks added to the underlying blockchain. For example, Bitcoin and Ether are protocol blockchain assets used on the Bitcoin and Ethereum blockchains, respectively. The INX Token is an application blockchain asset that is recorded on the Ethereum blockchain.
Ownership of a blockchain asset is established by recording on the blockchain ledger the owner’s unique identifier address, or “public address,” and the amount of the asset held by such address. When a blockchain asset is transferred, the ledger records the sender’s public address, the recipient’s public address and the amount of digital assets transferred. Authorization of the transfer requires the sender’s digital signature and a transfer fee.
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Digital signatures are generated by use of the private key associated with the relevant public address. The public address is publicly known so that it may be used to direct transfers of the blockchain asset. Private keys are used to sign transactions that initiate the transfer of blockchain assets from a sender’s public address to a recipient’s public address. Only the private key associated with a particular public address can digitally sign a transaction proposing a transfer of the blockchain asset from one public address to another. Similar to a digital password, if an unauthorized third person learns of a user’s private key, that third person could forge the user’s digital signature and transfer blockchain assets from the user’s public address to another public address, thereby transferring ownership of the user’s blockchain assets.
Blockchain Asset Classes
Blockchain assets exist as a digital representation of value or rights, including rights to an underlying asset. Some blockchain assets may be viewed as having intrinsic value. In addition, the blockchain asset may be tethered to the value of another asset or may be a representation of contractual rights. Almost any asset can be “tokenized,” meaning that title to the asset, including any rights associated with such title, can be recorded on a blockchain ledger. To this point, blockchain assets may be used to pay for goods and services, may entitle the owner to certain rights, or may represent assets that have traditionally existed off the blockchain.
We have identified and targeted our business operations around two emerging blockchain asset classes: cryptocurrencies and security tokens.
A “cryptocurrency,” also known as a digital currency or virtual currency, is a digital representation of value that functions as a medium of exchange, a unit of account, or a store of value. Cryptocurrencies are generally used as a substitute for fiat currencies as a means of paying for goods or services or transferring value. While there remains considerable regulatory uncertainty as to which specific blockchain assets qualify as “cryptocurrencies” and which are “digital securities” (and therefore subject to securities laws), a “cryptocurrency,” as the term is used in this report, is not a “security” as that term is defined under U.S. federal securities laws. Bitcoin and Ether are examples of well-known cryptocurrencies.
A “digital security” is a blockchain asset that falls within the definition of a security under federal securities laws. On April 3, 2019, the Strategic Hub for Innovation and Financial Technology (FinHub) of the SEC published informal guidance, titled “Framework for ‘Investment Contract’ Analysis of Digital Assets” (the “Framework”), which provides analytical tools for determining whether a blockchain asset is a security under federal securities laws. In the Framework, the SEC uses the term “digital asset” to refer to an asset that is issued and transferred using distributed ledger or blockchain technology. In this report, we use the term “blockchain asset” to distinguish between assets that are recorded and stored using blockchain technology and assets that may be stored in digital form, but which do not utilize blockchain technology. In addition, the SEC has not used the term “digital security.” The Framework provides a list of factors to consider when determining whether a digital asset offered for sale is a security. The factors included in the Framework are based on an analysis of whether the blockchain asset is an “investment contract” as that term was first used by the Supreme Court in SEC v. Howey, 328 U.S. 293 (1946), and which has been further clarified through subsequent case law.
The SEC staff has acknowledged that determining whether a blockchain asset is a security can require a careful analysis of the nature of the blockchain asset and how it is offered and sold. Further, the SEC staff acknowledged that a blockchain asset that is initially sold as a security may, at a later point, no longer meet the characteristics of a security. The Framework represents the views of the SEC staff, and it is not a rule, regulation, or statement of the SEC and it is not binding on the SEC.
To determine the character of a blockchain asset and whether it should be traded on the INXD trading platform or the INXS Trading Platform, we have sought the guidance of nationally recognized outside legal counsel. In certain instances, we may seek a declaratory judgment or no action relief from the relevant regulatory agency prior to deciding whether to permit the trading of an asset on one of our platforms.
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Markets for Blockchain Assets
The market for blockchain assets has grown dramatically including through dramatic volatility since blockchain assets were first introduced in 2009 with the launch of Bitcoin. According to CoinMarketCap.com, over 230 blockchain asset trading platforms (both spot and derivative exchanges) provide basic buy and sell services for one or more blockchain assets. According to CoinMarketCap.com, as of February 2, 2024, over 230 blockchain asset trading platforms (Both Spot and Derivative Exchanges) provided basic buy and sell services for one or more blockchain assets, and over 66 of those trading platforms had 24-hour daily trading volumes over US$400 million, approximately 51 of which had 24-hour trading volumes over US$1 billion. Top blockchain asset trading platforms, based on USD daily trading volume, include BlueBit, Binance, OKX, and Bybit.
Some blockchain industry participants have reported that a significant percentage of blockchain asset trading activity is artificial or non-economic in nature and may represent attempts to manipulate the price of certain blockchain assets. Deloitte, in its 2021 report “Market Manipulation in Digital Assets’’ pointed out that market capitalization for cryptocurrency had hit $1 trillion two years prior. It warned that up to 90% of trading could be vulnerable to market manipulation. The most popular ways of manipulation are: pumping and dumping, whale wall spoofing and stop hunting, wash trading, and disseminating false information. As a result, trading platforms or blockchain assets may seek to inflate demand for specific blockchain assets, or blockchain assets generally, which could increase the volatility of that asset or blockchain asset trading prices generally.
On the digital securities side, we believe that this nascent market is beginning to blossom. In a Citibank report titled “Money, Tokens, and Games. Blockchain’s Next Billion Users and Trillions In Value,” Citibank estimated that the market for tokenization of financial and real-world assets could reach “up to almost $4 trillion in value by 2020.”
Blockchain Asset Exchanges
We believe that there is a growing institutional interest in operating regulated blockchain asset exchanges and trading platforms and utilizing blockchain assets in bank financing practices.
On November 16, 2018, the SEC’s Division of Corporation Finance, Division of Investment Management, and Division of Trading and Markets issued the Statement on Digital Asset Securities Issuance and Trading addressing the SEC’s enforcement actions involving and relating to digital asset securities. The Statement confirmed the applicability of the U.S. federal securities law framework to new and emerging technologies, such as blockchain, and provided a summary of the circumstances under which the SEC has taken enforcement action against participants in the marketplace for digital asset securities, including actions against initial offerings and sales of securities and actors and institutions that develop and facilitate the secondary market for securities.
Finally, the CFTC has stated that virtual currencies, like Bitcoin, may be commodities that are within the purview of the CFTC. However, beyond its anti-fraud and anti- manipulation authorities, the CFTC generally does not oversee “spot” or cash market exchanges and transactions involving cryptocurrencies that do not utilize margin, leverage, or financing.
According to CoinMarketCap.com, as of February 2, 2024, around 55 cryptocurrency derivatives exchanges were operating with 24-hour trade volumes of over $300 million. Top derivatives exchanges (by volume) include BlueBit, Binance, UEEx, OKX, and Bybit with 24-hour trade volumes all over $10bn each.
Because of the uncertainty built into a “facts and circumstances” analysis, as well as general regulatory uncertainty worldwide, companies have begun to structure their blockchain assets as securities and conduct sales of their blockchain assets as securities offerings. As blockchain assets take on the attributes of securities and market makers expand the breadth of blockchain asset trading products into spot, futures and derivative trading instruments, the need and demand for a regulated blockchain asset trading solution continues to grow.
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Opportunities in the Current Market
As blockchain assets are sorted into cryptocurrencies and digital securities, the need and demand for regulated trading solutions for each asset class continues to grow. However, current platforms or exchange markets that permit the trading of blockchain assets have the following shortcomings:
● | Lack of Trading History. Some blockchain asset trading platforms do not or cannot present the entire history of trades to exchange participants in a manner that would be requested by a regulator. This lack of trading history does not allow regulatory agencies to effectively monitor transactions. |
● | Lack of Regulatory Compliance. Many blockchain asset trading platforms are not prepared to comply (or are not willing to comply) with regulatory requirements imposed by federal and state securities law. Blockchain asset trading platforms assume less responsibility for what takes place on their platforms as compared to regulated exchanges. For example, blockchain asset trading platforms are generally unable to verify the legitimate origin of funds in a trade and therefore cannot confirm that the trades are not in violation of anti-money laundering laws. In addition, current blockchain asset trading platforms do not provide traditional trading protections, such as liquidity reserves, making professional traders unable or reluctant to conduct trading on these exchanges. The lack of compliant exchanges for the trading of blockchain assets leads to low customer and public confidence in both the exchanges and the blockchain assets traded. |
● | Lack of Technological Capability. Blockchain asset trading platforms generally do not have the technological capability to handle the large trading volumes or capture trades for multiple simultaneous trading requests without disruption or significant errors. The technology of many blockchain asset trading platforms was not developed to handle the dramatic growth in demand to engage in blockchain trades and the market has witnessed exchange outages, sometimes for many hours, pricing errors, lack of user access to their funds, and other service-related complaints. |
● | Lack of Fee Transparency. There is currently no clear market standard for fees for trading blockchain assets. This is particularly true in the retail market, where many trading platforms do not separately state the transaction fee but instead include any fees as part of the price of the blockchain asset. In this way, many unregulated exchanges do not disclose their fees, creating uncertainty regarding the cost of trading. |
● | Poor Price Discovery. Blockchain asset trading platforms experience inefficiencies in the form of significant arbitrage due to recurrent operational issues including temporary service outages and other temporary restrictions on access to the trading platform, the ability to withdraw or deposit fiat currencies and cryptocurrencies, or otherwise perform a trade on the platform. This creates significant exposure to arbitrage trading between exchanges. Further, the operator of a blockchain asset trading platform may trade on its own behalf on the trading platform. Doing so provides liquidity to platform participants. However, it also presents potential conflicts of interest, such as front-running customer order flow and engaging in price manipulation. By acting as a trading participant on one’s own platform, trading platforms may artificially inflate or deflate prices, which impairs market pricing discovery. |
These weaknesses in current blockchain asset trading platforms reveal a significant opportunity in the blockchain asset industry for market development through operations and services that provide functionality, transparency and trading platforms backed by cash reserves similar to those of regulated trading marketplaces.
INX.One (a/k/a INX Trading Solutions), a Single Regulated Ecosystem for Trading Blockchain Assets
We believe that we have a comprehensive solution to the issues that we have identified.
Since our inception, we have sought to become a regulated digital hub, aiming to offer all digital services, whether with cryptocurrencies, digital securities or derivatives, under a regulated umbrella.
The first stage involved cementing our place in the United States as we began by obtaining money transmitter licenses, a broker/dealer and an ATS (registered under the SEC and FINRA) for digital assets. We are qualified to operate as a money transmitter in forty-six (46) U.S. states plus Washington D.C. and Puerto Rico. We intend to obtain money transmitter licenses or otherwise become qualified to operate in more US states by the end of the 2024 calendar year. We started our international expansion with the purchase of an institutional FX trading operation in Israel, seeking to bridge the gap between the mostly retail world and the largest financial institutions. This interdealer broker has relationships with over 50 tier-1 and tier-2 global banks (including: Citibank, HSBC, Goldman Sachs, Morgan Stanley, JP Morgan and others) focusing on OTC trading of FX, interest rates and other derivative products. This broker is an NFA member registered under the CFTC as an introducing broker and swap firm and holds other licenses in Israel.
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On September 14, 2022, we launched INX.One. a single point of entry with one onboarding process and a unified graphic user interface for both. INX.One is not a separate platform but rather a solution designed to provide users with access to INX Digital and INXS platforms, creating a unified customer experience for trading both security tokens and digital assets. After successfully completing the distinguish onboarding processes and receiving the relevant platform’s approval, customers gain entry to either INX Digital and/or INXS platforms through the INX.ONE hub, which integrates both security and crypto-asset trading on a single application:
● | The digital asset platform operated through our subsidiary INX Digital Inc., which offers trading on digital assets that do not constitute securities (e.g. Bitcoin and Ethereum), and |
● | The digital security platform operated through our subsidiary INXS, which offers trading and investing in digital assets that do constitute securities under applicable securities laws (such as the INX Token and tokens of other issuers who chose to issue a digital security). |
We offer professional traders and retail and institutional investors trading platforms with established practices common in other regulated financial services markets, such as customary trading and settlement procedures, regulatory compliance, capital and liquidity reserves and operational transparency.
We also created the INX Token, an ERC-1404 blockchain asset that is programmed using a smart contract that is compatible with the Ethereum blockchain (the “INX Token”), which was offered to the public from August 20, 2020 and closed on April 22, 2021. For more information see below “The INX Token” and Item 4, Part A – “Information on the Company - History and Development of the Company – The Token Offering.”
We designed our platforms to provide the following solutions to the problems identified above, which we believe makes the INXD trading platform, the INXS trading platform and our related business activities (collectively, the “INX Trading Solutions”) an attractive choice for the trading of blockchain assets:
● | Robust Pre-Trade and Post-Trade Services. We have developed trading features to permit clients to continually monitor and manage blotter, position, and other technical analysis. We also offer investment tools during the pre-trading period and provide trade confirmations, reporting and access to pricing data during the post-trading period. We intend to continue with the development of additional features and improvements to our pre-trade and post-trade services. |
● | Historical Trading Record. Beginning with the first recorded transaction on the INX Trading Solutions trading platforms, we apply anti-money laundering (“AML”) and “Know Your Client” (“KYC”) procedures for all account holders and provide transparency so that clients have the ability to review all activities taken by them. We believe that this accessibility will supplement the transparency of blockchain assets. |
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● | Regulation and Safeguards. We believe that regulatory oversight will instill greater confidence in our trading platforms compared to unregulated blockchain asset trading platforms. As the ownership of blockchain assets becomes more commonplace and professional traders continue to analyze and enter the blockchain asset marketplace, we believe that clients will expect regulatory safeguards for blockchain asset trading, comparable to the current fiat and securities exchanges. All customers of INX Trading Solutions, whether trading cryptocurrencies or security tokens, are required to complete KYC/AML checks in compliance with applicable laws and regulations. Blockchain assets traded on the INXD trading platform are transferred to a digital wallet held by one of our custodians.
Blockchain assets traded on the INXD trading platform are transferred to a digital wallet held by one of our custodians, which transfer is recorded on the blockchain ledger that underlies such blockchain asset. Once a blockchain asset is deposited with our custodian, none of the trading transactions performed on the INXD trading platform are recorded on a blockchain ledger. Trades on our trading platforms are recorded only on our internal centralized servers, and they are then reflected in each customer’s respective account. A transfer of a blockchain asset is recorded on its underlying blockchain ledger when the owner of the blockchain asset wishes to withdraw the blockchain asset from their account. In this event, the blockchain asset is transferred from our respective custodian’s digital wallet to the customer’s private digital wallet. Digital securities traded on the INXS ATS are reflected via bids and offers in the order book visible to approved users on INXS. Each user self-custodies the digital security in their own digital wallet. Trades are executed based on user instructions using API connections to third party custodians and blockchain distributed ledger technology.
We have a cyber security function that ensures that transfers in and out of our respective custodian’s digital wallet will be done after full verification of the person that requested the withdrawal. The procedure includes user credential verification plus a one-time password that is replaced every 30 seconds. The customer gets a dedicated unique cryptographic application that generates unique passwords every 30 seconds while we have a second unique key that enables the verification of the one-time password. The used technology implements the PPK algorithm which is considered to highly strengthen the security of the customer’s account. Alex Weinert, Group Program Manager for Identity Security and Protection at Microsoft said, “Based on our studies, your account is more than 99.9% less likely to be compromised if you use MFA (Multi- Factor Authentication).”8 Our system, after verifying the client’s one-time password, sends a verification email with a short expiration to get additional client verification for the withdrawal request. A withdrawal request will be approved only after a completion of all the above steps. In addition to robust policies and procedures that govern the onboarding of customers to INXD trading platform, including both AML and KYC screening and controls, fiat withdrawal requests are screened by operations staff to match the account credentials and identifying information to the receiving bank account information provided for the withdrawals (i.e. first-party wires only). Discrepancies in information are investigated by operations staff and escalated to compliance staff for further review, if necessary, in-line with the suspicious activity escalation procedures in the policies referenced above. Similarly, regarding crypto withdrawal requests, our industry-leading vendor Elliptic analyzes the blockchain and risk scores the recipient wallets (barring a de minimis or market maker transfer), allowing our operations staff to timely screen withdrawal and approve, deny, or escalate to our compliance staff for further review, if necessary. |
● | Reserve Fund. We provide additional comfort to our customers with respect to the financial stability of the Company by allocating a reserve fund (the “Reserve Fund”), out of the funds raised in the Token Offering, which fund is available to cover customer and Company losses, if any, that result from cybersecurity breaches or theft, errors in execution of the trading platform or its technology, and counterparty defaults, including instances where counterparties lack sufficient collateral to cover losses. As of March 31, 2024, there is an amount of $34.4 million in the Reserve Fund. |
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● | Our Robust Technology. We are developing technology to support rapid trading activity. Our platforms are custom-built to support the growing blockchain asset market, and to scale along with the continued growth of the market.
The architecture for the INX Trading Solutions matching engine is such that all orders are matched based on a “first in, first out” (“FIFO”) asset-management and valuation method in which assets produced or acquired first are sold, used, or disposed of first. Orders in different markets/pairs are processed in parallel to provide the fastest possible execution. To facilitate liquidity and support a vibrant trading market on our trading platforms, we offer incentives to attract high volume traders and establish strategic partnerships with market makers. INX Trading Solutions enables trading via web portal and application programming interface solutions (“API”). The INXS ATS allows users to place bids and offers in digital securities such as the INX Token. All orders are placed in the order book which are visible to all approved users of the ATS. The ATS only accepts limit orders placed by each user. The system will automatically execute the best bids or offers in the order book. The ATS enables this peer-to-peer trading for approved users that have passed the KYC/AML requirements of INXS. |
● | Transaction Fee Transparency. We have established transaction fees as a percentage of digital assets received by the buyer and a percentage of consideration paid by the seller in each trade, which could be denominated in fiat or in a digital asset. For trades in digital assets on INX.One, transaction fees are charged by deducting the fee amount from the asset that is received by the buying and selling customer in a trade. For trades in security tokens on INX.One, the trading fee is deducted from the buyer and the seller in US Dollars as a percentage of the trade value in US Dollars. The transaction fees of our trading platforms are published and updated from time to time on our website available at https://www.inx.co/.
For example, if a customer buys BTC with USD, the transaction fee would be charged from that customer in BTC. The same process is followed with regards to transactions where one digital asset is purchased for another. For example, if BTC is purchased with ETH, the transaction fee would be charged from the buyer in BTC.
With regards to trading of security tokens, the transaction fee is charged and deducted from both customers’ bank accounts (the buyer and the seller) in USD at the time of the order execution. The transaction fee is similarly set as a percentage of the transaction value based on the fee schedule referred to above. In addition, there is an Ethereum settlement fee paid by both the buyer and seller per order, which covers the blockchain costs associated with the order’s execution. |
As of the date of this Annual Report on Form 20-F, we offer services in the following crypto assets and security tokens (identified by symbol) on INX Trading Solutions, also known as INX.One:
INX Digital | INX Securities | |
BTC | INX | |
ETH | MSTO | |
AAVE | BCAP | |
LTC | SPICE | |
USDC | PRTS | |
AVAX | SCI2 | |
FTM | TXC | |
UNI | TRZX | |
CRV | ATX | |
TRUCPAL | ||
XMNA | ||
NOTE | ||
HAG | ||
UNX | ||
CCNA |
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The INX Digital platform operates within the U.S.; however, users from other regions may independently access our platform and engage in trading activities involving securities or cryptocurrencies, subject to compliance with the Company’s policies and procedures. Trading on the INX Digital platform is offered in the following 48 U.S. jurisdictions: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Puerto Rico, Rhode Island, South Carolina, South Dakota, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming. For these assets, the Company offers listing and trading services.
On the INX Securities platform, the security tokens are listed for trading in all 50 U.S. states plus the District of Columbia and Puerto Rico, and other foreign jurisdictions that we believe we have the right to operate in. For certain of our security tokens listed on our INXS platform, in addition to trading services, the Company also offers broker-dealer of record services for certain primary offerings in compliance with local laws.
We believe that our use of the Ethereum blockchain to create the INX Token has the following benefits, which we believe makes the INX Token an attractive choice:
● | Decentralization. Record-keeping of transfers is performed in real time using a distributed ledger, with no need for third party or intermediary validation. |
● | Traceability. Full historical data of all transfers of INX Tokens is recorded on the Ethereum blockchain. |
● | Immutability. Data is written into the blockchain to allow it to be shared publicly while ensuring its immutability. There are no known methods for changing a blockchain once it has been written. |
● | High Availability. Because the Ethereum blockchain is based on thousands of nodes in a peer-to-peer network, and data is replicated and updated on each and every node, the distributed ledger becomes highly available. |
● | Privacy. Personal information of INX Token holders is stored in an encrypted form and only available to the Company and will be provided to regulatory and governmental authorities as required by law. |
In the future, we intend to establish a platform for the trading of cryptocurrency-based futures, options and swaps. We have taken no steps towards the establishment of such a platform, which will require the development of technological solutions as well as federal and state regulatory approvals; accordingly, there is no assurance that such a trading platform will ever be developed.
Technology and Product Development
We designed our trading platforms to provide clients with a multi-currency non-biased execution trading solution and to eventually function as broker, execution, and clearing agent. We provide trading of different types of digital blockchain assets, including cryptocurrencies and security tokens.
Our goal in the development of INX Trading Solutions is to offer professionals in the financial services community a comprehensive, interactive platform that allows for seamless integrated trading, real-time risk management and reporting and administration tools. The INX Trading Solutions will help our customers automate and coordinate front-office trading functions, middle-office risk management and reporting functions, and back-office accounting functions.
The INX.One website serves as a single entry point for our customers. INX.One is not a separate platform but rather a solution designed to provide users with access to INXD and INXS platforms, creating a unified customer experience for trading both security tokens and digital assets. After successfully completing the distinguish onboarding processes and receiving the relevant platform’s approval, customers gain entry to either INXD and/or INXS platforms through the INX.ONE hub, which integrates both security and crypto-asset trading on a single application. As we further develop and update our trading platforms, we intend to add functionalities across the entire transaction lifecycle, as well as other information and features. Our platforms do not support cross-asset (i.e., digital securities for cryptocurrency) trading, nor will we permit the settlement of securities transactions in cryptocurrency, at least until such time as the regulatory uncertainty regarding such transactions is resolved.
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We developed and operate each of our trading platforms through certain of our subsidiaries and these functions are separated by entity as follows:
● | INXD is responsible for recording cryptocurrency trades in accordance with state money transmitter regulations; and |
● | INXS is responsible for recording digital security trades in accordance with applicable SEC and FINRA regulations. |
We utilize key criteria in the selection of our leadership team and team members. This includes relevant experience in platform development (designing, building, and operating trading platforms), trading, financial markets, digital assets, regulations, legal or compliance skills, foreign exchange, and money transmission. Multiple team members are involved in hiring potential candidates and screening for relevant experience. Multiple interviews and reference checks are conducted for each role, and where appropriate, background checks and/or police report screening is mandatory. Licensed individuals are registered with relevant regulatory authorities. Potential team members are also evaluated based on their experience operating within regulated businesses, especially of a financial nature.
The Company utilizes “straight-through processing” for efficiently managing customer orders and subsequent trades, on both INXD and INXS. This approach entails the automatic recording of orders and trade outcomes within internal databases, seamlessly updating customer accounts without any manual involvement. While both entities maintain a dedicated staff to oversee trading activities and provide customer support as necessary, the initiation and execution of orders are fully automated
Our proprietary order management software, which is utilized by both INXD and INXS has a rules engine that ensures sufficient funds or fully paid assets are available to cover orders, prior to their submission.
INX Digital Trading Platform
We developed the INXD trading platform and tested its trading capabilities from a functional and load perspective. We have completed the minimum viable product of the platform that includes the architecture design, trading functionalities and the user interface and experience. To be able to handle large amounts of traffic and transactions, we are currently working on scaling the capabilities of the system from an architecture and application level. We are putting in place fail safe and recovery processes in case of system failure that are designed to inherently respond in a way that will cause no or minimal harm to core trading data.
Customers of the INXD trading platform may be entitled to discounts on trading fees charged by the Company, providing that they hold INX Tokens. Discounts may be granted according to different tiers, allowing for larger discounts given to customers who hold a larger number of INX Tokens.
We have registered INXD with FinCEN as a federal money services business. In addition, as of March 31, 2024, we have been issued a license by the following U.S. states, territories, and districts: Alabama, Alaska, Arizona, Arkansas, Connecticut, Delaware, District of Columbia, Florida, Georgia, Idaho, Illinois, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Minnesota, Mississippi, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Puerto Rico, Rhode Island, South Carolina, South Dakota, Vermont, Virginia, Washington, and West Virginia, and have submitted notifications or are otherwise qualified to operate (based on being exempted from any licensing requirement or notice requirement) in the following States: California, Colorado, Indiana, Massachusetts, Michigan, Missouri, Montana, Pennsylvania, Utah, Wisconsin, and Wyoming. INX Digital is now eligible to operate as proposed in those jurisdictions.
The INXD trading platform incorporates a secure trading and matching engine, which has high frequency transaction capabilities and supports a range of standard order types. We also developed an API interface for institutional and high volume clients.
The architecture for the INXD trading platform allows all orders to be matched based on a FIFO logic. Orders in different markets/pairs are processed in parallel to provide the fastest possible execution.
We have designed trading features to permit clients to continually monitor and manage blotter, position, and other technical analysis. We also offer investment tools during the pre-trading period and provide trade confirmations, reporting and access to pricing data during the post-trading period.
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Custody of Client Assets on the INXD trading platform
INXD receives custodian services for cryptocurrencies held on behalf of the clients of our INXD trading platform from BitGo Trust Company (“BitGo Trust”), a trust company under §51-A of the South Dakota Banking Law that is licensed to act as a custodian of its client’s digital assets on its client’s behalf and BitGo, Inc. (together, “BitGo”). BitGo Trust describes itself as a “qualified custodian” as defined in Rule 206(4)-2 promulgated under the Investment Advisers Act of 1940.
We believe that BitGo is a leading provider of custody and wallet services for cryptocurrency trading, with a high degree of electronic and physical security, as well as transaction processing and reporting. BitGo is independent from INX.
BitGo offers two types of services; a hot wallet solution and a cold storage solution. INXD is contracted with BitGo for both services. A hot wallet is a multi-signature storage solution, which requires two of three private keys to transfer digital assets. Pursuant to our agreement with BitGo, INX is holding two of the keys, and BitGo, Inc. is holding the other key. Two keys are created whenever INX establishes a BitGo hot wallet, a primary key (used to authorize transactions) and a backup key (used to recover the wallet, if the wallet password is lost or if BitGo ceases operations). The Company currently utilizes BitGo’s hot wallet multi-signature solution. However, we have strategic plans to transition to a cold storage solution utilizing BitGo Trust Company, Inc., which will serve as a qualified custodian for safeguarding the majority of our cryptocurrency assets once they reach a substantial level. Cold storage offers superior asset protection through a combination of robust policies and stringent physical security measures. Up to this point, our operations have exclusively relied on the hot wallet solution.
The third key is used by BitGo to co-sign transactions; this key is created by BitGo’s servers and is known only to BitGo to mitigate the risk of an unauthorized transfer of assets. All multi-signature wallets require that INXD and BitGo must act together to transfer assets. INXD maintains an omnibus wallet at BitGo for each type of asset to be traded on our platform, which is designated for the exclusive benefit of customers. We currently store cryptocurrency assets held by us in wallets provided by BitGo using properly constructed policies in conjunction with multiple admins on the wallets which are a key element in keeping funds safe.
BitGo Trust’s cold storage solution outsources key management and security to BitGo Trust. Cold storage is offline storage; it is the most secure way to store digital assets, as it is never connected to a network. INXD will transfer cryptocurrency assets from its hot wallet to cold storage at BitGo Trust; BitGo Trust, as custodian, will safeguard cryptocurrency assets for our customers. To initiate a transfer from cold storage to a Company hot wallet, we will specify the amount to transfer and submit the request to BitGo Trust. BitGo Trust will contact us, to conduct an out-of-band video verification to confirm the transfer is legitimate and that a Company authorized signatory approves it. BitGo Trust will then generate the transaction and sign it securely offline with the user key that BitGo Trust holds in custody. Once half-signed, BitGo Trust will bring the transaction back online, and upload it to the platform. After key policies are evaluated and satisfied, BitGo Inc. will then sign the transaction with the BitGo Inc. key. Once completely signed, BitGo Inc. will broadcast the transaction to the blockchain, and the cryptocurrency assets will be transferred from cold storage to the appropriate Company hot wallet. This separation of functions makes our operations more secure because, among other reasons, we only need to keep a hot wallet sufficiently funded to service withdrawals. We plan to use cold storage to store the majority of the cryptocurrency assets held by us when they become material, because cold storage provides greater asset protection through policies and physical security.
Assets are held using BitGo’s multi-signature solution and properly constructed policies used in conjunction with multiple admins on a wallet, which are key elements in keeping funds safe.
BitGo’s custodial services are provided pursuant to a custodial services agreement dated August 21, 2021 (as amended on January 8, 2021, March 1, 2021, and April 17, 2023, the “Custodial Services Agreement”) between INXD and BitGo. For its custodial services, BitGo receives an onboarding fee and receives a monthly custody fee equal to an annualized percentage of the market value of the assets under custody (subject to a minimum monthly charge). BitGo also receives various transaction-based fees.
The Custodial Services Agreement is for an initial term of one year and has been automatically extended for one-year periods, unless terminated by either party by delivery of a written notice at least 60-days prior to the expiration of the then-current term. INXD may also terminate the Custodial Services Agreement for any reason upon 30 days’ prior written notice.
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The foregoing description of the Custodial Services Agreement summarizes the material terms of the Custodial Services Agreement but is not a complete description. For more details about the Custodial Services Agreement, please refer to the full text of the Custodial Services Agreement, which is attached as Exhibit 4.13 to the Company’s Annual Report on Form 20-F.
In addition to the Custodial Services Agreement, on August 17, 2021 the parties thereto entered into an Electronic Trading Agreement (the “Electronic Trading Agreement”) in connection with BitGo’s services to INXD and the access granted to INXD by BitGo to BitGo Prime LLC’s (“BitGo Prime”) proprietary electronic trading system (the “BitGo System”). The Electronic Trading Agreement includes, without limitation, terms of use of the BitGo Prime System by INXD, disclaimers by BitGo Prime and limitations to its responsibly and liability in connection with the BitGo Prime System, undertakings by INXD to indemnify BitGo Prime under certain circumstances, and the right of BitGo Prime to terminate the Electronic Trading Agreement at its discretion and without cause upon a 30 days’ notice. INXD’s access and use of the BitGo Prime’s proprietary electronic trading system is further subject to execution of, and to the terms that were determined by, the Custodial Services Agreement and a clearing and settlement addendum with BitGo Prime. BitGo Prime and its affiliates retain all rights, title and interest in and to the BitGo System, including all source code, object code, data, information, copyrights, trademarks, patents, inventions and trade secrets embodied therein, and all other rights not expressly granted to INXD pursuant to the Electronic Trading Agreement. The Electronic Trading Agreement is governed by the laws of California, USA and includes a binding arbitration clause pursuant to the Commercial Arbitration Rules of the American Arbitration Authority.
As stated in INXD’s Custodian Services Agreement with BitGo, BitGo obtains and maintains insurance coverage in such types and amounts as are commercially reasonable for the custodial services provided. Any insurance related to theft of coins will apply to custodial services only (where keys are held by Trust Company, i.e., “cost storage”) and not to non-custodial accounts (where keys are held by client, i.e., “hot-wallets”).
As of March 31, 2024, there is about $5.0 million of customers’ funds held in BitGo wallets.
INX committed to reserve 75% of the gross proceeds less payments to underwriters from its initial public offering in excess of $25,000 to be available to cover customer and INX’s losses, if any, that result from cybersecurity breaches or theft, errors in execution of the trading platform or its technology, and counterparty defaults, including instances where counterparties lack sufficient collateral to cover losses. INX refers to this amount as the “Cash Fund” or “Reserve Fund”. As of December 31, 2023, INX has segregated $34,405,000, which is restricted as the Cash Fund. The Cash Fund is comprised of cash and cash equivalents, U.S. Treasury securities and corporate bonds held at banks and brokerage firms.
On July 13, 2021, the INX’s Board of Directors approved the investment policy of the Cash Fund (the “Investment Policy”). Per the Investment Policy, as amended on August 11, 2022, the Cash Fund, post the amendment, shall be invested as follows: minimum 15% in cash and bank deposits, up to 70% in U.S Treasury securities, up to 20% shall be invested in exchange traded funds and up to 50% in corporate bonds and other instruments with the lowest investment grade rating of BBB.
INXS Trading Platform
Company owns INXS, a Pennsylvania limited liability company, that is registered in the United States as a broker-dealer, a FINRA member, and that operates and is registered as an Alternative Trading System by the SEC. We count INXS’s broker-dealer/ATS - including its digital security listings and client base - among our wholly owned subsidiaries.
INXS was developed as a platform for investors that trade (buy and sell) securities and would like to enrich their portfolios with a new type of securities, also known as “digital securities.”
The INXS Trading Platform opens access to a new stream of market liquidity that comes from the alternative asset markets. The INXS Trading Platform manages to complete transactions without the need to custody the clients’ tokens nor funds and still provides full confidence to the seller and the buyer that the trade will be completed based on their firm orders.
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INX Securities does not provide custodial services for the funds traded on the Platform. INX Securities does not guarantee or otherwise have responsibility for settling the trades and does not, at any time, exercise any level of control over the cash being used to make the purchase. The user establishes a bank account in their name at Evolve Bank and Trust (“Evolve”), a licensed money service business and FDIC-insured bank which provides custodial services with respect to platform users’ funds for US Dollars. The user consents to instruct Evolve Bank to transfer funds to and from the user’s bank account to effectuate settlement of a trade. As needed for trade funds settlement, banking instructions of the user are conveyed via API calls transmitted via the platform to Evolve.
When a user desires to buy a security token, these banking instructions direct Evolve to move funds out of the user’s account to pay net sale proceeds to the seller’s account and to pay commissions and fees to INX Securities’ account. Pursuant to the Digital Trading Agreement, entry of a Bid order on the Platform explicitly constitutes the user’s direct and complete instruction to Evolve to, upon match, distribute net transaction proceeds from the Buyer’s trading account to the matched seller’s trading account and distribute commissions and fees from the Buyer’s trading account to INX Securities’ Evolve account and authorizes INX Securities to transmit this instruction, upon match, to the subject security’s digital registrar.
When a user desires to sell a security token, the user will indicate the quantity of the security token that he/she wishes to offer and must indicate the desired ask price. INX Securities will electronically confirm with the digital registrar that the seller’s Digital Wallet indicates sufficient seller security holdings. The user consents to forward the user’s transfer instructions for the security being offered to the digital registrar via a Platform API call to the digital registrar’s smart contract on the Ethereum Network, to prepare for a potential transfer of the security in the event of an order match. Pursuant to the Digital Trading Agreement, entry of an Offer order on the Platform explicitly constitutes the user’s direct and complete instruction to the subject security’s digital registrar to, upon match, transfer the security to a matched buyer and authorizes the Company to transmit this instruction, upon match, to the subject security’s digital registrar. Once this has been verified, the digital security is allowed to be offered for sale on the Platform’s displayed order book.
The seller/buyer is obligated to sell/buy the digital security if there is a bid at the ask price, as determined by the matching engine, which operates on a price-time priority algorithm. These terms are described in the Digital Trading Agreement and are re-confirmed by both buyers and sellers each time a bid or offer is entered onto the Platform.
Once the platform receives confirmation that the digital registrar has changed the ownership name from the seller to the buyer, as represented by the digital registrar’s transfer of the security token from the seller’s Digital Wallet to the buyer’s Digital Wallet, INX Securities communicates the buyer’s funds distribution instructions via an API call to Evolve, as explicitly authorized by the buyer in the Digital Trading Agreement. These buyer instructions detail the net proceeds amount due to the seller and the amount of commissions and fees to be sent to INX Securities. Evolve then processes these transfers.”
Once the asset and funds transfers described above are completed, the settlement process and trade are deemed complete.
We are continuing the maintenance and development of the INXS Trading Platform in order to create additional ways of trading digital securities. We listed the INX Token on the INXS Trading Platform in July 2021. Customers of INXS will be entitled to discounts on trading fees charged by the company, providing that they hold INX Tokens. Discounts will be granted according to different tiers, allowing for larger discounts given to customers who hold a larger number of INX Tokens.
The INX Token
We developed the INX Token, an ERC-1404 blockchain asset that is programmed using a smart contract that is compatible with the Ethereum blockchain, which was offered to the public from August 20, 2021 to April 22, 2021. For more information regarding the initial offering of the INX Tokens with the SEC, see “Item 4, Part A – Information on the Company - History and Development of the Company – The Token Offering.”
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The INX Token operates on the ERC-1404 blockchain standard, a modified version of ERC-20 that introduces two additional functions:
1. Detect Transfer Restrictions: This feature allows for the identification of transfer restrictions, providing enhanced security and compliance; and
2. Human-Readable Error Messages: ERC-1404 enhances user experience by offering clear and understandable error messages when a transfer is likely to fail.
Furthermore, ERC-1404’s compatibility with existing wallets and exchanges designed for ERC-20 simplifies integration, making it convenient for a wide range of users and platforms.
In July 2021, we listed the INX Token on the INXS Trading Platform. We developed our token smart contract based on the “ERC-1404: Simple Restricted Token Standard.” ERC-1404 is designed for security tokens, tokenized securities and other tokens that carry complex compliance requirements. ERC-1404 is a token standard developed with corporate governance, banking, and securities laws in mind. It is fully open source, which is paramount to ensuring its security, quality and interoperability. ERC-1404 carries all of the same benefits of an ERC-20 token, it is simple, easy to deploy and interoperable with the entire Ethereum universe, with a few key improvements that allow issuers to enforce regulatory transfer restrictions and maintain compliance with KYC/AML rules as well as the ability to recover tokens in case of wallet loss. The INX Token/smart contract passed an external audit test by Quantstamp.
We engaged Quantstamp, a blockchain security firm, a leader in blockchain security, having performed over 200 audits and secured over US$100 billion in value, to perform an audit of the INX Token smart contract code, which was completed on December 12, 2019 (the “INX Contract Audit”). Quantstamp’s team has decades of combined experience in formal verification, static analysis, and software verification. Through their services, Quantstamp has assisted blockchain projects globally with its white glove security auditing services, and has secured billions of dollars in transaction value for blockchain applications. Quantstamp is also dedicated to research and development in the form of collaborations with leading academic institutions such as National University of Singapore and MIT (Massachusetts Institute of Technology). Quantstamp has experience with auditing various blockchain platforms including Ethereum, Binance Chain, Hyperledger, EOS, and Corda, and languages including Solidity and Vyper.
The INX Contract Audit was intended to evaluate security-related issues, code quality, adherence to specification and best practices and it includes a manual review of code and a comparison to specifications of the code. Quantstamp reviewed the INX Token smart contract for vulnerabilities related to transaction-ordering dependence, timestamp dependence, mishandled exceptions and call stack limits, reentrancy and cross-function vulnerabilities, logical oversights, access control, code clones, functionality duplication, gas usage and arbitrary token minting. The INX Contract Audit is not an endorsement of the reliability or effectiveness of the INX Token smart contract, but rather it is limited to an assessment of its logic and implementation.
During the INX Contract Audit, Quantstamp identified two specific risks: (i) the ability of a hacker to delay the release of INX Tokens by other holders as a means to get a trading advantage, and (ii) the risk to users if the Company’s private keys are compromised. Quantstamp advised that the Company take caution in using particular functions when transaction ordering. Quantstamp also advised that the Company disclose the risk associated with theft or loss of its private keys having the ability to revoke INX Tokens from a third-party account or time-lock INX Tokens of such accounts. The Company has acknowledged each of these risks and has taken security precautions with regards to each.
The INX Tokens are accessible only from secure Ethereum wallets and have a recovery mechanism that allows the Company under certain circumstances to protect the INX Token holder even in the case of loss of wallet credentials.
Prospective investors who were duly identified through KYC/AML procedures were able to purchase the INX Token under the INX Token Purchase Agreement, which all initial purchasers of INX Tokens in the offering of the INX Token with the SEC are a party to, and which sets forth the rights of each INX Token holder with regard to the INX Tokens held by such holder.
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Holders of INX Tokens are entitled to receive an annual pro rata distribution of 40% of the Company’s cumulative net cash flow from operating activities, excluding any cash proceeds from an initial sale by the Company of an INX Token (“Adjusted Operating Cash Flow”). INX’s profit share model makes these INX Token holders beneficiaries of the growth and success of INX’s business.
The distribution is calculated on an annual basis and paid on or before April 30 to parties (other than the Company or its subsidiaries) that hold INX Tokens on the preceding March 31. Each annual distribution is based on INX’s cumulative Adjusted Operating Cash Flow (net of cash flows which have already formed the basis for a prior distribution), calculated as of December 31 of the year prior to the distribution. However, because each INX Token holder’s right to a pro rata distribution is based on our cumulative Adjusted Operating Cash Flow, no distribution will be made to INX Token holders, if at all, until the Company generates positive cumulative Adjusted Operating Cash Flows. As of December 31, 2023, cumulative Adjusted Operating Cash Flow was negative $64.5 million. The distribution to INX Token holders is a contractual obligation of the Company and a right of each INX Token holder of record as of March 31 of a year following a year end for which there was positive cumulative Adjusted Operating Cash Flow. However, the pro-rata distribution of the Company’s cumulative Adjusted Operating Cash Flow is not self-executing and requires the approval of the Company’s financial statements and calculation of such distributions in good faith by the Company’s Board of Directors. For purposes of the calculation of the Adjusted Operating Cash Flow, cash flow from the sale and purchase of blockchain assets, including cash flow from the sale and purchase of the INX Token (excluding cash proceeds from an Initial Sale) and cash flow for interest paid and interest received, will be included in the calculation of Adjusted Operating Cash Flow regardless of their classification in the consolidated statement of cash flow of the Company. An “Initial Sale” refers to the first sale and transfer of the respective INX Token by the Company to an initial purchaser. Distributions will be paid either in U.S. Dollars to an INX Token holder’s bank account or in ether which will be transferred to the INX Token holders’ wallet that is recorded on the INX Token Distributed Ledger (as defined in the Token Offering).
In addition, holders of INX Tokens will be entitled to, at a minimum, a 10% discount on the payment of transaction fees on the INX trading platform, INX.One, provided that they hold INX Tokens. Discounts will be granted according to different tiers, allowing for larger discounts given to customers who hold a larger number of INX Tokens. The Company does not currently accept INX Tokens as payment for its services.
Holders of INX Tokens have contractual rights determined by the INX Token Purchase Agreement. Pursuant to the terms of the INX Token Purchase Agreement, ownership of the INX Tokens and all rights under the INX Token Purchase Agreement are contingent upon holders of INX Tokens satisfying the Company’s KYC/AML procedures, including any requirements to periodically or otherwise update information provided to the Company. Transfer of INX Tokens would include similar rights and obligations toward the new holder of the INX Tokens.
● | Rights of INX Token Holders Upon a Failure or a Change of Control. Each INX Token held by parties other than the Company shall entitle its holder to receive a pro rata portion (based upon the number of INX Tokens then outstanding) of the Cash Fund, if any of the following occur: |
- | The Company fails to operate a bona fide trading platform that permits the spot trading of Bitcoin and Ethereum by December 31, 2021, (a milestone which has, as of the date hereof, been achieved); or |
- | (a) a sale of all or substantially all of the assets of the Company; (b) any person or entity becoming the beneficial owner, directly or indirectly, of more than 50% of the outstanding voting interests of the Company; or (c) the closing of a merger, consolidation, recapitalization or reorganization of the Company with or into any person or entity pursuant to which the shareholders of the Company immediately prior to such transaction own less than 50% of the outstanding voting interests of the resulting entity or its parent company. |
● | Rights of INX Token Holders Upon an Insolvency Event. If (i) the Company permanently discontinues all the activities of INX Trading Solutions and there is no successor conducting a substantially similar business that assumes the obligations of the Company with regard to the INX Tokens and (ii) an “Insolvency Event” (as defined in the INX Token Purchase Agreement) occurs, then INX shall be deemed to be in breach of its obligations under the INX Token Purchase Agreement, which breach shall create a claim in favor of INX Token holders that may be asserted by INX Token holders against the Company in any proceeding arising from such Insolvency Event. The claim amount will be determined by the liquidator, a court of competent jurisdiction overseeing the liquidation, or some other authority pursuant to applicable insolvency law, and accordingly, there can be no assurance as to the payment amount, if any, that may be received by an INX Token Holder in settlement of such claim. |
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The Company intends that the INX Token holders will be unsecured creditors of the Company and would therefore rank pari passu with all the other unsecured creditors of the Company and senior to the claims of holders of the Company’s shares. On closing of the transactions contemplated by the Security Exchange Agreement, TIDCI entered an agreement with the Company (the “Waiver and Subordination Undertaking”), pursuant to which TIDCI will (a) irrevocably subordinate its rights to receive any distributions and payments from the Company prior to the payment in full by the Company of all distributions owed to INX Token holders, and (b) irrevocably waive and subordinate its rights, in the event of an Insolvency Event, to any cash held in the Cash Fund.
The Cash Fund is not held in an escrow or trust account, but rather, is held in a separate bank account or accounts controlled by the Company. The Cash Fund can be used only for very specific designated purposes, under certain pre-identified circumstances, such as for covering losses of the Company and its clients that result from cybersecurity breaches or theft, errors in the execution of the trading platform or its technology, and counterparty defaults, including instances where counterparties lack sufficient collateral to cover losses, or for the purpose of payment to holders of INX Tokens (other than to the Company itself) in the event of a change of control in the Company. In the case of an Insolvency Event, a liquidator, court or other applicable authority may determine that INX Token holders are not entitled to any payment from the Company’s assets or that the INX Token holders’ claims are not senior in right to claims or interests of the Company’s shareholders, in particular the shareholders who have not agreed to subordinate their rights to the claims of INX Token holders. In addition, the Company may incur debt (including secured debt) that ranks equally with, or senior to, the rights of INX Token holders. In the case of an Insolvency Event, holders of debt instruments ranking senior to INX Tokens, as well as holders of other preferential claims under relevant insolvency laws, may be entitled to receive payment in full before INX Token holders receive any distribution, including distributions of Adjusted Operating Cash Flow and distributions from the Cash Fund. INX Token holders do not have a perfected security interest in either the Cash Fund, or their Pro Rata Portion (as such term is defined in the Token Offering) of the Distributable Amount (as such term is defined in the Token Offering) of the cumulative Adjusted Operating Cash Flow. There is no guarantee that an INX Token holder will receive any funds following an Insolvency Event (as such term is defined in the Token Offering).
Future Development
We plan to further develop our products and business, and in particular, to conduct the following development activities:
● | Develop full solution to support onboarding and trading of institutions - front and back office. |
● | Enhance risk trading management tools. |
● | Create the infrastructure to develop and launch new digital assets and/or integration with third party providers for specific solutions. INX intends to establish a platform for the trading of cryptocurrency-based futures, options and swaps. INX has taken no steps towards the establishment of such a platform, which will require both the development of technological solutions as well as applicable regulatory approvals, and accordingly, there is no assurance that such a trading platform will ever be developed. | |
● | Execute the full vision of one regulated hub for digital assets – all under the same platform and share common processes (such as: registration, onboarding, trading, support). | |
● | Develop automated know-your-client (KYC) and anti-money laundering (AML) procedures. | |
● | Develop and launch a mobile application for digital securities trading. | |
● | Add additional payment methods for INX Trading Solutions. | |
● | Develop multi-blockchain support for the INXS platform. |
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Our Growth Strategies
We believe that as INX Trading Solutions completes each phase of development, which we expect will increase the number of high-volume blockchain assets included on our platforms, our business operations will grow and enable us to launch several growth strategies, including the following:
● | Active expansion of institutional blockchain asset trading and large-scale block transactions. We promote our trading platforms and related services with institutional and other accredited investors such as family offices, hedge funds and others who require access to platforms for trading cryptocurrencies or security tokens, including trades in large-scale block transactions. |
● | Fully monetize market data and connectivity. We aim to serve as a hub for blockchain asset traders, institutional investors, commercial banks and individuals trading blockchain assets. As we attract more clients, we expect that we will accumulate non-proprietary big-data relating to trading behavior and related market statistics. We plan to use this data for internal use and as a product to be sold to institutional investors and trade analysts. |
● | Strategic opportunities. Upon completion of development phases, we plan to pursue strategic alliances with commercial banks and other licensed and regulated blockchain asset trading platforms for the expansion of our business. |
● | The INX Token. Use of the INX Token is intended to create a “virtuous cycle,” where users will get benefits to buy INX Tokens. For example, INX Token holders may be entitled to a minimum of 10% discount on the trading fees on the INXS Trading Platform. This, in turn, may increase the value of the INX Token as the number of users on the INXS Trading Platform grows. In addition, holders of INX Tokens will be entitled to a distribution based on our net cash flow from operating activities, excluding any cash proceeds from an initial sale by the Company of an INX Token. Our profit share model makes these INX Token holders beneficiaries of the growth and success of the Company’s operations. The Company has not allocated for issuance and has no current intention to issue 35 million of the 200 million INX Tokens that have been created. In addition, the Company may reserve an additional 20% of INX Tokens received as payment of transaction fees, as long as the total amount of INX Tokens reserved does not exceed 35 million plus 50% of the number of INX Tokens sold by the Company to the public pursuant to our initial public offering and subsequent offerings of INX Tokens (excluding re-issuances of reacquired INX Tokens), up to a maximum of 100 million INX Tokens. The Company does not intend to issue these reserved INX Tokens for general fundraising purposes; these INX Tokens may be issued to fund acquisitions, address regulatory requirements or fund the operations of the Company if the Board of Directors determines that the Company has net cash balances sufficient to fund less than six months of the Company’s operations. We intend to restrict issuances of the reserved INX Tokens to these or similar extraordinary situations to limit the dilution to INX Token holders. |
● | Single integrated solution. We believe that developing INX Trading Solutions with the capability to provide customers with a single integrated solution to access an array of services and features will be preferred by participants in the financial services community and will attract high volume traders who need a multifunctional trading solution. We intend to bolster our competitive position by developing platforms for a wide breadth of asset classes, each platform with a suite of workflow functionalities across the entire transaction lifecycle, including pre-trade, trade and post-trade services. In the future, the Company intends to establish a platform for the trading of cryptocurrency-based futures, options and swaps. We have taken no steps towards the establishment of such a platform, which will require the development of technological solutions as well as federal and state regulatory approvals; accordingly, there is no assurance that such a trading platform will ever be developed. |
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Competition
We face intense competition in the blockchain asset trading market on a global level. As of March 1, 2024, top blockchain asset trading platforms, based on USD daily trading volume, include Binance, Upbit, OKX, Coinbase, and Bybit.
An ever-growing number of previously unregulated trading platforms have announced intentions to operate as a regulated broker-dealers, or as otherwise regulated entities either under the federal securities laws, U.S. state or local laws or, as applicable, the laws of other jurisdictions (outside the U.S.) such as the EU. The market for trading blockchain assets has generated considerable interest and is continually evolving with new entrants to the market. In addition, established financial institutions have expressed interest in operating regulated blockchain asset exchanges or trading platforms and utilizing blockchain assets in bank financing practices.
For example, in January 2019, t0.com, Inc. announced that its security token trading platform was operational and began trading tZERO token, in compliance with SEC and FINRA regulations. Coinbase and Uphold, two blockchain asset trading platforms, have each announced plans to seek SEC approval to operate trading platforms for trading blockchain assets that are securities, and on April 14, 2021, Coinbase listed its shares on the Nasdaq stock exchange. In September 2021, Securitize Markets launched secondary trading for digital securities. In May 2023, Prometheum Ember Capital announced it had been approved by the Financial Industry Regulatory Authority to operate as a special purpose broker dealer for digital asset securities.
The market for trading blockchain assets is developing and we anticipate new entrants to the market and competition to intensify in the future. Our future competitors may have greater resources than us and there can be no assurance that we will have the financial and operational resources necessary to carry out our business plan and successfully compete with our competitors.
Regulation of our Trading Solution
We have registered INX Digital with FinCEN as a federal money service business. In addition, as of March 2, 2024, we have been issued a license by the following U.S. states, territories, and districts: Alabama, Alaska, Arizona, Arkansas, Connecticut, Delaware, District of Columbia, Florida, Georgia, Idaho, Illinois, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Minnesota, Mississippi, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Puerto Rico, Rhode Island, South Carolina, South Dakota, Vermont, Virginia, Washington, and West Virginia, and have submitted notifications or are otherwise qualified to operate (based on being exempted from any licensing requirement or notice requirement) in the following States: California, Colorado, Indiana, Massachusetts, Michigan, Missouri, Montana, Pennsylvania, Utah, Wisconsin, and Wyoming. INX Digital is now eligible to operate as proposed in those jurisdictions.
INXS was accredited by FINRA as a registered broker-dealer and by the SEC as a recognized alternative trading system.
In the future, we intend to establish a platform for the trading of cryptocurrency-based futures, options and swaps. We have taken no steps towards the establishment of such a platform, which will require the development of technological solutions as well as federal and state regulatory approvals; accordingly, there is no assurance that such a trading platform will ever be developed.
Regulation of Our Trading Platforms and Our Subsidiaries
The financial services industry is subject to extensive regulation under both federal and state laws. Regulators that oversee our business activities are charged with ensuring the integrity of the financial markets and the protection of customers and other third parties who engage in the financial markets. Registration as a money transmitter, broker-dealer, and alternative trading system subject our subsidiaries to laws and regulations covering all aspects of financial services, including sales methods, trade practices, use and safekeeping of clients’ funds and other assets, minimum capital requirements, record keeping, financing of securities purchases and conduct of directors, officers and employees.
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Regulation of Money Transmitters
The vast majority of States maintain “money transmitter”, “money service business” or “check casher” licensing and regulatory regimes, which generally govern entities that are in the business of taking possession of, providing non-bank storage services for and transferring funds. These state licensing regimes vary from jurisdiction to jurisdiction and, while certain states have issued guidance indicating that its licensing requirements do not apply to virtual currency, the majority of states have either affirmatively stated that certain virtual currency activities are covered by their licensing regime or have been silent on the issue. Many jurisdictions maintain exemptions and/or exceptions to their respective licensing regimes.
At a federal level, the activity regulated by state licenses also may make the relevant actor a “money transmitter” or “provider of prepaid access,” each of which is considered a “money service business” (“MSB”) that must be registered with FinCEN unless otherwise exempt. MSBs are subject to regulatory oversight and enforcement by FinCEN. MSBs are subject to the Bank Secrecy Act, as amended by the USA PATRIOT Act of 2001 (“BSA”). MSBs must register with FinCEN and implement a compliance program appropriately tailored to the MSBs’ money laundering and financial crime risks. An MSB’s compliance program must incorporate relevant reporting, recordkeeping and anti-money laundering controls and processes, including, to the extent applicable to the MSB’s business know-your-customer controls, transaction monitoring, filing of suspicious activity reports (“SARs”), and sharing information with other financial institutions under Section 314(b) of the USA PATRIOT Act, the “Funds Transfer Rule,” or the “Funds Travel Rule.” On March 18, 2013 and May 9, 2019, FinCEN issued guidance concerning virtual currency and MSB licensing requirements in which FinCEN identified “administrators” or “exchangers” of virtual currencies as MSBs, unless an exemption applies. There are various exemptions to the MSB registration requirements. For example, entities that are “registered with, and functionally regulated or examined by, the SEC or the CFTC” are exempt from federal MSB registration and reporting obligations.
Larger money transmitters may also be subject to direct supervision by the Consumer Financial Protection Bureau (the “CFPB”) and are required to provide additional consumer information and disclosures, adopt error resolution standards and adjust refund procedures for international transactions originating in the United States in a manner consistent with the Remittance Transfer Rule (a rule issued by the CFPB pursuant to the Dodd-Frank Act). In addition, the CFPB may adopt other regulations governing consumer financial services, including regulations defining unfair, deceptive, or abusive acts or practices, and new model disclosures. In addition, money transmitters may be subject to periodic examination by the CFPB.
We have registered INX Digital with FinCEN as a federal MSB and we have notified or intend to notify and/or register with state regulators in compliance with state money transmitter requirements. We do not currently intend to rely on any state or federal exemptions to registering as an MSB, including any exemptions relating to registration with and regulation by the SEC or CFTC, and we intend to monitor all legislative and regulatory developments with respect to the BSA, including the publication of further rulings or guidance by FinCEN, and to make revisions to INX Digital’s compliance program when appropriate.
Broker-Dealer Regulation
In the United States, the SEC is the federal agency responsible for the administration of the federal securities laws, with certain standard setting and monitoring responsibilities delegated to self-regulatory organizations (“SROs”). Of these SROs, the regulation of broker-dealers is principally the function of FINRA and every firm and broker that sells securities to the public in the United States must be licensed and registered by FINRA. National securities exchanges, such as the New York Stock Exchange, also regulate and monitor broker-dealer activity. In addition to federal and SRO oversight, securities firms are also subject to regulation by state securities administrators in those states in which they conduct business.
Broker-dealers, like other securities market participants, must comply with the general “antifraud” provisions of the federal securities laws. The “antifraud” provisions prohibit misstatements or misleading omissions of material facts, and fraudulent or manipulative acts and practices, in connection with the purchase or sale of securities, and broker-dealers must conduct their activities to avoid these kinds of practices.
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Broker-dealers must also comply with many requirements that are designed to maintain high industry standards. Broker-dealers owe their customers a duty: a) of fair dealing, b) to recommend only those specific investments or overall investment strategies that are suitable, c) to seek to obtain the most favorable terms available under the circumstances for its orders (best execution), d) to provide at or before the completion of transaction certain information (including the identifying the securities involved in the transaction and compensation related to the transaction), and e) to provide notice about purchasing securities on credit, among other disclosure requirements.
Broker-dealers are also subject to broad obligations under the Bank Secrecy Act to guard against money laundering and terrorist financing which include requirements to file reports or retain records relating to suspicious transactions, customer identity, large cash transactions, cross-border currency movement, foreign bank accounts and wire transfers, among other things.
Every U.S.-registered broker-dealer is also subject to the Uniform Net Capital Requirements. The Uniform Net Capital Requirements are designed to ensure financial soundness and liquidity by prohibiting a broker or dealer from engaging in business at a time when it does not satisfy minimum net capital requirements.
In the United States, net capital is essentially defined as net worth (assets minus liabilities), plus qualifying subordinated borrowings and less certain mandatory deductions that result from excluding assets that are not readily convertible into cash and from conservatively valuing certain other assets, such as a firm’s positions in securities. Among these deductions are adjustments, which are referred to as “haircuts,” in the market value of securities positions to reflect the market risk of such positions prior to their liquidation or disposition. The Uniform Net Capital Requirements also impose a minimum ratio of equity to subordinated debt which may be included in net capital.
Regulations have been adopted by the SEC that prohibit the withdrawal of equity capital of a broker-dealer, restrict the ability of a broker-dealer to distribute or engage in any transaction with a parent company or an affiliate that results in a reduction of equity capital or to provide an unsecured loan or advance against equity capital for the direct or indirect benefit of certain persons related to the broker-dealer (including partners and affiliates) if the broker-dealer’s net capital is, or would be as a result of such withdrawal, distribution, loan or advance, below specified thresholds of excess net capital. In addition, the SEC’s regulations require certain notifications to be provided in advance of such withdrawals, distributions, reductions, loans and advances that exceed in the aggregate 30% of excess net capital within any 30 day period, and the SEC has the authority to restrict, for up to 20 business days, such withdrawal, distribution or reduction of capital if the SEC concludes that it may be detrimental to the financial integrity of the broker-dealer or may expose its customers or creditors to loss. Notice is required following any such withdrawal, distribution, reduction, loan or advance that exceeds in the aggregate 20% of excess net capital within any 30 day period. The SEC’s regulations limiting withdrawals of excess net capital do not preclude the payment to employees of “reasonable compensation.”
Compliance with the Uniform Net Capital Requirements may limit the extent and nature of our operations requiring the use of our registered broker-dealer subsidiaries’ capital and could also restrict or preclude our ability to withdraw capital from our broker-dealer subsidiaries.
Regulation ATS
Regulation ATS permits a U.S. ATS to match orders submitted by buyers and sellers without having to register as a national securities exchange. An ATS, although functionally an exchange, is regulated as a broker-dealer. In order to acquire the status of an ATS, a firm must first be registered as a broker-dealer, and then file an initial operation report with respect to the trading system on Form ATS. The Form ATS must provide detailed information regarding the types of subscribers it expects to admit to the system, the securities it expects to trade, the manner in which the system operates, including how orders are entered and transactions executed, reported, cleared and settled, as well as all relevant infrastructure and procedures concerning system access, capacity, supervision, security, contingency planning and subscriber compliance.
The initial operation report must be accurate and kept current. The Commission does not issue approval orders for Form ATS filings; however, the Form ATS is not considered filed unless it complies with all applicable requirements under Regulation ATS. Regulation ATS contains provisions concerning the system’s operations, including: fair access to the trading system; fees charged; the display of orders and the ability to execute orders; system capacity, integrity and security; record keeping and reporting; and procedures to ensure the confidential treatment of trading information.
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An ATS must also comply with any applicable SRO rules and with state laws relating to alternative trading systems and relating to the offer or sale of securities or the registration or regulation of persons or entities affecting securities transactions.
Futures Exchanges, Clearing Houses, and Swaps
The CFTC is the federal agency primarily responsible for the administration of federal commodities laws, including the adoption of rules applicable to Futures Commissions Merchants, Designated Contract Markets and Swap Execution Facilities. The operations of U.S. futures exchanges, clearing houses, swap data repository and swap execution facilities are subject to extensive regulation by the CFTC. The CFTC carries out the regulation of the futures and swaps markets and clearing houses in accordance with the provisions of the CEA as amended by, among others, the Commodity Futures Modernization Act and Dodd-Frank.
Regulatory Oversight of Blockchain Assets
The following is a summary of recent demonstrations of regulatory action taken with regard to blockchain assets. We believe that these actions will impact the Company; however, regulation of the blockchain industry is evolving rapidly. The regulatory landscape may differ from country to country, but we expect for the foreseeable future that regulators will maintain an increased focus on blockchain assets. In addition, the SEC, FINRA, and courts have continued, and likely will continue, to promulgate statements, enforcement actions and rulings, as applicable, interpreting the characterization of blockchain assets, the issuance of blockchain assets and regulating behavior in the market.
Regulation of blockchain assets by U.S. federal and state governments, foreign governments and self-regulatory organizations remains in its early stages. As blockchain assets have grown in popularity and in market size, the Federal Reserve Board, U.S. Congress and certain U.S. agencies such as the SEC, the CFTC, FinCEN and the Federal Bureau of Investigation, have begun to examine the nature of blockchain assets and the markets on which they are traded.
The SEC has taken various actions against persons or entities misusing blockchain assets, including virtual currencies, in connection with fraudulent schemes, inaccurate and inadequate publicly disseminated information, and the offering of unregistered securities. In addition, on July 25, 2017, the SEC issued Release No. 81207 (“the DAO Report”), in which it analyzed a certain issuance of tokens, and indicated that “whether or not a particular transaction involves the offer and sale of a security – regardless of the terminology used – will depend on the facts and circumstances, including the economic realities of the transaction.” The SEC clarified that the registration requirements” apply to those who offer and sell securities in the United States, regardless whether the issuing entity is a traditional company or a decentralized autonomous organization, regardless whether those securities are …distributed in certificated form or through distributed ledger technology…” On December 4, 2017 and December 11, 2017, the SEC announced enforcement actions relating to the PlexCoin and Munchee token launches, respectively. Also on December 11, 2017, SEC Chairman Jay Clayton published a public statement entitled “Cryptocurrencies and Initial Coin Offerings.” The SEC has made a concerted effort to monitor the ICO market and address—through the DAO Report and the more recent SEC guidance—transactions and behaviors it believes are both inconsistent with and in violation of U.S. securities laws. In early 2018, media reports indicated that the SEC has subpoenaed around 80 cryptocurrency firms as part of a targeted probe. On March 7, 2018, the Divisions of Enforcement and Trading and Markets issued a public statement stating that many digital assets are likely to be securities under the federal securities laws and urged investors to use platforms for trading such assets that are registered with the SEC, such as a national securities exchange, ATS, or broker-dealer. Since March 2018, the SEC has continued to bring enforcement actions and make public statements which further supports its view that blockchain assets should be treated as securities in almost all cases.
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In December 2021 the SEC filed an action against Ripple Labs Inc. and two of its executives, who are also significant security holders, alleging that they illegally sold a cryptocurrency, XPR and raised over $1.3 billion through an unregistered, ongoing digital asset securities offering.
The SEC also sued blockchain-based publishing company LBRY Inc,. alleging LBRY offered and sold “LBRY Credits” or “LBC” without registering them as securities in violation of the US federal securities laws. A US District Court judge in New Hampshire ruled that no reasonable jury could reject the SEC’s claim that LBRY offered LBC as an investment in its content distribution network and therefore, securities. LBC did not sell the tokens through an initial coin offering (ICO), but instead sold LBC directly through the LBRY application. LBRY attempted to argue that LBC had utility and were able to be used as currency on the platform early on to compensate creators and incentivize users. LBRY CEO noted the judge’s decision in this case “threatens the entire US cryptocurrency industry” by setting a standard that would deem “almost every cryptocurrency” a security. As this case was heard in the US First District, it does not necessarily impact any decision in the Ripple case held in the Second District. Meanwhile, Chairman Gensler has stated he believes that the vast majority of cryptocurrency tokens he has seen are securities.
In December of last 2022, the SEC filed a complaint against Thor Technologies for the sale of its Thor tokens as unregistered securities from its 2018 ICO. The SEC highlighted in its complaint that the Thor tokens were marketed as an investment, and Thor did not give proper disclosures to investors regarding its financial condition and ability to generate profits.
The SEC charged the FTX Trading Ltd. CEO and co-founder with defrauding investors through its crypto asset trading platform, FTX, with investigations of other securities law violations ongoing. The CEO of FTX and various alleged celebrity endorsers were also sued in a potential class action lawsuit for engaging in the unlawful sale of unregistered securities, deceptive and unfair business practices and participation in a civil conspiracy akin to a “Ponzi scheme.” However, this is only one of many during 2022, and we will highlight a few notable ones below.
In July 2022, the SEC filed a complaint against Coinbase Global, Inc., employee and two others alleging insider trading in violation of the federal securities laws. In its complaint, the SEC points to nine different crypto assets and alleges that these are all “crypto asset securities.”
In June 2023, the SEC filed a complaint against Coinbase Global, Inc., claiming that it was operating an unlawful securities exchange, clearing agency, and broker. In June 2023, the SEC also filed a complaint against Binance, its U.S. affiliate, and founder Changpeng Zhao, alleging several securities violations.
In November 2023, the SEC filed a complaint against Kraken, alleging it was operating as an unregistered securities exchange, broker, dealer, and clearing agency, in violation of the Securities Act of 1934.
The SEC continues to focus on the cryptocurrency industry, and we expect digital asset regulation to remain a priority in the near future. The SEC’s Division of Enforcement nearly doubled the size of its Crypto Assets and Cyber Unit last year, allocating more resources to enforcement in the crypto markets.
On April 3, 2019, the Strategic Hub for Innovation and Financial Technology (FinHub) of the SEC published informal guidance, titled “Framework for ‘Investment Contract’ Analysis of Digital Assets” (the Framework), which provides analytical tools for determining whether a blockchain asset is a security under the U.S. federal securities laws. In the Framework, the SEC uses the term “digital asset” to refer to an asset that is issued and transferred using distributed ledger or blockchain technology. In this report, we use the term “blockchain asset” to distinguish between assets that are recorded and stored using blockchain technology and assets that may be stored in digital form but which do not utilize blockchain technology. In addition, the SEC has not used the term “security token.” The Framework provides a list of factors to consider when determining whether a digital asset offered for sale is a security. The factors included in the Framework are based on an analysis of whether the blockchain asset is an “investment contract” as that term was first used by the Supreme Court in SEC v. Howey, 328 U.S. 293 (1946), and which has been further clarified through subsequent case law.
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The CFTC has asserted the belief that bitcoin and other virtual currencies meet the definition of a commodity and that the CFTC has regulatory authority over futures and other derivatives based on virtual currencies, subject to facts and circumstances. The CFTC defined “virtual currencies” as “a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value, but does not have legal tender status in any jurisdiction. Bitcoin and other virtual currencies are distinct from ‘real’ currencies, which are the coin and paper money of the United States or another country that are designated as legal tender, circulate, and are customarily used and accepted as a medium of exchange in the country of issuance.” Although the CFTC maintains regulatory oversight of the commodities markets, beyond its anti-fraud and anti- manipulation authorities, the CFTC generally does not oversee “spot” or cash market exchanges and transactions involving virtual currencies that do not utilize margin, leverage, or financing. In late 2022, CFTC Chair Rostin Behnam has requested “clear authority to impose the CFTC’s traditional regulatory regime over the digital asset commodity market.” Earlier this year, bipartisan legislators in the U.S. Congress introduced competing bills that would each establish a crypto market intermediary registration regime overseen by the CFTC. After recent crypto market events, a comprehensive crypto bill that expands the CFTC’s jurisdiction may see broad support and if passed, would impact the Company.
In addition to relevant state money transmitter and securities laws, local state regulators may also regulate or seek to regulate blockchain assets. In July 2014, the New York State Department of Financial Services (the “NYSDFS”) proposed the first state regulatory framework for licensing participants in “virtual currency business activity.” The regulations, known as the “BitLicense,” are intended to focus on consumer protection and, after the closure of an initial comment period that yielded 3,746 formal public comments and a re-proposal, the NYSDFS issued its final BitLicense regulatory framework in June 2015. The BitLicense regulates the conduct of businesses that are involved in “virtual currencies” in New York or with New York customers and prohibits any person or entity involved in such activity to conduct activities without a license. Not all regulations of blockchain assets are restrictive. For example, on June 28, 2014, California repealed a provision of its Corporations Code that prohibited corporations from using alternative forms of currency or value. The bill indirectly authorizes the use of bitcoin as an alternative form of money in the state.
The IRS has released guidance treating bitcoin as property that is not currency for U.S. federal income tax purposes. Taxing authorities of a number of U.S. states have also issued their own guidance regarding the tax treatment of bitcoin for state income or sales tax purposes. The treatment of blockchain assets may be the subject of contemplated tax reform.
On November 13, 2017, the European Securities and Markets Authority (“ESMA”) issued two statements, the first statement was intended to warn investors of the inherent risks of ICOs, and the second statement sought to alert companies involved in ICOS to the need to meet relevant EU and member state regulatory requirements. On February 12 2018, ESMA issued another EU-wide warning to consumers about the risks of buying virtual currencies. In July 2018, The EU Fifth Anti Money Laundering Directive (EU) 2018/843 came into force and extended the scope of KYC/AML regulations pertaining to virtual currency exchange platforms and wallet providers. On January 9 2019, both ESMA as well as the European Banking Authority published reports on crypto-assets and assessed the suitability of the existing regulatory framework relating to these instruments. In October 2021, the FATF updated its 2019 Guidance for a risk-based approach to virtual assets and virtual asset service providers (“VASPs”). The update focused mainly on helping countries and VASPs understand their anti-money laundering and counter-terrorist financial obligations, whilst also providing guidance on how to effectively implement the FATF’s requirements as they apply to this sector.
Additionally, newly introduced European regulations establish the foundation for a new regulatory framework governing crypto assets within the EU. MiCA entered into force in 2023 and creates one of the most encompassing regulatory regimes designed to provide legal clarity and certainty for crypto-asset issuers, crypto-asset providers and crypto-assets not covered by existing financial services legislation. MiCA covers transparency and disclosure requirements for the issuing, offering to the public and admitting of crypto-assets to a trading platform; the authorization and supervision of crypto-asset service providers and issuers of asset-referenced and electronic money tokens; the operation, organization and governance of the issuers and crypto-asset service providers; protection for holders of crypto-assets and clients of service providers; measures to prevent insider dealing, unlawful disclosure of inside information and market manipulation. MiCA will apply starting on December 30, 2024, however, rules on asset-referenced tokens and e-money tokens apply starting on June 30, 2024, and are expected to impact any operations in the European Union. The new Regulation on the Traceability of Transfers of Funds (“TFR”) will apply as of December 2024 and provides for the traceability of crypto-assets transfers and the authentication of users, aligning with FATF standards.
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MiCA is part of a broader E.U. digital finance package, which, inter alia, also includes the Digital Operational Resilience Act (“DORA”) which will apply as of January 2025; and the DLT Pilot Regime which has started applying since March 2023 and provides, amongst others, a legal framework for trading and settlement of transactions in crypto-assets that qualify as financial instruments under MiFID II.
Blockchain assets also face an uncertain regulatory landscape in many foreign jurisdictions. On September 4, 2017, the People’s Bank of China labeled blockchain asset sales as “illegal and disruptive to economic and financial stability.” Previously, China had issued a notice that classified bitcoin as legal and “virtual commodities;” however, the same notice restricted the banking and payment industries from using bitcoin, creating uncertainty and limiting the ability of Bitcoin Exchanges to operate in the then-second largest bitcoin market. South Korea’s Financial Services Commission likewise prohibited all forms of tokens on September 29, 2017. Japan has enacted a law regulating virtual currencies which has brought Bitcoin exchanges under know-your-customer and anti-money laundering rules and resulted in the categorization of Bitcoin as a kind of prepaid payment instrument. The law puts in place capital requirements for exchanges as well as cybersecurity and operational stipulations. In addition, those exchanges are also required to conduct employee training programs and submit to annual audits. To date, the Japanese Financial Services Agency (FSA) has granted licenses to 15 different cryptocurrencies or tokens trading platforms. In November 2017, the Monetary Authority of Singapore (“MAS”) issued a statement that tokens sold through the blockchain funding model may be considered securities under certain circumstances under Singapore law and provided case studies as examples of tokens that do and do not constitute securities. Previously, the MAS had stated that other laws may apply to token sales, such as money laundering and terrorism financing laws.
Other jurisdictions are still researching the subject. In September 2017, FINMA issued guidance that it was investigating ICOs and that whenever FINMA is notified about ICO procedures that breach regulatory law or which seek to circumvent financial market law it initiates enforcement proceedings. On February 16, 2018, FINMA publicly announced ICO guidelines. In December 2018, the Swiss Federal Council adopted a report on the legal framework for blockchain and distributed ledger technology in the financial sector. In March 2019, the Federal Council initiated consultation with regard to specific amendments to federal law for the purpose of adapting federal law to developments in distributed ledger technology.
In December 2017, the UK Financial Conduct Authority (“FCA”) issued a statement on distributed ledger technology which said, in part, that the FCA will gather further evidence and conduct a deeper examination of the ICO market and that its findings will help to determine whether or not there is need for further regulatory action. In June 2018, an amendment to the Tel Aviv Stock Exchange Ltd. (“TASE”) regulations entered into effect, under which shares of companies operating in the field of cryptographic currencies will be excluded and / or not included in the TASE indices, if such a company is engaged in the holding, investing or mining of distributed cryptographic currencies, and the TASE Indices Committee decides that this activity is material or expected to be material to the company’s business. The Israel Securities Authority (ISA) has previously indicated that to date, there is uncertainty as to the format and extent of the regulation that will apply to the various activities in cryptographic currencies - especially those of decentralized currencies without any centralized entity, such as Bitcoin, in terms of taxation, prevention of money laundering and terrorism, cyber security and investor protection. In addition, the ISA has appointed a special committee authorized to examine the regulation of issuances of cryptographic currencies to the public.
In its final report, published in March 2019, the special committee recommended, among other things, focusing on the following: establishing a dedicated disclosure regime to adjust to the unique characteristics of such activities; formation by a number of Israeli regulatory authorities (among others, the Bank of Israel, Israeli Tax Authority, Anti-Money-Laundering Authority, Ministry of Finance, Justice Department, Israeli National Cyber Directorate and ISA) of a ‘regulatory sandbox’ with the aim of creating a harmonious government policy and the removal of barriers to domestic industry in the field of cryptographic assets; and examining a better suitable regulatory framework for the trading activity of cryptographic assets that are deemed securities. In addition, the special committee final report further provided the following initial regulatory guidelines to this field:
(1) the question of whether a cryptocurrency will be considered a security will be decided according to the totality of the circumstances and characteristics of each case on its merits against the background of the purposes of the Israeli law;
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(2) cryptographic currencies that grant rights similar to those of traditional securities such as shares, bonds or participation units will be considered securities. This category includes, for example, tokens who grant rights to participate in revenue or profits generated from an enterprise; tokens granting rights to receive payments, fixed or variable, whether by way of the allocation of additional currencies or by way of redemption of currencies; or tokens granting ownership rights or membership in an enterprise whose purpose is to generate an economic yield;
(3) blockchain assets intended to be used as a method of payment, clearing or exchange only, other than in a specific enterprise, which do not confer additional rights and are not controlled by a central entity, shall not typically be considered a security;
(4) blockchain assets that embody a right to a product or service and are purchased for consumption and use only shall not typically be considered securities; and
(5) a public offering of a cryptographic currency falling within the definition of a security is subject to the requirement to publish a prospectus.
In Canada, the Canadian Securities Administrators (the “CSA”), the umbrella group for the provincial and territorial securities regulators, have generally taken the position that securities laws apply to cryptocurrencies. The CSA, beginning in 2017, has published a series of Staff Notices outlining their position and explaining how securities laws apply to various aspects of the cryptocurrency industry. The majority of those Staff Notices have dealt with the question of when a cryptocurrency constitutes a security for securities law purposes, as well as providing specific regulatory guidance for cryptocurrency trading platforms that have Canadian resident customers and other businesses that hold cryptocurrencies on behalf of Canadian clients. As the Company does not have Canadian clients, or other Canadian operations, such regulatory guidance does not apply to the Company.
The Government of Gibraltar enacted the Financial Services (Distributed Ledger Technology Providers) Regulations (the “DLT Regulations”) which came into effect on January 1, 2018. The primary purpose of the DLT Regulations is to create a safe environment for DLT-related businesses to operate and innovate, while simultaneously protecting consumers and safeguarding Gibraltar’s reputation as a trusted and stable global business hub. In April 2022, Gibraltar introduced the 10th core principle of their DLT Regulations, Market Integrity. This principle focuses on combating market and price manipulation, as well as any other activity that may negatively affect the reputation of Gibraltar’s digital asset market. The integrity of these markets is a key focus and Gibraltar intends to remain at the forefront of standard setting in the industry. Companies which use blockchain technology to store or transmit value belonging to others by way of business are caught by the DLT Regulations and require a license in Gibraltar. The activity of undertaking a token sale does not automatically fall within the scope of the DLT Regulations, however, this will depend on the manner in which the sale of tokens is structured and the characteristics of the token.
European Regulation
The extension of anti-money laundering requirements to certain crypto-related activities by the European Union’s Fifth Money Laundering Directive has increased the regulatory compliance burden for our business in Europe and, as a result of the fragmented approach to the implementation of its provisions, resulted in distinct and divergent national licensing and registration regimes in different E.U. Member States. In addition, the European Council and European Parliament have recently reached a provisional agreement on parts of the European anti-money laundering (AML) package, bringing new rules on anti-money laundering one step closer in the legislative process. The aim of the AML package is to update the EU AML framework and tackle the evolving landscape of money laundering practices within the EU.
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Additionally, newly introduced European regulations establish the foundation for a new regulatory framework governing crypto assets within the EU. MiCA entered into force in 2023 and creates one of the most encompassing regulatory regimes designed to provide legal clarity and certainty for crypto-asset issuers, crypto-asset providers and crypto-assets not covered by existing financial services legislation. MiCA covers transparency and disclosure requirements for the issuing, offering to the public and admitting of crypto-assets to a trading platform; the authorization and supervision of crypto-asset service providers and issuers of asset-referenced and electronic money tokens; the operation, organization and governance of the issuers and crypto-asset service providers; protection for holders of crypto-assets and clients of service providers; measures to prevent insider dealing, unlawful disclosure of inside information and market manipulation. MiCA will apply starting on December 30, 2024, however, rules on asset-referenced tokens and e-money tokens apply starting on June 30, 2024, and are expected to impact any operations in the European Union. The new Regulation on the Traceability of Transfers of Funds (“TFR”) will apply as of December 2024 and provides for the traceability of crypto-assets transfers and the authentication of users, aligning with FATF standards.
MiCA is part of a broader E.U. digital finance package, which, inter alia, also includes the Digital Operational Resilience Act (“DORA”) which will apply as of January 2025; and the DLT Pilot Regime which has started applying since March 2023 and provides, amongst others, a legal framework for trading and settlement of transactions in crypto-assets that qualify as financial instruments under MiFID II.
United Kingdom
In October 2022, the House of Commons voted to give HM Treasury (HMT) the power to make crypto assets a regulated financial instrument. The vote clarified that ‘Digital Settlement Assets’ can be brought within the scope of the existing provisions of the Financial Services and Markets Act 2000 (FSMA).
The Financial Services and Markets Act of 2023 (FSMA 2023) became effective on June 29, 2023. It gives the government of the United Kingdom the authority to specify which cryptocurrency activities fall under the FSMA and to specify what activities fall under the Designated Activities Regime (DAR). FSMA 2023 also grants the authority to establish a regulatory regime for digital settlement assets (DSA), also known as stablecoins, for payment activities.
Japan
In June 2023, the Japanese government introduced new notification obligations (travel rule) regarding crypto-assets and electronic payment instruments providing Japanese authorities with additional monitoring capabilities to track virtual currency transfers.
Crypto-asset Exchange Service Providers and Electronic Payment Instrument Exchange Service Providers (collectively referred to as “VASPs”) have to submit information on originators and beneficiaries at the time of transfer of crypto-assets or electronic payment instruments, to make it possible to trace transaction flows.
In a recent update, Japan limited the scope of the travel rule to transfers to foreign VASPs located in jurisdictions that have regulations equivalent to the travel rule requirements in Japan.
To date, we have treated, and we anticipate continuing to treat, the INX Tokens as securities under the laws of all foreign jurisdictions.
C. Organizational Structure.
Parent
TIDCI, the current sole shareholder of the Company, was incorporated under the Business Corporations Act (British Columbia) (“BCBCA”) on August 22, 2018, as evidenced by a Certificate of Incorporation issued pursuant to the provisions of the BCBCA under the name “Valdy Investments Ltd.”
On May 27, 2019, Valdy completed its initial public offering of common shares as a CPC, pursuant to which it issued 2,500,000 common shares (“Valdy Shares”) at a price of CAD$0.10 per Valdy Share for gross proceeds of CAD$250,000. The Valdy Shares were listed on the TSXV on May 29, 2019, under the symbol “VLDY.P” until November 16, 2021, when they were voluntarily delisted from the TSXV.
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TIDCI consolidated its issued and outstanding common shares (the “Consolidation”) on the basis of one (1) post-Consolidation Share for every 2.7266667 pre-Consolidation Shares outstanding on a fully-diluted basis such that immediately prior to the Closing, there were 5,124,740 Shares outstanding on a fully-diluted basis (“post consolidated shares”).
TIDCI issued to the shareholders of INX (excluding holders of INX Financing Shares) consideration of an aggregate of 167,331,410 post-Consolidation common shares. The common shares issued to holders of INX Financing Shares were issued on a 1:1 basis, and all other common shares will be issued on the basis of 10.4871348 common shares for each INX Share (the “Conversion Ratio”).
On January 10, 2022, the Valdy Transaction was completed, pursuant to which Valdy acquired all of the issued and outstanding securities of the Company (including all outstanding options and warrants) from the INX Securityholders by way of a securities exchange, in accordance with the terms and conditions of the Security Exchange Agreement dated November 3, 2021, whereby its name was changed from “Valdy Investments Ltd.” to “The INX Digital Company, Inc.” For more information on the Security Exchange Agreement, see “Item 7, Part A – Major Shareholders and Related Party Transactions – Major Shareholders – Changes in Percentage Ownership by Major Shareholders - Security Exchange Agreement.”
TIDCI has obtained a final approval from the Cboe Canada exchange (“Cboe CA”) to list the Valdy Shares on Cboe CA under the symbol “INXD” upon fulfilling all listing requirements of Cboe CA and as of January 24, 2022, the shares of TIDCI started trading on Cboe CA under such symbol. Also, on July 28, 2022, TIDCI received approval from The OTCQB Venture Market operated by OTC Markets Group Inc. to commence trading of its common shares under the symbol INXDF, also being eligible to be cleared and settled by the Depository Trust Company.
List of Subsidiaries
The following table sets forth the legal name, location and country of incorporation and percentage ownership of each of our current principal operating subsidiaries:
Subsidiary Name | Country of Incorporation | Ownership Percentage | ||
INX Digital, Inc. | United States (Delaware) | 100% | ||
INX Services, Inc. | United States (Delaware) | 100% | ||
INX Solutions Limited | Gibraltar | 100% | ||
Midgard Technologies Ltd. | Israel | 100% | ||
INX Securities, LLC | United States (Pennsylvania) | 100% | ||
I.L.S. Brokers Ltd. | Israel | 100% | ||
INX Digital Assets UK Limited | UK | 100% | ||
INX Transfer Agent LLC | United States (Delaware) | 100% | ||
INX EU Ltd. | Cyprus | 100% | ||
NABATECH SA | Switzerland | 33% |
The contractual relationship between the Company and the following Company Subsidiaries: INX Digital, INX Services, INXS and Midgard, and between ILSB and INX UK are administered by a series of intercompany agreements that include services agreements, license agreements, loan agreements and expense sharing agreements.
For more information on our subsidiaries, see “Item 4, Part A – “Information on the Company - History and Development of the Company.”
D. Property, Plant and Equipment.
Other than computer equipment used in operations, the Company currently does not own or hold any tangible fixed assets, including real property, plant or equipment, whether by leasehold or otherwise.
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ITEM 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. Operating Results.
You should read the following discussion and analysis of our financial condition and results of operations together with the section titled “Selected Financial Data” and our financial statements and related notes included elsewhere in this report. This discussion and other parts of this report contain forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives, expectations, and intentions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors.”
Nature of Operations
The Company was incorporated on November 27, 2017, and through its subsidiaries, is engaged in the operation and ongoing development of an integrated and regulated solution for trading of blockchain assets on a digital asset and security token trading platform called INX.One. The Company also provides other services and products related to the trading of blockchain assets.
The Company, through one of the subsidiaries, also facilitates financial transactions between global banks and offers a full range of brokerage services to several leading banking institutions worldwide, mainly in foreign exchange and interest rate derivatives.
INX Token
As part of its blockchain ecosystem, the Company created the INX Token (the “INX Token”), and on August 20, 2020, the SEC acknowledged the effectiveness of the F-1 Registration Statement that was filed by INX with the SEC and declared effectiveness of the INX Token Offering (“the Offering”). In such Offering, INX offered up to 130 million INX Tokens at a price of $0.90 per INX Token.
The INX Token was offered to the public on August 24, 2020, and closed on April 22, 2021, when the Offering was completed.
The Company is the world’s first company to debut and successfully complete an SEC-registered IPO of a blockchain security token (the INX Token). The public offering of the INX Token was registered under the United States Securities Act of 1933 and, in such registration, the INX Token is deemed to be an “equity security” under relevant SEC rules and regulations.
In July 2021, INX listed the INX Token for trading on the INXS Trading Platform, rebranded since then to INX.One.
INX has not allocated for issuance and does not intend to issue 35 million of the 200 million INX Tokens that have been created. The Company may reserve an additional 20% of INX Tokens received as payment of transaction fees, as long as the total amount of INX Tokens reserved does not exceed 35 million plus 50% of the number of INX Tokens sold by the Company to the public pursuant to the Offering and subsequent offerings of INX Tokens (excluding re-issuances of reacquired INX Tokens), up to a maximum of 100 million INX Tokens. The Company does not intend to issue these reserved INX Tokens for general fundraising purposes; these INX Tokens may be issued to fund acquisitions, address regulatory requirements or fund the operations of the Company if the Board of Directors of it determines that the Company has net cash balances sufficient to fund less than nine months of its operations. The Company intends to restrict issuances of the reserved INX Tokens to these or similar extraordinary situations to limit dilution to INX Token holders. As of December 31, 2023, the Company held approximately 64.4 million INX Tokens in reserve.
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Following an amendment to the INX Token rights which was approved by the Board of Directors of the Company on May 17, 2019 (the “Token Rights Amendment”), the holders of INX Tokens (other than INX) are entitled to receive a pro rata distribution of 40% of the Company’s net cash flow from operating activities, excluding any cash proceeds from an initial sale by the Company of an INX Token (the “Adjusted Operating Cash Flow”). The distribution is based on the Company’s cumulative Adjusted Operating Cash Flow, net of cash flows which have already formed a basis for a prior distribution, calculated as of December 31 of each year. The distribution is to be paid to parties (other than the Company) holding INX Tokens as of March 31 of the following year on April 30th, commencing with the first distribution to be paid, if at all. As of December 31, 2023, the cumulative adjusted operating cash flow activity was negative, and therefore no distribution is expected to be paid on April 30, 2024.
We offer holders of INX Tokens an entitlement to, at a minimum, a 10% discount on the payment of transaction fees on the INX.One Trading Platform.
Results of Operations for the year ended December 31, 2023
Income
The main source of our revenue includes brokerage fees earned by facilitating foreign currency exchange (“FX”) transactions for banks and financial institutions, as well as trading and transaction fees earned from providing digital assets and security tokens trading platforms to our customers.
During the year ended December 31, 2023, the Company generated $5.6 million in total income, consisting of brokerage fees related to our FX business of $4.9 million, as well as transaction and trading fees of $0.4 million and net gain on digital assets utilized in operations of $0.2 million related to our security token and digital asset business.
Brokerage fee revenue
Brokerage fees related to our FX business represent a significant portion of total revenue for the year ended December 31, 2023, and are based on the notional amounts traded. Brokerage fees revenue consists of brokerage fees generated by our subsidiary ILSB, based in the State of Israel, from trading in foreign exchange markets with global forex dealers and banks. Transactions denominated in foreign currency are recorded at the representative rate of exchange on the date of the transaction.
During the year ended December 31, 2023, we earned brokerage fees of $4.9 million, compared to $3.6 million in 2022. The 2022 to 2023 increase in brokerage revenue is primarily driven by a higher trading volume transacted during the year and increased volatility in global currency markets relative to the New Israeli Shekel (NIS).
Transaction fee revenue
Transaction fees on security tokens and digital assets represent our second main source of revenue. They are based on the amounts transacted by our customers in security tokens and digital assets on the INX.One platform and consist of trading and transaction fees. Transaction fees are either fixed or are based on the amount of the transaction. Transaction fees based on the amount traded are charged as a percentage of digital assets received by the buyer and a percentage of consideration paid by the seller in each trade, which could be denominated in fiat or in a digital asset. Transaction fees for our trading platform are published and updated from time to time on our website available at https://www.inx.co/. Fee revenue is recognized at the time the transaction is processed and is directly correlated with trading and transaction volume on INX.One.
The Company evaluates the digital assets business as a whole and uses total trading volume on the platform to measure its performance. During the years ended December 31, 2023, our subsidiaries INXD and INXS, earned total trading and transaction fees of $0.4, while the total notional amount traded on the platform was $48.0 million.
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Service revenue
Service revenue includes fees from technology consultation and advisory, as well as listing services offered by the Company under written agreements.
In late 2022, we launched listings of security tokens seeking to raise capital in primary offerings. This service is offered by our SEC broker-dealer subsidiary, INXS. Similar to the INX Token, security tokens listed by us are registered with the SEC and are deemed to be an “equity security” under relevant SEC rules and regulations. After the primary offerings are completed, tokens are expected to trade on INX.One in the secondary market. Listing fees are generated on each primary raise and are directly correlated to the total capital raised by the issuer. Revenue from this activity was not significant in 2023.
In addition, in 2023, we entered into a service agreement with Nabatech, an entity organized under a joint venture agreement between the Company and SICPA, a global industry leader providing authentication technology and services to sovereign central banks globally based in Switzerland, to develop central bank digital currency (“CBDC”) solutions utilizing blockchain technology for clients of SICPA and beyond. Both parties agreed to join their expertise to develop central bank digital currency solutions. We provide blockchain technology support and advisory services to Nabatech and earn revenue based on time and resources dedicated to the development project. During the year ended December 31, 2023, we recognized service revenue and cost of sales of $1 million and $1 million, respectively, for providing services to Nabatech.
Revenue from purchases and sales of digital assets
As part of our risk management and trading activities, one of the Company’s subsidiaries held and traded digital assets and related derivative contracts. Such digital assets and derivative contracts were principally acquired for the purpose of selling in the near future. During the year ended December 31, 2023, the company generated a net gain from purchases and sales of digital assets of $0.2 million. Proceeds from sales and cost of digital assets sold were $11.4 million and $11.4 million, respectively.
Total operating expenses
Operating expenses for the year ended December 31, 2023, were $22 million, and they consist of research and development, sales and marketing, general and administrative expenses, other expense, as well as the change in fair value of INX Token warrants.
− | Research and development expenses, of $3.3 million, primarily consist of costs of our technology development personnel, software and web services and other technology related expenses. |
− | Sales and marketing expenses of $4.0 million primarily includes personnel cost, promotional campaigns and other marketing costs incurred mainly related to the digital assets business segment. |
− | General and administrative expenses of $13.3 million, mainly include the cost of personnel, compliance and legal costs, amortization of intangible assets, audit services and insurance. |
− | Other expense of $1.6 million includes a loss on derivative contracts as a result of a cyber breach incident. In December 2023, the Company learned of a cyber-attack that occurred on the computer system of a third-party service provider of one of the Company’s subsidiaries. As a result, the malicious party managed to cause a loss of funds of the Company’s subsidiary in the amount of $1.6 million. |
− | Operating expenses include a gain on the change in the fair value of the INX Token warrant liability for warrants granted to employees and service providers of $0.2 million. |
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Gain (loss) on INX Tokens issued
Our balance sheet as of December 31, 2023 includes the INX Token liability of $54.1 million compared to $56.9 million as of December 31, 2022. Based on the terms of the INX Token, the INX Token is a hybrid financial instrument and under the applicable accounting standards it is presented as a financial liability on our consolidated balance sheet due to the right of the INX Token holders to use the INX Token to pay transaction fees on the INX.One trading platform. Accordingly, we elected, in accordance with IFRS 9, to designate the entire financial liability at fair value with changes in fair value of the liability recognized as gain or loss in the Company’s consolidated statements of profit and loss.
During the year ended December 31, 2023, the Company recorded an unrealized gain on INX Tokens issued of $3.8 million, compared to gain of $226 million recorded during the year ended December 31, 2022.
Net income (loss)
Our net loss from operations and net loss for the year ended December 31, 2023, was approximately $16.5 million and $12.1 million, respectively.
Total comprehensive income (loss)
Total comprehensive income (loss) includes net income (loss) and other comprehensive income (loss). The other comprehensive income (loss) mainly includes unrealized gain (loss) on securities and investments held in our portfolio as part of our operating capital and the Reserve Fund. During the year ended December 31, 2023, we recognized $1.1 million unrealized gain on our investments. Total comprehensive loss for the year was $11 million.
Adjusted Operating Cash Flow
Following an amendment to the INX Token rights, which was approved by the Board of Directors of INX on May 17, 2019 (the “Token Rights Amendment”), the Holders of INX Tokens (other than the Company) are entitled to receive a pro rata distribution of 40% of the INX’s net cash flow from operating activities, excluding any cash proceeds from an initial sale of INX Tokens (the “Adjusted Operating Cash Flow”). The distribution is based on the INX’s cumulative Adjusted Operating Cash Flow, net of cash flows which have already formed a basis for a prior distribution, calculated annually as of December 31. The distribution is to be paid to parties (other than the Company) holding INX Tokens as of March 31 of the following year on April 30, commencing with the first distribution to be paid, if any. As of December 31, 2023, the cumulative adjusted operating cash flow activity was negative, and therefore no distribution is expected on April 30, 2024.
Our Adjusted Operating Cash Flow for the year ended December 31, 2023, was negative $7.8 million. The cumulative Adjusted Operating Cash Flow as of December 31, 2023, was negative $64.5 million.
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The following table provides the calculation of our cumulative Adjusted Operating Cash Flow as of December 31, 2023 (unaudited):
(in U.S. Dollars in thousands)
Cumulative Adjusted Operating Cash Flow as of December 31, 2022 | $ | (56,679 | ) | |
Less: Net cash used in operating activities in the year ended December 31, 2023 | (7,781 | ) | ||
Less: Cumulative Adjusted Operating Cash Flow as of December 31, 2022 that formed the basis of distribution paid to INX Token holders on April 30, 2023 (there was no distribution) | - | |||
Plus: Proceeds from INX Tokens during the year ended December 31, 2023 | - | |||
Less: Proceeds from initial sale of INX Tokens during the year ended December 31, 2023 | - | |||
Cumulative Adjusted Operating Cash Flow as of December 31, 2023 | $ | (64,460 | ) |
Results of Operations for the year ended December 31, 2022
Income
The Company generated $4.3 million in total income during the year ended December 31, 2022, consisting of $3.6 million in revenue from brokerage fees related to our FX business, and $0.9 from transaction and trading fees as well as net loss on digital assets utilized in operations of $0.2 million related to our security token and digital assets business.
Brokerage fees
Brokerage fees revenue consists of brokerage fees generated from trading in foreign exchange markets with global forex dealers and banks by one of our subsidiaries, ILSB. Transactions denominated in foreign currency are recorded at the representative rate of exchange on the date of the transaction. Revenues from brokerage services are recorded on the date the service is provided or the operation is carried out, and are based on notional amounts traded. During the year ended December 31, 2022, we earned brokerage fees of $3.6 million.
Transaction fees
Transaction fee revenue consists of transaction and trading fees earned on transactions in security tokens and digital assets on our INX.One platform. Transaction fees may be either set as a fixed fee per transaction or as a percentage of the amount traded. Transaction fees based on the amount traded are charged as a percentage of digital assets received by the buyer and a percentage of consideration paid by the seller in each trade, which could be denominated in fiat or in a digital asset. Transaction revenue is recognized at the time the transaction is processed and is directly correlated with trading and transaction volume on the INX.One platform.
During the years ended December 31, 2022, our subsidiaries INXD and INXS, earned total trading and transaction fees of $0.9, while the total notional amount traded on the platform was $133.5 million.
Revenue from purchases and sales of digital assets
As part of our risk management and trading activities, one of the Company’s subsidiaries held and traded digital assets and related derivative contracts. Such digital assets and derivative contracts were principally acquired for the purpose of selling in the near future. During the year ended December 31, 2022, the Company incurred a net loss from purchases and sales of digital assets of $0.2 million. Proceeds from sale of digital assets and cost of digital assets sold were $8.7 million and $8.7 million, respectively, and a loss from the decrease in fair value of digital assets held was $0.2.
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Total operating expenses
Operating expenses for the year ended December 31, 2022, were $19.0 million, and they consist of research and development, sales and marketing and general and administrative expenses, net of gain from the decrease in fair value of INX Token warrants issued to employees and service providers.
− | Research and development expenses, of $5.3 million, include the cost of development of our trading platform and primarily consist of costs of our technology research and development personnel and other technology development related expenses. |
− | Sales and marketing expenses of $6.5 million primarily consist of personnel cost, promotional campaigns and other marketing costs incurred mainly related to the digital assets business segment. |
− | General and administrative expenses of $15.5 million, mainly include the cost of personnel, compliance and legal costs, software and technology infrastructure, audit services and insurance. |
− | Operating expenses also include a decrease in the fair value of the INX Token warrant liability for warrants granted to employees and service providers of $8.3 million, which is recorded as a gain. |
Net income (loss)
Our loss from operations for the year ended December 31, 2022 was $14.7 million. The net income for the year then ended was approximately $211.3 million, which includes an unrealized gain on INX Tokens issued of $226 million.
Total comprehensive income (loss)
Total comprehensive income (loss) includes net income (loss) and other comprehensive income (loss). The other comprehensive income (loss) mainly includes unrealized gain (loss) on securities and investments held in our portfolio as part of our operating capital and the Reserve Fund. During the year ended December 31, 2022, we recognized $1.4 million unrealized loss on our investments. Total comprehensive loss for the year was $209.9 million.
Adjusted Operating Cash Flow
Our Adjusted Operating Cash Flow for the year ended December 31, 2022 was approximately negative $22.3 million. The cumulative Adjusted Operating Cash Flow as of December 31, 2022 was approximately negative $56.7 million.
The following table provides the calculation of our cumulative Adjusted Operating Cash Flow as of December 31, 2022 (unaudited):
(in U.S. Dollars in thousands)
Cumulative Adjusted Operating Cash Flow as of December 31, 2021 | (34,374 | ) | ||
Less: Net cash used in operating activities in the year ended December 31, 2022 | (22,305 | ) | ||
Less: Cumulative Adjusted Operating Cash Flow as of December 31, 2022 that formed the basis of distribution paid to INX Token holders on April 30, 2022 (there was no distribution) | - | |||
Plus: Proceeds from INX Tokens in the year ended December 31, 2022 | - | |||
Less: Proceeds from initial sale of INX Tokens in the year ended December 31, 2022 | - | |||
Cumulative Adjusted Operating Cash Flow as of December 31, 2022 | (56,679 | ) |
Results of Operations for the year ended December 31, 2021
Revenues
The Company generated $2.5 million in revenue during the year ended December 31, 2021, consisting of $2.3 million in revenue from brokerage fees related to our FX business and $0.3 million from transaction and trading fees related to our digital asset and security token business.
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Total operating expenses
Operating expenses for the year ended December 31, 2021 were $56 million and they mainly consist of research and development, sales and marketing, and general and administrative expenses.
− | Research and development expenses, of $3.9 million, primarily includes costs of our research and development personnel and other development-related expenses. |
− | Sales and marketing expenses of $6.4 million, are primarily comprised of personnel costs and marketing costs incurred in connection with our initial public offering. |
− | General and administrative expenses, of $33.1 million, include costs of personnel, costs associated with the registration of our platform, as well as legal and other services related to our initial public offering. |
− | Operating expenses include an increase in fair value of the INX Token warrant liability for warrants granted to employees and service providers of $12.6 million, which is recorded as a loss. |
Net Loss
Our net loss from operations for the year ended December 31, 2021 is $53.5 million. Our net loss for the year then ended was approximately $215.2 million, and includes an unrealized loss on INX Tokens issued of $161.2 million.
Adjusted Operating Cash Flow
Our Adjusted Operating Cash Flow for the year ended December 31, 2021 was negative $22.0 million. The cumulative Adjusted Operating Cash Flow as of December 31, 2021 was negative $34.4 million.
The following table provides the calculation of our cumulative Adjusted Operating Cash Flow as of December 31, 2021 (unaudited):
(in U.S. Dollars in thousands)
Cumulative Adjusted Operating Cash Flow as of December 31, 2020 | (12,419 | ) | ||
Less: Net cash used in operating activities in the year ended December 31, 2021 | (21,955 | ) | ||
Less: Cumulative Adjusted Operating Cash Flow as of December 31, 2019 that formed the basis of distribution paid to INX Token holders on April 30, 2021 (there was no distribution) | - | |||
Plus: Proceeds from INX Tokens in the year ended December 31, 2021 | 81,340 | |||
Less: Proceeds from initial sale of INX Tokens in the year ended December 31, 2021 | (81,340 | ) | ||
Cumulative Adjusted Operating Cash Flow as of December 31, 2021 | (34,374 | ) |
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Comparison of operating results for the year ended December 31, 2023 and 2022
The following table presents an overview of our results of operations for years ended December 31, 2023 and 2022:
(U.S. Dollars in thousands, except share and per share data)
Year ended December 31 | ||||||||
2023 | 2022 | |||||||
Revenue | ||||||||
Transaction and brokerage fees | $ | 5,345 | $ | 4,495 | ||||
Service revenue | 976 | - | ||||||
Cost of services | (976 | ) | - | |||||
Gross profit on service revenue | - | - | ||||||
Sales of digital assets | 11,380 | 8,724 | ||||||
Cost of digital assets | (11,380 | ) | (8,758 | ) | ||||
Change in revaluation of digital assets | 235 | (188 | ) | |||||
Net gain (loss) on digital assets | 235 | (222 | ) | |||||
Total income | 5,580 | 4,273 | ||||||
Operating income (expenses): | ||||||||
Research and development | (3,319 | ) | (5,306 | ) | ||||
Sales and marketing | (4,006 | ) | (6,512 | ) | ||||
General and administrative | (13,316 | ) | (15,450 | ) | ||||
Other expense | (1,618 | ) | - | |||||
Change in fair value of INX Token warrant liability | 204 | 8,294 | ||||||
Total operating expenses | (22,055 | ) | (18,974 | ) | ||||
Loss from operations | (16,475 | ) | (14,701 | ) | ||||
Unrealized gain (loss) on INX Tokens issued | 3,775 | 226,044 | ||||||
Finance income | 1,696 | 787 | ||||||
Financial expenses | (255 | ) | (677 | ) | ||||
Loss on investment in associate | (591 | ) | - | |||||
Income (loss) before tax | (11,850 | ) | 211,453 | |||||
Tax expenses | (205 | ) | (119 | ) | ||||
Net income (loss) | $ | (12,055 | ) | $ | 211,334 | |||
Amounts that will be or that have been reclassified to profit or loss when specific conditions are met: | ||||||||
Realized loss on securities at fair value through other comprehensive income (loss) reclassification adjustment into net income (loss) | 77 | 424 | ||||||
Unrealized gain (loss) on securities at fair value through other comprehensive income (loss) | 1,086 | (1,353 | ) | |||||
Adjustments arising from translating financial statements from functional currency to presentation currency | (53 | ) | (513 | ) | ||||
Total other comprehensive income (loss) | 1,110 | (1,442 | ) | |||||
Total comprehensive income (loss) | $ | (10,945 | ) | $ | 209,892 | |||
Earnings (loss) per share, basic and diluted | $ | (0.25 | ) | $ | 4.52 | |||
Weighted average number of shares outstanding, basic and diluted | 47,635,875 | 46,767,930 |
Income
Brokerage fee revenue
Brokerage fees related to our FX business represent a significant portion of total revenue for both years ended December 31, 2023, and 2022 and are based on the notional amounts traded. During the year ended December 31, 2023, we earned brokerage fees of $4.9 million, compared to $3.6 million in 2022. The increase in revenue is primarily driven by a higher trading volume transacted during 2023 and the increased volatility in global currency markets relative to the New Israeli Shekel (NIS).
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Transaction fee revenue
Transaction fees on security tokens and digital assets are based on the amounts transacted by our customers in security tokens and digital assets on the INX.One platform and consist of trading and transaction fees. During the years ended December 31, 2023, and 2022, our subsidiaries INXD and INXS, earned total trading and transaction fees of $0.4 and $0.9, respectively, while the total notional amount traded on the platform was $48.0 million and $133.5 million, respectively. The total trading and transaction fee revenue decreased in 2023 compared to 2022 as a result of lower volume, however, the average per transaction fee amount in 2023 increased compared to 2022, mainly due to an increase of transaction volume as a percentage of total volume, and the increased trading volume in security tokens, which are charged at a higher fee per transaction.
Service revenue
Service revenue includes fees from technology consultation and advisory, as well as listing services performed by the Company under written agreements.
In 2023, we entered into a service agreement with Nabatech, to develop central bank digital currency solutions utilizing blockchain technology. The Company provides blockchain technology support and advisory services to Nabatech and earns revenue based on time and resources dedicated to the development project. During the year ended December 31, 2023, the Company recognized service revenue and cost of sales of $1 million and $1 million, respectively, for providing services to Nabatech.
In late 2022, we launched listings of security tokens seeking to raise capital in primary offerings. This service is offered by our SEC broker-dealer subsidiary, INXS. Service revenue related to listings earned in 2022 and 2023 was not significant.
Revenue from purchases and sales of digital assets
As part of our risk management and liquidity providing activities, one of the Company’s subsidiaries held and traded digital assets and related derivative contracts. During the year ended December 31, 2023, the company generated a net gain from purchases and sales of digital assets of $0.2 million, compared to a net loss of $0.2 million incurred during 2022. We maintained a hedged portfolio seeking to minimize market risk exposure while holding open positions. Gains and losses related to this activity are mainly due to fluctuating market conditions.
Operating Expenses
Research and development expenses
We incurred $3.3 million in research and development expenses for the year ended December 31, 2023, compared to $5.3 million for the year ended December 31, 2022. Research and Development expenses decreased by $2 million from 2022 to 2023. This decrease was primarily driven by a decrease of $2.6 million in personnel cost, which was offset by the increase in share-based and token-based compensation expense of $0.4 million, and an increase in software and web services related to development services of $0.2 million.
Sales and marketing expenses
We incurred $4 million in sales and marketing expenses for the year ended December 31, 2023, compared to $6.5 million for the year ended December 31, 2022. Sales and marketing expenses decreased by $2.5 million from 2022 to 2023. This decrease was mainly driven by decreases in marketing campaigns of $1.1 million, customer support and personnel cost of $0.4 million, share-based compensation of $0.6 million, online marketing of $0.2 million, and a token-based compensation expense of $0.2 million.
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General and administrative expenses
We incurred $13.3 million in general and administrative expenses during the year ended December 31, 2023, compared to $15.5 million for the year ended December 31, 2022. The decrease of $2.2 million was mainly driven by decreases related to personnel cost of $1.3 million, legal costs of $0.7 million, compliance and registration costs of $0.5 million, amortization of intangible assets of $0.4 million, INX Token-based compensation expense of $0.4 million, software and web services of $0.3 million, depreciation of $0.2 million, and other administrative costs of $0.4 million. These decreases are offset by increases related to share-based compensation of $1.8 million, and financial and audit expenses of $0.2 million.
Change in fair value of INX Tokens and INX Token warrants
Our balance sheet as of December 31, 2023 includes the INX Token liability of $54.1 million compared to $56.9 million as of December 31, 2022. Based on the terms of the INX Token, the INX Token is a hybrid financial instrument and under the applicable accounting standards it is presented as a financial liability on our consolidated balance sheet due to the right of the INX Token holders to use the INX Token to pay transaction fees on the INX.One Trading Platform.
On December 31, 2023 and 2022, we measured the INX Token at fair value based on the closing market price of the INX Token (see further details in Note 14 in the audited consolidated financial statements).
In addition, we may grant restricted INX Token awards or INX Token warrants to directors, advisors, employees or service providers as compensation. As of December 31, 2023 and December 31, 2022 the total amount of outstanding INX Token warrants the Company has granted to directors, employees and service providers is 5,574,292 and 6,972,192, respectively. The INX Token warrant liability of $1.2 million and $1.6 million at December 31, 2023 and 2022, respectively, is presented at fair value based on Black-Scholes pricing model. (see further details in Note 15 in the financial statements).
Changes in fair value of the liabilities noted above are recorded through profit and loss in our consolidated statement of comprehensive income (loss). During the year ended December 31, 2023, the fair value of INX Tokens and INX Token warrants issued decreased, and is recorded as an unrealized gain in the statement of comprehensive income (loss) of $3.8 million and $0.2 million, respectively.
INX Token Valuation
The fair value of each INX Token as of December 31, 2023 and 2022, was $0.40 and $0.43, respectively.
Net income (loss)
Net loss for the year ended December 31, 2023, was $12.1 million compared to net income of $211.3 million for the year ended December 31, 2022, a decrease of $223.4 million. A substantial portion of this decrease is attributable to a decrease in the unrealized gain related to the change in fair value of INX Tokens and INX Token warrants issued, of $222.3 million and $8.1 million, respectively, which is recorded through profit and loss. The decrease in unrealized gain was offset by a decrease in research and development, sales and marketing, and general and administrative expenses of $6.6 million.
Total comprehensive income (loss)
Total comprehensive loss for the year ended December 31, 2023 was $11 million compared to total comprehensive income of $209.9 million for the year ended December 31, 2022, a decrease of $220.9 million. A substantial portion of this decrease is attributable to the change in the fair value of liabilities related to INX Tokens issued, which are recorded through profit or loss
Adjusted Operating Cash Flow
Adjusted Operating Cash Flow for the year ended December 31, 2023, was negative $7.8 million, compared to negative $22.3 million during the year ended December 31, 2022. The 2022 to 2023 decrease in cash outflows from operations of $14.5 million is mainly due to an increase in brokerage fee revenue of $1.3 million, an increase in interest income earned of $1 million, a decrease in our operating expenses of $6.6 million, a net decrease in digital assets inventory and related derivative assets of $5.5 million.
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Comparison of years ended December 31, 2021 and 2022
The following table presents an overview of our results of operations for years ended December 31, 2021 and 2022:
(U.S. Dollars in thousands, except share and per share data)
Year ended December 31 | ||||||||
2022 | 2021 | |||||||
Revenue | ||||||||
Transaction and brokerage fees | $ | 4,495 | $ | 2,544 | ||||
Sales of digital assets | 8,724 | - | ||||||
Cost of digital assets | (8,758 | ) | - | |||||
Change in revaluation of digital assets | (188 | ) | - | |||||
Net gain (loss) on digital assets | (222 | ) | - | |||||
Total income | 4,273 | 2,544 | ||||||
Operating (expenses) income | ||||||||
Research and development | (5,306 | ) | (3,849 | ) | ||||
Sales and marketing | (6,512 | ) | (6,411 | ) | ||||
General and administrative | (15,450 | ) | (33,136 | ) | ||||
Change in fair value of INX Token warrant liability | 8,294 | (12,626 | ) | |||||
Total operating expenses | (18,974 | ) | (56,022 | ) | ||||
Loss from operations | (14,701 | ) | (53,478 | ) | ||||
Unrealized gain (loss) on INX Tokens issued | 226,044 | (161,173 | ) | |||||
Finance income | 787 | - | ||||||
Financial expenses | (677 | ) | (427 | ) | ||||
Income (loss) before tax | 211,453 | (215,078 | ) | |||||
Tax expenses | (119 | ) | (157 | ) | ||||
Net income (loss) | $ | 211,334 | $ | (215,235 | ) | |||
Amounts that will be or that have been reclassified to profit or loss when specific conditions are met: | ||||||||
Realized loss on securities at fair value through other comprehensive income (loss) reclassification adjustment into net income (loss) | 424 | - | ||||||
Unrealized gain (loss) on securities at fair value through other comprehensive income (loss) | (1,353 | ) | - | |||||
Adjustments arising from translating financial statements from functional currency to presentation currency | (513 | ) | 188 | |||||
Total other comprehensive income (loss) | (1,442 | ) | 188 | |||||
Total comprehensive income (loss) | $ | 209,892 | $ | (215,047 | ) | |||
Earnings (loss) per share, basic and diluted | $ | 4.52 | $ | (14.30 | ) | |||
Weighted average number of shares outstanding, basic and diluted | 46,767,930 | 15,048,576 |
Income
Brokerage fee revenue
Brokerage fees related to our FX business represent a significant portion of total revenues for both years ended December 31, 2021, and 2022 and are based on the notional amounts traded. During the years ended December 31, 2022, and 2021, our subsidiary ILSB earned brokerage fees of $3.6 million in 2022 compared to $2.3 million in 2021. The 2021 to 202 increase is primarily related to the fact that the 2021 revenue is for the period from June 9, 2021, the date of the acquisition of our FX business by the Company, to December 31, 2021, while the 2022 revenue is for the whole calendar year.
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Transaction fee revenue
Trading and transaction fees on security tokens and digital assets represent our second main source of revenue. Trading fees are based on the amount traded by our customers. Transaction fees are either fixed or are based on the amount of the transaction. The Company evaluates the digital assets business as a whole and uses total trading volume on the platform to measure performance. During the years ended December 31, 2022, and 2021, our subsidiaries INXD and INXS, earned total trading and transaction fees of $0.7 million and $0.3 million, respectively. The transaction fee revenue for 2022 increased compared to 2021 mainly due to the increase in the trading volume on the INX.One platform.
Revenue from purchases and sales of digital assets
Net loss on digital assets utilized in operations of $0.2 million included gross sales of $8.7 million, less cost of digital assets of $8.7 million, less the loss on the change in fair value of $0.2 million, which mainly relates to liquidity providing and risk management activity initiated during 2022 by one of the subsidiaries.
Operating Expenses
Research and development expenses
We incurred $5.3 million in research and development expenses for the year ended December 31, 2022, compared to $3.9 million for the year ended December 31, 2021. Research and Development expenses increased by $1.4 million for the year ended December 31, 2022 compared to 2021. This increase was primarily driven by an increase of $2.7 million in personnel cost and cost related to the development of our trading platform, which is offset by the decrease in share-based compensation expense of $1.1 million.
Sales and marketing expenses
We incurred $6.5 million in sales and marketing expenses during the year ended December 31, 2022, compared to $6.4 million for the year ended December 31, 2021. Sales and marketing expenses increased by $0.1 million for the year ended December 31, 2022 compared to 2021. This net increase was primarily driven by a decrease in share-based compensation expenses of $1.1 million, which is offset by increases in token-based compensation of $0.3 million, personnel costs of $0.5 million, other marketing costs of $0.3 million and customer support expenses of $0.1 million.
General and administrative expenses
We incurred $15.5 million in general and administrative expenses during the year ended December 31, 2022, compared to $33.1 million for the year ended December 31, 2021, a decrease of $17.6 million, primarily driven by a decrease in share-based and token-based compensation expense of $7.6 million and $6.0 million, respectively, a decrease in IPO related costs of $5.2 million, and $1.5 million decrease related to compliance and registration fees. The decrease offsets an increase in personnel costs of $0.8 million, an increase in amortization expense of $0.6 million, an increase in right-of-asset depreciation of $0.4 million, an increase in software and technology of $0.3 million, and an increase in other operation costs of $0.6 million.
Change in fair value of INX Token and INX Token warrants
Our consolidated balance sheet as of December 31, 2022 includes the INX Token liability of $56.9 million compared to $282.6 million as of December 31, 2021. Based on the terms of the INX Token, the INX Token is a hybrid financial instrument and under the applicable accounting standards it is presented as a financial liability on our consolidated balance sheet due to the right of the INX Token holders to use the INX Token to pay transaction fees on the INX.One Trading Platform.
On December 31, 2022 and 2021, we measured the INX Token at fair value based on the closing market price of the INX Token.
Also, as of December 31, 2022 and 2021, the total amount of outstanding INX Token warrants the Company has granted to directors, employees and service providers is 6,972,192 and 5,660,861, respectively. The INX Token warrant liability of $1.6 million and $9.8 million at December 31, 2022 and 2021, respectively, is presented at fair value.
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Changes in fair value of the liabilities noted above are recorded through profit or loss in our consolidated statements of comprehensive income (loss). During the year ended December 31, 2022, the fair value of INX Tokens and INX Token warrants issued decreased by $226 million and $8.2 million, respectively, which is recorded as a gain in the statement of comprehensive income (loss).
INX Token Valuation
The fair value of each INX Token as of December 31, 2022 and 2021, was $0.43 and $2.20, respectively.
Net income (loss)
Net income for the year ended December 31, 2022, was $211.3 million compared to net loss of $215.2 million, for the year ended December 31, 2021, an increase of $426.5 million. A substantial portion of this increase, specifically $387.2 and $20.1 million, is attributable to the change in the fair value of the liabilities related to INX Tokens and INX Token warrants, respectively, from December 31, 2021 to 2022.
Total comprehensive income (loss)
Total comprehensive income for the year ended December 31, 2022, was $209.9 million compared to total comprehensive loss of $215.1 million, for year ended December 31, 2021, an increase of $425.0 million. A substantial portion of this increase is attributable to the change in the fair value of liabilities related to INX Tokens issued, which are recorded through profit or loss.
Adjusted Operating Cash Flow
Adjusted Operating Cash Flow for the year ended December 31, 2022, was negative $22.3, compared to an Adjusted Operating Cash Flow of negative $22.0 million for the year ended December 31, 2021, an increase in cash outflows from operations of $0.3 million due to an increase in our loss from operations.
Key Business Metrics
Security Token and Digital Asset Business
For our security token and digital assets business, we use the following key business metrics to evaluate our business, measure performance and make strategic decisions:
Years ended December 31 (unaudited) | ||||||||||||
2023 | 2022 | 2021 | ||||||||||
Number of Verified Accounts | 5,946 | 30,584 | 23,856 | |||||||||
Trading Volume | $ | 47,947,000 | $ | 133,469,000 | $ | 117,310,000 | ||||||
Customer Assets on Platform | $ | 3,242,000 | $ | 2,609,000 | $ | 4,270,000 |
We define “Verified Accounts” as all retail and institutional customers that have registered and successfully onboarded onto our platform and have established an account during the applicable period of measurement. Verified Users are an indication of our growth. These customers have demonstrated an interest in our platform or direct intent to invest and transact in security tokens and digital assets. Number of Verified Accounts represents our customer acquisition pace. Verified Accounts may overstate the number of unique customers who have established an account on our platform as one customer may register for, and use, multiple accounts.
We define “Trading Volume” as the total U.S. dollar equivalent value of spot matched trades transacted by buyers and sellers on our platform during the applicable period of measurement. Trading Volume represents the product of the quantity of asset transacted and the trade price at the time the transaction was executed. As trading activity directly impacts transaction revenue, we believe this measure is a reflection of liquidity on our order books, trading health, and the underlying growth of the digital asset economy. Generally, Trading Volume on our platform is primarily influenced by the price of security tokens and digital assets, price volatility and macroeconomic conditions.
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We define “Customer Assets on Platform” as the aggregate of customer owned digital assets and fiat balances, set forth on our consolidated balance sheet under Customer Funds.
The value of Assets on Platform is driven by three factors: the price, quantity, and type of digital asset or security token held by customers on our platform. Changes in the price and quantity or type of digital asset or security token held on our platform, can result in the increase or decrease in assets on the platform in a particular period.
FX Business
For our FX business, we use the total notional amount traded to evaluate this business, measure its performance, and make strategic decisions. During the year ended December 31, 2023, our subsidiary ILSB traded a total notional amount of approximately $137.4 billion, compared to $88.7 billion in 2022 and 86.7 billion in 2021.
B. Liquidity and Capital Resources.
Capital resources
Our consolidated financial statements as of December 31, 2023 have been prepared on a going concern basis which assumes that the Company will be able realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. Management and the Board of Directors are actively involved in the review, planning and approval of our significant expenditures and financial commitments.
As of December 31, 2023 and 2022, our operating capital of $26.3 million and $29.5 million, respectively, is held in cash and cash equivalents, U.S. Treasury securities, marketable corporate bonds and other investments as follows:
(U.S. Dollars in thousands)
December 31, 2023 | December 31, 2022 | |||||||
Cash and cash equivalents | $ | 12,572 | $ | 19,781 | ||||
Short-term investments | ||||||||
U.S. Treasury securities | 4,604 | 3,444 | ||||||
Corporate bonds – marketable investments | 5,889 | 1,589 | ||||||
Total short-term investments | $ | 10,493 | $ | 5,033 | ||||
Long-term investments | ||||||||
Corporate bonds – marketable investments | 403 | 4,254 | ||||||
Investments in private equity | 490 | 400 | ||||||
Total long-term investments | $ | 893 | $ | 4,254 | ||||
Total capital | $ | 23,958 | $ | 29,468 |
Reserve Fund (otherwise referred to as Cash Fund)
As of December 31, 2022, INX had segregated $36 million as the Reserve Fund. In December 2023, the Company learned of a cyber-attack that occurred on the computer system of a third-party service provider of one of the Company’s subsidiaries. As a result, the malicious party managed to cause a loss of funds of the Company’s subsidiary in the amount of $1.6 million. Upon the discovery of the breach, the Company took an immediate action to eliminate the security vulnerability, subsequently put in place additional security measures designed to prevent such cyber-attack incidents in the future, and continues to work with relevant law enforcements seeking to recover lost funds. The Company utilized funds set aside in the Reserve Fund to cover the loss, as a result, as of December 31, 2023, the balance of the Reserve Fund was reduced to $34.4 million.
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The Reserve Fund consists of cash and cash equivalents, U.S. Treasury securities and corporate bonds held at banks and brokerage firms as follows:
(U.S. Dollars in thousands)
December 31, 2023 | December 31, 2022 | |||||||
Cash and cash equivalents | 16,522 | 5,824 | ||||||
Short-term investments | ||||||||
U.S. Treasury securities | 986 | 6,141 | ||||||
Corporate bonds – marketable investments | 15,996 | 12,332 | ||||||
Total short-term investments | 16,982 | 18,473 | ||||||
Long-term investments | ||||||||
U.S. Treasury securities | 901 | 474 | ||||||
Corporate bonds – marketable investments | - | 11,252 | ||||||
Total long-term investments | 901 | 11,726 | ||||||
Total Reserve Fund | 34,405 | 36,023 |
Digital assets
As of December 31, 2023 and 2022, we held approximately $1 million and $2.6 million, respectively, of digital assets for operating purposes.
Coin Symbol | December 31, 2023 | December 31, 2022 | ||||||
USDC | $ | 453 | $ | 463 | ||||
BTC | 354 | 546 | ||||||
ETH | 86 | 503 | ||||||
USDT | 23 | 684 | ||||||
LTC | 15 | 109 | ||||||
ZEC | 3 | 51 | ||||||
UNI | - | 44 | ||||||
AAVE | - | 31 | ||||||
COMP | - | 31 | ||||||
CRV | - | 29 | ||||||
MATIC | - | 28 | ||||||
Other | 15 | 78 | ||||||
Total digital assets | $ | 949 | $ | 2,597 |
Material cash commitments and contractual obligations
As of December 31, 2023 and 2022, we have the following short and long-term cash commitments and contractual obligations:
(U.S. Dollars in thousands)
December 31, 2023 | December 31, 2022 | |||||||
Current liabilities | ||||||||
Accounts payable and accrued expenses | 2,900 | 2,298 | ||||||
Funds due to customers | 3,242 | 2,609 | ||||||
Lease liability | 390 | 519 | ||||||
Deferred revenue | 85 | - | ||||||
Total current liabilities | 6,617 | 5,426 | ||||||
Non-current liabilities | ||||||||
Provision for loss on investment in associate | 597 | - | ||||||
Lease liability | 479 | 868 | ||||||
Total non-current liabilities | 1,076 | 868 | ||||||
Total | 7,693 | 6,294 |
We are required to hold corporate liquid assets or net worth at our subsidiaries to meet capital requirements established by our regulators based on statutory net capital requirements. We are in compliance with these capital requirements.
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Operating capital
To date, although we have generated brokerage fee revenue through ILSB as well as trading and transaction fees earned on our security token and digital assets business offered by INXS and INXD, we have mainly financed our operations through equity investments made by our Parent Company shareholders, the INX Token Offering in the US and the Valdy Transaction in Canada.
Our future expenditures and capital requirements will depend on numerous factors, including our growth, our ability to acquire and retain new clients utilizing our services and attract issuers to issue security tokens and list them on INX.One for trading, as well as the continuing market acceptance of our products and services and digital assets and blockchain technology and overall economic conditions.
We believe that our existing operating capital is sufficient in both the short and long term to meet our operating requirements, including meeting our working capital and capital expenditure requirements.
C. Research and development, patents and licenses, etc.
For information concerning our research and development policies and a description of the amount spent during each of the last four fiscal years on company-sponsored research and development activities, see “Item 5. Operating and Financial Review and Prospects—Results of Operations.”
D. Trend Information
See “Item 4, Item 5.A” and “Item 5.B.”
E. Critical Accounting Estimates
Critical Accounting Policies and Estimates
The consolidated financial statements have been prepared in accordance with International Accounting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and interpretations of the International Reporting Interpretations Committee (“IFRIC”).
In accordance with IFRS, in preparing our consolidated financial statements, we must make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of net revenues and expenses during the reported period. We develop and periodically change these estimates and assumptions based on historical experience and on various other factors that we believe are reasonable under the applicable circumstances. Actual results may differ from these estimates.
Many aspects of the digital currency and blockchain industry have not yet been addressed by current IFRS guidance. We are required to make significant assumptions and judgments as to applicable accounting policies and the application thereof, which is disclosed in the notes to the consolidated financial statements. If specific guidance is enacted by the IASB in the future, the impact may result in changes to the Company’s profit or loss and financial position as currently presented.
The critical accounting policies requiring estimates, assumptions and judgments that we believe have the most significant impact on our financial statements are described below.
Financial liabilities at fair value through profit or loss - INX Token liability:
Based on the terms of the INX Token, the INX Token is a hybrid financial instrument. The host instrument is a financial liability due to the right of the INX Token holder to use the INX Token to pay transaction fees on the INX.One trading platform. The INX Token is considered a puttable instrument which is a financial liability in accordance with IAS 32, Financial Instruments: Presentation.
Our obligation to make a pro rata distribution annually to the INX Token holders from INX’s Adjusted Operating Cash Flow is an embedded derivative. The Company views INX’s operating cash flows as a financial variable, and therefore, the embedded derivative requires bifurcation pursuant to IFRS 9. The Company elected, in accordance with IFRS 9, to designate the entire financial liability (including the embedded derivative) at fair value through profit and loss. Accordingly, the INX Token liability and the INX Token warrant liability are re-measured to fair value at the end of each reporting period.
The change in the fair value of the INX Token liability that is attributable to changes in credit risk, excluding those changes in credit risk attributable to the embedded derivative, to the extent there are any, would be presented in other comprehensive income. The remaining amount of the change in the fair value of the INX Token liability would be presented in profit or loss. The change in fair value of the INX Token liability is included in profit or loss.
Should the INX Token be used to pay for services provided by INX, revenue would be recognized and the respective portion of the INX Token liability would be derecognized. Additionally, the fair value of INX Tokens issued in consideration for services provided to the Company would be recognized as compensation expense when services are provided.
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Determining the fair value of an unquoted financial liability
The fair value of unquoted warrant liability in Level 3 of the fair value hierarchy is determined using the Black and Scholes option pricing model. The inputs to the model include share price, exercise price and assumptions regarding expected volatility, expected life of and expected dividend yield.
Impairment of goodwill
The Company reviews goodwill for impairment once a year, on December 31, or more frequently if events or changes in circumstances indicate that there is an impairment. This requires management to make an estimate of the projected future cash flows from the continuing use of the cash-generating unit (or a group of cash-generating units) to which the goodwill is allocated and also to choose a suitable discount rate for those cash flows.
Discount rate for a lease liability
When the Company is unable to readily determine the discount rate implicit in a lease in order to measure the lease liability, the Company uses an incremental borrowing rate. That rate represents the rate of interest that the Company would have to pay to borrow over a similar term and with similar security, the funds necessary to obtain an asset of similar economic environment. When there are no financing transactions that can serve as a basis, the Company determines the incremental borrowing rate based on its credit risk, the lease term and other economic variables deriving from the lease contract’s conditions and restrictions. In certain situations, the Company is assisted by an external valuation expert in determining the incremental borrowing rate.
Deferred tax assets
Deferred tax assets are recognized for unused carryforward tax losses and deductible temporary differences to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the timing and level of future taxable profits, its source and the tax planning strategy.
Revenue recognition
The Company determines revenue recognition from contracts with customers through the following steps:
● | Identification of the contract with the customer; |
● | Identification of performance obligations in the contract; |
● | Determination of transaction price; |
● | Allocation of the transaction price to the performance obligations in the contract; and |
● | Recognition of the revenue when, or as, the Company satisfies a performance obligation. |
In determining the amount of revenue from contracts with customers, the Company evaluates whether it is a principal or an agent in the arrangement. The Company is a principal when the Company controls the promised goods or services before transferring them to the customer. In these circumstances, the Company recognizes revenue for the gross amount of the consideration. When the Company is an agent, it recognizes revenue for the net amount of the consideration, after deducting the amount due to the principal.
Transaction fees revenue includes revenue from transaction and trading fees charged to customers utilizing the Company’s trading platform and are presented on a net basis. The Company’s service is comprised of a single performance obligation to provide a matching service when customers buy, sell, or convert digital assets. The Company does not control the digital asset being provided before it is transferred to the buyer, does not have inventory risk related to the digital asset, and is not responsible for the settlement of the digital asset. The Company also does not set the price for the digital asset as the price is a market rate established by users of the platform. As a result, the Company acts as an agent in facilitating the ability for a customer to purchase digital assets from another customer.
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Transaction fees charged on the INX.One trading platform are recognized as revenue when the Company’s obligation is satisfied, promised services are transferred to the customer and the customer obtains control. Brokerage fees revenue is recorded according to the date the service was provided, or the operation was carried out. Relevant to brokerage and transaction fees, contracts with customers are usually open-ended and can be terminated by either party without a termination penalty. Therefore, these contracts are defined at the transaction level and do not extend beyond the service already provided. The transaction price is the amount of the consideration that is expected to be received based on the contract terms, excluding amounts collected on behalf of third parties (such as taxes).
Service revenue represents fees for technology consultation and advisory, as well as listing services performed by the Company under written agreements and is recognized upon the delivery of promised goods or services to the customer and when Company’s performance obligation to the customer is satisfied. The revenue is recognized in an amount that reflects the fair value of the consideration to which the Company expects to be entitled to, upon completion of the Company’s performance obligation for those services, as stated in the contract. As of December 31, 2023, the Company received payments prior to the completion of its performance obligation under contracts with customers, which are recognized as deferred revenue.
The Company also recognizes revenue from buying and selling digital assets it owns. Such revenue is recognized in the gross amount of consideration received on sales less the cost of digital assets sold.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management.
The following table sets forth certain information relating to our executive officers and board members, including their ages, as of April 10, 2024. Unless otherwise stated, the address for our senior management is at the Company’s registered office currently located at 57/63 Line Wall Road, Gibraltar, GX11 1AA.
Name | Age | Position | ||
Shy Datika | 55 | Director, President & CEO | ||
Itai Avneri | 50 | Deputy CEO & Chief Operating Officer | ||
Maia Naor | 40 | Chief Product Officer | ||
Alan Silbert | 51 | Director; Chief Executive Officer of North America | ||
Paz Diamant | 55 | Chief Technology Officer | ||
Renata Szkoda | 47 | Chief Financial Officer | ||
Vlad Uchenik | 54 | Chief Compliance Officer; Chief Executive Officer of INXS | ||
David Weild (1) | 67 | Independent Director | ||
Nicholas Thadaney (1) (2)(3) | 55 | Independent Director | ||
Thomas Lewis (1) (2)(3) | 71 | Independent Director | ||
Hilary Kramer (2)(3) | 60 | Independent Director | ||
Demetra Kalogerou | 55 | Independent Director |
* | Under Gibraltar law, directors are appointed indefinitely unless their appointment specifies a defined period. Our directors were not appointed with a specified defined period of term. |
(1) | Member of the Compensation Committee |
(2) | Member of the Audit Committee |
(3) | Member of the Nominating and Governance Committee |
Mr. Shy Datika is one of our founders and has served as our President since 2017 and CEO since 2022. Mr. Datika has also been a member of the board of directors since December 2021. Mr. Datika has more than 25 years of experience in the banking and finance industry. As founder and former Chief Executive Officer of ILS Brokers, a multinational brokerage house based in Tel-Aviv, Israel, Mr. Datika has a significant role in the adoption of electronic trading in the global OTC foreign exchange (OTC Forex) market as well as in the brokerage activity and online trading business. During the last 20 years, Mr. Datika has been extensively involved in financial technology (“fin-tech”) as an investor, director or manager of several companies, including as CEO of ForexManage Ltd., a software company providing professional technology platform solutions for institutional risk management and trading activities in the forex and interest rate derivatives markets for the banking industry, anyoption, Ouroboros Ltd (CySec licenced CIF) and as an independent (external) director and the Chairman of the Investment Committee and member of the Audit Committee of Altshuler Shaham provident funds and Pension Ltd. Prior to that, he was a senior dealer in Bank Hapoalim heading the G7 spot desk. Mr. Datika possesses broad knowledge in the areas of fin-tech and trading and has an extensive track record in building sustainable businesses in the financial market.
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Mr. Itai Avneri has served as our Deputy CEO since March 2022 and our Chief Operating Officer since January 2021. Mr. Avneri brings over 20 years of executive management experience into this role. His commercial work spans a variety of technology companies, including from June 2015 to June 2017, COO of anyoption, and former Playtech Group-CMO and CEO of the Israel office. Since 2018 Mr. Avneri has served on the advisory boards of various enterprises and startups. Mr. Avneri has led the launch of multiple financial services and products in Europe and South Africa among other regulated jurisdictions. He designed and built advanced information systems with specializations in trading, BI & CRM solutions, marketing and KYC automation as well as payments and integration hubs. His in-depth knowledge and hands-on experience on all aspects of online business (B2B & B2C), marketing, technology and finance will play a key role at INX Limited.
Ms. Maia Naor has served as our Chief Product Officer and has been with the Company since its founding. Ms. Naor has over ten years of fin-tech experience working for companies across Europe and Israel. From 2010 until July 2017, Ms. Naor served as Vice President – Product in Anyoption Ltd., a leading European regulated trading group where she oversaw the planning, implementation and launch of several financial services and computer-internet-based and cellular-based trading applications. Ms. Naor also gained experience in building and training teams of data scientists that supported the growth and optimization of the trading products. Ms. Naor is a graduate of the Tel Aviv University School of Economics and the Tel Aviv University School of Mathematical Sciences, with honors.
Mr. Alan Silbert has served as our Secretary and our Chief Executive Officer of North America since April 2021. Mr. Silbert has also been a member of the board of directors since March 2018. He joined the Company in March 2018 as Executive Managing Director. He has over 27 years of experience in the financial services industry. Mr. Silbert is responsible for Company operations in North America, and his responsibilities include facilitating the build-out of the director and advisor team, raising capital, growing operations and infrastructure for North American operations and leading regulatory and licensing processes. From December 2015 until March 2018, he was Senior Vice President at Capital One Commercial Banking, serving on the Asset Based Lending and Venture Debt teams. Prior to that, he was Senior Vice President at GE Capital and Vice President at Merrill Lynch Capital. From February 2013 until October 2017, he served as founder and Chief Executive Officer of BitPremier LLC, a bitcoin luxury marketplace. Mr. Silbert received his BS in Business Administration with a concentration in Finance from Towson University.
Mr. Paz Diamant has served as our Chief Technology Officer since July 2021. Mr. Diamant has more than 26 years of experience in the banking and financial technology industry. From November 2013 to January 2021, Mr. Diamant held several roles at eToro, a worldwide leading social investment network, where he was most recently Managing Director of R&D and Product. In that role he directed the design, development, and deployment of the company’s cloud-based exchange system, and was responsible for the development of eToro’s complicated hedging algorithms. While at eToro, Mr. Diamant managed R&D teams for several years while implementing cutting-edge, cloud-based technologies successfully. From October 2002 to January 2011, Mr. Diamant was the founder and Chief Executive Officer of ForexManage Ltd., a leading provider of advanced, real-time, risk management and foreign exchange online trading technologies for the banking industry. Through his role at ForexManage, Mr. Diamant had a significant role in the adoption of advanced risk management models in major European banks and brokerage houses. Mr. Diamant holds a BS in Physics from the Technion - Israel Institute of Technology, where he graduated cum laude, and an MBA, Finance from Bar-Ilan University.
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Mrs. Renata Szkoda is our Chief Financial Officer. Ms. Szkoda brings with her over 20 years of experience and financial leadership in regulated capital markets and financial services industry. Ms. Szkoda has deep expertise in financial regulation and a strong record of building financial and operational infrastructure to enable business expansion within regulated environments. She was previously the Director of Finance at Galaxy Digital, a financial services and investment management firm focused on digital assets. Prior to that, Ms. Szkoda was the Chief Financial Officer at Blue Fire Capital, proprietary trading firm based in Chicago, Chief Financial Officer of KCG Futures, the division of KCG Americas (KCG), a self-clearing futures commission merchant (FCM) and the Senior Vice President, Accounting and Finance at Rosenthal Collins Group (RCG), a FCM based in Chicago where she oversaw the finance and treasury operations. Prior to her employment at RCG, Ms. Szkoda was a senior audit manager in the Financial Services Practice Group of RSM McGladrey, providing audit and consulting services to a variety of financial services firms, including securities broker-dealers, futures commission merchants, hedge funds, investment advisors, market specialists and commodity pools. Ms. Szkoda is a CPA and holds a Bachelors of Science in Accounting from University of Illinois at Chicago.
Mr. Vlad Uchenik is Chief Compliance Officer for the INX Trading Solutions group of companies and the Chief Executive Officer of INXS. Mr. Uchenik has over 27 years of experience in the financial services industry. Vlad is currently CEO and CCO for INXS (formerly Openfinance Securities, LLC, Sageworks Capital, LLC and Raiseworks), and has been in the role since 2013. Mr. Uchenik was responsible for getting regulatory approval for the first ATS that traded digital securities in the secondary market, with the first trade occurring in November 2018. Mr. Uchenik also previously worked as CCO for Eagliew Securities, LLC, as CCO for iTB Securities LLC, a fixed income ATS trading platform BD, and as COO and CCO for InterMerchant Securities, LLC in New York. Prior to that, Mr. Uchenik was the Chief Operating, Compliance and Financial Officer of Jesup & Lamont Securities Corp supervising over 150 registered reps. Mr. Uchenik was also the COO/CCO of Safdie Investment Services Corp., a boutique BD and Investment Advisor, and served as the VP of Regulatory Risk and Control for US Trust’s Operations Division where his responsibilities included overseeing the risk and compliance measures in operations for the BD, 4 SEC IAs, a National Bank, ’40 Act mutual funds and a Trust company. Mr. Uchenik also held a CCO role with BBVA Securities Corp in New York and was CCO/COO for Security Financial Network in Phoenixville, PA. Mr. Uchenik has the FINRA Series 4, 7, 24, 28, 53, 63 and 65 licenses. Mr. Uchenik has an undergraduate degree in Business Management from Rutgers University in New Brunswick, NJ and a master’s degree in Finance from Temple University in Philadelphia, PA.
Mr. David Weild has been an independent director of the Company since April 2018. He is the founder, chairman and chief executive officer of Weild & Co., Inc., founded in 2012, and parent company of the investment banking firm Weild Capital, LLC. Prior to Weild & Co., Mr. Weild was vice chairman at Nasdaq, president of PrudentialFinancial.com and head of corporate finance and equity capital markets at Prudential Securities, Inc. Mr. Weild holds an M.B.A. from the Stern School of Business and a B.A. from Wesleyan University. Mr. Weild currently serves on the boards of Scopus BioPharma, INX, LTD and recently joined the board of the charity Dignity Beyond Borders which creates safe and inclusive global communities for survivors of traumatic loss. Mr. Weild has served as a director of BioSig Technologies, Inc. from May 2015 until February 2024 and previously served on the board of PAVmed. From September 2010 to June 2011, Mr. Weild served on the board of Helium.com, until it was acquired by R.R. Donnelly & Sons Co. Since 2003, Mr. Weild was a director and then chairman of the board of the 9-11 charity Tuesday’s Children. He became chairman emeritus in late 2016. Mr. Weild brings extensive financial, economic, stock exchange, capital markets, regulatory, legislative and small company expertise to our Board gained throughout his career on Wall Street. He is a recognized expert in capital markets and has spoken at the White House, Congress, the SEC, the Organization for Economic Co-operation and Development and the G-20 on how market structure can be bettered to improve capital formation and economic growth. He is referred to as the “father” of the Jumpstart Our Business Startups Act (JOBS) based on the role he played in drafting the legislation. The Act served as the foundation for securities crowdfunding, generally solicited private placements, emerging growth company IPOs, Reg. A+ offerings, Testing the Waters, and a host of other improvements to U.S. capital markets that contribute to the growth in ecosystems that spur access to capital and drive innovation. Mr. Weild’s service at Nasdaq, his recognized expertise in capital markets including extensive experience in aiding private and public company financing, his knowledge of corporate governance and service on boards of directors, including service as an audit committee chair for a Nasdaq-listed company, will make him a well-qualified member of our board of directors.
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Mr. Nicholas (Nick) Thadaney has been an independent director of the Company since July 2018. He founded Partners Capital Corp. in 2019, a firm focused on advising, co-investing and partnering with entrepreneurs and their management teams to accelerate the growth of their businesses through innovative capital and strategic solutions. Mr. Thadaney was previously President and Chief Executive Officer, Global Equity Capital Markets, and a member of the senior management team of TMX Group until February 2018. In his roles with TMX Group, Mr. Thadaney was responsible for all equity listing and trading activity across the company’s equities markets and alternative trading systems, including heading the Toronto Stock Exchange, TSX Venture Exchange, Alpha, TMX Select, and TSX Private Markets. He also oversaw TSX Trust - TMX Group’s transfer agency and corporate trust services provider. Prior to joining TMX Group in 2015, Mr. Thadaney was Chief Executive Officer of ITG Canada Corp. (now Virtu Financial) since 2005, with responsibility for managing all aspects of the business, as well as a Member of ITG’s Global Executive Committee. He joined ITG Canada as Director of Sales and Trading in 2000. Before his tenure at ITG, Mr. Thadaney was Vice-President, Business Development (Equities) at C.T. Securities Inc.(Canada Trust), which was later acquired by T.D. Securities Inc.(TD Bank) in 1999. Mr. Thadaney has been a board & committee member for a number of prominent businesses, industry associations, and registered charities, including: Bermuda Stock Exchange; CanDeal; Investment Industry Regulatory Organization of Canada (IIROC now CIRO); Investment Industry Association of Canada; JA (Junior Achievement) Canada; Mount Sinai Hospital Asset Management Industry Hold’em for Life Charity (Co-Chair); Toronto Financial Services Alliance (now Toronto Finance International); Young Presidents Organization (Ontario Chapter); and the World Federation of Exchanges SME Advisory Board. Mr. Thadaney also currently serves as a senior advisor to a number of firms and a director on the boards of Wonderfi Technologies Inc., Tetra Trust Company and Agrinam Acquisition Corporation.
Mr. Thomas K. Lewis, Jr. has been an independent director of the Company since October 2018. Mr. Lewis was the Founder of Noble 4 Advisors, LLC, a company he founded in September 2012 that develops and provides methodologies, technologies and guidance that assist boards, CEOs, investors and senior executives in defining and implementing plans to improve operating performance. Mr. Lewis retired from Noble 4 Advisors in January 2021. Mr. Lewis has served as CEO of four companies, including The Green Exchange, a federally regulated futures and options exchange in New York and London, from September 2009 to July 2012; Automated Power Exchange Inc. (APX), a venture-backed wholesale power markets and renewable energy services provider, from August 2003 to October 2007; Ameritrade, an online retail broker, from February 1999 to August 2000; and Campus Pipeline, an educational software company. Prior to that, Mr. Lewis served in technology leadership positions with American Express, Credit Suisse First Boston, USF&G Insurance and Marriott Corporation. Mr. Lewis has served on the boards of The New York Ledger Exchange, aka LedgerX (from 2014 to 2017), Green Exchange Holdings, LLC (2009 to 2012), Evolution Markets, Inc. (2007 to 2009), Automated Power Exchange Inc. (2003 to 2007) and Neovest Holdings, Inc. (2001 to 2004). Mr. Lewis has served on the advisory board of Xpansiv Limited, a global marketplace for ESG commodities, including carbon, RECs, digital fuels, and water rights, since 2021. Mr. Lewis currently serves on the board of FiùturX (June 2003 to present). Mr. Lewis holds an honorary doctorate, a master’s degree in computer and information science, and a bachelor’s degree, magna cum laude, in business administration from the University of New Haven in Connecticut, where he was honored as a distinguished alumnus. He served as chairman of the Board of Trustees of the Henry Lee Institute of Forensic Science, and served for twelve years as a member of the Board of Trustees of the University of New Haven. He served as Chairman of the Advisory Board for Gore School of Business at Westminster College. He has also served as a member of the Advisory Board of the Johns Hopkins Carey Business School at Johns Hopkins University. Mr. Lewis served as Executive in Residence and Assistant Professor at Johns Hopkins University, Carey Business School. Mr. Lewis also served as the head of technology for the Executive Office of the President of the United States during the Ronald Reagan Administration.
Ms. Hilary Kramer has been an independent director of the Company since January 2023. Ms. Hilary Kramer is a former analyst and investment banker at Morgan Stanley and Lehman Brothers, founded and ran a long-short hedge fund, GreenTech Research LLC, and has been chief investment officer overseeing more than $5 billion of debt and equity portfolios. Ms. Kramer served as the co-head and board member of a $1.0 billion private equity fund jointly owned by Hicks, Muse that developed and invested in new programming content as well as serving on the advisory board of numerous companies including DirecTV International, Spalding and Evenflo. Ms. Kramer has served as a director to four publicly-traded companies and consults in family offices and institutions, such as Montgomery Asset Management, Freddie Mac, and families on the Forbes list of global billionaires ranging from Latin America to the Middle East. Ms. Kramer authors seven subscription-based investment newsletters and has a nationally syndicated investment radio show, Kramer’s Millionaire Maker, on the Salem Network in 140 markets. In 2021, Ms. Kramer was awarded the Gracie Award for best syndicated national radio show. She is the author of Ahead of the Curve (Simon & Schuster 2007) and The Little Book of Big Profits from Small Stocks (Wiley 2012). Her latest book, Game Changing Investing (Regnery 2021) is on the best- selling lists at “The Wall Street Journal”, “USA TODAY” and on Amazon.com. Ms. Kramer was a founding member of the Wall Street Journal Women in Business. In 2011, Ms. Kramer received the Certified Fraud Examiner (CFE) designation and has been an investigator and expert witness on compliance, board governance, executive compensation, portfolio structure and investment suitability cases. Ms. Kramer holds an MBA from the Wharton School of the University of Pennsylvania and a BA with honors from Wellesley College.
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Ms. Demetra Kalogerou has been an independent director of the Company since February 2023. Mrs. Demetra also currently serves as a non-executive independent board member of the listed company Swissquote Group Holding Ltd., and of the private company Ecommbx Ltd. Ms. Kalogerou (BSc, MSc, MPhil) from September 2011 to September 2021 was the Chairwoman of CYSEC, the independent public supervisory Authority responsible for the supervision of the Capital Markets, the investment services market, all the transactions in transferable securities and other financial instruments carried in and out of the Republic of Cyprus and the collective investment and asset management sector. It also supervises firms offering administrative services as well as Crypto Exchanges only in terms of AML issues and financial terrorism. From 2011 to 2021, she participated in the board of supervisors of the European Securities and Markets Authority (ESMA). Also, from November 2012 until February 2021, she was a member of the Cyprus Public Audit Oversight Board, which has been established for the oversight of auditors and audit firms. Furthermore, from November 2019 until June 2021 Mrs. Kalogerou chaired the ad-hoc tripartite committee and she was also a member of the four-party committee concerning the investigation of the naturalization of all persons done through the CIP. Additionally from September 2013 until June 2014, Mrs. Kalogerou has been a member of the Resolution Authority, with the Minister of Finance and the Governor of Central Bank of Cyprus, which supervised the implementation of the resolution of financial institutions in Cyprus.
Arrangements Concerning Election of Directors; Family Relationships
There are no family relationships between any of the directors or members of senior management named above.
We are not aware of any arrangements or understandings with major shareholders, customers, suppliers or others, pursuant to which any person referred to above was selected as a director or member of senior management.
B. Compensation.
Compensation of Senior Management and Directors
Each of the Company’s independent directors is entitled to receive an option to purchase 3,500 INX Tokens each month at an exercise price equal to the fair market value of the INX Token at the date of the grant.
Compensation provided to key management personnel and directors for the years ended December 31, 2023, and 2022 and 2021 was as follows:
(U.S. Dollars in thousands)
Year ended December 31 | ||||||||||||
2023 | 2022 | 2021 | ||||||||||
Cost of service: | ||||||||||||
Compensation and benefits | $ | 226 | $ | - | $ | - | ||||||
$ | 226 | $ | - | $ | - | |||||||
Research and development: | ||||||||||||
Compensation and benefits | $ | 234 | $ | 465 | $ | 598 | ||||||
Share-based compensation (*) | 190 | 70 | 391 | |||||||||
INX Token-based compensation | 41 | 6 | 448 | |||||||||
$ | 465 | $ | 541 | $ | 1,437 | |||||||
Sales and marketing: | ||||||||||||
Compensation and benefits | $ | - | 369 | $ | 4,406 | |||||||
Share-based compensation (*) | - | 176 | 2,783 | |||||||||
INX Token-based compensation | - | 298 | 3,878 | |||||||||
$ | - | $ | 843 | $ | 11,067 | |||||||
General and administrative: | ||||||||||||
Compensation and benefits | $ | 2,934 | $ | 2,204 | $ | 1,577 | ||||||
Share-based compensation (*) | 1,702 | 543 | 6,883 | |||||||||
INX Token-based compensation | 396 | 278 | 2,249 | |||||||||
$ | 5,032 | $ | 3,025 | $ | 10,709 | |||||||
Total compensation and benefits | $ | 5,723 | $ | 4,409 | $ | 23,213 | ||||||
Change in fair value of INX Token and warrant liabilities | $ | (830 | ) | $ | (20,133 | ) | $ | 24,673 |
(*) | See Note 19 Share-Based Payment to the consolidated audited financial statements as of December 31, 2023, for the description of options granted by Parent to employees of the Company that are exercisable into Common shares of Parent. |
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For additional information, see “Item 7.B Related Party Transactions – Relationships and Transactions with Directors and Executive Officers.”
Equity Compensation Plan Information
On February 22, 2021, the Company’s board of directors adopted the INX Limited Share Ownership and Award Plan (2021) (the “INX Plan”) and, on March 18, 2021, the Company’s shareholders approved the Plan. The Plan provided for grants of options to purchase Ordinary Shares and restricted shares to such employees, directors and consultants engaged by the Company or any of its affiliates. In connection with the Valdy Transaction, the INX Plan was terminated and replaced by the Parent Company Omnibus Equity Incentive Compensation Plan (the “Plan”). Upon closing of the Valdy Transaction, awards granted pursuant to the INX Plan were exchanged for equivalent awards under the Plan.
The Plan provides for grants of options to purchase the Parent Company’s common shares and restricted share units to employees, directors and service providers of the Company. The Plan includes U.S. and Israeli appendices that further specify the terms and conditions of grants of options and restricted share units to such grantees.
Effective January 10, 2022, the completion date of the Valdy Transaction, all of our outstanding share capital is held by TIDCI. Commencing as of this completion date, share award compensation are granted to employees, directors and consultants engaged by the Company or any of its affiliates pursuant to the TIDCI Equity Incentive Plan. The Plan is used by the Company solely for grant of Token awards as described below.
Grant of Token Awards under the Plan:
Token Plan Awards. On March 31, 2022, our Board of Directors and the Board of Directors of our Parent (acting as our general meeting) approved certain changes to our Plan (including to the Plans’ US and Israeli Appendices) in connection with grant of INX Tokens, restricted INX Tokens and options to purchase INX Tokens (collectively, “Token Awards”) pursuant to the provisions of the Plan. The Plan provides for the grant of Token Awards to employees, directors and consultants who are Gibraltar citizens and others who are not Gibraltar citizens, and includes U.S. and Israeli appendices that further specify the terms and conditions of grants of Token Awards to such non-Gibraltar grantees.
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Authorized Tokens for Grant under the Plan. Subject to certain capitalization adjustments, the aggregate number of INX Tokens that may be issued pursuant to Token Awards under the Plan may not exceed 17,373,438 INX Tokens. Tokens subject to Token Awards granted under the Plan that expire, become un-exercisable or are canceled, forfeited to or repurchased by the Company due to the failure to vest, or otherwise terminated without having been exercised or settled in full, in accordance with the Plan, shall revert to and again become available for issuance under the Plan (unless the Plan has terminated). This includes INX Tokens that are reacquired pursuant to any forfeiture provision, right of repurchase or redemption or INX Tokens that are used to satisfy the exercise or purchase price for the award or any tax withholding obligations related to an award.
Plan Administration. The Company’s board of directors administers and interprets the provisions of the Plan. Under the Plan, the Company’s board of directors has the authority to, among other things, determine award grantees, the numbers and types of Token Awards to be granted, the applicable fair market value and the provisions of each Token Award, including the period of their exercisability and the vesting schedule applicable to a Token Award, construe and interpret the Plan and awards granted thereunder, prescribe, amend and rescind rules and regulations for the administration of the Plan, and accelerate the vesting of awards.
Options for INX Tokens. Options to purchase INX Tokens are granted under option agreements adopted by the Company’s board of directors. The Company’s board of directors determines the exercise price for Tokens, within the terms and conditions of the Plan. Options granted under the Plan vest at the rate specified in the option agreements and option rules as determined by the Company’s board of directors.
The Company’s board of directors determines the term of options for Tokens granted under the Plan, up to a maximum of 15 years, or 10 years for its US grantees. If a grantee’s service relationship with the Company or any of its affiliates ceases for any reason other than disability or death or Cause (as such term is defined below), the grantee may generally exercise any vested awards for a period of up to 90 days following the cessation of service, or such other period of time set forth in the option agreement. If a grantee’s service relationship with the Company or any of its affiliates ceases by reason of death or disability (as determined by the Company’s board of directors in its absolute discretion), the award shall remain exercisable for a period of one year following such termination (but only to the extent exercisable at termination of engagement or appointment, as the case may be, and not beyond the scheduled expiration date). If a grantee’s service relationship with the Company or any of its affiliates ceases by reason of retirement, pursuant to applicable law with the approval of the Company’s board of directors, the award shall remain exercisable for a period of one hundred and eighty (180) days following such termination (but only to the extent exercisable at termination of engagement or appointment, as the case may be, and not beyond the scheduled expiration date). If a grantee’s service relationship with the Company or any of its affiliates ceases for Cause, as shall be determined by the Company’s board of directors, all awards held by or on behalf of such grantee shall immediately expire upon the earlier of such termination or notice of termination. In no event may an option be exercised beyond the expiration of its term.
For purposes of the Plan, the term “Cause” means any of (i) a material breach by the grantee of the grantee’s obligations under any agreement with the Company or any related company; (ii) the commission by the grantee of an act of fraud or embezzlement against the Company or any related company or the willful taking of action injurious to the business or prospects of the Company or any related company; (iii) the conviction of the grantee of a felony; and (iv) the grantee’s involvement in an act or omission which constitutes breach of trust between the grantee and the Company or any related company.
The exercise price for INX Tokens issued under the Plan is generally payable in cash or cash equivalents or other forms of consideration determined by the Company’s board of directors, including but not limited to a cashless exercise.
Unless the Company’s board of directors provides otherwise, options may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of, except by will or the laws of descent and distribution.
Restricted Tokens. Restricted Tokens may be awarded in consideration for cash or cash equivalents or another form of consideration, including past services, as determined by the Company’s board of directors. The Company’s board of directors determines the terms and conditions of restricted Tokens, including vesting and forfeiture terms. If a participant’s service relationship with the Company ends for any reason, the Company may receive any or all of the INX Tokens held by the participant that have not vested as of the date the participant terminates service with the Company through a forfeiture condition or a repurchase right.
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Significant Event. In the event of (a) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation, other than a transaction in which the holders of INX Shares (on an as converted basis) immediately prior thereto have the same, or substantially similar, proportionate ownership of shares (on an as converted basis) of the surviving corporation immediately after the transaction and a transaction in which the holders of INX Shares (on an as converted basis) immediately prior thereto own a majority of the voting power of the surviving corporation; or (b) any sale, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all the assets or all or substantially all of the outstanding and issued shares of the Company; each outstanding award will be treated as the Company’s board of directors determines, unless in each case the applicable award agreement provides otherwise. The Board may, but shall not be obligated to, determine that a certain portion of the outstanding awards held by or for the benefit of any grantee and which have not yet vested shall be accelerated and become immediately vested and exercisable. The Board is not obligated to treat all awards similarly.
Plan Amendment or Termination. The Company’s board of directors may at any time amend, alter, suspend or terminate the Plan. Certain amendments, alterations, or the suspension or discontinuance of the Plan may require the written consent of holders of outstanding awards. Certain material amendments also require the approval of the Company’s shareholders. Unless sooner terminated, the Plan terminates in February 2036.
Grant of TIDCI Share Awards under the TIDCI Equity Incentive Plan:
Commencing as of the completion of the Valdy Transaction, certain employees, directors and consultants engaged by the Company or any of its affiliates are being compensated by grant of share awards of TIDCI pursuant to the TIDCI Equity Incentive Plan.
The TIDCI Equity Incentive Plan provides for the grant of shares of TIDCI, options to purchase shares of TIDCI, restricted shares of TIDCI and restricted share units of TIDCI and it includes US and Israeli appendices that further specify the terms and conditions of grants of share awards to US and Israeli grantees.
Authorized Shares. Subject to certain capitalization adjustments, the aggregate number of TIDCI shares that may be issued pursuant to share awards under the TIDCI Equity Incentive Plan may not exceed 37,408,948 shares. Should any award for any reason expire or be canceled prior to its exercise or relinquishment in full, the share underlying to such award may again, according to the TIDCI Board’s sole and absolute discretion, be subject to an award under the TIDCI Equity Incentive Plan, provided, however, that shares that have actually been issued under the TIDCI Equity Incentive Plan shall not be returned to the TIDCI Equity Incentive Plan and shall not become available for future distribution under the TIDCI Equity Incentive Plan. The aggregate number of shares to be delivered upon the exercise of all awards granted under the TIDCI Equity Incentive Plan shall not exceed the maximum number of shares permitted under the rule of any stock exchange on which shares are then listed or other regulatory body having jurisdiction.
Plan Administration. The TIDCI Board administers and interprets the provisions of the TIDCI Equity Incentive Plan. Under the TIDCI Equity Incentive Plan, the TIDCI Board has the authority to, among other things, determine award grantees, the numbers and types of share awards to be granted, applicable market value and the provisions of each share award, including the period of their exercisability and the vesting schedule applicable to a share award, construe and interpret the TIDCI Equity Incentive Plan and awards granted thereunder, prescribe, amend and rescind rules and regulations for the administration of the TIDCI Equity Incentive Plan, and accelerate the vesting of awards.
Share Options. Options to purchase TIDCI shares are granted under option agreements adopted by the TIDCI’s Board. TIDCI’s Board determines the exercise price for share options, within the terms and conditions of the TIDCI Equity Incentive Plan. Options granted under the TIDCI Equity Incentive Plan vest at the rate specified in the share option agreements and option rules as determined by the TIDCI Board.
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The TIDCI’s Board determines the term of share options granted under the TIDCI Equity Incentive Plan, up to a maximum of 10 years. If a grantee’s service relationship with TIDCI or any of its affiliates ceases for any reason other than disability or death or Cause (as such term is defined below), the grantee may generally exercise any vested awards for a period of up to 90 days following the cessation of service, or such other period of time set forth in the option agreement. If a grantee’s service relationship with TIDCI or any of its affiliates ceases by reason of death or disability (as determined by the TIDCI’s Board in its absolute discretion), the award shall remain exercisable for a period of one year following such termination (but only to the extent exercisable at termination of engagement or appointment, as the case may be, and not beyond the scheduled expiration date). If a grantee’s service relationship with the TIDCI or any of its affiliates ceases by reason of retirement, pursuant to applicable law with the approval of the TIDCI’s Board, the award shall remain exercisable for a period of one hundred and eighty (180) days following such termination (but only to the extent exercisable at termination of engagement or appointment, as the case may be, and not beyond the scheduled expiration date). If a grantee’s service relationship with the Company or any of its affiliates ceases for Cause, as shall be determined by TIDCI’s Board, all awards held by or on behalf of such grantee shall immediately expire upon the earlier of such termination or notice of termination. In no event may an option be exercised beyond the expiration of its term.
For purposes of the TIDCI Equity Incentive Plan, the term “Cause” means any of (i) a material breach by the grantee of the grantee’s obligations under any agreement with the TIDCI or any subsidiary; (ii) the commission by the grantee of an act of fraud or embezzlement against TIDCI or any subsidiary or the willful taking of action injurious to the business or prospects of TIDCI or any subsidiary; (iii) the conviction of the grantee of a felony; and (iv) the grantee’s involvement in an act or omission which constitutes breach of trust between the grantee and the TIDCI or any subsidiary.
The exercise price for shares issued under the TIDCI Equity Incentive Plan are generally payable in cash or cash equivalents or other forms of consideration determined by TIDCI’s Board, including but not limited to a cashless exercise.
Unless TIDCI’s Board provides otherwise, options may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of, except by will or the laws of descent and distribution.
TIDCI’s Board may award options to purchase shares of the TIDCI to any eligible grantee. Each option granted under the TIDCI Equity Incentive Plan shall be evidenced by a written agreement between TIDCI and the grantee, in such form as TIDCI’s Board shall from time to time approve. The options shall be subject to all applicable terms of the TIDCI Equity Incentive Plan. The provisions of the various option agreements entered into under the TIDCI Equity Incentive Plan need not be identical.
Limitations on Grants.
The TIDCI Equity Incentive Plan provides that-
◌ | Awards granted to any one individual in any 12-month period cannot exceed more than 5% of the issued TIDCI shares, unless TIDCI has obtained disinterested shareholder approval. |
◌ | Awards granted to any one consultant, in aggregate, in any 12-month period cannot exceed more than 2% of the issued TIDCI shares. |
◌ | Stock options granted to all persons, in aggregate, conducting investor relations activities in any 12-month period cannot exceed more than 2% of the issued TIDCI shares. |
Restricted Shares. Restricted shares may be awarded in consideration for cash or cash equivalents or another form of consideration, including past services, as determined by TIDCI’s Board. TIDCI’s Board determines the terms and conditions of restricted shares, including vesting and forfeiture terms. If a participant’s service relationship with TIDCI ends for any reason, TIDCI may receive any or all of the shares held by the participant that have not vested as of the date the participant terminates service with TIDCI through a forfeiture condition or a repurchase right.
Restricted Share Units. Restricted share units may be awarded in consideration for cash or cash equivalents or another form of consideration, including past services, as determined by TIDCI’s Board. TIDCI’s Board determines the terms and conditions of restricted share units, including vesting and forfeiture terms. If a participant’s service relationship with TIDCI ends for any reason, TIDCI may receive any or all of the shares held by the participant that have not vested as of the date the participant terminates service with TIDCI through a forfeiture condition or a repurchase right.
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Changes to Capital Structure. In the event of any dividend or other distribution, recapitalization, share split, reverse share split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of shares or other change in TIDCI’s corporate structure affecting its shares, TIDCI Board may make any adjustments it deems appropriate, including in the aggregate number and class of shares available under the TIDCI Equity Incentive Plan, and TIDCI Board’s determination in this regard shall be conclusive.
Significant Event. In the event of the consummation of a Significant Event (as defined below) or the adoption of any plan or proposal for the liquidation or dissolution of TIDCI, then, notwithstanding any contrary vesting periods in any agreement or in the TIDCI Equity Incentive Plan, and unless in each case the applicable agreement provides otherwise, TIDCI Board may, but shall not be obligated to, determine that a certain portion of the outstanding awards held by or for the benefit of any grantee and which have not yet vested shall be accelerated and become immediately vested and exercisable.
For purposes of the TIDCI Equity Incentive Plan, the term “Significant Event” means each of the following: (a) a takeover bid (as defined in the Act), which is successful in acquiring shares, (b) a change of control of the TIDCI Board resulting from the election by the members of TIDCI of less than a majority of the persons nominated for election by management of TIDCI, (c) any consolidation, plan of arrangement or amalgamation of TIDCI, other than a transaction in which the holders of shares immediately prior thereto have the same, or substantially similar, proportionate ownership of shares of the surviving or resulting entity immediately after the transaction and a transaction in which the holders of shares immediately prior thereto own a majority of the voting power of the surviving or resulting entity, (d) any sale, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all the assets or all or substantially all of the outstanding and issued Shares of TIDCI, or (e) the dissolution of TIDCI business or the liquidation of its assets.
C. Board Practices
Election of Directors; Independent Board Members
Under the Companies Act, a Gibraltar private company must have at least one director. Appointments of directors are performed by means of a vote at the general meeting of shareholders, or by a resolution of the board if permitted by the memorandum or if the articles so provide. Our Articles of Association provide that, any person who is willing to act as a director, and is permitted by law to do so, may be appointed to be a director (a) by ordinary resolution of the shareholders (members) (within the meaning given in section 200 of the Companies Act), or (b) by a decision of our Board of Directors.
Our Articles of Association also provide that, upon the effectiveness of the registration statement submitted as part of the Token Offering, the Company shall maintain a Board consisting of a majority of independent directors, as defined by the NASAA Statements of Policy and the UK Corporate Governance Code. We currently have seven (7) directors, five of whom are independent as such term is defined by the North American Securities Administrators Association (NASAA) Statement of Policy Regarding Corporate Securities Definitions and the UK Corporate Governance Code. There is no definition under Gibraltar law to the term “Independent Director.”
Further, our Articles of Association state that, in addition to any obligation, duty or consideration imposed on them by law, independent directors shall be required to consider the interests of token holders in determining whether to approve or disapprove of the following events:
(1) | a transaction with an Affiliate (as such term is defined in the Articles); |
(2) | a Deemed Liquidation (as such term is defined in the Articles); and |
(3) | an Insolvency (as such term is defined in the Articles). |
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In connection with all future material affiliated transactions and loans, we will (i) make and enter into such transactions and loans on terms no less favorable to us than those that can be obtained from unaffiliated third parties; (ii) obtain approval from a majority of our independent directors of all future material transactions and loans, including any forgiveness of loans; and (iii) to the extent required by law, obtain shareholder approval for any such transaction. Our officers and directors have considered their due diligence and assure that there is a reasonable basis for these representations. Further, we have considered and decided to embody certain of these representations in our Articles of Association. Our Articles of Association include a provision that any material transaction between the Company and an affiliate of the Company must be approved by a majority (and at least two) of our independent directors who do not have an interest in the transaction.
Our Articles of Association provide that if the numbers of director votes for and against a proposal are equal, the chairman of the meeting has a casting vote.
Qualification of Directors
The shareholding qualification for directors may be fixed by the Company in general meeting, and unless and until so fixed no qualification shall be required.
Authority Granted to Directors
Subject to the Articles, the directors are responsible for the management of the company’s business, for which purpose they may exercise all the powers of the Company. Subject to the Articles, the directors may delegate any of the powers which are conferred on them under the Articles: (i) to such person or committee; (ii) by such means (including by power of attorney) to such an extent; (iii) in relation to such matters or territories; and (iv) on such terms and conditions; as they think fit. Committees to which the directors delegate any of their powers must follow procedures which are based (as far as they are applicable) on those provisions of the articles which govern the taking of decisions by directors. The directors may make rules of procedure for all or any committees, which prevail over rules derived from the articles if they are not consistent with them.
Directors’ Remuneration
Directors may undertake any services for the Company as determined by the Board of Directors. Directors are entitled to such remuneration as determined by the Board of Directors: (a) for their services to the Company as directors, and (b) for any other services undertaken for the Company. Subject to the Company’s articles of association, a director’s remuneration may take any form, and include any arrangements in connection with the payment of a pension, allowance or gratuity, or any death, sickness or disability benefits, to or in respect of that director. Unless otherwise determined by the Board of Directors, their remuneration accrues from day to day and directors are not accountable to the Company for any remuneration that they receive as directors or as officers or employees of the Company’s subsidiaries or of any other body corporate in which the Company is interested. The Company may pay any reasonable expenses which the directors properly incur in connection with their attendance at: (a) meetings of directors or committees of directors, (b) general meetings, or (c) separate meetings of the holders of any class of shares or of debentures of the company, or otherwise in connection with the exercise of their powers and the discharge of their responsibilities in relation to the Company.
Corporate Governance
Under Gibraltar law, the Company is governed in accordance with its memorandum and articles of association, the provisions of the Companies Act and other Gibraltar statutory and common law principles. The Board is committed to the principles of corporate governance which it considers to be central to the effective management of the business and to maintaining the confidence of investors.
Differences between the Gibraltar Companies Act and laws impacting Delaware companies
The Sarbanes-Oxley Act, as well as related rules subsequently implemented by the SEC, requires foreign private issuers, such as us, to comply with various corporate governance practices. Under those rules, we may elect to follow certain corporate governance practices permitted under the Companies Act, in lieu of compliance with corresponding corporate governance requirements otherwise imposed by the SEC regulations for U.S. domestic issuers.
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The Companies Act and the laws of Gibraltar affecting Gibraltar companies like us and our shareholders differ from laws applicable to U.S. corporations and their shareholders. Set forth below is a summary of the significant differences between the provisions of the laws of Gibraltar applicable to us and, for illustrative purposes only, the Delaware General Corporation Law (the “DGCL”), which governs companies incorporated in the state of Delaware. The summary is not intended to be a complete discussion nor a comprehensive all included description of the respective rights and it is qualified in its entirety by reference to Delaware law and the Companies Act, and as may be relevant, to our Memorandum and our Articles of Association.
Number of Directors
Under the Companies Act, every Gibraltar private limited company shall have at least one director and the number shall be fixed in the company’s memorandum and articles of association.
Removal of Directors
Under the Gibraltar law, directors may be removed from office, with or without cause, in accordance with the provisions of their memorandum and articles of association. Gibraltar law allows shareholders with sufficient majority to exercise a vote to remove directors. In addition, under our Articles of Association, a person ceases to be a director as soon as: (a) that person ceases to be a director by virtue of any provision of the Companies Act or the Gibraltar Insolvency Act 2011 or is prohibited from being a director by law; (b) a bankruptcy order is made against that person; (c) a composition is made with that person’s creditors generally in satisfaction of that person’s debts; (d) a registered medical practitioner who is treating that person gives a written opinion to the company stating that that person has become physically or mentally incapable of acting as a director and may remain so for more than three months; (e) notification is received by the company from the director that the director is resigning from office, and such resignation has taken effect in accordance with its terms. Under Delaware law, unless otherwise provided in the certificate of incorporation, directors may be removed from office, with or without cause, by a majority stockholder vote, though in the case of a corporation whose board is classified, stockholders may affect such removal only for cause.
Vacancies on the Board of Directors. Under the Companies Act, appointments of directors (other than nomination of directors via the general meeting of shareholders) may also be made by a resolution of the board if allowed by the articles of association of the Gibraltar company. Our Articles of Association provide that, any person who is willing to act as a director, and is permitted by law to do so, may be appointed to be a director (a) by ordinary resolution of the shareholders (members) of the Gibraltar company (within the meaning given in section 200 of the Companies Act), or (b) by a decision of our Board of Directors. Under Delaware law, vacancies on a corporation’s board of directors, including those caused by an increase in the number of directors, may be filled by a majority of the remaining directors.
Shareholder/Stockholder Meetings. Under the Companies Act, annual general meetings of shareholders and extraordinary general meetings of shareholders (within the meaning given in sections 193 and 195 of the Companies Act) shall be held at such place, on such date and at such time as may be designated from time to time by the board of directors or as provided in the articles of association of the Gibraltar company, and extraordinary general meetings of the shareholders may be called by the board of directors or by such person or persons as may be authorized under the Companies Act or by the articles of association. With respect to notices of general meetings, subject to the provisions of the Companies Act relating to special resolutions, seven days’ notice at the least (exclusive of the day on which the notice is served or deemed to be served, but inclusive of the day for which notice is given) specifying the place, the day and the hour of meeting and, in case of special business, the general nature of that business shall be given in manner hereinafter mentioned, or in such other manner (if any) as may be prescribed by the company in general meeting, to such persons as are, under the articles of association of the company, entitled to receive such notices from the company; but with the consent of all the members entitled to receive notice of some particular meeting, that meeting may be convened by such shorter notice and in such manner as those members may think fit. Meetings to resolve matters requiring a special resolution necessitate a 21 day notice period.
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A Gibraltar company can decide its own way of communicating with its shareholders, including publication of notice of meetings on a website of a company (in accordance with the provision of the Companies Act). Ordinary resolutions (within the meaning given in section 200 of the Companies Act) at the general meetings are passed by a simple majority. Extraordinary and special resolutions (within the meaning given in section 201 of the Companies Act) are passed by seventy-five percent (75%) majority. Under Delaware law, (i) the annual meeting of stockholders shall be held at such place, on such date and at such time as may be designated from time to time by the board of directors or as provided in the certificate of incorporation or by the bylaw, and (ii) special meetings of the stockholders may be called by the board of directors or by such person or persons as may be authorized by the certificate of incorporation or by the bylaws.
Shareholder action by written consent. Under the Companies Act, it is not necessary in the case of a Gibraltar private company to hold a general meeting in order to pass an ordinary, an extraordinary, or a special resolution. Subject to provisions in the articles of the company, such resolutions may be passed in writing by unanimous approval. Our Memorandum and Articles of Association currently provide such provisions. Under the DGCL, a corporation may eliminate the right of shareholders to act by written consent by amendment to its certificate of incorporation.
Preemptive Rights. Under Gibraltar law, rights of pre-emption can be worked into the articles of association of the company. However, in the absence of such explicit rights, shareholders are not automatically entitled to benefit from preemptive rights. Under Delaware law, unless otherwise provided in a corporation’s certificate of incorporation, a stockholder does not, by operation of law, possess preemptive rights to subscribe to additional issuances of the corporation’s stock.
Liability of Directors and Officers.
Pursuant to s. 224 of the Companies Act, in a limited company the liability of the directors or managers, or of the managing director, if so provided by the memorandum, may be unlimited, while s. 225 of the Companies Act states that a limited company, if so authorized by its articles, may by special resolution, alter its memorandum so as to render unlimited the liability of its directors or managers, or of any managing director. Upon the passing of any such special resolution the provisions of the special resolution shall be as valid as if they had been originally contained in the memorandum. However, s. 231 (1) states that subject to its provisions, any provision, whether contained in the articles of a company or in any contract with a company or otherwise, for exempting any director, manager or officer of the company from, or indemnifying him against, any liability which by virtue of any rule of law would otherwise attach to him in respect of any negligence, default, breach of duty or breach of trust of which he may be guilty in relation to the company, shall be void. S. 231 (2) further states that nothing shall preclude:
● | Any person, not being the company, indemnifying any director, manager or officer of the company against any such liability as referred to in subsection (1); | |
● | A company from purchasing and maintaining for any director manager or officer of the company, or any person (whether an officer of the company or not) employed by the company as auditor, insurance against any such liability referred to in subsection (1); |
A company from indemnifying any director, manager or officer of the company against any such liability incurred by him in defending any proceedings, whether civil or criminal, in which judgment is given in his favor or in which he is acquitted or in connection with any application under s. 477 in which relief is granted to him by the court.
Under Delaware law, a corporation’s certificate of incorporation may include a provision eliminating or limiting the personal liability of a director to the corporation and its stockholders for damages arising from a breach of fiduciary duty as a director. However, no provision can limit the liability of a director for:
● | any breach of the director’s duty of loyalty to the corporation or its stockholders; | |
● | acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; |
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● | intentional or negligent payment of unlawful dividends or stock purchases or redemptions; or | |
● | any transaction from which the director derives an improper personal benefit. |
Standard of Conduct for Directors. Under Gibraltar law, directors are subject to various common law duties. Director’s duties are not codified in Gibraltar and are not set in statute but derive from common law principles and case law. These significant duties and responsibilities include the following:
● | to act in good faith and in the best interest of the company; | |
● | to not allow their interests to conflict with those of the company; and |
● | to act with due care and skill. |
Delaware law does not contain specific provisions setting forth the standard of conduct of a director. The scope of the fiduciary duties of directors is generally determined by the courts of the State of Delaware. In general, directors have a duty to act without self-interest, on a well-informed basis and in a manner they reasonably believe to be in the best interest of the stockholders.
Voting Rights. Under Gibraltar law, the basic presumption is that each shareholder is entitled to one vote for each share held. However, the rights and entitlements attaching to shares of a Gibraltar company are set out in a company’s memorandum and articles of association which can be modified to denote the rights and entitlements attaching to each type of share in the company. Certain shares may be granted additional voting rights while others may only be entitled to financial remuneration and not voting rights. Delaware law provides that, unless otherwise provided in the certificate of incorporation, each stockholder of capital stock is entitled to one vote for each share of capital stock held by such stockholder, and blockchain assets are not considered capital stock unless expressly identified in the certificate of incorporation of the company.
Distribution of periodic reports to shareholders; proxy solicitation. Under the Companies Act, each company decides its own way of communicating with its shareholders, however shareholders have a right to request certain information from the company.
Quorum. Under the Companies Act, a company is entitled to determine in its memorandum of association and in its articles of association, the number of shareholders and percentage of holdings required for a quorum at a shareholders meeting. Our Articles and our memorandum of association, or the Memorandum, provides that two members present in person or by proxy shall constitute a quorum unless there shall at any time be one member in which event such member alone shall have the authority to transact the business of a general meeting. An ordinary resolution of the members (or of a class of members) can be passed by members representing a simple majority (i.e. more than 50%) of the total voting rights of the members or, as the case may be, of the class of members. An extraordinary or special resolution of the members requires a majority of not less than 75% of those members at a general meeting of which notice specifying the terms of the resolution and the intention to propose the resolution as such a resolution has been given.
Nomination of our directors. Our directors are elected by an annual meeting of our shareholders to hold office until the next annual meeting following one year from his or her election. The nominations of directors, which are presented to our shareholders by our Board, are generally made by the Board itself, in accordance with the provisions of our Articles of Association and the Companies Act. Nominations need not be made by a nominating committee of our Board consisting solely of independent directors.
Compensation of officers. Under the Companies Act and our Memorandum and Articles of Association, compensation of our officers requires approval by, our Board and, at times, our shareholders. The Board will seek recommendations and approval from the Audit Committee.
Independent directors. A majority of the directors serving on our Board are “independent”, and in any case, we will at all times maintain a Board with at least two directors who are independent. We define independence using both the North American Securities Administrators Association (NASAA) Statement of Policy Regarding Corporate Securities Definitions and the UK Corporate Governance Code.
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Gibraltar law does not require, nor do our independent directors conduct, regularly scheduled meetings at which only they are present.
Shareholder approval. We will seek shareholder approval for all corporate actions requiring such approval under the requirements of the Companies Act. The Companies Act sets our various matters requiring shareholder approval. Notable examples of this include any amendments to the company’s Memorandum and Articles of Association, any increase or reclassification of share capital and the issuance of dividends.
In particular, shareholder approval shall be generally required for: (i) an acquisition of shares/assets of another company that involves the issuance of 20% or more of the acquirer’s shares or voting rights or if a director, officer or 5% shareholder has greater than a 5% interest in the target company or the consideration to be received; (ii) the issuance of shares leading to a change of control; (iii) adoption/amendment of equity compensation arrangements; and (iv) issuances of 20% or more of the shares or voting rights (including securities convertible into, or exercisable for, equity) of a listed company via a private placement (and/or via sales by directors/officers/5% shareholders) if such equity is issued (or sold) at below the greater of the book or market value of shares.
Generally, under Delaware law, unless the certificate of incorporation provides for the vote of a larger portion of the stock, completion of a merger, consolidation, sale, lease or exchange of all or substantially all of a corporation’s assets or dissolution requires:
● | the approval of the board of directors; and |
● | approval by the vote of the holders of a majority of the outstanding stock or, if the certificate of incorporation provides for more or less than one vote per share, a majority of the votes of the outstanding stock of a corporation entitled to vote on the matter. |
Mergers and similar arrangements. Under the Gibraltar law, there are various mechanisms to give effect to a merger or takeover. However, the most common way is pursuant to the provisions of the Companies Act by way of scheme of arrangement. The procedure for a scheme of arrangement is set out at Part VIII of the Companies Act.
In very general terms, a scheme of arrangement is a compromise or arrangement between a company and its members. Under a scheme to effect a merger, the shares in one Gibraltar company (target) would be exchanged by its shareholders for consideration shares and/or cash by another Gibraltar company.
A brief overview of the process is as follows:
● | Court order for holding meeting: an application may be made by a company or any member (or creditors) of such company to summon a meeting of members; |
● | Statement to be circulated: Where a meeting is summoned, the notice of such meeting which is sent to members must include a statement explaining the proposed arrangement and disclosing any material interests of the directors of the company, whether as directors or as members or as creditors of the company or otherwise; |
● | Approval of members of merging companies: The scheme is conditional on, amongst other things, the approval by shareholders; the statutory majority required to approve the scheme at the meeting is a 75% majority of those shareholders who are present and vote in person or who vote by proxy or at any adjournment thereof; |
● | Petition to the Court: Upon approval of a majority of shareholders, an application must then be made to Court by way of petition seeking the Court’s sanction of the scheme. As part of this application, the Court will need to be satisfied that the requisite approval of the shareholders has been duly sought and obtained in accordance with the necessary legal processes. If the Court is satisfied in this regard, it may then, either by order sanctioning the arrangement or by imposing certain conditions for the implementation of the scheme or by any subsequent order, make provision for the amalgamation of the relevant companies. |
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● | Delivery of the Order to the Registrar: When issued by the Court, the order sanctioning the scheme will need to be delivered to with the Register of Companies for registration and, it is upon such delivery and registration that the scheme will become effective; a copy of such order must be delivered to the Registrar within 7 days after its making. The entire process can take between 4 and 8 months. |
Under Delaware law each corporation’s board of directors must approve a merger agreement. The merger agreement must state, among other terms, the terms of the merger and method of carrying out the merger. This agreement must then be approved by the majority vote of the outstanding stock entitled to vote at an annual or special meeting of each corporation, and no class vote is required unless provided in the certificate of incorporation. Delaware permits an agreement of merger to contain a provision allowing the agreement to be terminated by the board of directors of either corporation, notwithstanding approval of the agreement by the stockholders of all or any of the corporations (1) at any time prior to the filing of the agreement with the Secretary of State or (2) after filing if the agreement contains a post-filing effective time and an appropriate filing is made with the Secretary of State to terminate the agreement before the effective time. In lieu of filing an agreement of merger, the surviving corporation may file a certificate of merger, executed in accordance with Section 103 of the DGCL. The surviving corporation is also permitted to amend and restate its certification of incorporation in its entirety. The agreement of merger may also provide that it may be amended by the board of directors of either corporation prior to the time that the agreement filed with the Secretary of State becomes effective, even after approval by stockholders, so long as any amendment made after such approval does not adversely affect the rights of the stockholders of either corporation and does not change any term in the certificate of incorporation of the surviving corporation. If the agreement is amended after filing but before becoming effective, an appropriate amendment must be filed with the Secretary of State. If the surviving corporation is not a Delaware corporation, it must consent to service of process for enforcement of any obligation of the corporation arising as a result of the merger; such obligations include any suit by a stockholder of the disappearing Delaware corporation to enforce appraisal rights under Delaware law.
If a proposed merger or consolidation for which appraisal rights are provided is to be submitted for approval at a shareholder meeting, the subject company must give notice of the availability of appraisal rights to its shareholders at least 20 days prior to the meeting.
A dissenting shareholder who desires to exercise appraisal rights must (a) not vote in favor of the merger or consolidation; and (b) continuously hold the shares of record from the date of making the demand through the effective date of the applicable merger or consolidation. Further, the dissenting shareholder must deliver a written demand for appraisal to the company before the vote is taken. The Delaware Court of Chancery will determine the fair value of the shares exclusive of any element of value arising from the accomplishment or expectation of the merger, together with interest, if any, to be paid upon the amount determined to be the fair value. In determining such fair value, the court will take into account “all relevant factors.” Unless the Delaware Court of Chancery in its discretion determines otherwise, interest from the effective date of the merger through the date of payment of the judgment will be compounded annually and accrue at 5% over the Federal Reserve discount rate.
Approval of Related Party Transactions. All related party transactions must be disclosed to the Company for approval.
Transactions with interested shareholders. Delaware law contains a business combination statute applicable to Delaware public corporations whereby, unless the corporation has specifically elected not to be governed by such statute by amendment to its certificate of incorporation, it is prohibited from engaging in certain business combinations with an “interested shareholder” for three years following the date that such person becomes an interested shareholder. An interested shareholder generally is a person or group who or which owns or owned 15% or more of the target’s outstanding voting shares within the past three years. This has the effect of limiting the ability of a potential acquirer to make a two-tiered bid for the target in which all shareholders would not be treated equally. The statute does not apply if, among other things, prior to the date on which such shareholder becomes an interested shareholder, the board of directors approves either the business combination or the transaction which resulted in the person becoming an interested shareholder. This encourages any potential acquirer of a Delaware public corporation to negotiate the terms of any acquisition transaction with the target’s board of directors.
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The Companies Act has no direct comparison, but it is worth noting that certain common law provisions relating, for example, to conflicts of interest and similar considerations, may, depending on the facts, apply under Gibraltar law.
Committees of the Board of Directors
Gibraltar companies are not required to establish any sub committees of the Board. Nevertheless, they have the power to create such subcommittees and delegate responsibilities and oversight accordingly. Committees to which the directors delegate any of their powers must follow procedures which are based as far as they are applicable on those provisions of the articles which govern the taking of decisions by directors. The directors may make rules of procedure for all or any committees, which prevail over rules derived from the articles if they are not consistent with them.
Our Board has established three committees: (1) an audit committee, (2) a compensation committee, and (3) a nominating and corporate governance committee. The members of the audit committee, compensation committee, and nominating and corporate governance committee were appointed by the Board.
Audit Committee
Our Board has adopted terms of reference for an audit committee, as customary for public companies, and established the committee upon the closing of the Token Offering. The audit committee is currently comprised of three independent members of the Board. The audit committee has primary responsibility for monitoring the quality of internal controls and ensuring that the financial performance of the Company is properly measured and reported on. It receives and reviews reports from our management and auditors relating to the interim and annual accounts and the accounting and internal control systems in use throughout the Company. The audit committee meets not less than once in each financial year and at such other times as circumstances require.
Our Board of Directors has adopted an audit committee charter, which sets forth the responsibilities of the audit committee consistent with SEC rules and regulations governing audit committee members, including the following:
● | considering and making recommendations to our Board on our financial statements, reviewing and discussing the financial statements and presenting its recommendations with respect to the financial statements to the Board prior to the approval of the financial statements by our Board; | |
● | oversight of our independent registered public accounting firm and recommending the engagement, compensation or termination of engagement of our independent registered public accounting firm to the Board in accordance with Gibraltar law; |
● | recommending the engagement or termination of the person filling the office of our internal auditor, reviewing the services provided by our internal auditor and reviewing effectiveness of our system of internal control over financial reporting; |
● | recommending the terms of audit and non-audit services provided by the independent registered public accounting firm for pre-approval by our Board; and |
● | reviewing and monitoring, if applicable, legal matters with significant impact, finding of regulatory authorities’ findings, receiving reports regarding irregularities and legal compliance, acting according to “whistleblower policy” and recommending to our Board if so required, and overseeing our policies and procedures regarding compliance to applicable financial and accounting related standards, rules and regulations. |
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Although not required under Gibraltar law, the members of our audit committee are independent in accordance with the independence standard that is applied to non-investment company issuers under Rule 10A-3 of the Exchange Act. All members of our audit committee are financially literate.
Remuneration (Compensation) Committee
Although not required under Gibraltar law, our Board has also adopted terms of reference for a compensation committee and SEC rules and regulations, and established the committee upon the closing of the Token Offering. The compensation committee is currently comprised of three independent members of the Board. The members of our compensation committee are independent in accordance with the independence standard under Rule 10C-1 of the Exchange Act. The compensation committee reviews the performance of management and makes recommendations to our Board on matters relating to their remuneration and terms of employment.
Nominating and Corporate Governance Committee
Although not required under Gibraltar law, our Board has also adopted terms of reference for a Nominating and Corporate Governance Committee under SEC rules and regulations and established the committee on December 14th, 2021. The Nominating and Corporate Governance committee is currently comprised of three independent members of the Board. The members of our Nominating and Corporate Governance committee are independent in accordance with the independence standard under Rule 10C-1 of the Exchange Act. The Nominating and Corporate Governance committee exercises general oversight with respect to the governance of the Board of Directors.
Role of Board of Directors in Risk Oversight Process
Risk assessment and oversight are an integral part of our governance and management processes and business strategy. Our Board encourages management to promote a culture that incorporates risk management into our corporate strategy and day-to-day business operations, to discusses strategic and operational risks at regular management meetings, and to conduct specific strategic planning and review sessions during the year that include a focused discussion and analysis of the risks facing us. Throughout the year, senior management reviews these risks with the Board at regular board meetings as part of management presentations that focus on particular business functions, operations or strategies, and presents steps taken by management to mitigate or eliminate such risks.
Appointment of Secretary
Subject to the provisions of the Companies Act, the secretary shall be appointed by the directors for such term, at such remuneration and upon such conditions as they may think fit; and any secretary so appointed may be removed by them.
Family Relationships
There are no family relationships between any members of our executive management and our directors.
Approval of Related Party Transactions
General
Under Gibraltar law, related party transactions need to be disclosed to the board as such before the transaction. Details on the transaction appear as related party transactions in the notes to the consolidated financial statements of the Company.
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Under the Companies Act, we may approve an action by an office holder from which the office holder would otherwise have to refrain, as described above, if:
● | the office holder acts in good faith and the act or its approval does not cause harm to the company; and | |
● | the office holder disclosed the nature of his or her interest in the transaction (including any significant fact or document) to the company at a reasonable time before the company’s approval of such matter. |
Duty to Disclose Personal Interests
As set out above, under Gibraltar law directors of the company have various common law and fiduciary duties to the company. These duties are not codified in the Companies Act but are wide ranging and include a duty to not to allow their interests to conflict with those of the company. They are therefore required to promptly disclose any direct or indirect personal interest that they may have and all related material information known to them relating to any existing or proposed transaction by the company.
All arrangements as to compensation and indemnification or insurance of office holders require approval of the compensation committee and Board of Directors, and compensation of office holders who are directors must be also approved, subject to certain exceptions, by the shareholders, in that order. If shareholders of a company do not approve the compensation terms of office holders, other than directors, the compensation committee and Board of Directors may override the shareholders’ decision, subject to certain conditions.
Exculpation and Indemnification of Directors and Officers Indemnities
The general common law position that a company can indemnify its directors has been circumscribed in Gibraltar by statutory enactment. Section 231 of the Companies Act imposes certain limits on the extent and scope of indemnification relieving directors of indemnification under Gibraltar law. Section 231(1) prohibits indemnification for liability arising from their own negligence, default, breach of duty or breach of trust. A provision in the articles of a company or a specific contract seeking to provide such indemnification is void. However, it follows that apart from such restrictions, directors can in certain circumstances be indemnified (i.e. for matters not expressly prohibited).
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions, the registrant has been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Act and is therefore unenforceable.
Insurance
Under our Articles, the directors may decide to purchase and maintain insurance, at the expense of the company, for the benefit of any relevant director in respect of any relevant loss. In this paragraph: (a) a “relevant director” means any director or former director of the company or an associated company, (b) a “relevant loss” means any loss or liability which has been or may be incurred by a relevant director in connection with that director’s duties or powers in relation to the company, any associated company or any pension fund or employees’ share scheme of the company or associated company, and (c) companies are associated if one is a subsidiary of the other or both are subsidiaries of the same body corporate.
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D. Employees.
Each individual who provides services to us does so through an employment, services, consulting or similar agreement.
Company(1) | Location | Management | Financing | Development | Administration and Other Positions | Total | ||||||||||||||||
INX Limited (Gib.) | Israel, Cyprus and Gibraltar | 0 | 0 | 0 | 4 | 4 | ||||||||||||||||
INX Digital, Inc. (US) (2) | United States | 1 | 1 | 0 | 5 | 7 | ||||||||||||||||
Midgard Technologies Ltd. (Israel) (2) | Israel | 4 | 5 | 19 | 6 | 34 | ||||||||||||||||
I.L.S. Brokers Ltd. (Israel) | Israel | 2 | 0 | 0 | 15 | 17 | ||||||||||||||||
INX Securities, LLC | United States | 1 | 0 | 0 | 0 | 1 | ||||||||||||||||
Total | 8 | 6 | 19 | 30 | 63 |
Notes:
(1) | As a single employee/service provider may be engaged in more than one activity, each employee/service provider is represented only once under the activity representing their primary responsibility. |
(2) | Employees/service providers of INXL, INXS, INXD and Midgard also provide services to other entities in the group. |
E. Share Ownership.
As of March 31, 2024, 47,635,875 of our ordinary shares are outstanding and are held by TINDCI. Beneficial ownership is determined in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting or investment power with respect to those securities and include shares subject to options and warrants that are exercisable within 60 days from the date of this report. Such shares are also deemed outstanding for purposes of computing the percentage ownership of the person holding the option, but not the percentage ownership of any other person. As of March 31, 2024, none of the outstanding ordinary shares are held by U.S. Persons.
Unless otherwise indicated below, to our knowledge, all persons named in the table have sole voting and investment power with respect to their shares, except to the extent that authority is shared by spouses under community property laws. None of our shareholders has informed us that he, she, or it is affiliated with a registered broker-dealer or is in the business of underwriting securities. None of our shareholders has different voting rights from other shareholders.
Ordinary Shares Beneficially Owned | Percentage of Ordinary Shares Beneficially Owned | |||||||
5% Shareholders | ||||||||
The INX Digital Company Inc.* | 47,635,875 | 100 | % | |||||
Senior Management and Directors(1) | ||||||||
Shy Datika | - | - | ||||||
Renata Szkoda | - | - | ||||||
Itai Avneri | - | - | ||||||
Maia Naor | - | - | ||||||
Vlad Uchenik | - | - | ||||||
Alan Silbert | - | - | ||||||
Paz Diamant | - | - | ||||||
David Weild | - | - | ||||||
Nicholas Thadaney | - | - | ||||||
Thomas Lewis | - | - | ||||||
Hilary Kramer | - | - | ||||||
Demetra Kalogerou | - | - | ||||||
All of the senior management and directors as a group (12 persons) | - | - |
* | Some of the Senior Management and Directors of the Company hold common shares of TIDCI and options to purchase common shares of TIDCI. |
(1) | The address of Senior Management and Directors is INX Limited’s registered office at 57/63 Line Wall Road, Gibraltar, GX11 1AA. |
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In addition, the following table sets forth information with respect to the outstanding beneficial ownership of INX Tokens as of March 31, 2024, by:
● | each of our executive officers and directors; |
● | each person or entity known by us to beneficially own more than 5% of our outstanding tokens; and |
● | all of our senior management and directors as a group. |
INX Tokens Beneficially Owned | Percentage
of INX Tokens Beneficially Owned | |||||||
5% INX Tokenholders | ||||||||
- | - | - | ||||||
Senior Management and Directors | ||||||||
Shy Datika(1) | 7,460,407 | 3.7 | % | |||||
Renata Szkoda(2) | 50,000 | * | ||||||
Itai Avneri(3) | 353 | * | ||||||
Maia Naor(4) | 917,966 | * | ||||||
Alan Silbert(5) | 538,699 | * | ||||||
Paz Diamant(6) | 83,600 | * | ||||||
David Weild(7) | - | * | ||||||
Nicholas Thadaney(8) | 361,667 | * | ||||||
Thomas Lewis(9) | 365,167 | * | ||||||
Hilary Kramer(10) | - | * | ||||||
Demetra Kalogerou(11) | - | * | ||||||
Vlad Uchenik(12) | 35,000 | * | ||||||
All of the senior management and directors as a group (12 persons) | 9,812,859 | 4.9 | % |
* | Less than 1% |
(1) | Mr. Datika, founder, director, and CEO, holds (directly and/or through Triple V (1999) Ltd., a private company incorporated under the laws of Israel, of which Mr. Datika is the sole shareholder) (i) 7,460,407 INX Tokens, and (ii) 1,000,000 restricted INX Tokens held pursuant to a Restricted Token Award that are currently unvested. |
(2) | Mrs. Renata Szkoda, our Chief Financial Officer, holds (i) 50,000 INX Tokens, and (ii) 125,000 restricted INX Tokens held pursuant to a Restricted Token Award (“RTA”) that are currently unvested. |
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(3) | Mr. Avneri, our Chief Operating Officer, holds (i) 353 tokens, and (ii) the following options: (a) an option to purchase 360,000 INX Tokens at a price of $0.09 per Token, (b) an option to purchase 100,000 INX Tokens at a price of $0.43 per Token, (c) an option to purchase 120,000 INX Tokens at a price of $0.28 per Token, and (d) an option to purchase 120,000 INX Tokens at a price of $0.41 per Token; of which options to purchase 418,333 INX Tokens have vested or will vest within 60 days of April 15, 2024. |
(4) | Ms. Maia Naor, our Chief Product Officer, holds (i) 917,966 INX Tokens, and (ii) the following options: (a) an option to purchase 125,000 INX Tokens at a price of $0.43 per INX Token, and (b) an option to purchase 25,000 INX Tokens at a price of $0.28 per INX Token; of which 50,000 have vested or will vest within 60 days of April 15, 2024. |
(5) | Mr. Silbert, a director of the Company and Chief Executive Officer of North America, holds (i) 538,699 INX Tokens, and (ii) 186,667 restricted INX Tokens held pursuant to a Restricted Token Award. |
(6) | Mr. Diamant, our Chief Technology Officer, holds (i) 83,600 INX Tokens, and (ii) the following options: (a) an option to purchase 200,000 INX Tokens, at the price of $0.08 per Token, (b) an option to purchase 52,000 INX Tokens at an exercise price of $0.43 per INX Token, (c) an option to purchase 25,000 INX Tokens at a price of $0.28 per INX Token, and (d) an option to purchase 10,000 INX Tokens at a price of $0.41 per INX Token; of which options to purchase 225,666 INX Tokens have vested or will vest within 60 days of April 15, 2024.
|
(7) | Mr. Weild, our director, holds options to purchase an aggregate amount of 480,667 INX Tokens at an exercise price equal to the fair market value of the INX Token at the date of each grant.
|
(8) | Mr. Thadaney, our director, holds (i) 361,667 INX Tokens, (ii) options to purchase 119,000 INX Tokens at an exercise price equal to the fair market value of the INX Token at the date of each grant. |
(9) | Mr. Lewis, our director, holds (i) 365,167 INX Tokens, and (ii) options to purchase 115,500 INX Tokens at an exercise price equal to the fair market value of the INX Token at the date of each grant.
|
(10) | Ms. Hilary Kramer, our director, holds options to purchase 94,500 INX Tokens at an exercise price equal to the fair market value of the INX Token at the date of each grant.
|
(11) | Ms. Demetra Kalogerou, our director, holds options to purchase 91,000 INX Tokens at an exercise price equal to the fair market value of the INX Token at the date of each grant.
|
(12) | Mr. Vlad Uchenik, Chief Compliance Officer of the Company and Chief Executive Officer of INXS, holds (i) 35,000 INX Tokens, and (ii) 125,000 restricted INX Tokens held pursuant to a Restricted Token Award. |
Share Ownership and Award Plan
See “Item 6, B. Compensation - Equity Compensation Plan Information” for a description of the Company’s Share Ownership and Award Plan.
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On March 31, 2022, our Board of Directors and the Board of Directors of our Parent (acting as our general meeting) approved certain changes to our Plan (including to the Plan’s US and Israeli Appendixes) in connection with grant of INX Tokens, restricted INX Tokens and options to purchase INX Tokens pursuant to the provisions of the Plan.
F. Disclosure of a Registrant’s Action to Recover Erroneously Awarded Compensation.
None.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders.
Except as set forth in “Item 6. Directors, Senior Management and Employees—E. Share Ownership,” to the best of our knowledge, no other person who we know beneficially owns 5% or more of our ordinary shares outstanding as of March 31, 2024. None of our shareholders has different voting rights from other shareholders. Other than as described herein, to the best of our knowledge, we are not owned or controlled, directly or indirectly, by another corporation, by any foreign government or by any natural person or legal persons, severally or jointly, and we are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.
Changes in Percentage Ownership by Major Shareholders
Security Exchange Agreement
On March 31, 2021, the Company, Valdy, certain Company securityholders, PI Financial Corp. and Eight Capital Inc. entered into the Security Exchange Agreement, for the consummation of a securities exchange.
Pursuant to the terms of the Security Exchange Agreement, on January 10, 2022, Valdy acquired all the issued and outstanding securities of the Company from the Company Securityholders by way of a securities exchange, as follows:
(a) | Valdy acquired an aggregate of 15,955,875 INX Shares (excluding the INX Shares issued pursuant to the Concurrent Financing (the “INX Financing Shares”)) from the holders thereof, and issued to such holders consideration of an aggregate of 167,331,410 post-Consolidation Valdy Shares, being the product of the number of INX Shares acquired by the ratio of 10.4871348 Valdy Shares for each INX Share (the “Exchange Ratio”); |
(b) | Valdy acquired an aggregate of 31,680,000 INX Financing Shares from the holders thereof and issued to such holders consideration of an aggregate of 31,680,000 post-Consolidation Valdy Shares; |
(c) | the holders of INX Options surrendered for cancellation each INX Option held by them, and for each INX Option so surrendered, Valdy issued to such holder options to acquire post-Consolidation Valdy Shares (the “Valdy Consideration Options”) having terms equivalent to the surrendered INX Option with respect to exercise price, vesting conditions, and expiry date, but adjusted such that: (i) the number of post- Consolidation Valdy Shares issuable pursuant to the Valdy Consideration Option shall be the product of the number of INX Shares issuable pursuant to the INX Option and the Exchange Ratio; and (ii) the exercise price for each post-Consolidation Valdy Share issuable upon conversion of the Valdy Consideration Option shall be equal to the exercise price of the INX Option divided by the Exchange Ratio; |
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(d) | the holders of common share purchase warrants which entitle the holder thereof to acquire one INX Share (the “INX Legacy Warrants”) surrendered for cancellation each INX Legacy Warrant held by them, and for each INX Legacy Warrant so surrendered, Valdy issued to such holder warrants to purchase post-Consolidation Valdy Shares (the “Valdy Consideration Warrants”) having terms equivalent to the surrendered INX Legacy Warrant with respect to exercise price, the number of post-Consolidation Valdy Shares issuable pursuant thereto, and expiry date, but adjusted such that: (i) the number of post-Consolidation Valdy Shares issuable pursuant to the Valdy Consideration Warrant shall be the product of the number of INX Shares issuable pursuant to the INX Legacy Warrant and the Exchange Ratio; and (ii) the exercise price for each post-Consolidation Valdy Share issuable upon conversion of the Valdy Consideration Warrant shall be equal to the exercise price of the INX Legacy Warrant divided by the Exchange Ratio; and |
(e) | each warrant to purchase INX Shares issued pursuant to the Concurrent Financing (“INX Financing Warrant”), in accordance with its terms, became exercisable to purchase an equivalent number of post-Consolidation Valdy Shares at the same exercise price as the INX Shares to which such warrant was previously exercisable for, and such INX Financing Warrant otherwise continued to be governed in accordance with its terms. |
Record Holders
As of March 31, 2024, there was one holder of record of our shares that is not incorporated in the United States.
B. Related Party Transactions.
The following is a description of the material terms of those transactions with related parties to which we are party to date.
For a description of the Valdy Transaction and the Security Exchange Agreement, see “Item 4, Part A - History and Development of the Company” and “Item 7, Part A – Major Shareholders and Related Party Transactions – Major Shareholders – Changes in Percentage Ownership by Major Shareholders – Security Exchange Agreement.”
Relationships and Transactions with Directors and Executive Officers
Mr. James Crossley
Transactions Involving the Company’s Securities
Under a Services Agreement, dated March 8, 2018, between Bentley Limited, owned by Mr. James Crossley, and the Company (as amended on August 1, 2018, January 7, 2019, October 1, 2021 and April 1, 2021) the “Bentley Services Agreement”), Bentley Limited received the option to purchase 10,000 INX Tokens per month at the price of $0.01 per Token, subject to a maximum of 100,000 INX Tokens. Options to purchase INX Tokens granted pursuant to the Bentley Services Agreement were exercised for the maximum amount. On January 7, 2019, the Bentley Services Agreement was amended to include the grant of options to Bentley Limited to purchase an additional 7,500 INX Tokens per month at the price of $0.01 per INX Token. On October 1, 2021, the Bentley Services Agreement was further amended such that Bentley Limited’s entitlement for INX Tokens ended on October 1, 2021. In the aggregate, 265,000 INX Tokens were issued pursuant to the Bentley Option Rights. As of the date hereof, Bentley Limited has exercised all options to purchase INX Tokens under the Bentley Option Rights.
Management, Services or Consulting Agreement
Pursuant to the Bentley Services Agreement, Bentley Limited provides services to the Company, including by way of Mr. James Crossley serving as a member of the Board of Directors. On December 14, 2021, Mr. Crossley resigned from his position as a member of the Company’s Board and is now serving as the Company’s Director of Business Development.
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Mr. David Weild, Chairman of the Board of Directors
Transactions Involving the Company’s Securities
Under the Weild Engagement Letter, Mr. Weild shall receive a monthly issuance of 3,500 INX Tokens in consideration for $0.01 per Token, as well as an option to purchase 350,000 INX Tokens at a price of $0.01 per Token. On June 9, 2021, our Board of Directors resolved that, commencing as of June 1, 2021, the grant of options to purchase INX Tokens by our directors shall be made based on an exercise price equal to the fair market value of the INX tokens on the date of the grant and that such options shall be granted following the end of each calendar quarter, with respect to the months of services in such calendar quarter. Effective June 1, 2021, options to purchase INX Tokens granted to Mr. Weild are issued in accordance with the June 9, 2021 Board resolution. The Board of Directors of TIDCI approved in November 2022 a grant of options to purchase 265,257 Ordinary Shares of TIDCI to Mr. Weild pursuant to the terms of the Omnibus Equity Incentive Compensation Plan of TIDCI, subject to the standard vesting provisions set forth in such plan. The exercise price of the shares underlying such grant shall be equal to their fair market value on the date of each grant.
Management, Services or Consulting Agreement
Mr. Weild has entered into a written services agreement with our Company, pursuant to which Mr. Weild provides services to the Company as a member of the Board of Directors (the “Weild Engagement Letter”). Mr. Weild currently serves as the Chairman of our Board of Directors.
Agreement with Weild Capital, LLC (“Weild Capital”)
On January 2, 2023, TIDCI entered into and advisory services agreement with Weild Capital LLC (dba Weild & Co.) (“Weild Agreement”), a wholly-owned subsidiary of Weild & Co., Inc., of which Mr. David Weild is Chairman & CEO. Mr. Weild serves as the Chairman of the board of TIDCI. Under the advisory agreement, TIDCI agreed to pay Weild Capital a nonrefundable advisory fee of $90,000 plus a transaction fee of three and a half percent (3.5%) of the aggregate transaction value up to $60,000, and four and a half percent (4.5%) of the aggregate transaction value in excess of $60,000, subject to a minimum transaction fee of $1.4 million, to be paid upon closing. In addition, under the terms of the agreement, in the event that an investment transaction is consummated within 12 months after the termination of the Weild Agreement, TIDCI is obligated to pay a financing placement fee equal to five and half percent (5.5%) of gross proceeds received, excluding any proceeds provided by existing shareholders of TIDCI. As of December 31, 2023, related to the Investment by Republic in the Company’s stock, TIDCI paid the advisory fee to Weild & Co. of $293,000. Additionally, under the Weild Agreement, TIDCI also issued to Weild & Co. 661,452 warrants to purchase TIDCI’s common shares valued, as of the date of issuance, at $139,000 based on the Black-Scholes options pricing model. Warrants are exercisable until August 18, 2028, at an exercise price of $0.2381 per warrant.
Mr. Nicholas Thadaney, Independent Director
Transactions Involving the Company’s Securities
Under the Thadaney Engagement Letter, Mr. Thadaney shall receive a monthly issuance of 3,500 INX Tokens per month in consideration for $0.01 per Token, as well as an option to purchase 350,000 INX Tokens at a price of $0.01 per Token. On June 9, 2021, our Board of Directors resolved that, commencing as of June 1, 2021, the grant of options to purchase INX Tokens by our directors shall be made based on an exercise price equal to the fair market value of the INX Tokens on the date of the grant and that such options shall be granted following the end of each calendar quarter, with respect to the months of services in such calendar quarter. Effective June 1, 2021, options to purchase INX Tokens granted to Mr. Thadaney are issued in accordance with the June 9, 2021 Board resolution. The Board of Directors of TIDCI approved in November 2022 a grant of options to purchase 265,257 Ordinary Shares of TIDCI and in January 2023 a grant to purchase 131,929 Ordinary Shares of TIDCI subject to a restricted stock unit to Mr. Thadaney pursuant to the terms of the Omnibus Equity Incentive Compensation Plan of TIDCI, subject to the standard vesting provisions set forth in such plan. The exercise price of the shares underlying such grant shall be equal to their fair market value on the date of each grant.
Management, Services or Consulting Agreement
Mr. Thadaney has entered into a written services agreement with our Company, pursuant to which Mr. Thadaney provides services to the Company as a member of the Board of Directors (the “Thadaney Engagement Letter”).
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Mr. Thomas Lewis, Independent Director
Transactions Involving the Company’s Securities
Under the Lewis Engagement Letter, Mr. Lewis shall receive a monthly issuance of 3,500 INX Tokens per month in consideration for $0.01 per Token, as well as an option to purchase 350,000 INX Tokens at a price of $0.01 per Token. On June 9, 2021, our Board of Directors resolved that, commencing as of June 1, 2021, the grant of options to purchase INX Tokens by our directors shall be made based on an exercise price equal to the fair market value of the INX Tokens on the date of the grant and that such options shall be granted following the end of each calendar quarter, with respect to the months of services in such calendar quarter. Effective June 1, 2021, options to purchase INX Tokens granted to Mr. Lewis are issued in accordance with the June 9, 2021 Board resolution. The Board of Directors of TIDCI approved in November 2022 a grant of options to purchase 265,257 Ordinary Shares of TIDCI to Mr. Lewis pursuant to the terms of the Omnibus Equity Incentive Compensation Plan of TIDCI, subject to the standard vesting provisions set forth in such plan. The exercise price of the shares underlying such grant shall be equal to their fair market value on the date of each grant.
Management, Services or Consulting Agreement
Mr. Lewis has entered into a written services agreement with our Company, pursuant to which Mr. Lewis provides services to the Company as a member of the Board of Directors (the “Lewis Engagement Letter”).
Ms. Hilary Kramer, Independent Director
Transactions Involving the Company’s Securities
Under the Kramer Engagement Letter, Ms. Kramer shall receive options to purchase 3,500 Tokens per each month of services to the Company at an exercise price equal to the fair market value of the Tokens on the date of the grant. Such options shall be granted following the end of each calendar quarter, with respect to the months of services in such calendar quarter. The Board of Directors of TIDCI approved in November 2022 a grant of options to purchase 66,314 Ordinary Shares of TIDCI to Ms. Kramer pursuant to the terms of the Omnibus Equity Incentive Compensation Plan of TIDCI, subject to the standard vesting provisions set forth in such plan. The exercise price of the shares underlying such grant shall be equal to their fair market value on the date of each grant.
Management, Services or Consulting Agreement
Ms. Kramer has entered into a written services agreement with our Company, pursuant to which Ms. Kramer provides services to the Company as a member of the Board of Directors.
Ms. Demetra Kalogerou, Independent Director
Transactions Involving the Company’s Securities
Under the Kalogerou Engagement Letter, Ms. Kalogerou shall receive options to purchase 3,500 Tokens per each month of services to the Company at an exercise price equal to the fair market value of the Tokens on the date of the grant. Such options shall be granted following the end of each calendar quarter, with respect to the months of services in such calendar quarter. The Board of Directors of TIDCI approved in November 2022 a grant of options to purchase 66,314 Ordinary Shares of TIDCI and in January 2023 a grant to purchase 43,976 Ordinary Shares of TIDCI subject to a restricted stock unit to Ms. Kalogerou pursuant to the terms of the Omnibus Equity Incentive Compensation Plan of TIDCI, subject to the standard vesting provisions set forth in such plan. The exercise price of the shares underlying such grant shall be equal to their fair market value on the date of each grant.
Management, Services or Consulting Agreement
Ms. Kalogerou has entered into a written services agreement with our Company, pursuant to which Ms. Kalogerou provides services to the Company as a member of the Board of Directors.
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Mr. Alan Silbert, Director and Officer
On June 25, 2018, Mr. Silbert and INX Services entered into an Amended and Restated Executive Employment Agreement (effective March 1, 2018) as amended effective as of November 1, 2019 (the “Silbert Previous Employment Agreement”), pursuant to which Mr. Silbert provided services to INX Services and the Company, including Mr. Silbert’s service as a member of the Company’s Board of Directors and Executive Managing Director of U.S. operations of INX Services. On January 1, 2021, the Silbert Previous Employment Agreement was terminated, and INX Digital and Mr. Silbert entered into an executive employment agreement, as amended on March 25, 2021 (effective April 1, 2021) (the “Silbert Employment Agreement”), pursuant to which Mr. Silbert provides services to INX Digital and the Company, including Mr. Silbert’s service as a member of the Company’s Board of Directors and Executive Managing Director of U.S. operations of INX Digital. On April 1, 2021, Mr. Silbert’s title changed to CEO, North America.
Transactions Involving the Company’s Securities
Under the Silbert Employment Agreement, on February 20, 2021, Mr. Silbert was granted an option to purchase 500,000 INX Tokens at a price of $0.01 per Token.
Following the adoption of a Share Ownership and Award Plan by the Company, Mr. Silbert was granted an option to purchase 287,290 Ordinary Shares of the Company constituting 3% of the share capital of the Company on a fully diluted basis at the date of the Original Silbert Employment Agreement, at a price per share equal to its fair value as of the effective date of the Original Silbert Employment Agreement or $0.391904. 25% of the option shares vest upon each anniversary of the Original Silbert Employment Agreement, such that the options would be fully vested and exercisable upon the 4th anniversary of the Original Silbert Employment Agreement. Unvested options were subject to accelerated vesting upon change of control of the Company.
On March 25, 2021, the Silbert Employment Agreement was amended such that, effective as of April 1, 2021, Mr. Silbert was granted an additional option to purchase 200,000 INX Tokens at a price of $0.90 per Token, and an option to purchase 197,710 Ordinary Shares of the Company at a price per share equal to $11.126. One thirty-sixth (1/36) of the Ordinary shares and INX Tokens underlying each option shall vest following lapse of each month of Mr. Silbert’s continuous engagement by the Company, such that all such Ordinary shares and INX Tokens would become fully vested by April 1, 2024.
On December 30, 2021, the Company’s Board of Directors approved that (i) all unvested options to purchase INX Tokens that were granted to Mr. Silbert (“Silbert’s Tokens”) shall accelerate and be fully vested commencing as of the date of such resolution and (ii) the entering into a customary reverse vesting agreement with Mr. Silbert in connection with such accelerated options of Mr. Silbert pursuant to which the Company would have the right to repurchase for cancellation Silbert’s Tokens in the event that the Silbert Employment Agreement is terminated without cause or good reason as such terms are defined in the Silbert Employment Agreement. The Company’s repurchase right shall lapse in equal parts on a monthly basis over the course of two (2) years and three (3) months commencing as of January 1, 2023, such that the repurchase right will have fully lapsed on April 1, 2024.
On December 30, 2021, the Company’s Board of Directors also approved the grant of an unsecured, non-recourse loan in the amount of US$404,129 bearing interest at a rate of 1.26% annually to Mr. Silbert (“Silbert Loan”) by INX Digital in connection with the exercise of a portion of his options to purchase Silbert’s Tokens (the “Silbert Promissory Note”). On February 8, 2023, the Board of Directors of TIDCI approved a grant of 100,000 INX Tokens to Mr. Silbert. Such INX Tokens were granted to Mr. Silbert on April 12, 2023 following the approval of the changes to our Plan on March 31, 2023. On March 24, 2023, the Board of Directors of TIDCI approved an increase of the Silbert Loan from US$ 404,129 to US$ 504,300. The Silbert Promissory Note was amended accordingly.
On February 8, 2022, the Board of Directors of TIDCI approved a grant of 509,617 Ordinary Shares of TIDCI to Mr. Silbert pursuant to the terms of the Omnibus Equity Incentive Compensation Plan of TIDCI, subject to the standard vesting provisions set forth in such plan. The exercise price of the shares underlying such grant shall be equal to their fair market value on March 15, 2022 (the date of the grant).
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On May 12, 2023, the Board of Directors of TIDCI approved a grant of 1,051,702 Ordinary Shares of TIDCI to Mr. Silbert pursuant to the terms of the Omnibus Equity Incentive Compensation Plan of TIDCI, subject to the standard vesting provisions set forth in such plan. The exercise price of the shares underlying such grant shall be equal to their fair market value on May 12, 2023 (the date of the grant).
Effective June 30, 2022 the Company purchased 632,474 INX Tokens from Mr. Silbert, at a per token purchase price of US$0.80, and on the same date Mr. Silbert used the aggregate proceeds from such purchase to repay the full balance of the Silbert Loan, in the amount of US$506,150, including accrued interest. On the same date, the Company’s Board of Directors also approved a grant of 837,385 INX Tokens subject to a Restricted Token Agreement, subject to continuous engagement of Mr. Silbert with the Company or its affiliates, such that the tokens became fully vested on March 30, 2024. Upon separation or termination of employment with the Company, 731,830 of these tokens would be fully vested on the date of termination of employment.
Management, Services or Consulting Agreement
Mr. Silbert has entered into a written employment agreement with INX Digital, pursuant to which he provides services, including as a member of the Board of Directors of the Company, formerly as the Executive Managing Director of U.S. operations of INX Digital, and commencing as of April 1, 2021 as the Chief Executive Officer of North America.
Mr. Shy Datika, Director and Officer
Transactions Involving the Company’s Securities
Under a Share Purchase Agreement, dated September 26, 2017, between the Company and Triple-V (1999) Ltd. (Triple-V”), a company wholly owned by Mr. Shy Datika, one of our founders, a member of our Board of Directors, President and CEO, the Company issued to Triple-V (1999) Ltd. 3,356,666 ordinary shares of the Company, par value of GBP 0.001 (each an “Ordinary Share”), in consideration of $446,875.
Under the Share Purchase Agreement, the Company also issued to Triple-V 9,435,939 INX Tokens at a price of $0.01 per INX Token.
On April 25, 2019, Mr. Datika invested an additional $150,000 in the Company pursuant to a Simple Agreement for Future Equity (the “SAFE”). Pursuant to the terms of the SAFE, upon consummation of an investment round (in shares of capital stock of the Company) in the amount of not less than $2 million (in addition to the funds raised under the SAFEs) (a “Qualifying Financing”), the funds raised under the SAFE would have automatically been converted into the same class of shares of capital stock as those issued in the Qualifying Financing at a price per share equal to the lower of: (i) a 25% discount on the base (undiscounted) price per share of the Qualifying Financing; and (ii) US$ 1.367 (the “Default Price”). A Qualifying Financing was not consummated before April 25, 2021, and thus the funds raised under the SAFE were automatically converted into Ordinary Shares at a price per share equal to the Default Price. Hence, under the terms of the SAFE, on April 25, 2021, Mr. Datika received 109,729 Ordinary Shares.
The foregoing description of the SAFE executed between Mr. Datika and the Company summarizes the material terms of the SAFE, but is not a complete description. For more details, you should reference the full text of the SAFE executed between Mr. Datika and the Company, which is attached as Exhibit 4.14 hereto, and is incorporated herein by reference.
On August 30, 2019 and November 29, 2019, Mr. Datika invested in the aggregate an additional $250,000 in the Company pursuant to Simple Agreements for Future Equity (the “Second SAFE”). The Second SAFE would also be automatically converted into the same class of shares of capital stock as those issued in a Qualifying Financing at a price per share equal to the lower of 25% discount on the base (undiscounted) price per share of the Qualifying Financing, and $1.367 per share. If a Qualifying Financing was not consummated within 12 months commencing as of the Effective Date (as such term is defined in the Second SAFE), the funds would automatically be converted at a price per share of $1.367. Hence, the SAFE would have an anti-dilutive impact on the Qualifying Financing as the number of shares issued pursuant to the SAFE increased relative to a decrease in the price per share of such Qualifying Financing. Notwithstanding an increased valuation, and thus increased price per share, of a Qualifying Financing, Mr. Datika was entitled to a minimum of 182,882 Ordinary Shares.
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In addition to the shares issued to the investors upon conversion of the Second SAFE, upon such conversion the Second SAFE investors would be entitled to an option to purchase additional shares, in the same amount and from the same class of the shares issued to them upon conversion of their investment under the Second SAFE, for an exercise price of $1.953 per share. This option shall be valid for a period of 36 months commencing as of the Effective Date.
A Qualifying Financing was not consummated before August 30, 2021, and thus the funds raised under the Second SAFE were automatically converted into Ordinary Shares at a price per share equal to $1.367. Hence, under the terms of one of the Second SAFEs, on August 30, 2021, Mr. Datika received 146,305 Ordinary Shares and Mr. Datika was entitled to an option to purchase 146,305 Ordinary Shares for an exercise price of $1.953 per share. All of the options were exercised on September 13, 2021.
The foregoing description of the Second SAFEs summarizes the material terms of the Second SAFE, but is not a complete description. For more details, you should reference to the full text of the Second SAFE executed between Mr. Datika and the Company and Triple-V (1999) Ltd. and the Company, which are attached as Exhibits 4.16 and 4.17 hereto, and are incorporated herein by reference.
On January 31, 2020 and March 31, 2020, Mr. Datika invested in the aggregate an additional $100,000 in the Company pursuant to Simple Agreements for Future Equity (the “Third SAFE”). The Third SAFE would also be automatically converted into the same class of shares of capital stock as those issued in the Qualifying Financing at a price per share equal to the lower of, 25% discount on the base (undiscounted) price per share of the Qualifying Financing, and $1.526 per share. If a Qualifying Financing was not consummated within 12 months commencing as of the Effective Date (as such term is defined in the Third SAFE), the funds would automatically be converted at a price per share of $1.526. Hence, the Third SAFE would have an anti-dilutive impact on the Qualifying Financing as the number of shares issued pursuant to the Third SAFE increased relative to a decrease in the price per share of such Qualifying Financing. Notwithstanding an increased valuation, and thus increased price per share, of a Qualifying Financing, Mr. Datika was entitled to a minimum of 65,530 Ordinary Shares.
In addition to the shares issued to the investors upon conversion of the Third SAFE, the Third SAFE investors would be entitled to an option to purchase additional identical number of shares, from the same class of the shares issued to them upon conversion of their investment under the Third SAFE, for an exercise price of $1.696 per share. This option shall be valid for a period of 36 months commencing as of the Effective Date.
A Qualifying Financing was not consummated before January 31, 2021, and thus the funds raised under the one of the Third SAFEs were automatically converted into Ordinary Shares at a price per share equal to $1.526. Hence, under the terms of Third SAFE, on January 31, 2021 Mr. Datika received an aggregate of 49,147 Ordinary Shares and Mr. Datika was entitled to an option to purchase 49,147 Ordinary Shares for an exercise price of $1.696 per share.
The foregoing description of the Third SAFE summarizes the material terms of the Third SAFE, but is not a complete description. For more details, you should refer to the full text of the Third SAFEs executed between Mr. Datika and the Company, which are attached as Exhibits 19 and 4.20 hereto, and is incorporated herein by reference.
On March 22, 2021, Mr. Datika entered into the March 2021 Subscription Agreement with the Company, pursuant to which Mr. Datika provided to the Company CAD$ 75,000 in consideration for subscription receipts of the Company that were replaced at the closing of the Valdy Transaction by 60,000 Ordinary Shares of Valdy and to an option to purchase 30,000 Ordinary Shares of Valdy at an exercise price of CAD$ 1.88 per share.
In January 2023, Triple V (1999) Ltd. converted part of its Fees into options to acquire 593,678 shares in the Company.
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On January 8, 2024, Mr. Datika, through Triple-V, was awarded 1,000,000 restricted INX Tokens subject to a restricted period of 3 years, whereby the award fully vests on January 8, 2027.
Management, Services or Consulting Agreement
Triple-V (1999) Ltd. has entered into a written services agreement with our Company, pursuant to which Triple-V, though the personal services of Mr. Datika, provides services to the Company as shall be determined by our Board of Directors.
On April 28, 2021, our Board of Directors appointed Mr. Datika as the CEO of the Company, upon and subject to closing of the Valdy Transaction.
On December 14, 2021, Mr. Datika was appointed as a member of the Company’s Board of Directors.
Effective January 1, 2023, compensation for services relating to the Triple-V (1999) Ltd. services agreement was reduced by 50%. At the same time, the Company’s subsidiary Midgard Technologies Ltd. entered into a written services agreement with Mr. Datika for an equal amount of compensation to the 50% reduced in the Triple-V (1999) Ltd. agreement mentioned above.
Ms. Maia Naor, Officer
Transactions Involving the Company’s Securities
Under a Loan Agreement, dated November 27, 2017, between the Company and Ms. Naor, our Chief Product Officer, the Company borrowed $40,635 from Ms. Naor. The term of the loan is five years, and the outstanding balance shall become due and payable on the five-year anniversary of the Naor Loan Agreement or upon the sooner of an IPO or a Deemed Liquidation Event (as such terms are defined in the Company’s Articles of Association). The interest rate on the principal of the loan is an annual rate of 2% compounded annually (subject to adjustment from time to time by the applicable Income Tax Ordinance).
Pursuant to the Loan Agreement, Ms. Naor was entitled, at any time and at her sole discretion, to convert outstanding principal and interest amounts of the loan agreement into 333,333 Ordinary Shares.
The Board of Directors of TIDCI approved two grants of an aggregate total amount of 786,535 Ordinary Shares of TIDCI to Ms. Naor pursuant to the terms of the Omnibus Equity Incentive Compensation Plan of TIDCI, subject to the standard vesting provisions set forth in such plan. The exercise price of the shares underlying such grant shall be equal to their fair market value on the date of each grant.
Under the terms of the Loan Agreement, Ms. Naor purchased 937,499 INX Tokens issued by the Company at a price of $0.01 per INX Token.
On February 25, 2021, Ms. Naor exercised her right to convert the outstanding principal and interest amounts of the loan agreement into 333,333 Ordinary Shares of the Company.
On February 8, 2022, the Board of Directors of TIDCI approved a grant of 786,535 options to purchase Ordinary Shares of TIDCI to Ms. Naor pursuant to the terms of the Omnibus Equity Incentive Compensation Plan of TIDCI, subject to the standard vesting provisions set forth in such plan. The exercise price of the shares underlying such grant shall be equal to their fair market value on March 15, 2022 (the date of the grant). On June 30, 2022, the Board of Directors of TIDCI approved a grant of 786,535 options to purchase Ordinary Shares of TIDCI to Ms. Naor pursuant to the terms of the Omnibus Equity Incentive Compensation Plan of TIDCI, subject to the standard vesting provisions set forth in such plan. The exercise price of the shares underlying such grant shall be equal to their fair market value on June 30, 2022 (the date of the grant). On May 12, 2023, the Board of Directors of TIDCI approved a grant of 262,926 options to purchase Ordinary Shares of TIDCI to Ms. Naor pursuant to the terms of the Omnibus Equity Incentive Compensation Plan of TIDCI, subject to the standard vesting provisions set forth in such plan. The exercise price of the shares underlying such grant shall be equal to their fair market value on May 12, 2023 (the date of the grant).
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Mrs. Naor has an option to purchase 125,000 INX Tokens at a price of $0.43 per INX Token and an option to purchase 25,000 INX Tokens at a price of $0.28 per INX Token.
Management, Services or Consulting Agreement
Ms. Naor had entered into a services agreement with Midgard Technologies Ltd., now the Company’s wholly-owned subsidiary, pursuant to which Ms. Naor provided services to the Company as VP Product. Ms. Naor’s services to the Company are rendered solely through Midgard. Prior to that, Ms. Naor provided services to the Company pursuant to a services agreement directly with Ms. Naor and to an agreement between the Company and Shiran Communications Ltd. On April 1, 2021, Midgard was purchased by the Company. On June 1, 2021, Ms. Naor’s position changed to that of Chief Product Officer.
Mr. Paz Diamant, Officer
Transactions Involving the Company’s Securities
Pursuant to Mr. Diamant’s Services Agreement, Mr. Diamant was granted options to purchase 50,000 Tokens, at the price of $0.08 per Token, which equals 10,000 Tokens per month during the three months between the effective date of Mr. Diamant’s Services Agreement and October 2021, plus 20,000 INX Tokens. Upon entering into an Employment Agreement, Mr. Diamant was granted an option to purchase an additional 200,000 INX Tokens at an exercise price of $0.08 per INX Token. The options granted under the Employment Agreement shall vest, subject to Mr. Diamant’s continued employment with the Company, over four years in equal amounts on each of the first four anniversaries of the effective date of the Employment Agreement.
In addition, the Company undertook that upon and subject to the adoption of a Share Ownership and Award Plan by the Company and approval of the Company’s board of directors, Mr. Diamant shall receive an option to purchase 67,158 Ordinary Shares of the Company. 20% of the option shares will vest on the first anniversary of the grant date. Thereafter, 5% of the options shares vest at the end of each quarter during the four (4) years after the first anniversary of the grant date, such that the options will be fully vested and exercisable upon the 5th anniversary of the grant date. The option to purchase Ordinary Shares is subject to the continued employment of Mr. Diamant with the Company.
On February 8, 2022, the Board of Directors of TIDCI replaced such commitment to issue options to purchase shares of the Company with a grant of 607,698 Restricted Shares of TIDCI (net number of Restricted Shares, issued on a “cashless basis”). On May 12, 2023, the Board of Directors of TIDCI approved a grant of 262,926 options to purchase Ordinary Shares of TIDCI to Mr. Diamant pursuant to the terms of the Omnibus Equity Incentive Compensation Plan of TIDCI, subject to the standard vesting provisions set forth in such plan. The exercise price of the shares underlying such grant shall be equal to their fair market value on May 12, 2022 (the date of the grant).
Mr. Diamant holds 83,600 INX Tokens, and options to purchase 287,000 INX Tokens, at exercise prices ranging from $0.08 to $0.43 per Token.
Management, Services or Consulting Agreement
Mr. Diamant has entered into a written services agreement with Midgard Technologies Ltd., pursuant to which he provides services as the Company’s Chief Technology Officer.
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Mr. Itai Avneri, Officer
Transactions Involving the Company’s Securities
Pursuant to Mr. Avneri’s Services Agreement, Mr. Avneri was granted an option to purchase 180,000 INX Tokens at a price of $0.09 per Token, and an option to purchase additional 180,000 INX Tokens upon the earlier of June 30, 2021 or the execution of the Avneri Employment Agreement with the Company. In addition, upon and subject to the adoption of a Share Ownership and Award Plan by the Company, the Company undertook that Mr. Avneri shall receive an option to purchase 269,640 Ordinary Shares of the Company and additional 269,640 Ordinary Shares upon the execution of the Avneri Employment Agreement with the Company. 25% of the option shares will vest on the first anniversary of the grant date. Thereafter, subject to Mr. Avneri’s continuous engagement with the Company, one-twelfth (1/12) of the remaining unvested options vest at the end of each quarter during the three (3) years after the first anniversary of the grant date, such that the options will be fully vested and exercisable upon the fourth anniversary of the grant date.
On February 8, 2022, the Board of Directors of TIDCI replaced such commitment to issue options to purchase shares of the Company with a grant of 4,428,434 Restricted Shares of TIDCI (net number of Restricted Shares, issued on a “cashless basis”). In addition, on the same date, the Board of Directors of TIDCI approved a grant of 509,617 Ordinary Shares of TIDCI to Mr. Avneri pursuant to the terms of the Omnibus Equity Incentive Compensation Plan of TIDCI, subject to the standard vesting provisions set forth in such plan. The exercise price of the shares underlying such grant shall be equal to their fair market value on March 15, 2022 (the date of the grant).
On January 19, 2023, the Board of Directors of TIDCI approved a grant of 319,043 Restricted Shares of TIDCI to Mr. Avneri pursuant to the terms of the Omnibus Equity Incentive Compensation Plan of TIDCI, subject to the standard vesting provisions set forth in such plan. The exercise price of the shares underlying such grant shall be equal to their fair market value on January 23, 2023 (the date of the grant).
In January 2023, Mr. Avneri converted part of his salary into options to acquire 319,043 Ordinary Shares in TIDCI.
On May 12, 2023, the Board of Directors of TIDCI approved a grant of 394,388 options to purchase Ordinary Shares of TIDCI to Mr. Avneri pursuant to the terms of the Omnibus Equity Incentive Compensation Plan of TIDCI, subject to the standard vesting provisions set forth in such plan. The exercise price of the shares underlying such grant shall be equal to their fair market value on May 12, 2023 (the date of the grant).
On January 8, 2024, the Board of Directors of TIDCI approved a grant of 394,388 options to purchase Ordinary Shares of TIDCI to Mr. Avneri pursuant to the terms of the Omnibus Equity Incentive Compensation Plan of TIDCI, subject to the standard vesting provisions set forth in such plan. The exercise price of the shares underlying such grant shall be equal to their fair market value on January 8, 2024 (the date of the grant).
Mr. Avneri holds an option to purchase 700,000 INX Tokens at an exercise price ranging from $0.09 to $0.43 per INX Token.
Management, Services or Consulting Agreement
Mr. Avneri has entered into a written services agreement with Midgard Technologies, Ltd., pursuant to which he provides services as the Company’s Chief Operating Officer.
Mr. Vladislav Uchenik, Officer
Management, Services or Consulting Agreement
Mr. Uchenik serves as the Chief Executive Officer and Chief Compliance Officer for INXS, pursuant to an offer letter with INX Digital and also serves as the Chief Compliance Officer of the Company.
Transactions Involving the Company’s Securities
On February 8, 2022, the Board of Directors of TIDCI approved a grant of 509,617 Ordinary Shares of TIDCI to Mr. Uchenik pursuant to the terms of the Omnibus Equity Incentive Compensation Plan of TIDCI, subject to the standard vesting provisions set forth in such plan. The exercise price of the shares underlying such grant shall be equal to their fair market value on March 15, 2022 (the date of the grant).
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The Company’s Board of Directors also approved, all subject to a Restricted Token Agreement: (i) a grant of 75,000 INX Tokens effective April 12, 2022, (ii) a grant of 75,000 INX Tokens effective December 8, 2022, and (iii) a grant of 25,000 INX Tokens effective May 12, 2023.
Ms. Renata Szkoda, Officer
On May 2, 2023, Ms. Szkoda entered into an Executive Employment Agreement with INX Digital, Inc. and INX Limited to serve as the Chief Financial Officer of the INX group.
Transactions Involving the Company’s Securities
Under the Executive Employment Agreement effective May 2, 2022, Ms. Szkoda was granted, subject to a Restricted Token Agreement, 150,000 INX Tokens. The Company’s Board of Directors also subsequently approved, all subject to a Restricted Token Agreement: (i) a grant of 50,000 INX Tokens effective May 12, 2023, and (ii) a grant of 25,000 INX Tokens effective January 8, 2024.
Ms. Szkoda was also granted an option to purchase a number of Option Shares constituting 0.50% of the share capital of TINXDCO on a fully diluted basis as of the Grant Date at a price per share at the Fair Market Value (“FMV”) per each Option Share on the Grant Date. The Option will vest and become exercisable as follows: 1/4 of the Option shall vest upon each anniversary of the Effective Date subject to the continuous engagement of the Executive with the Company at such time, such that, subject to the continuous engagement of the Executive with the Company at such time, the entire Option shall be vested and exercisable upon the 4th anniversary of the Agreement’s Effective Date.
On May 12, 2023, the Board of Directors of TIDCI approved a grant of 394,388 options to purchase Ordinary Shares of TIDCI to Ms. Szkoda pursuant to the terms of the Omnibus Equity Incentive Compensation Plan of TIDCI, subject to the standard vesting provisions set forth in such plan. The exercise price of the shares underlying such grant shall be equal to their fair market value on May 12, 2023 (the date of the grant).
Agreements with Other Interested Parties
A-Labs
The Company and A-Labs Finance and Advisory Ltd. (“A-Labs”), a limited liability company registered under the laws of the state of Israel, entered into the A-Labs Engagement Agreement dated September 26, 2017, as amended in December 2017 and January 31, 2018. A-Labs, a shareholder of the Company, provided services to the Company which included, among others, development, planning, management, execution, branding and marketing outside of the US with relation to the Offering of the INX Tokens on behalf of the Company (the “A-Labs Agreement”).
On January 7, 2019, the Board of Directors of the Company approved the issuance to A-Labs of 47,893 Ordinary Shares in consideration of $50,000.
On April 25, 2019, A-Labs invested an additional $100,000 in the Company pursuant to a SAFE dated as of such date. On April 25, 2021, under the terms of the SAFE, A-Labs received 73,152 Ordinary Shares. See “Item 7.B Related Party Transactions – Relationships and Transactions with Directors and Executive Officers – Mr. Shy Datika – Transactions Involving the Company’s Securities” for a summary of the material terms of the SAFE.
On March 7, 2020, A-Labs invested an additional $30,000 in the Company pursuant to a Third SAFE dated as of such date. Under the terms of the Third SAFE, A-Labs is entitled to a minimum of 19,659 Ordinary Shares. See “Item 7.B Related Party Transactions – Relationships and Transactions with Directors and Executive Officers – Mr. Shy Datika – Transactions Involving the Company’s Securities” for a summary of the material terms of the SAFE and Third SAFE.
A Qualifying Financing was not consummated before March 7, 2021, and thus the funds raised under the Third SAFEs were automatically converted into Ordinary Shares at a price per share equal to $1.526. Hence, under the terms of Third SAFE, on March 7, 2021 A-Labs received 19,659 Ordinary Shares and A-Labs will be entitled to an option to purchase 19,659 Ordinary Shares for an exercise price of $1.696 per share.
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The foregoing descriptions of the SAFE and Third SAFE executed between A-Labs and the Company summarizes the material terms of the SAFE and Third SAFE but are not complete descriptions. For more details, you should reference to the full text of the SAFE and Third SAFE executed between A-Labs and the Company, which are attached as Exhibits 4.15 and 4.21 hereto, and incorporated herein by reference.
On March 22, 2021, A-Labs (for itself and/or on behalf of any affiliate or fund or other investment vehicle managed by A-Labs or an affiliate thereof) entered into the March 2021 Subscription Agreement with the Company, pursuant to which A-Labs provided to the Company CAD$ 2,487,500 in consideration for subscription receipts of the Company that was replaced at the closing of the Valdy Transaction by 1,990,000 Ordinary Shares of Valdy and an option to purchase 995,000 Ordinary Shares of Valdy at an exercise price of CAD$ 1.88 per share.
In consideration for the advisory services, during 2021, the Company paid A-Labs $4.1 million.
A-Labs also received a grant of 4,550,000 INX Tokens at a fair value of $6. In addition, pursuant to an agreement signed contemporaneously with the A-Labs Agreement, the Company issued 1,120,000 Ordinary shares to A-Labs. The fair value of the shares issued of $136,000, was deemed as additional consideration for the services to be provided by A-Labs and was recorded during the year ended December 31, 2021.
In addition, on July 29, 2021, the Company made a payment to A-Labs of $1.0 million and granted A-Labs with an option to purchase 1,527,084 Tokens. These options were exercised during 2023 and vest on July 12, 2024.
C. Interests of Experts and Counsel.
None.
ITEM 8. FINANCIAL INFORMATION.
A. Consolidated Statements and Other Financial Information.
See “Item 18. Financial Statements.”
Legal Proceedings
From time to time we may be subject to legal proceedings and claims in the ordinary course of business. We are not involved in any material legal proceedings.
Dividends
We have never declared or paid cash dividends to our shareholders. Currently we do not intend to pay cash dividends. We currently intend to reinvest any future earnings in developing and expanding our business. Any future determination relating to our dividend policy will be at the discretion of our Board of Directors and will depend on a number of factors, including future earnings, our financial condition, operating results, contractual restrictions, capital requirements, business prospects, applicable law and other factors our Board of Directors may deem relevant.
B. Significant Changes.
None.
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ITEM 9. THE OFFER AND LISTING
A. Offer and Listing Details.
Our Parent has listed its common shares on the Cboe Canada exchange in Canada and on the OTCQB exchange in the United States (operated by OTC Markets). No trading market currently exists for our Ordinary Shares in the United States or elsewhere.
B. Plan of Distribution.
Not applicable.
C. Markets.
Our Parent has listed its common shares on the Cboe Canada exchange in Canada and on the OTCQB exchange in the United States (operated by OTC Markets). No trading market currently exists for our Ordinary Shares in the United States or elsewhere.
D. Selling Shareholders.
Not applicable.
E. Dilution.
Not applicable.
F. Expenses of the Issue.
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital.
Not applicable.
B. Memorandum and Articles of Association.
On March 18, 2021, the shareholders of the Company approved the amendment of the Third Amended and Restated Articles of Association of the Company. Pursuant to such amendment, Article 80.D(f) shall be amended such that the Bring Along and Forced Sale provisions of the Articles shall not be terminated upon the completion of the Token Offering.
C. Material Contracts.
We have not entered into any material contract within the two years prior to the date of this annual report on Form 20-F, other than (i) contracts entered into in the ordinary course of business, (ii) as otherwise described below, (iii) herein in “Item 4.A. History and Development of the Company” above, (iv) “Item 4.B. Business Overview” above, (v) “Item 7A. Major Shareholders” above, or (vi) “Item 8B. Significant Changes.”
On December 15, 2022, INX entered into a shareholders’ and joint venture agreement with SICPA SA, a company organized under the laws of Switzerland, Mr. Yosef Meir Cohen and Mr. Hagai Itkin (“SICPA Agreement”), whereby parties to the agreement have agreed to joint their expertise and collaborate to develop central bank digital currency solutions with the utilization of blockchain technology. Subsequently, for the purpose of executing joint objectives under the SICPA Agreement, the parties agreed to form SICPA INX SA (“SICPA INX”), an entity organized under the laws of Switzerland. All parties to the agreement are to become shareholders of SICPA INX, with INX’s share of the issued and outstanding share capital to be 33 percent. Also, under the SICPA Agreement, INX is entitled to introduce a new partner within the first year from the date of the agreement, which, if approved by the majority shareholder, would be entitled to receive a maximum number of shares constituting 16.5 percent of the issued and outstanding share capital of SICPA INX, which shall be reduced from INX’s initial allocation of shares. In relation to the SICPA Agreement, INX also intends to enter into a service agreement with SICPA INX to license its technology and provide technology support and management services for a period of one year in return for compensation.
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On June 19, 2023, the Company announced that Republic, a global alternative investment platform, entered into a subscription agreement (the “Subscription Agreement”) with TIDCI to acquire 9.5% of the issued and outstanding shares of TIDCI in a combination of cash and shares at an approximately pre-money valuation of US$50 million. As part of the agreement, TIDCI and Republic entered into a non-binding term sheet, which contemplates a transaction where Republic acquires 100% of the common equity of the Company at a valuation up to US$120 million. Additionally, the two parties entered into a collaboration agreement (“Collaboration Agreement”) pursuant to which the parties will seek to expand the breadth and depth of tokenization infrastructure and access to digital assets for investors worldwide. On August 18, 2023, the Company announced the closing of the investment by Republic for 9.5% of TIDCI’s shares.
On November 8, 2023, the Company announced an extension of the deadline for Republic’s potential option exercise to acquire the remaining common shares of TIDCI. The deadline was extended until February 15, 2024. Additionally, the Company announced that the Collaboration Agreement would be extended until February 15, 2024.
On February 15, 2024, the Company announced that it agreed to extend the negotiating period for the previously announced acquisition of TIDCI by Republic Group (“Republic”) for three months, to May 15, 2024. The Company also announced that it and Republic were renewing their previously announced collaboration agreement for an additional year.
D. Exchange Controls.
Dividends paid or deemed to be paid or credited by the Company to a U.S. Holder are subject to Canadian withholding tax under Part XIII of the Tax Act. The default rate of withholding tax is 25% of the gross dividend paid to a non-resident of Canada.
Under the Treaty, the rate of withholding tax on dividends paid to a U.S. Holder is generally limited to 15% of the gross dividend. In the case of a U.S. Holder that is a corporation owning at least 10% of the Company’s voting shares, the applicable withholding rate is 5% of the gross dividend, provided the U.S. Holder can establish entitlement to the benefits of the Treaty.
Except as provided in the Investment Canada Act, or the Act, there are no limitations under the laws of Canada, the Province of British Columbia or in the charter or any other constituent documents of the Company on the right of foreigners to hold or vote the ordinary shares of the Company.
The following discussion summarizes the principal features of the Investment Canada Act for a non-resident who proposes to acquire the ordinary shares.
The Investment Canada Act generally prohibits an “entity” that is not Canadian-controlled from effecting an acquisition of control of a Canadian business that exceeds the applicable financial threshold for review, unless after review, the Director of Investments appointed by the Minister responsible for the Investment Canada Act is satisfied that the investment is likely to be of net benefit to Canada. The financial thresholds for review vary according to whether the direct acquisition of control is made by (i) an investor that is controlled by nationals of a specified free trade party; (ii) a national of a World Trade Organization (WTO) member state; or (iii) a state-owned enterprise. Any investment, regardless of the applicable financial threshold for review, may be reviewed on national security grounds. An acquisition of control is presumed to occur under the Investment Canada Act if a non-Canadian acquires a majority of the ordinary shares. An acquisition resulting in the non-Canadian purchaser holding one third or more, but less than a majority, of the ordinary shares would be presumed to be an acquisition of control of the Company unless it could be established that, on the acquisition, the Company was not controlled in fact by the acquirer through the ownership of the ordinary shares. Certain transactions relating to the ordinary shares would be exempt from the Investment Canada Act, including: (a) an acquisition of the ordinary shares by a person in the ordinary course of that person’s business as a trader or dealer in securities; (b) an acquisition of control of the Company in connection with the realization of security granted for a loan or other financial assistance and not for a purpose related to the provisions of the Investment Canada Act; and (c) an acquisition of control of the Company by reason of an amalgamation, merger, consolidation or corporate reorganization following which the ultimate direct or indirect control in fact of the Company, through the ownership of the ordinary shares, remained unchanged
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E. Taxation.
U.S. Federal Income Tax Considerations
Set forth below is a discussion, in summary form, of certain United States federal income tax consequences relating to the acquisition, ownership and disposition of Tokens. This summary does not attempt to present all aspects of the United States federal income tax laws or any state, local or foreign laws that may affect an interest in Tokens. Financial institutions, insurance companies, tax-exempt entities, purchasers subject to the alternative minimum tax and other purchasers of special status must consult with their own professional tax advisors regarding a prospective or current investment in INX Tokens. This summary is by nature general in nature and should not be construed as tax advice to any prospective purchaser or current INX Token holder. No ruling has been or will be requested from the IRS and no assurance can be given that the IRS will agree with the tax consequences described in this summary. The following discussion assumes that each purchaser will acquire Tokens as a capital asset (generally, property held for investment). This description is based on the U.S. Internal Revenue Code of 1986, as amended, (the “Code”), existing, proposed and temporary U.S. Treasury Regulations and judicial and administrative interpretations thereof, in each case as available on the date hereof. All of the foregoing is subject to change, which change could apply retroactively and could affect the tax consequences described below. The following discussion is limited to prospective purchasers and current INX Token holders who are “United States Persons” within the meaning of the Code. Each prospective purchaser and current INX Token holder should consult with its own tax adviser in order to fully understand the United States federal, state, local and foreign income tax consequences of purchasing or holding an interest in Tokens. No formal or legal tax advice is hereby given to any prospective purchaser or current INX Token holder, and no prospective purchaser and or INX Token holder may rely on the Company’s statements regarding the anticipated tax consequences of purchasing, holding and disposing of Tokens.
Transactions involving Tokens are relatively new and it is more than likely that the IRS will issue guidance, possibly with retroactive effect, impacting the taxation of participating in the purchase, ownership and disposition of Tokens. Such future tax guidance from the IRS (or guidance resulting from future judicial decisions) could negatively impact purchasers of Tokens.
Character of Tokens
There are no regulations, published rulings or judicial decisions involving the characterization for US federal income tax purposes of instruments with substantially the same terms as the INX Tokens. It is also unclear what guidance on the characterization and treatment of tokens for U.S. federal income tax purposes may be issued in the future. Thus, the characterization and treatment of INX Tokens for U.S. federal income tax purposes is uncertain.
The IRS has ruled on the tax treatment of virtual currencies. In Notice 2014-21, the IRS held that digital currencies (i) are “property” that is not currency for US federal income tax purposes and (ii) may be held as a capital asset. The Notice does not address other aspects of the U.S. federal income tax treatment of tokens, including the tax characterization of tokens which possess non-currency rights or powers (so called “utility” tokens) or tokens which provide a share of profits to holders.
Moreover, there is no authority on the circumstances in which profit-sharing tokens such as INX Tokens may be treated as equity in the Company for U.S. federal income tax purposes. It should be expected, however, that the IRS or a court would determine the characterization of tokens based on a consideration and weighing of the characteristics of these instruments. Based on the characteristics of the INX Tokens, the Company intends to treat the INX Tokens as property that is not an equity interest in the Company for US federal income tax purposes. This treatment is supported by the following characteristics:(i) distribution rights on the INX Tokens are (a) based on annual net cash flow from operating activities rather than earnings and profits of the Company and (b) entitlements pursuant to the terms of the INX Tokens without any action to declare a payment (distribution) required by Company’s board of directors, (ii) no participation rights in residual property of the Company on liquidation along with common equity and no specified liquidation preference typical with preferred equity and (iii) no voting rights.
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Other characterizations of the INX Tokens are possible, including the possible characterization as equity of the Company. If INX Tokens were characterized as equity interests in the Company for U.S. federal income purposes, U.S. holders of INX Tokens would be subject additional tax consequences and related reporting considerations applicable to holders of stock in a foreign company, including the possible application of rules relating to PFICs and CFCs. The summary below assumes that INX Tokens will not constitute an equity interest in the Company for U.S. federal income tax purposes.
Potential purchasers and current INX Token holders are strongly advised to consult their own tax advisors as to the US federal income tax characterization of the INX Tokens and the consequences to them of the various alternative characterizations.
Treatment of Token Sales. The issuance of Tokens to a purchaser will be treated as a taxable sale of property by the Company to the purchaser. A purchaser should not be taxed upon the acquisition of Tokens. A purchaser should generally have a tax basis for U.S. federal income tax purposes in INX Tokens it acquires from the Company equal to the value of the purchase price paid by such purchaser for INX Tokens. The purchaser’s holding period in INX Tokens should begin on the day INX Tokens are issued to the purchaser.
Disposition of Tokens. A Token holder who sells, exchanges, or otherwise disposes of Tokens for cash or other property (including pursuant to an exchange of such Tokens for other convertible virtual currency) should, pursuant to Internal Revenue Service Notice 2014-21, recognize capital gain or loss in an amount equal to the difference between the fair market value of the property received in exchange for such Tokens and the purchaser’s adjusted tax basis in INX Tokens. This capital gain may be long term if the purchaser has held his Tokens for more than one year prior to disposition. Preferential tax rates for long term capital gain will generally apply to non-corporate U.S. Holders. Any gain or loss realized by a U.S. Holder on the sale, exchange, or other disposition of Tokens should generally be treated as from sources within the United States for U.S. foreign tax credit purposes. The deductibility of capital losses for U.S. federal income tax purposes is subject to limitations.
Treatment of Profit-Share Distributions. U.S. holders of Tokens are required to include in gross income the amount of any distribution paid with respect to their Tokens. The source of distributions paid in respect of INX Tokens for U.S. foreign tax credit purposes is not clear.
EACH PURCHASER SHOULD SEEK, AND MUST DEPEND UPON, THE ADVICE OF HIS OR HER TAX ADVISOR WITH RESPECT TO THEIR PURCHASE OWNERSHIP AND DISPOSITION OF TOKENS, AND EACH PURCHASER IS RESPONSIBLE FOR THE FEES OF SUCH ADVISOR. NOTHING IN THIS ANNUAL REPORT ON FORM 20-F IS OR SHOULD BE CONSTRUED AS LEGAL OR TAX ADVICE TO A PURCHASER. PURCHASERS SHOULD BE AWARE THAT THE INTERNAL REVENUE SERVICE MAY NOT AGREE WITH ALL TAX POSITIONS TAKEN BY THE COMPANY AND THAT CHANGES TO THE INTERNAL REVENUE CODE OR THE REGULATIONS OR RULINGS THEREUNDER OR COURT DECISIONS AFTER THE DATE OF THIS REPORT MAY CHANGE THE ANTICIPATED TAX TREATMENT TO A PURCHASER. THE COMPANY WILL NOT OBTAIN ANY RULING FROM THE INTERNAL REVENUE SERVICE WITH REGARD TO THE TAX CONSEQUENCES OF PURCHASES OF TOKENS.
THE TAX TREATMENT OF INX TOKENS IS UNCERTAIN AND THERE MAY BE ADVERSE TAX CONSEQUENCES FOR PURCHASERS UPON CERTAIN FUTURE EVENTS. A PURCHASE OF TOKENS MAY RESULT IN ADVERSE TAX CONSEQUENCES TO PURCHASERS, INCLUDING WITHHOLDING TAXES, INCOME TAXES AND TAX REPORTING REQUIREMENTS. EACH PURCHASER SHOULD CONSULT WITH AND MUST RELY UPON THE ADVICE OF ITS OWN PROFESSIONAL TAX ADVISORS WITH RESPECT TO THE UNITED STATES TAX TREATMENT OF TOKENS.
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F. Dividends and Paying Agents.
Not applicable.
G. Statement by Experts.
Not applicable.
H. Documents on Display.
We are subject to certain information reporting requirements of the Exchange Act, applicable to foreign private issuers and under those requirements will file reports with the SEC. The SEC maintains an internet site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. Our filings with the SEC will also be available to the public through the SEC’s website at www.sec.gov.
As a foreign private issuer, we will be exempt from the rules under the Exchange Act related to the furnishing and content of proxy statements, and our officers, directors and principal shareholders will be exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we will not be required under the Exchange Act to file annual, quarterly and current reports and financial statements with the SEC as frequently or as promptly as U.S. domestic companies whose securities are registered under the Exchange Act. However, we will file with the SEC, within 120 days after the end of each fiscal year, or such applicable time as required by the SEC, an annual report on Form 20-F containing financial statements audited by an independent registered public accounting firm, and may submit to the SEC, on a Form 6-K, unaudited quarterly financial information.
We maintain a corporate website at https://www.inx.co/. Information contained on, or that can be accessed through, our website and the other websites referenced above do not constitute a part of this annual report. We have included these website addresses in this report solely as inactive textual references.
I. Subsidiary Information.
Not applicable.
J. Annual Report to Security Holders.
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange Risk
We have not been exposed to material risks due to changes in foreign exchange rates, and we have not used any derivative financial instruments to manage our foreign exchange risk exposure.
Interest Rate Risk
We have not been exposed to material risks due to changes in market interest rates, and we have not used any derivative financial instruments to manage our interest risk exposure.
We have invested a portion of our operating funds and a portion of the Cash Fund (also known as “Reserve Fund”) in interest-earning instruments. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall.
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Credit Risk
Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into, causing the other party to incur a financial loss. The Company’s cash and cash equivalents, investments and digital assets are exposed to credit risk. The Company limits its credit risk by placing its assets with high credit quality banks, financial institutions and digital assets custodians that are believed to have sufficient capital to meet their obligations. While the Company intends to only transact with counterparties that it believes to be creditworthy there can be no assurance that a counterparty will not default and that the Company will not sustain a material loss as a result. It is the Company’s policy to monitor the creditworthiness of its counterparties and to minimize the concentration of credit risk to mitigate significant loss caused by potential counterparty’s failure.
Market Risk
Market risk is the risk that the value of financial instruments will fluctuate as a result of changes in market prices (other than those arising from interest rate risk or foreign currency risk), whether caused by factors specific to an individual investment, its issuer, or factors affecting all instruments traded in a market or market segment. All investments present a risk of loss of capital. The maximum risk resulting from financial instruments is equivalent to their fair value. The Company’s investments are susceptible to market risk arising from uncertainties about future prices of the instruments. The Company manages this risk through the various investment strategies within the parameters of the Company’s investment guidelines.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. Debt Securities.
Not applicable.
B. Warrants and Rights.
Not applicable.
C. Other Securities.
Not applicable.
D. American Depositary Shares.
Not applicable.
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PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures
Our management, with the participation of our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2023 (the “Evaluation Date”). Based on such evaluation, those officers have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be included in periodic filings under the Exchange Act and that such information is accumulated and communicated to management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.
(b) Management’s annual report on internal control over financial reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
● | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and asset dispositions; |
● | provide reasonable assurance that transactions are recorded as necessary to permit the preparation of our financial statements in accordance with generally accepted accounting principles; |
● | provide reasonable assurance that receipts and expenditures are made only in accordance with authorizations of our management and board of directors (as appropriate); and |
● | provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on our financial statements. |
Due to its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our CEO, and our CFO, we assessed the effectiveness of our internal control over financial reporting as of December 31, 2023 based on the framework for Internal Control-Integrated Framework set forth by The Committee of Sponsoring Organizations of the Treadway Commission (COSO) (2013).
Based on our assessment and this framework, our management concluded that our internal controls over financial reporting were effective as of December 31, 2023.
(c) Attestation Report of the Registered Public Accounting Firm
This Annual Report on Form 20-F does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting due to an exemption for emerging growth companies provided in the JOBS Act.
(d) Changes in Internal Control over Financial Reporting
During the year ended December 31, 2023, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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ITEM 16. [RESERVED]
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Currently no independent Audit Committee member is an “audit committee financial expert”, as that term is defined by the SEC in its final rules implementing Section 407 of the Sarbanes-Oxley Act of 2002, because, after self-evaluation, our Audit Committee members did not consider themselves, individually, as an “audit committee financial expert”. However, our Audit Committee members and our Board of Directors believe that our Audit Committee members are nonetheless qualified to carry out their duties on the Audit Committee given their experience and other qualifications in financial matters.
ITEM 16B. CODE OF ETHICS
We have adopted a Code of Business Ethics applicable to all of our directors and employees, including our chief executive officer, chief financial officer, controller or principal accounting officer, and other persons performing similar functions, which is a “code of ethics” as defined in Item 16B of Form 20-F promulgated by the SEC. The full text of the Code of Business Ethics is posted on our website at INX.co. Information contained on, or that can be accessed through, our website does not constitute a part of this report and is not incorporated by reference herein.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees billed for professional services rendered by our principal auditors for the years ended December 31, 2023 and 2022, for various types of services and a brief description of the nature of such services. Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, and an independent public accounting firm, was our principal auditor for the year ended December 31, 2023 and 2022. We currently expect Kost Forer Gabbay & Kasierer to serve as our principal auditor for the year ended December 31, 2024.
(U.S. dollars in thousands)
Year Ended December 31, | ||||||||
2023 | 2022 | |||||||
Services Rendered | (U.S. dollars in thousands) | |||||||
Audit services (1) | 490 | 490 | ||||||
Total | 490 | 490 |
(1) | These include professional services rendered by the principal accountant for the audit of the registrant’s annual financial statements, including audited financial statements that were included in registration statements filed as part of our initial public offering. |
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Not applicable.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
Not applicable.
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ITEM 16G. CORPORATE GOVERNANCE
Not applicable.
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
ITEM 16I. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
ITEM 16J. INSIDER TRADING POLICIES
Pursuant to applicable SEC transition guidance, the disclosure required by Item 16J will only be applicable to the Company from the fiscal year ending on December 31, 2024.
ITEM 16K. CYBERSECURITY
We have developed and maintain a cybersecurity risk management program, consisting of cybersecurity policies, procedures, compliance and awareness programs to mitigate risk and to ensure compliance with security, availability and confidentiality trust principles. The cybersecurity process has been integrated into our overall risk management system and process and is managed both internally and through an external cybersecurity vendor. Management is responsible for identifying risks that threaten achievement of the control activities stated in the management’s description of the services organizations systems. Management has implemented a process for identifying relevant risks that could affect the organization’s ability to provide secure and reliable service to its users. The risk assessment occurs annually, or as business needs change, and covers identification of risks that could act against the company’s objectives as well as specific risks related to a compromise to the security of data. See “Item 3.D — Risk Factors—Risks Related to Blockchain Assets— — The open-source structure of blockchain software means that blockchain networks may be susceptible to malicious cyber-attacks or may contain exploitable flaws, which may result in security breaches and the loss or theft of blockchain assets.”
The level of each identified risk is determined by considering the impact of the risk itself and the likelihood of the risk materializing and high scoring risks are actioned upon. Risks are analyzed to determine whether the risk meets company risk acceptance criteria to be accepted or whether a mitigation plan will be applied. Mitigation plans include both the individual or department responsible for the plan and may include budget considerations.
The oversight of cybersecurity threats is undertaken by our Chief Technology Officer, who holds over two decades of experience in information technology and the design and architecture of information systems and is supported by management. Our audit committee is responsible for cybersecurity oversight and monitoring risk. Management informs the audit and investment committee of such risk by committee meetings.
We have not, to our knowledge, experienced any material IT system failures or any material cybersecurity attacks to date. See “Item 3.D — Risk Factors—Risks Related to Blockchain Assets—The open-source structure of blockchain software means that blockchain networks may be susceptible to malicious cyber-attacks or may contain exploitable flaws, which may result in security breaches and the loss or theft of blockchain assets.”
As of the date of this report, we are not aware of any material risks from cybersecurity threats that have materially affected or are reasonably likely to materially affect us, including our business strategy, results of operations or financial condition.
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PART III
ITEM 17. FINANCIAL STATEMENTS
We have elected to provide consolidated financial statements and related information pursuant to Item 18.
ITEM 18. FINANCIAL STATEMENTS
The consolidated audited financial statements and the related notes required by this Item are included in this Annual Report on Form 20-F beginning on page F-1.
ITEM 19. EXHIBITS.
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* | Filed herewith |
# | Management contract or compensatory plan |
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SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this report filed on its behalf.
INX LIMITED | ||
Date: April 18, 2024 | By: | /s/ Shy Datika |
Shy Datika | ||
President and CEO |
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INX LIMITED
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2023
U.S. DOLLARS IN THOUSANDS
INDEX
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Kost Forer Gabbay & Kasierer 144 Menachem Begin Road, Building A Tel-Aviv 6492102, Israel |
Tel: +972-3-6232525 Fax: +972-3-5622555 ey.com |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
INX LIMITED
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of INX Limited (the “Company”) and its subsidiaries as of December 31, 2023 and 2022, the related consolidated statements of comprehensive income (loss), changes in equity and cash flows for each of the three years in the period ended December 31, 2023 (collectively referred to as the “financial statements”), and the related notes. In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with International Financial Reporting Standards, as issued by the International Accounting Standard Board.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
We have served as the Company’s auditor since its incorporation in 2017.
April 18, 2024
F-1
INX LIMITED
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
U.S. Dollars in thousands (except share and per share data)
December 31 | |||||||||||
Note | 2023 | 2022 | |||||||||
Assets | |||||||||||
Current assets | |||||||||||
Cash and cash equivalents | $ | $ | |||||||||
Cash and cash equivalents held in Reserve Fund | 5 | ||||||||||
Short-term investments held in Reserve Fund | 5 | ||||||||||
Short-term investments | 6 | ||||||||||
Digital assets | 7 | ||||||||||
Trade receivables | |||||||||||
Derivative assets | 8 | ||||||||||
Customer funds | 9 | ||||||||||
Prepaid expenses and other receivables | 10 | ||||||||||
Total current assets | |||||||||||
Non-current assets | |||||||||||
Long-term investments held in Reserve Fund | 5 | ||||||||||
Long-term investments | 6 | ||||||||||
Property and equipment, net | 11 | ||||||||||
Intangible assets, net | 12 | ||||||||||
Goodwill | 12 | ||||||||||
Right-of-use-assets, net | 13 | ||||||||||
Total non-current assets | |||||||||||
Total Assets | $ | $ | |||||||||
Liabilities and Equity | |||||||||||
Current liabilities | |||||||||||
Accounts payable and accrued expenses | $ | $ | |||||||||
Funds due to customers | 9 | ||||||||||
Deferred revenue | |||||||||||
Lease liability | 13 | ||||||||||
INX Token liability | 14 | ||||||||||
INX Token warrant liability | 15 | ||||||||||
Total current liabilities | |||||||||||
Non-current liabilities | |||||||||||
Provision for loss on investment in associate | 5 | ||||||||||
Lease liability | 13 | ||||||||||
Total non-current liabilities | |||||||||||
Equity | 18 | ||||||||||
Ordinary shares of GBP Authorized: | |||||||||||
Share premium | |||||||||||
Contribution to equity by controlling shareholder | |||||||||||
Other comprehensive loss | ( | ) | ( | ) | |||||||
Accumulated deficit | ( | ) | ( | ) | |||||||
Total Equity | |||||||||||
Total Liabilities and Equity | $ | $ |
The accompanying notes are an integral part of the consolidated financial statements.
F-2
INX LIMITED
CONSOLIDATED STATEMENTS OF PROFIT AND LOSS AND COMPREHENSIVE INCOME (LOSS)
U.S. Dollars in thousands (except share and per share data)
Year ended December 31 | |||||||||||||||
Note | 2023 | 2022 | 2021 | ||||||||||||
Revenue | |||||||||||||||
Transaction and brokerage fees | 22 | $ | $ | $ | |||||||||||
Service revenue | 22 | ||||||||||||||
Cost of services | ( | ) | |||||||||||||
Gross profit on service revenue | |||||||||||||||
Sales of digital assets | 22 | ||||||||||||||
Cost of digital assets | ( | ) | ( | ) | |||||||||||
Change in revaluation of digital assets | ( | ) | |||||||||||||
Net gain (loss) on digital assets | ( | ) | |||||||||||||
Total income | |||||||||||||||
Operating (expenses) income | |||||||||||||||
Research and development | ( | ) | ( | ) | ( | ) | |||||||||
Sales and marketing | ( | ) | ( | ) | ( | ) | |||||||||
General and administrative | ( | ) | ( | ) | ( | ) | |||||||||
Other expense | 5 | ( | ) | ||||||||||||
Change in fair value of INX Token warrant liability | ( | ) | |||||||||||||
Total operating expenses | ( | ) | ( | ) | ( | ) | |||||||||
Loss from operations | ( | ) | ( | ) | ( | ) | |||||||||
Unrealized gain (loss) on INX Tokens issued | 14 | ( | ) | ||||||||||||
Finance income | |||||||||||||||
Financial expenses | ( | ) | ( | ) | ( | ) | |||||||||
Loss on investment in associate | 6 | ( | ) | ||||||||||||
Income (loss) before tax | ( | ) | ( | ) | |||||||||||
Tax expenses | 24 | ( | ) | ( | ) | ( | ) | ||||||||
Net income (loss) | $ | ( | ) | $ | $ | ( | ) | ||||||||
Amounts that will be or that have been reclassified to profit or loss when specific conditions are met: | |||||||||||||||
Realized loss on securities at fair value through other comprehensive income (loss) reclassification adjustment into net income (loss) | |||||||||||||||
Unrealized gain (loss) on securities at fair value through other comprehensive income (loss) | ( | ) | |||||||||||||
Adjustments arising from translating financial statements from functional currency to presentation currency | ( | ) | ( | ) | |||||||||||
Total other comprehensive income (loss) | ( | ) | |||||||||||||
Total comprehensive income (loss) | $ | ( | ) | $ | $ | ( | ) | ||||||||
20 | $ | ( | ) | $ | $ | ( | ) | ||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-3
INX LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
U.S. Dollars in thousands (except share and per share data)
Note | Ordinary Shares |
Par Value |
Share Premium |
Conversion of Loans |
Contribution to Equity by Controlling Shareholder |
Accumulated Other Comprehensive Income (Loss) |
Accumulated Deficit |
Total Equity |
||||||||||||||||||||||||||
Balance as of December 31, 2020 | $ | |
$ | ( |
) | $ | $ | ( |
) | $ | ( |
) | ||||||||||||||||||||||
Net loss | - | ( |
) | ( |
) | |||||||||||||||||||||||||||||
Contribution to equity by a controlling shareholder | 4 | - | ||||||||||||||||||||||||||||||||
Collection of a receivable | - | |||||||||||||||||||||||||||||||||
Conversion of convertible loan | 17 | ( |
) | |||||||||||||||||||||||||||||||
Conversion of SAFE | 18 | |||||||||||||||||||||||||||||||||
Exercise of options under SAFE agreements | 18 | |||||||||||||||||||||||||||||||||
Share-based compensation | 19 | - | ||||||||||||||||||||||||||||||||
Foreign currency translation | - | |||||||||||||||||||||||||||||||||
Balance as of December 31, 2021 | $ | $ | $ | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||||||||||
Net income | - | |||||||||||||||||||||||||||||||||
Realized loss on available-for sale securities reclassification adjustment into net income (loss) | - | |||||||||||||||||||||||||||||||||
Unrealized loss on available-for-sale securities, net of realized gain (loss) reclassification | - | ( |
) | ( |
) | |||||||||||||||||||||||||||||
Proceeds from private placement, net of issuance costs | 18 | |||||||||||||||||||||||||||||||||
Surrender and cancellation of private placement warrants | 18 | - | ||||||||||||||||||||||||||||||||
Share-based compensation | 19 | - | ||||||||||||||||||||||||||||||||
Foreign currency translation | - | ( |
) | ( |
) | |||||||||||||||||||||||||||||
Balance as of December 31, 2022 | $ | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ |
The accompanying notes are an integral part of the consolidated financial statements.
F-4
INX LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
U.S. Dollars in thousands (except share and per share data)
Note | Ordinary Shares |
Par Value |
Share Premium |
Contribution to equity by controlling shareholder |
Accumulated other comprehensive income (loss) |
Accumulated deficit |
Total equity |
|||||||||||||||||||||||
Balance as of December 31, 2022 | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||||
Net loss | ( |
) | ( |
) | ||||||||||||||||||||||||||
Realized loss on available-for sale securities reclassification adjustment into net income (loss) | - | |||||||||||||||||||||||||||||
Unrealized gain on available-for-sale securities, net of realized gain (loss) reclassification | - | |||||||||||||||||||||||||||||
Share-based compensation | 19 | - | ||||||||||||||||||||||||||||
Foreign currency translation | - | ( |
) | ( |
) | |||||||||||||||||||||||||
Balance as of December 31, 2023 | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ |
The accompanying notes are an integral part of the consolidated financial statements.
F-5
INX LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. Dollars in thousands
Year ended December 31 | ||||||||||||
2023 | 2022 | 2021 | ||||||||||
Net cash flows from operating activities: | ||||||||||||
Net income (loss) for the period | $ | ( | ) | $ | $ | ( | ) | |||||
Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||||||
Share-based payment | ||||||||||||
Realized loss on investments, net | ||||||||||||
Financial income, net | ( | ) | ( | ) | ( | ) | ||||||
Income tax expense | ||||||||||||
Depreciation of equipment and right-of-use-assets | ||||||||||||
Amortization of intangible assets | ||||||||||||
Changes in accrued interest and amortization of premium (discount) on investments | ( | ) | ||||||||||
INX Token-based compensation | ( | ) | ||||||||||
Unrealized gain (loss) on INX Tokens issued | ( | ) | ( | ) | ||||||||
Loss on investment in associate | ||||||||||||
Other expense | ||||||||||||
Net loss on office space sublease agreement | ||||||||||||
Impairment loss on digital assets | ||||||||||||
Revaluation of lease liability and right-of-use assets | ( | ) | ||||||||||
Changes in operating assets and liabilities: | ||||||||||||
Decrease (increase) in digital assets, net | ( | ) | ||||||||||
Decrease )increase) in trade receivables | ( | ) | ||||||||||
Increase in derivative assets | ( | ) | ( | ) | ||||||||
Decrease (increase) in prepaid expenses and receivables from related parties | ( | ) | ( | ) | ||||||||
Increase from revaluation of contingent liability | ( | ) | ||||||||||
Increase (decrease) in accounts payable and accrued expenses | ( | ) | ||||||||||
Increase in deferred revenue | ||||||||||||
Cash paid and received during the year for: | ||||||||||||
Interest received | ||||||||||||
Taxes received (paid), net | ( | ) | ( | ) | ||||||||
Net cash used in operating activities | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Net cash flows from investing activities: | ||||||||||||
Proceeds from INX Token offering | ||||||||||||
Increase in digital assets | ( | ) | ||||||||||
Proceeds received under office space sublease agreement | ||||||||||||
Purchase of equipment | ( | ) | ( | ) | ( | ) | ||||||
Investment in associate | ( | ) | ||||||||||
Purchase of investments | ( | ) | ( | ) | ( | ) | ||||||
Proceeds from sales and maturities of investments | ||||||||||||
Increase in loan receivable from related parties | ( | ) | ( | ) | ||||||||
Net cash used in business combinations | ( | ) | ||||||||||
Net cash provided by (used in) investing activities | $ | $ | ( | ) | $ |
The accompanying notes are an integral part of the consolidated financial statements.
F-6
INX LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. Dollars in thousands
Year ended December 31 | ||||||||||||
2023 | 2022 | 2021 | ||||||||||
Net cash flows from financing activities: | ||||||||||||
Proceeds from exercise of INX Token warrants | $ | $ | $ | |||||||||
Proceeds from issuance of INX tokens, net | ||||||||||||
Proceeds from exercise of option under SAFE agreements | ||||||||||||
Proceeds from private placements, net of issuance cost | ||||||||||||
Repayment of contingent consideration liability | ( | ) | ||||||||||
Repayment of finance lease liabilities | ( | ) | ( | ) | ( | ) | ||||||
Net cash provided by (used in) financing activities | $ | ( | ) | $ | $ | |||||||
Change in cash and cash equivalents | ( | ) | ||||||||||
Cash and cash equivalents at beginning of year | ||||||||||||
Cash and cash equivalents at end of year | $ | $ | $ |
At December 31, 2023, 2022 and 2021, cash and cash equivalents include the following:
2023 | 2022 | 2021 | ||||||||||
Cash and cash equivalents | $ | $ | $ | |||||||||
Cash and cash equivalents held in Reserve Fund | ||||||||||||
Total cash and cash equivalents | $ | $ | $ |
Supplemental disclosure of cash flow information and non-cash investing and financing activities:
2023 | 2022 | 2021 | ||||||||||
Right of-use-asset recognized with corresponding lease liability | $ | $ | $ | |||||||||
Repayment of loan receivable from related parties | $ | $ | $ | |||||||||
Contribution to equity upon cancellation of private placement warrants | $ | $ | $ | |||||||||
Premium on exercise of shares by related party | $ | $ | $ | |||||||||
Contribution to equity by controlling shareholder | $ | $ | $ | |||||||||
Conversion of convertible loan | $ | $ | $ | |||||||||
INX Token Offering proceeds received in digital assets | $ | $ | $ | |||||||||
Proceeds from exercise of share option | $ | $ | $ |
The accompanying notes are an integral part of the consolidated financial statements.
F-7
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 1: NATURE OF OPERATIONS
INX Limited (the “Company” or “INX”) was incorporated under the Gibraltar Companies Act on November 27, 2017 with registered office at 57/63 Line Wall Road, Gibraltar GX11 1AA, Gibraltar. The Company is wholly owned by The INX Digital Company Inc., a company incorporated under the provincial Business Corporations Act in British Columbia, Canada, with publicly listed shares on Cboe Canada under the symbol INXD and The OTCQB Venture Market under the symbol INXDF.
The consolidated financial statements of the Company as of December 31, 2023 and 2022 and for each of the three years in the period ended December 31, 2023, were authorized for issuance in accordance with a resolution of the board of directors on April __, 2024.
Nature of Operations
The Company, through its subsidiaries, is engaged in the operation and ongoing development of comprehensive infrastructure and regulated solutions for trading and investing in blockchain assets as well as utilizing digital assets as a form of payment. The Company operates INX.One, a single point of entry platform that offers primary listings of regulated security tokens and trading of security tokens and digital assets in the secondary market.
The Company charges fees at a transaction level. The transaction fee is calculated based on volume and the value of the transaction. The transaction fee is collected from customers at the time the transaction is executed.
The Company, through one of the subsidiaries, also facilitates financial transactions between global banks and offers a full range of brokerage services to several leading banking institutions worldwide, mainly in foreign exchange and interest rate derivatives.
The Company operates in the following reportable segments:
● | Digital asset segment - development and operation of integrated, regulated solutions for trading of blockchain assets, and providing services for products utilizing blockchain technology. |
● | Brokerage segment - facilitates financial transactions between financial institutions and offers a full range of brokerage services to banks worldwide. |
INX Token
As part of the Company’s blockchain ecosystem,
INX created the INX Token (the “INX Token”), and on August 20, 2020, the U.S Securities and Exchange Commission (the “SEC”)
acknowledged the effectiveness of the F-1 Registration Statement that was filed by INX with the SEC and declared the effectiveness of
the initial public offering of INX Tokens (“The INX Token Offering” or “the Offering”) pursuant to which INX offered
up to
The INX Token was offered to the public on August 24, 2020, and closed on April 22, 2021, when the Offering was completed.
In July 2021, INX listed the INX Token for trading on the trading platform for “digital securities,” i.e., digital assets that constitute securities under the applicable law, operated through INX’s subsidiary, INX Securities, LLC (formerly the “INX Securities Trading Platform”, rebranded as INX.One in 2022).
INX has not allocated for issuance and does not
intend to issue
F-8
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 1: NATURE OF OPERATIONS (Cont.)
Following
an amendment to the INX Token rights which was approved by the Board of Directors of the Company on May 17, 2019 (the “Token Rights
Amendment”), the holders of INX Tokens (other than INX) are entitled to receive a pro rata distribution of
Holders of INX Tokens are also entitled, at a
minimum, to a
Securities Exchange Agreement
On January 10, 2022, the Company completed the definite securities exchange agreement (the “Transaction”) with The INX Digital Company, Inc. (formerly - Valdy Investments Ltd.) (the “Parent Company”), whereby the Parent Company acquired all issued and outstanding securities of INX. The Transaction resulted in a reverse takeover transaction whereby pre-transaction shareholders of INX became majority shareholders of the Parent Company and INX became a wholly owned subsidiary of the Parent Company. The Parent Company continues the business of INX.
Organizational Structure
The Company operates through the following wholly owned subsidiaries:
● | INX Digital, Inc. (“INXD”), a Delaware corporation, is registered in 46 US states plus Washington D.C. and Puerto Rico as a money transmitter to operate a trading platform for digital assets. INXD launched a digital asset trading platform on April 29, 2021, which was developed by INX and is operated by INXD. Select digital assets are supported for trading on the INXD platform, such as (identified by symbol): AAVE, AVAX, BTC, CRV, ETH, FTM, LTC, UNI, USDC and ZEC. |
● | INX Securities, LLC (Previously named: Openfinance Securities, LLC) (“INXS”), a Pennsylvania limited liability company. INXS is recognized in the US as a SEC registered Broker Dealer and is an SEC registered Alternative Trading System (“ATS”). INXS was purchased by INX on May 10, 2021, as part of the Asset Purchase Agreement with Openfinance Holdings, Inc. and certain subsidiaries of Openfinance Holdings, Inc., dated January 12, 2021. After closing on the acquisition, the company’s name was changed from Openfinance Securities, LLC to INX Securities, LLC. INXS offers investment in primary offering and secondary market trading of security tokens previously registered with the SEC or offered under an applicable SEC exemption. |
● | I.L.S. Brokers Ltd. (“ILSB”), a company incorporated under the laws of the State of Israel, was purchased by INX, pursuant to the share purchase agreement between INX and the shareholders of ILSB, dated June 9, 2021, for the purchase of all of the issued outstanding shares of ILSB. ILSB is a multinational brokerage house, established in 2001, that facilitates financial transactions between banks and offers a full range of brokerage services to several leading banks worldwide. ILSB’s main field of operation is foreign exchange and interest rate derivatives services. ILSB’s activities are regulated by the Israeli Capital Market Authority, Insurance and Savings and are registered with the U.S. National Futures Association (“NFA”) (authorized by the U.S. Commodity Futures Trading Commission (“CFTC”)). ILSB holds the following license: Provider of Financial Services in Israel and an introducing broker (IB) license from NFA (CFTC) in the US. |
● | Midgard Technologies Ltd. (“Midgard”) is a company incorporated under the laws of the State of Israel. Midgard had served as the research and development arm of INX since November 1, 2020, and was acquired on April 1, 2021. Midgard provides software development, marketing and operations services for the group and holds certain intellectual property. |
F-9
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 1: NATURE OF OPERATIONS (Cont.)
● | INX Transfer Agent LLC (previously named TokenSoft LLC) (“INX Transfer Agent”), is a Delaware limited liability company. INX Transfer Agent is a transfer agent registered with the SEC and was acquired by INX pursuant to a purchase agreement dated December 28, 2021 for a nominal consideration. |
● | INX Solutions Limited (“INX Solutions”) was incorporated by INX in Gibraltar as a private company limited by shares. INX Solutions provided liquidity and risk management services to the group through the end of 2023. |
The following subsidiaries are currently dormant:
● | INX Digital Assets UK Limited (Previously named: ILSB UK Limited) (“INX UK”), a company incorporated under the laws of England and Wales. INX acquired all issued and outstanding shares of INX UK on July 13, 2021, from Mr. James Crossley, former board member of INX, in consideration for an inconsequential amount of cash. |
● | INX EU Ltd. (“INX EU”), a company incorporated under the laws of Cyprus. |
● | INX Services, Inc., a Delaware corporation. |
Capital management
These consolidated financial statements have been
prepared on a going concern basis, which contemplates that the Company will continue in operation for the foreseeable future and be able
to realize its assets and discharge its liabilities and commitments in the normal course of business. As of December 31, 2023, the Company
had an accumulated deficit of $
NOTE 2: MATERIAL ACCOUNTING POLICIES
The following accounting policies have been applied consistently in these consolidated financial statements for the periods presented, unless otherwise stated.
a. | Basis of presentation of the financial statements: |
These consolidated financial statements have been prepared in accordance with International Accounting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and interpretations of the International Reporting Interpretations Committee (“IFRIC”).
The consolidated financial statements have been prepared on a historical cost basis, except for certain financial instruments which are measured at fair value and digital assets characterized as inventory which are measured at fair value less cost to sell recognized through profit or loss.
b. | Consolidated financial statements: |
The consolidated financial statements comprise the financial statements of the Company and companies that are controlled by the Company (subsidiaries). Control is achieved when the Company is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Potential voting rights are considered when assessing whether an entity has control. The consolidation of the financial statements commences on the date on which control is obtained and ends when such control ceases.
F-10
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 2: MATERIAL ACCOUNTING POLICIES (Con.)
The financial statements of the Company and of the subsidiaries are prepared as of the same dates and periods. The consolidated financial statements are prepared using uniform accounting policies by all companies in the group. Significant intra group balances and transactions and gains or losses resulting from intragroup transactions are eliminated in full in the consolidated financial statements.
c. | Functional and presentation currencies: |
1. | Functional currency and presentation currency: |
The consolidated financial statements are presented in U.S. Dollars.
The Company determines the functional currency of each entity through an analysis of the consideration factors identified in International Accounting Standard (“IAS”) 21.
Assets, including fair value adjustments upon acquisition, and liabilities of an investee which is a foreign operation, are translated at the closing rate at each reporting date. Profit or loss items are translated at average exchange rates for all periods presented. The resulting translation differences are recognized in other comprehensive income (loss).
2. | Transactions, assets and liabilities in foreign currency: |
Transactions denominated in foreign currency are recorded upon initial recognition at the exchange rate at the date of the transaction. After initial recognition, monetary assets and liabilities denominated in foreign currency are translated at each reporting date into the functional currency at the exchange rate at that date. Exchange rate differences, other than those capitalized to qualifying assets or accounted for as hedging transactions in equity, are recognized in profit or loss. Non-monetary assets and liabilities denominated in foreign currency and measured at cost are translated at the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currency and measured at fair value are translated into the functional currency using the exchange rate prevailing at the date when the fair value was determined.
3. | Index-linked monetary items: |
Monetary assets and liabilities linked to the changes in the Israeli Consumer Price Index (“Israeli CPI”) are adjusted at the relevant index at each reporting date according to the terms of the agreement.
d. | Use of material estimates and judgements: |
The preparation of the consolidated financial statements in accordance with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. Actual results may differ from those estimates.
Key assumptions made in the consolidated financial statements concerning uncertainties at the reporting date that may result in a material adjustment to the carrying amount of the INX Token liability and INX Token warrant liability within the next financial year are discussed in Note 14 and Note 15.
Many aspects of the digital currency and blockchain industry have not yet been addressed by the current IFRS guidance. The Company is required to make assumptions and judgments as to its accounting policies and the application thereof, which is disclosed in the notes to the consolidated financial statements. If specific guidance is enacted by the IASB in the future, the impact may result in changes to the Company’s profit or loss and financial position as currently presented.
F-11
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 2: MATERIAL ACCOUNTING POLICIES (Cont.)
Determining the fair value of share-based payment transactions
The fair value of share-based payment transactions is determined upon initial recognition by an acceptable option pricing model. The inputs to the model include share price, exercise price and assumptions regarding expected volatility, expected life of share option and expected dividend yield.
Discount rate for a lease liability
When the Company is unable to readily determine the discount rate implicit in a lease in order to measure the lease liability, the Company uses an incremental borrowing rate. That rate represents the rate of interest that the Company would have to pay to borrow over a similar term and with similar security, the funds necessary to obtain an asset of similar economic environment. When there are no financing transactions that can serve as a basis, the Company determines the incremental borrowing rate based on its credit risk, the lease term and other economic variables deriving from the lease contract’s conditions and restrictions. In certain situations, the Company is assisted by an external valuation expert in determining the incremental borrowing rate.
Impairment of goodwill
The Company reviews goodwill for impairment once a year, on December 31, or more frequently if events or changes in circumstances indicate that there is an impairment. This requires management to make an estimate of the projected future cash flows from the continuing use of the cash-generating unit (or a group of cash-generating units) to which the goodwill is allocated and also to choose a suitable discount rate for those cash flows.
Deferred tax assets
Deferred tax assets are recognized for unused carryforward tax losses and deductible temporary differences to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the timing and level of future taxable profits, its source and the tax planning strategy.
Determining the fair value of an unquoted financial liability
The fair value of unquoted warrant liability in Level 3 of the fair value hierarchy is determined using the Black and Scholes option pricing model. The inputs to the model include share price, exercise price and assumptions regarding expected volatility, expected life of and expected dividend yield.
e. | Financial instruments: |
1. | Financial assets, including short-term and long-term investments, and derivative assets, are initially recognized at fair value plus directly attributable transaction costs, except for financial assets measured at fair value through profit or loss in respect of which transaction costs are recorded in profit or loss. |
The Company classifies and measures debt instruments in the financial statements based on the following criteria:
- | The Company’s business model for managing financial assets; and |
- | The contractual cash flow terms of the financial asset. |
a) | Debt instruments are measured at fair value through other comprehensive income when: |
The Company’s business model is to hold the financial assets in order to both collect their contractual cash flows and to sell the financial assets, and the contractual terms of the financial assets give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
F-12
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 2: MATERIAL ACCOUNTING POLICIES (Cont.)
After initial recognition, instruments in this category are measured at fair value. Gains or losses from fair value adjustments, excluding interest and exchange rate differences, are recognized in other comprehensive income.
b) | Debt instruments are measured at fair value through profit or loss when: |
A financial asset which is a debt instrument does not meet the criteria for measurement at amortized cost or at fair value through other comprehensive income. After initial recognition, the financial asset is measured at fair value and gains or losses from fair value adjustments are recognized in profit or loss.
c) | Derivative instruments |
As part of its risk management activities, the Company held positions in derivatives such as digital currency forwards. A digital currency forward is an exchange traded contract which represents a legal agreement to either buy or sell a referenced digital asset at a predetermined price at some time in the future. Digital assets forwards utilized by the Company settle in a stable coin. Derivative assets are carried at fair value and any realized and unrealized gains (losses) are recognized through profit and loss.
2. | Loans and receivables are held to collect contractual cash flows and give rise to cash flows representing solely payments of principal and interest. These are measured subsequent to initial recognition at amortized cost. |
Impairment of financial assets:
At the end of each reporting period, the Company evaluates the loss allowance for financial debt instruments which are not measured at fair value through profit or loss.
The Company has short-term financial assets such as trade receivables for which the Company applies the simplified approach in IFRS 9 and measures the loss allowance in an amount equal to the expected lifetime credit losses.
With regards to trade receivables, the Company grants its customers interest-free credit for periods of 30-90 days. As of December 31, 2023 and 2022, there were no material past-due accounts and no allowance for doubtful accounts was recorded.
3. | Derecognition of financial assets: |
A financial asset is derecognized only when:
a) | Contractual rights to the cash flows from the financial asset have expired; or |
b) | The Company has transferred substantially all risks and rewards deriving from the contractual rights to receive cash flows from the financial asset or has neither transferred nor retained substantially all risks and rewards of the asset, but has transferred control of the asset; or |
c) | The Company has retained its contractual rights to receive cash flows from the financial asset but has assumed a contractual obligation to pay the cash flows in full without material delay to a third party. |
4. | Financial liabilities: |
Financial liabilities are initially recognized at fair value. After initial recognition, the accounting treatment of financial liabilities is based on their classification as follows:
a) | Financial liabilities at amortized cost: |
After the initial recognition, loans and other liabilities are measured based on their terms at amortized cost less directly attributable transaction costs using the effective interest method.
F-13
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 2: MATERIAL ACCOUNTING POLICIES (Cont.)
b) | Financial liabilities at fair value through profit or loss: |
These liabilities include financial liabilities held for trading (including the INX Token warrant liability) and financial liabilities designated upon initial recognition as at fair value through profit or loss. Changes in the fair value of liabilities held for trading are recognized in profit or loss in financial expenses. Based on the terms of the INX Token, as described in Note 1, the INX Token is a hybrid financial instrument. The host instrument is a financial liability due to the right of the INX Token holder to use the INX Token to pay transactions fees on the INX.One Trading Platform. The INX Token is considered a puttable instrument which is a financial liability in accordance with IAS 32, Financial Instruments: Presentation.
INX’s obligation to make a pro rata distribution annually to the INX Token holders from INX’s Adjusted Operating Cash Flow is an embedded derivative. The Company views INX’s operating cash flows as a financial variable, and therefore, the embedded derivative requires bifurcation pursuant to IFRS 9. The Company elected, in accordance with IFRS 9, to designate the entire financial liability (including the embedded derivative) at fair value through profit and loss. Accordingly, the INX Token liability and the INX Token warrant liability are remeasured to fair value at the end of each reporting period.
The change in the fair value of the INX Token liability that is attributable to changes in credit risk, excluding those changes in credit risk attributable to the embedded derivative, to the extent there are any, would be presented in other comprehensive income. The remaining amount of the change in the fair value of the INX Token liability would be presented in profit or loss. At December 31, 2023, the change in fair value of the INX Token liability is included in profit or loss.
Should the INX Token be used to pay for services provided by INX, revenue would be recognized and the respective portion of the INX Token liability would be derecognized. Additionally, the fair value of INX Tokens issued in consideration for services provided to the Company would be recognized as compensation expense when services are provided.
5. | Offsetting financial instruments: |
Financial assets and financial liabilities are offset, and the net amount is presented in the statement of financial position if there is a legally enforceable right to set off the recognized amounts and there is an intention either to settle on a net basis or to realize the asset and settle the liability simultaneously. The right of set-off must be legally enforceable not only during the ordinary course of business of the parties to the contract but also in the event of bankruptcy or insolvency of one of the parties.
6. | Compound financial instruments: |
Convertible debt which contains both an equity component and a liability component are separated into two components. This separation is performed by first determining the liability component based on the fair value of an equivalent non-convertible liability. The value of the conversion component is determined to be the residual amount. Directly attributable transaction costs are apportioned between the equity component and the liability component based on the allocation of proceeds to the equity and liability components.
7. | Simple Agreement for Future Equity (“SAFE”): |
INX has entered into equity funding agreements (SAFEs) pursuant to which funds received by INX from investors have been automatically converted into the same class of share capital of INX that were issued in a qualifying financing, as defined in the SAFEs. INX is not obligated to complete a qualifying financing or to approve the issuance of shares or dilutive securities within the term specified in the SAFE that would result in the issuance of a variable number of the INX’s equity instruments. Accordingly, as the SAFEs are a non-derivative for which the conversion price into the Company’s equity instruments is fixed at the end of its term, the consideration received from investors pursuant to the SAFEs is classified as equity. As of December 31, 2023, all INX SAFE’s have been converted into ordinary shares.
F-14
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 2: MATERIAL ACCOUNTING POLICIES (Cont.)
f. | 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. Fair value measurement is based on the assumption that the transaction will take place in the asset’s or the liability’s principal market, or in the absence of a principal market, in the most advantageous market.
The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.
Fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.
The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.
All assets and liabilities measured at fair value or for which fair value is disclosed are categorized into levels within the fair value hierarchy based on the lowest level input that is significant to the entire fair value measurement.
The Company classifies the bases used to measure certain assets and liabilities at their fair value. Assets and liabilities carried or measured at fair value have been classified into three levels based upon a fair value hierarchy that reflects the significance of the inputs used in making the measurements.
The levels are as follows:
Level 1: | Quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date; |
Level 2: | Significant inputs other than within Level 1 that are observable for the asset or liability, either directly (i.e.: as prices) or indirectly (i.e.: derived from prices); |
Level 3: | Inputs for the assets or liabilities that are not based on observable market data and require management assumptions or inputs from unobservable markets. |
For details of the fair value of the INX Token liability, see Note 14. For the fair value of INX Token warrant liability, see Note 15. The fair values of current financial assets and financial liabilities, other than the INX Token and INX Token warrant liability, approximate their carrying amounts due to the short-term maturity of these instruments.
g. | Investments: |
Investments, other than the investment in an associate, are accounted for as financial assets, which are initially recognized at fair value and subsequently measured at fair value through other comprehensive income (loss).
The Company’s investment in an associate represents an ownership share in an entity in which the Company has significant influence and that is accounted for under the equity method in accordance with IAS 28 Investments in Associates. Under the equity method, the investment is presented at cost with the addition of post-acquisition changes in the Company’s share of net assets, including other comprehensive income of the associate. Gains and losses resulting from transactions between the Company and the associate are eliminated to the extent of the interest in the associate.
F-15
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 2: MATERIAL ACCOUNTING POLICIES (Cont.)
Losses of an associate are recognized by the Company to the extent of its investment in the associate plus any losses that the Company may incur as a result of its legal or constructive obligations on behalf of the associate. As of December 31, 2023, the Company’s share of losses incurred by the associate exceeds its investment amount and is reflected in the profit or loss as loss on investment in associate. Loss in excess of the Company’s investment amount is recognized as a non-current liability.
The equity method is applied until the loss of significant influence or the classification of the investment as held for sale. On the date of loss of significant influence, the Company would measure any remaining investment in the associate at fair value and recognize in profit or loss the difference between the fair value of any remaining investment plus any proceeds from the sale of the investment in the associate and the carrying amount of the investment on that date.
h. | Digital assets: |
Digital assets are measured at cost on the initial recognition.
Digital assets characterized as inventory (current assets):
The Company has assessed that it acts in a capacity as a commodity broker trader as defined in IAS 2, Inventories, in characterizing its holdings of digital assets as inventory. Such digital assets held by the Company are principally acquired for the purpose of selling in the near future and generating a profit from fluctuations in price or broker-traders’ margin, therefore, they are accounted for as inventory, and changes in fair value (less cost to sell) are recognized in profit or loss.
Digital assets characterized as intangible assets (non-current assets):
Digital assets not characterized as
inventory are classified as indefinite life intangible assets and are tested for impairment annually or whenever there is an indication
that the intangible asset may be impaired. An impairment loss is recognized if the carrying amount exceeds its fair value less cost of
sale. The Company recorded impairment of digital assets in the amount of $
The fair value of digital assets is based on quoted prices in the principal market as of 12:00 AM UTC.
i. | Customer funds and funds due to customers: |
Customer funds represent cash and digital assets that are held for the exclusive benefit of customers. The Company safeguards these assets on behalf of its customers and is subject to security risks for loss, theft or misuse. The Company restricts the use of the assets underlying the customer funds to meet regulatory requirements and classifies them as current based on their purpose and availability to fulfill its direct obligation to customers. Due to the Company’s custodial obligation to safeguard customer assets, consistent with the SEC Staff Accounting Bulletin No. 121 guidance, the Company recognizes a liability to reflect its obligation to safeguard assets held for its customers and the corresponding customer assets, measured at the fair value upon the initial recognition and subsequently at each reporting period.
j. | Intangible assets: |
Intangible assets acquired in a business combination are measured at fair value at the acquisition date.
Intangible assets with a finite useful life are amortized on a straight-line basis over their useful life and reviewed for impairment whenever there is an indication that the asset may be impaired. The amortization period and the amortization method for an intangible asset are reviewed at least at each year-end.
Intangible assets with indefinite useful lives are not systematically amortized and are tested for impairment annually or whenever there is an indication that the intangible asset may be impaired. The useful life of these assets is reviewed annually to determine whether their indefinite life assessment continues to be supportable. If the events and circumstances do not continue to support the assessment, the change in the useful life assessment from indefinite to finite is accounted for prospectively as a change in the accounting estimate and on that date the asset is tested for impairment. Commencing from that date, the asset is amortized systematically over its useful life.
F-16
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 2: MATERIAL ACCOUNTING POLICIES (Cont.)
k. | Business combinations and goodwill: |
Business combinations are accounted for by applying the acquisition method. The cost of the acquisition is measured at the fair value of the consideration transferred on the acquisition date with the addition of non-controlling interests in the acquiree. In each business combination, the Company chooses whether to measure the non-controlling interests in the acquiree based on their fair value on the acquisition date or at their proportionate share in the fair value of the acquiree’s net identifiable assets. Direct acquisition costs are recorded in the statement of comprehensive income as incurred. Contingent consideration is recognized at fair value on the acquisition date and classified as a financial asset or liability in accordance with IAS 39. Subsequent changes in the fair value of the contingent consideration are recognized in profit or loss.
Goodwill is initially measured at cost which represents the excess of the acquisition consideration and the amount of non-controlling interests over the net identifiable assets acquired and liabilities assumed. If the resulting amount is negative, the acquirer recognizes the resulting gain on the acquisition date.
l. | Impairment of non-financial assets: |
The Company evaluates the need to record an impairment of non-financial assets whenever events or changes in circumstances indicate that the carrying amount is not recoverable. If the carrying amount of non-financial assets exceeds their recoverable amount, the assets are reduced to their recoverable amount. The recoverable amount is the higher of fair value less costs of sale and value in use. In measuring value in use, the expected future cash flows are discounted using a pre-tax discount rate that reflects the risks specific to the asset. The recoverable amount of an asset that does not generate independent cash flows is allocated to the cash-generating unit to which the asset belongs. Impairment losses are recognized in profit or loss.
An impairment loss of an asset, other than goodwill, is reversed only if there have been changes in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized. Reversal of an impairment loss, as above, shall not be increased above the lower of the carrying amount that would have been determined (net of depreciation or amortization) had no impairment loss been recognized for the asset in prior years and its recoverable amount. The reversal of impairment loss of an asset presented at cost is recognized in profit or loss.
The following criteria are applied in assessing impairment of these specific assets:
1. | Goodwill: |
The Company reviews goodwill for impairment once a year, on December 31, or more frequently if events or changes in circumstances indicate that there is an impairment.
Goodwill is tested for impairment by assessing the recoverable amount of the cash-generating unit (or group of cash-generating units) to which the goodwill has been allocated. An impairment loss is recognized if the recoverable amount of the cash-generating unit (or group of cash-generating units) to which goodwill has been allocated is less than the carrying amount of the cash-generating unit (or group of cash-generating units). Any impairment loss is allocated first to goodwill. Impairment losses recognized on goodwill cannot be reversed in subsequent periods.
2. | Intangible assets with an indefinite useful life that have not yet been systematically amortized: |
The impairment test is performed annually, on December 31, or more frequently if events or changes in circumstances indicate that there is an impairment (see Note 12e).
F-17
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 2: MATERIAL ACCOUNTING POLICIES (Cont.)
m. | Leases: |
The Company accounts for a contract as a lease when the contract terms convey the right to control the use of an identified asset for a period of time in exchange for consideration.
The Company as a lessee:
For leases in which the Company is the lessee, the Company recognizes on the commencement date of the lease a right-of-use asset and a lease liability, excluding leases whose term is up to 12 months and leases for which the underlying asset is of low value. For these excluded leases, the Company has elected to recognize the lease payments as an expense in profit or loss on a straight-line basis over the lease term.
In measuring the lease liability, the Company has elected to apply the practical expedient in the Standard and does not separate the lease components from the non-lease components (such as management and maintenance services, etc.) included in a single contract. On the commencement date, the lease liability includes all unpaid lease payments discounted at the interest rate implicit in the lease, if that rate can be readily determined, or otherwise using the Company’s incremental borrowing rate. After the commencement date, the Company measures the lease liability using the effective interest rate method.
On the commencement date, the right-of-use asset is recognized in an amount equal to the lease liability plus lease payments already made on or before the commencement date and initial direct costs incurred. The right-of-use asset is measured applying the cost model and depreciated over the shorter of its useful life and the lease term.
The Company tests for impairment of the right-of-use asset whenever there are indications of impairment pursuant to the provisions of IAS 36.
n. | Revenue recognition: |
The Company determines revenue recognition from contracts with customers through the following steps:
● | Identification of the contract with the customer; |
● | Identification of performance obligations in the contract; |
● | Determination of transaction price; |
● | Allocation of the transaction price to the performance obligations in the contract; and |
● | Recognition of the revenue when, or as, the Company satisfies a performance obligation. |
In determining the amount of revenue from contracts with customers, the Company evaluates whether it is a principal or an agent in the arrangement. The Company is a principal when the Company controls the promised goods or services before transferring them to the customer. In these circumstances, the Company recognizes revenue for the gross amount of the consideration. When the Company is an agent, it recognizes revenue for the net amount of the consideration, after deducting the amount due to the principal.
Transaction fees revenue includes revenue from transaction and trading fees charged to customers utilizing the Company’s trading platform and are presented on a net basis. The Company’s service is comprised of a single performance obligation to provide a matching service when customers buy, sell, or convert digital assets. The Company does not control the digital asset being provided before it is transferred to the buyer, does not have inventory risk related to the digital asset, and is not responsible for the settlement of the digital asset. The Company also does not set the price for the digital asset as the price is a market rate established by users of the platform. As a result, the Company acts as an agent in facilitating the ability for a customer to purchase digital assets from another customer.
Transaction fees charged on the INX.One trading platform are recognized as revenue when the Company’s obligation is satisfied, promised services are transferred to the customer and the customer obtains control. Brokerage fees revenue is recorded according to the date the service was provided, or the operation was carried out. Relevant to brokerage and transaction fees, contracts with customers are usually open-ended and can be terminated by either party without a termination penalty. Therefore, these contracts are defined at the transaction level and do not extend beyond the service already provided. The transaction price is the amount of the consideration that is expected to be received based on the contract terms, excluding amounts collected on behalf of third parties (such as taxes).
F-18
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 2: MATERIAL ACCOUNTING POLICIES (Cont.)
Service revenue represents fees for technology consultation and advisory, as well as listing services performed by the Company under written agreements and is recognized upon the delivery of promised goods or services to the customer and when Company’s performance obligation to the customer is satisfied. The revenue is recognized in an amount that reflects the fair value of the consideration to which the Company expects to be entitled to, upon completion of the Company’s performance obligation for those services, as stated in the contract. As of December 31, 2023, the Company received payments prior to the completion of its performance obligation under contracts with customers, which are recognized as deferred revenue.
o. | Share-based payment transactions: |
Certain of the Company’s employees and other service providers are entitled to compensation in the form of equity settled share-based payment. The cost of the transactions is measured at the fair value of the equity instruments granted at the grant date, using an appropriate valuation model, further details of which are provided in Note 19. The cost of share-based grants is recognized in profit or loss together with a corresponding increase in equity during the period during which the performance and/or service conditions are to be satisfied ending on the date on which the relevant employee or service provider becomes entitled to the award (the “vesting period”). The cumulative expense is recognized at the end of each reporting period until the vesting period expires, reflecting the number of instruments that will ultimately vest at the end of the vesting period.
Until December 31, 2021, the Company granted options exercisable into its ordinary shares. Commencing in 2022, subsequent to the completion of the Transaction (see Note 1), options are granted to the Company’s employees and other service providers by the Parent Company and are exercisable into the Common shares of the Parent Company.
p. | Research and development expenses: |
Research expenses are recognized in profit or loss when incurred. An intangible asset arising from a development project or from the development phase of an internal project is recognized if the Company can demonstrate all of the following: the technical feasibility of completing the intangible asset so that it will be available for use or sale; the Company’s intention to complete the intangible asset and use or sell it; the Company’s ability to use or sell the intangible asset; how the intangible asset will generate future economic benefits; the availability of adequate technical, financial and other resources to complete the intangible asset; and the Company’s ability to measure reliably the expenditure attributable to the intangible asset during its development. Through December 31, 2023, the Company has not met all the aforementioned criteria and therefore all development costs have been recognized in profit or loss.
q. | Income taxes: |
The consolidated financial statements include estimates and assumptions for determining the future tax rates applicable to subsidiaries and identifying temporary differences that relate to each subsidiary. Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities using the tax rates used enacted or substantively enacted at the reporting date. Deferred tax is provided using a liability method on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date. Deferred tax assets are recognized for deductible temporary differences and the carryforward of any unused tax losses. Deferred tax assets are recognized to the extent it is probable that taxable profit will be available against the deductible temporary differences and that the carryforward of unused tax losses can be utilized. The carrying amount of deferred tax assets is reviewed at each reporting date and adjusted accordingly.
F-19
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 2: MATERIAL ACCOUNTING POLICIES (Cont.)
r. | Net income (loss) per share: |
Basic income (loss) per share is computed by dividing the net income (loss) attributable to equity holders of the Company by the weighted average number of ordinary shares outstanding during the period. Diluted income (loss) per share is computed by dividing the net income (loss) by the weighted average number of ordinary shares outstanding, plus the weighted average number of ordinary shares that would be issued on conversion of stock options and warrants.
Potential ordinary shares are included in the computation of diluted earnings per share when their conversion decreases earnings per share from continuing operations. Potential ordinary shares that are converted during the period are included in diluted earnings per share only until the conversion date and from that date in basic earnings per share.
NOTE 3: NEW ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS
a. | Amendments to existing standards effective during the year ended December 31, 2023. |
Amendment to IAS 1, “Disclosure of Accounting Policies”:
In February 2021, the IASB issued amendments to IAS 1 Presentation of Financial Statements, amendments to IFRS Practice Statement 2 Making Materiality Judgements and amendments to IAS 8 Definition of Accounting Estimate. The amendments require companies to disclose material accounting policies rather than their significant accounting policies. This amendment is effective for annual periods starting on or after January 1, 2023.
The application of the above Amendment did not have a material impact on the Company’s consolidated financial statements.
Amendment to IAS 8, “Accounting Policies, Changes to Accounting Estimates and Errors”:
In February 2021, the IASB issued an amendment to IAS 8, “Accounting Policies, Changes to Accounting Estimates and Errors” (“the Amendment”), in which it introduces a new definition of “accounting estimates”.
Accounting estimates are defined as “monetary amounts in financial statements that are subject to measurement uncertainty”. The Amendment clarifies the distinction between changes in accounting estimates and changes in accounting policies and the correction of errors.
The Amendment is applied prospectively for annual reporting periods beginning on January 1, 2023 and is applicable to changes in accounting policies and changes in accounting estimates that occur on or after the start of that period.
The application of the Amendment did not have a material impact on the Company’s consolidated financial statements.
Amendment to IAS 12, “Income Taxes”:
In May 2021, the IASB issued an amendment to IAS 12, “Income Taxes” (“IAS 12”), which narrows the scope of the initial recognition exception under IAS 12.15 and IAS 12.24 (“the Amendment”).
According to the recognition guidelines of deferred tax assets and liabilities, IAS 12 excludes recognition of deferred tax assets and liabilities with respect to certain temporary differences arising from the initial recognition of certain transactions. This exception is referred to as the “initial recognition exception”. The Amendment narrows the scope of the initial recognition exception and clarifies that it does not apply to the recognition of deferred tax assets and liabilities arising from transactions that are not a business combination and that give rise to equal taxable and deductible temporary differences, even if they meet the other criteria of the initial recognition exception.
F-20
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 3: NEW ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS (Cont.)
The Amendment applies for annual reporting periods beginning on or after January 1, 2023, with earlier application permitted. In relation to leases and decommissioning obligations, the Amendment is to be applied commencing from the earliest reporting period presented in the financial statements in which the Amendment is initially applied. The cumulative effect of the initial application of the Amendment should be recognized as an adjustment to the opening balance of retained earnings (or another component of equity, as appropriate) at that date.
The application of the Amendment did not have a material impact on the Company’s consolidated financial statements.
b. | Accounting standards and amendments to existing standards that are not yet effective. |
Amendment to IAS 1, “Disclosure of Accounting Policies”:
In January 2020, which was further amended in October 2022, the IASB issued an amendment to IAS 1, Classification of Liabilities as Current or Non-Current to clarify the requirements for classifying liabilities as current or non-current.
The new guidance will be effective for annual periods starting on or after January 1, 2024 and must be applied retrospectively. Early adoption is permitted.
The above Amendment is not expected to have a material impact on the Company’s consolidated financial statements.
Amendments to IAS 7, “Statement of Cash Flows”, and IFRS 7, “Financial Instruments: Disclosures”:
In May 2023, the IASB issued amendments to IAS 7, “Statement of Cash Flows”, and IFRS 7, “Financial Instruments: Disclosures” (“the Amendments”) to address the presentation of liabilities and the associated cash flows arising out of supplier finance arrangements, as well as disclosures required for such arrangements.
The disclosure requirements in the Amendments are intended to assist users of financial statements in understanding the effects of supplier finance arrangements on an entity’s liabilities, cash flows and exposure to liquidity risk.
The Amendments are effective for annual reporting periods beginning on or after January 1, 2024. Early adoption is permitted but will need to be disclosed.
The Company believes that the Amendments are not expected to have a material impact on its consolidated financial statements.
Amendments to IAS 21, “The Effects of Changes in Foreign Exchange Rates”:
In August 2023, the IASB issued “Amendments to IAS 21: Lack of Exchangeability (Amendments to IAS 21, “The Effects of Changes in Foreign Exchange Rates”)” (“the Amendments”) to clarify how an entity should assess whether a currency is exchangeable and how it should measure and determine a spot exchange rate when exchangeability is lacking.
The Amendments set out the requirements for determining the spot exchange rate when a currency lacks exchangeability. The Amendments require disclosure of information that will enable users of financial statements to understand how a currency not being exchangeable affects or is expected to affect the entity’s financial performance, financial position and cash flows.
The Amendments apply for annual reporting periods beginning on or after January 1, 2025. Earlier adoption is permitted, in which case, an entity is required to disclose that fact. When applying the Amendments, an entity should not restate comparative information. Instead, if the foreign currency is not exchangeable at the beginning of the annual reporting period in which the Amendments are first applied (the initial application date), the entity should translate affected assets, liabilities and equity as required by the Amendments and recognize the differences as of the initial application date as an adjustment to the opening balance of retained earnings and/or to the foreign currency translation reserve, as required by the Amendments.
The Company believes that the Amendments are not expected to have a material impact on its consolidated financial statements.
F-21
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 4: BUSINESS COMBINATIONS
I.L.S. Brokers Ltd.
On June 9, 2021, INX entered into a share purchase
agreement with the shareholders of I.L.S. Brokers Ltd., a Company incorporated under the laws of the State of Israel (“ILSB”)
for the purchase of all of the issued outstanding shares of ILSB (the “ILSB Acquisition”). The consideration paid by INX as
part of the ILSB Acquisition to the shareholders was $
Mr. Datika was a shareholder of ILSB and sold
his shares to INX as part of the ILSB Acquisition. Immediately prior to the ILSB Acquisition, Mr. Datika held, directly and indirectly,
approximately
June 9, 2021 | ||||
Cash and cash equivalents | $ | |||
Accounts receivable | ||||
Property and equipment | ||||
Right-of-use-assets | ||||
Intangible assets | ||||
Total assets | ||||
Accounts payable and accrued expenses | ( | ) | ||
Lease liability | ( | ) | ||
Total liabilities | ( | ) | ||
Net identifiable assets | ||||
Goodwill arising on acquisition | ||||
Total cost of acquisition | $ | |||
Cost of Acquisition: | ||||
Cash paid | $ | |||
Equity contribution by shareholder | ||||
Total cost of acquisition | $ | |||
Cash outflow on Acquisition: | ||||
Cash paid | $ | |||
Cash and cash equivalents acquired | ||||
Net cash outflow | $ |
Intangible assets include Customer Relationships, Trade Name and License. See Note 12.
F-22
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 4: BUSINESS COMBINATIONS (Cont.)
The Company estimated fair values allocated to
the assets and liabilities of ILSB with the assistance of an external independent expert. From the acquisition date to December 31, 2021,
ILSB has contributed net income of $
If the business combination had taken place at
the beginning of the calendar year 2021, the effect on consolidated net loss would have been immaterial and the consolidated revenue would
have been increased by $
Acquisition costs that are directly attributable to the transaction were immaterial.
INX Securities LLC (formerly Openfinance Securities LLC)
On January 12, 2021, INX entered into an asset
purchase agreement (the “OFN Asset Purchase Agreement”) with Openfinance Holdings, Inc. and certain subsidiaries of Openfinance
Holdings, Inc. (collectively, “OFN”). The consideration paid by INX as part of the OFN Acquisition to the shareholders was
$
May 9, 2021 | ||||
Cash and cash equivalents | $ | |||
Other current assets | ||||
Intangible assets | ||||
Total Assets | ||||
Accounts payable | ( | ) | ||
Total Liabilities | ( | ) | ||
Net identifiable assets | ||||
Goodwill arising on acquisition | ||||
Total cost of acquisition | $ | |||
Cost of Acquisition: | ||||
Cash paid | $ | |||
Token warrant liability | ||||
Contingent consideration liability | ||||
Total cost of acquisition | $ | |||
Cash outflow on Acquisition: | ||||
Cash paid | $ | |||
Cash and cash equivalents acquired | ||||
Net cash outflow | $ |
Intangible assets include License, Core Technology and Customer Relationships – see Note 12.
F-23
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 4: BUSINESS COMBINATIONS (Cont.)
The Company estimated the fair values allocated
to the assets and liabilities of OFN with the assistance of an external independent expert. During the year ended December 31, 2021, OFN
has contributed a net loss of $
Acquisition costs that are directly attributable to the transaction were immaterial.
Contingent consideration:
As part of the purchase agreement with the previous owner of Open Finance securities, LLC., it was agreed that the previous owner would be entitled to an additional consideration (“the contingent consideration”) as follows:
a. | Six months after closing and contingent upon the continued operation of the platform by the Company or
its affiliates - $ |
b. | 12 months after closing and contingent upon the continued operation of the platform by the Company or
its affiliates - $ |
2022 | 2021 | |||||||
Balance as of January 1 | $ | $ | ||||||
Liability arising as result of business combination | ||||||||
Payment | ( | ) | ( | ) | ||||
Change in fair value of contingent liability recognized in profit or loss | - | |||||||
Balance as of December 31 | $ | $ |
As of December 31, 2021, the first installment
was paid and the fair value of the second installment of the contingent consideration was estimated at $
Token warrant grant:
As part of the consideration for the acquisition,
the Company granted the shareholders of OFN,
NOTE 5: RESERVE FUND
In connection with the INX Token Offering, INX
committed to reserve
As of December 31, 2022, INX had segregated $
F-24
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 5: RESERVE FUND (Cont.)
On July 13, 2021,
December 31, 2023 | December 31, 2022 | |||||||
a. Cash and cash equivalents | $ | $ | ||||||
b. Financial assets at fair value through other comprehensive income: | ||||||||
Short-term investments (*) | ||||||||
U.S. Treasury securities | ||||||||
Corporate bonds – marketable investments | ||||||||
Total short-term investments | ||||||||
Long-term investments (*) | ||||||||
U.S. Treasury securities | ||||||||
Corporate bonds and loans (principally) – marketable investments | ||||||||
Total long-term investments | ||||||||
Total Reserve Fund | $ | $ |
(*) | Classified as Level 1 inputs in the fair value hierarchy. |
NOTE 6: INVESTMENTS
December 31, 2023 |
December 31, 2022 |
|||||||
Financial assets at fair value through other comprehensive income: | ||||||||
Short-term investments (*) | ||||||||
U.S. Treasury securities | $ | $ | ||||||
Corporate bonds – marketable investments | ||||||||
Total short-term investments | $ | $ | ||||||
Long-term investments | ||||||||
Corporate bonds – marketable investments (*) | ||||||||
Investments in private equity (**) | ||||||||
Total long-term investments | $ | $ | ||||||
Total investments | $ | $ |
(*) |
(**) |
F-25
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 6: INVESTMENTS (Cont.)
Investments in Private Equity
Investments in private equity are not traded in public markets and include Company’s holdings in private companies under share purchase agreements and a simple agreement for future equity (SAFE), which entitle the Company to receive common stock of the issuing companies at a future date.
As of December 31, 2023, INX holds investments
in three separate private companies. Under the share purchase agreement dated March 20, 2021, one of the investments of $
During 2023, INX invested $
Investment in Associate
In June 2023, INX entered into a shareholders’
and joint venture agreement (“SICPA Agreement”), whereby parties to the agreement have agreed to joint their expertise and
collaborate to develop central bank digital currency solutions with the utilization of blockchain technology. Subsequently, for the purpose
of executing joint objectives under the SICPA Agreement, the parties formed SICPA INX SA, subsequently renamed as NABATECH SA, (“Nabatech”),
an entity organized under the laws of Switzerland. During the year ended December 31, 2023, the Company made the initial capitalization
investment in Nabatech of $
As of December 31, 2023, the Company recorded
loss on the investment in associate of $
NOTE 7: DIGITAL ASSETS
Coin Symbol | December 31, 2023 | December 31, 2022 | ||||||
USDC | $ | $ | ||||||
BTC | ||||||||
ETH | ||||||||
USDT | ||||||||
LTC | ||||||||
ZEC | ||||||||
UNI | ||||||||
AAVE | ||||||||
COMP | ||||||||
CRV | ||||||||
MATIC | ||||||||
Other | ||||||||
$ | $ |
Digital assets are classified as Level 2 in the fair value hierarchy, based on quoted prices in the principal market at 12:00 UTC.
F-26
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 8: DERIVATIVE ASSETS
The Company used derivative assets for risk management
and economic hedging of digital assets owned. On December 31, 2022, the Company held $
NOTE 9: CUSTOMER FUNDS
As of December 31, 2023 and 2022, customer funds
include cash balances of $
NOTE 10: PREPAID EXPENSES AND OTHER RECEIVABLES
December 31 | ||||||||
2023 | 2022 | |||||||
Receivable from related parties (see Note 16) | $ | $ | ||||||
Prepaid expenses and advances to service providers | ||||||||
Receivable from government agencies | ||||||||
Office space sublease receivable | ||||||||
Other receivables | ||||||||
$ | $ |
F-27
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 11: PROPERTY AND EQUIPMENT
Computers and software | Office equipment & furniture | Leasehold improvements | Communication & equipment | Total | ||||||||||||||||
Property and equipment, at cost: | ||||||||||||||||||||
Balance at January 1, 2022 | $ | $ | $ | $ | $ | |||||||||||||||
Additions | ||||||||||||||||||||
Adjustments arising from translating financial statements from functional currency to presentation currency | ( | ) | ( | ) | ||||||||||||||||
Balance at December 31, 2022 | ||||||||||||||||||||
Additions | ||||||||||||||||||||
Adjustments arising from translating financial statements from functional currency to presentation currency | ( | ) | ( | ) | ||||||||||||||||
Balance at December 31, 2023 | $ | $ | $ | $ | $ | |||||||||||||||
Accumulated depreciation: | ||||||||||||||||||||
Balance at January 1, 2022 | ||||||||||||||||||||
Depreciation expense | ||||||||||||||||||||
Adjustments arising from translating financial statements from functional currency to presentation currency | ( | ) | ( | ) | ||||||||||||||||
Balance at December 31, 2022 | ||||||||||||||||||||
Depreciation expense | ||||||||||||||||||||
Balance at December 31, 2023 | ||||||||||||||||||||
Net assets at December 31, 2023 | $ | $ | $ | $ | $ | |||||||||||||||
Net assets at December 31, 2022 | $ | $ | $ | $ | $ |
F-28
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 12: GOODWILL AND OTHER INTANGIBLE ASSETS
Trade Name | Customer Relationships | Licenses | Technology | Goodwill | Total | |||||||||||||||||||
Intangible assets, at cost: | ||||||||||||||||||||||||
Balance as of January 1, 2022 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Adjustments arising from translating financial statements from functional currency to presentation currency | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
Balance as of December 31, 2022 | ||||||||||||||||||||||||
Adjustments arising from translating financial statements from functional currency to presentation currency | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
Balance as of December 31, 2023 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Accumulated amortization and impairment: | ||||||||||||||||||||||||
Balance as of January 1, 2022 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Impairment of technology | ||||||||||||||||||||||||
Amortization expense | ||||||||||||||||||||||||
Balance as of December 31, 2022 | ||||||||||||||||||||||||
Amortization expense | ||||||||||||||||||||||||
Balance as of December 31, 2023 | $ | $ | $ | $ | $ | |||||||||||||||||||
Net intangible assets at cost, at December 31, 2022 | ||||||||||||||||||||||||
Net intangible assets at cost, at December 31, 2023 | $ | $ | $ | $ | $ | $ |
a. | Useful life of intangible assets: |
| Licenses | Customer relationships | Trade name | |||
Useful life | ||||||
Amortization method |
Licenses don’t have a fixed term and do not require a renewal. Consequently, licenses have an indefinite useful life.
b. | Amortization expense: |
Amortization of intangible assets of $
c. | Impairment of goodwill and other intangible assets: |
During the year ended December 31, 2022, the Company
recorded $
F-29
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 12: GOODWILL AND OTHER INTANGIBLE ASSETS (Cont.)
d. | Net carrying value: |
ILSB | INXS | Total | ||||||||||
Goodwill | $ | $ | $ | |||||||||
Licenses | ||||||||||||
Trade Name | ||||||||||||
Customer Relationships | ||||||||||||
Total Intangible Assets | $ | $ | $ |
The recoverable amounts of goodwill and intangible
assets related to ILSB (brokerage segment), prepared by an independent valuation specialist, were determined based on the value in use
which is calculated at the expected estimated future cash flows from the cash-generating unit, as determined according to the budget for
the next
The recoverable amounts of goodwill and intangible
assets related to INXS (digital assets segment), prepared by an independent valuation specialist, were determined based on the value in
use which is calculated at the expected estimated future cash flows from the cash-generating unit, as determined according to the budget
for the next
The recoverable amounts as determined above exceed the carrying amounts of goodwill and intangible assets of both ILSB and INXS.
The value in use for all cash-generating units may change if any changes occur in the following key assumptions:
● | Discount rate. |
● | Growth rate for the period exceeding the |
Discount rate: The discount rate reflects management’s assumptions regarding each unit’s specific risk. In determining the appropriate discount rate for each unit, the Company relied on the rate of return of long-term government bonds relevant for each unit.
Sensitivity analysis of changes in assumptions: With respect to assumptions used in determining the value in use as described above, management believes that there are no reasonably expected changes in the key assumptions detailed above, which might lead to a significant change in the recoverable amounts of goodwill and intangible assets related to ILSB and INXS.
F-30
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 13: RIGHT-OF-USE ASSETS AND LEASE LIABILITIES
a. | Activity with respect to right-of-use assets: |
The Company has entered into agreements to lease office spaces, which
are used for the Company’s operations. Leases of office space have lease terms of between
On June 19, 2023, the Company entered into an
office space sublease agreement with a third party. The agreement terminates on
Land and Buildings | ||||
Right-of-use-assets, at cost: | ||||
Balance as of January 1, 2022 | $ | |||
Additions during the year: | ||||
New leases | ||||
Adjustments arising from translating financial statements from functional currency to presentation currency | ( | ) | ||
CPI and revaluation differences | ||||
Balance as of December 31, 2022 | $ | |||
Accumulated depreciation: | ||||
Balance as of January 1, 2022 | $ | |||
Depreciation and amortization | ||||
Balance as of December 31, 2022 | $ | |||
Right-of-use assets as of December 31, 2022, net | $ | |||
Right-of-use-assets, at cost: | ||||
Balance as of January 1, 2023 | $ | |||
Additions during the year: | ||||
Disposal | ( | ) | ||
Lease modification | ( | ) | ||
Adjustments arising from translating financial statements from functional currency to presentation currency | ||||
CPI and revaluation differences | 30 | |||
Balance as of December 31, 2023 | $ | |||
Accumulated depreciation: | ||||
Balance as of January 1, 2023 | $ | |||
Depreciation and amortization | ||||
Disposal | ( | ) | ||
Balance as of December 31, 2023 | $ | |||
Right-of-use assets as of December 31, 2023, net | $ |
F-31
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 13: RIGHT-OF-USE ASSETS AND LEASE LIABILITIES (Cont.)
b. |
Land
and Buildings | ||||
Lease liability, January 1, 2022 | $ | |||
Changes during the year: | ||||
New leases | ||||
Lease payments | ( | ) | ||
Interest expense | ||||
CPI and revaluation differences | ( | ) | ||
Lease liability, December 31, 2022 | $ | |||
Current lease liability, December 31, 2022 | $ | |||
Non-current lease liability, December 31, 2022 | $ | |||
Lease liability, January 1, 2023 | $ | |||
Changes during the year: | ||||
Lease payments | ( | ) | ||
Interest expense | ||||
Lease modification | ( | ) | ||
CPI and revaluation differences | ||||
Lease liability, December 31, 2023 | $ | |||
Current lease liability, December 31, 2023 | $ | |||
Non-current lease liability, December 31, 2023 | $ |
c. |
December 31, | ||||
2023 | ||||
2024 | $ | |||
2025 | ||||
2026 | ||||
2027 | ||||
2028 | ||||
$ |
F-32
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 14: INX TOKEN LIABILITY
Based on the terms of the INX Token, as described
in Note 1, the INX Token is a hybrid financial instrument and is accounted for as a financial liability.
December 31, 2023 | December 31, 2022 | |||||||
Total number of INX Tokens | ||||||||
INX Token liability | $ | $ |
The Company’s significant shareholder is
Triple-V, wholly owned by Mr. Shy Datika, the CEO of the Company, who, as of December 31, 2023 on a combined basis, owns
During the year ended on December 31, 2022, the
Company granted
During the year ended on December 31, 2023, the
Company granted
On August 9, 2023, INX’s Board of Directors authorized
the management to repurchase INX Tokens (the “Repurchased Tokens”) from their holders as the management deems required or
desirable for the benefit of INX, provided that the aggregate purchase amount of Repurchased Tokens and common shares of the Parent Company
repurchased through August 10, 2024 will not exceed $
Discount rate | Number of INX Tokens | Total fair value | ||||||||||
Not subject to lock-up | $ | |||||||||||
Subject to lock-up through January 2024 | ||||||||||||
Subject to lock-up through February 2024 | ||||||||||||
Subject to lock-up through July 2024 | ||||||||||||
Total | $ |
F-33
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 14: INX TOKEN LIABILITY (Cont.)
The fair value of INX Tokens free of, or subject to lock-up agreements and the discount rates applied as of December 31, 2022, are as follows:
Discount rate | Number of INX Tokens | Total fair value | ||||||||||
Not subject to lock-up | $ | |||||||||||
Subject to lock-up through February-April 2023 | ||||||||||||
Subject to lock-up through May 2023 | ||||||||||||
Subject to lock-up through June 2023 | ||||||||||||
Subject to lock-up through July 2024 | ||||||||||||
Total | $ |
The fair value per INX Token as of December 31,
2023 and 2022, for tokens that are not subject to lock-up agreement was $
December 31, 2023 | December 31, 2022 | |||||||
Expected term (years) | ||||||||
Expected volatility |
The level in the fair value hierarchy applied to tokens under lock-up agreements is level 2.
For the years ended December 31, 2023 and 2022,
the re-measurement to fair value of the INX Token liability with respect to INX Tokens issued by the Company resulted in unrealized gain
of $
The changes in the fair value of the INX Token liability attributable to changes in credit risk, excluding those changes in credit risk attributable to the embedded derivative, are immaterial for all reported periods and therefore no amounts have been included in other comprehensive income with respect of the credit risk.
NOTE 15: INX TOKEN WARRANT LIABILITY
The Company may grant restricted INX Token awards
or INX Token warrants to directors, advisors, employees or service providers as compensation.
December 31, | ||||||||
2023 | 2022 | |||||||
INX Token warrant liability: | ||||||||
Warrants granted to employees, advisors and service providers | $ | $ |
The liability related to INX Token warrants is presented at fair value based on the below inputs. The level in the fair value hierarchy is level 3.
F-34
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 15: INX TOKEN WARRANT LIABILITY (Cont.)
December 31, 2023 | December 31, 2022 | |||||||
Expected volatility of the token prices (%) | ||||||||
Risk-free interest rate (%) | ||||||||
Expected life of warrant (years) | ||||||||
Exercise price | $ | $ |
2023 | 2022 | |||||||||||||||
Number of tokens | Weighted average exercise price | Number of tokens | Weighted average exercise price | |||||||||||||
INX Token warrants outstanding at beginning of year (*) | $ | $ | ||||||||||||||
INX Token warrants granted during the year | ||||||||||||||||
INX Token warrants forfeited during the year | ( | ) | ( | ) | ||||||||||||
INX Token warrants expired during the year | ( | ) | ( | ) | ||||||||||||
INX Token warrants exercised (INX Token issued) and INX Tokens vested during the year | ( | ) | ( | ) | ||||||||||||
INX Token warrants outstanding at the end of year | $ | $ | ||||||||||||||
INX Token warrants exercisable at the end of year | $ | $ |
(*) |
Year ended December 31 | ||||||||||||
2023 | 2022 | 2021 | ||||||||||
Operating expenses (income): | ||||||||||||
Research and development | $ | $ | $ | |||||||||
Sales and marketing | ||||||||||||
General and administrative | ||||||||||||
Change in fair value of INX Token warrant liability | ( | ) | ( | ) | ||||||||
Total token-based compensation expense (income) | $ | $ | ( | ) | $ |
F-35
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 16: RELATED PARTIES
The Company’s related parties include the Parent Company, Company’s subsidiary, associates and service providers over which the Company exercises significant influence, and key management personnel. Key management personnel are those persons having the authority and responsibility, directing and controlling the activities of the Company, directly and indirectly. Key management personnel include officers, directors and companies controlled by officers and directors.
December 31 | ||||||||
2023 | 2022 | |||||||
Assets: | ||||||||
Prepaid expenses and other receivables | ||||||||
Receivable from Parent Company | $ | $ | ||||||
Receivable from Nabatech | ||||||||
Prepaid expenses | ||||||||
Total | $ | $ | ||||||
Liabilities: | ||||||||
Accounts payable and accrued expenses | $ | $ | ||||||
INX Token liability | ||||||||
INX Token warrant liability | ||||||||
Total | $ | $ |
Receivable from Parent Company includes general and administrative expenses incurred by the Parent Company and paid by INX.
F-36
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 16: RELATED PARTIES (Cont.)
Year ended December 31 | ||||||||||||
2023 | 2022 | 2021 | ||||||||||
Service revenue | $ | $ | $ | |||||||||
$ | $ | $ | ||||||||||
Cost of service: | ||||||||||||
Compensation and benefits | ||||||||||||
$ | $ | $ | ||||||||||
Research and Development: | ||||||||||||
Compensation and benefits | $ | $ | $ | |||||||||
Share-based compensation (*) | ||||||||||||
INX Token-based compensation | ||||||||||||
$ | $ | $ | ||||||||||
Sales and marketing: | ||||||||||||
Compensation and benefits | ||||||||||||
Share-based compensation (*) | ||||||||||||
INX Token-based compensation | ||||||||||||
$ | $ | $ | ||||||||||
General and administrative: | ||||||||||||
Compensation and benefits | ||||||||||||
Share-based compensation (*) | ||||||||||||
INX Token-based compensation | ||||||||||||
$ | $ | $ | ||||||||||
Total compensation and benefits | $ | $ | $ | |||||||||
Change in fair value of INX Token and warrant liabilities | $ | ( | ) | $ | ( | ) | $ |
(*) |
Each of the Company’s independent directors
is entitled to receive an option to purchase
Service Agreement with Nabatech
Effective on January 1, 2023, as part of the joint
venture SICPA Agreement, the Company entered into a service agreement with Nabatech, under which it provides technology support and advisory
services to Nabatech, an entity formed for the development of central bank digital currency solutions with the utilization of blockchain
technology, and in which the Company holds
F-37
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 16: RELATED PARTIES (Cont.)
Agreement with A-Labs Finance and Advisory Ltd. (“A-Labs”)
Under a service agreement dated September 26,
2017, as amended in December 2017 and January 31, 2018, A-Labs, a shareholder of the Company, provided services to the Company which included,
among others, development, planning, management, execution, branding and marketing outside of the US with relation to the Offering of
the INX Tokens on behalf of the Company (the “A-Labs Agreement”). In consideration for these services, during 2021, the Company
paid A-Labs $
A-Labs also received a grant of
In addition, on July 29, 2021, the Company made
a payment to A-Labs of $
Agreement with Weild Capital, LLC (“Weild Capital”)
On January 2, 2023, the Parent Company entered
into and advisory services agreement with Weild Capital LLC (dba Weild & Co.) (“Weild Agreement”), a wholly owned subsidiary
of Weild & Co., Inc., of which Mr. David Weild is Chairman & CEO. Mr. Weild serves as the Chairman of the board of the Company.
Under the advisory agreement, the Parent Company agreed to pay Weild Capital a nonrefundable advisory fee of $
NOTE 17: CONVERTIBLE LOANS
The Company entered into convertible loan agreements
dated November 27, 2017 (“Convertible Loans”) with three individuals, of which one is an officer of the Company (the “Lenders”),
for an aggregate amount of $
Until 2018, the Company received $
During the year ended December 31, 2021, interest
and amortization of discount on the convertible loans amounted to $
On February 25, 2021, holders of Convertible loans
exercised their right under their loan agreements and converted the outstanding amounts provided by them to the Company under such loan
agreements into an aggregate of
F-38
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 18: EQUITY
December 31 | ||||||||||||||||
2023 | 2022 | |||||||||||||||
Number of shares | ||||||||||||||||
Authorized | Issued and outstanding | Authorized | Issued and outstanding | |||||||||||||
Ordinary shares with 0.01 GBP par value per share |
Conversions of Simple Agreements for Future Equity
On February 21, 2020, the Board of Directors of
the Company approved capital raise of up to $
Exercise of Options under SAFE Agreements
During 2021, several investors exercised equity
options that were granted to them under the SAFE agreement dated August 30, 2019, and were issued
During 2021, several investors exercised equity
options that were granted to them under the SAFE dated March 31, 2020, and were issued
On September 13, 2020, the Company entered into
a subscription agreement with a new investor pursuant to which the investor invested in the Company $
Private Placement
As part of the Transaction (see Note 1), on January
10, 2022, the Company completed a private placement of
The warrants were valued at $
Agents of the private placement collectively received
cash commissions of $
F-39
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 18: EQUITY (Cont.)
The placement agents also received
As a result of the Transaction (see Note 1), effective
on January 10, 2022, options granted and warrants issued by INX prior to such date were surrendered and cancelled, and new options and
warrants of the Parent Company were issued to holders with equivalent terms, adjusted for the Exchange Ratio, as defined under the agreement.
Upon the cancellation of the private placement warrants, the warrant liability in the amount of $
Reserve
from financial assets measured at fair value through OCI | Gain
(loss) on foreign currency translation | Total | ||||||||||
Balance as of December 31, 2020 | $ | $ | $ | |||||||||
Realized loss on available-for sale securities reclassification adjustment into net income (loss) | ||||||||||||
Unrealized gain on available-for-sale securities | ||||||||||||
Foreign currency translation | ||||||||||||
Balance as of December 31, 2021 | $ | $ | $ | |||||||||
Realized loss on available-for sale securities reclassification adjustment into net income (loss) | ||||||||||||
Unrealized gain on available-for-sale securities | ( | ) | ( | ) | ||||||||
Foreign currency translation | ( | ) | ( | ) | ||||||||
Balance as of December 31, 2022 | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Realized loss on available-for sale securities reclassification adjustment into net income (loss) | ||||||||||||
Unrealized gain on available-for-sale securities | ||||||||||||
Foreign currency translation | ( | ) | ( | ) | ||||||||
Balance as of December 31, 2023 | $ | $ | ( | ) | $ | ( | ) |
NOTE 19: SHARE-BASED PAYMENT
a. | Shares reserved for Employee Stock Option Plan of the Parent Company: |
INX’s board of directors adopted the INX Limited Share Ownership and Award Plan (2021) on February 22, 2021, as amended from time to time (the “Share Ownership and Award Plan” or the “INX Plan”), and INX shareholders approved the INX Plan on March 18, 2021.
In connection with the Transaction (see Note1), the INX Plan was terminated and replaced by the Parent Company Omnibus Equity Incentive Compensation Plan (the “Plan”). The Plan provides for grants of options to purchase the Parent Company’s common shares and restricted share units to employees, directors and service providers of the Company. The Plan includes U.S. and Israeli appendices that further specify the terms and conditions of grants of options and restricted share units to such grantees.
Upon closing of the Transaction, Awards
granted pursuant to the INX Plan were exchanged for equivalent awards under the Plan. As of closing of the Transaction,
F-40
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 19: SHARE-BASED PAYMENT (Cont.)
On June 22, 2022, the Parent Company
shareholders approved further increase of the common shares reserved for the purpose of the Plan. Subject to certain capitalization adjustments,
the aggregate number of common shares that may be issued pursuant to share awards under the Plan may not exceed
b. | Share options and restricted stock of the Parent Company granted to employees, directors and service providers under the Plan during years ended on December 31, 2023 and 2022: |
1. | On March 15, 2022, two officers received |
2. | On March 15, 2022, the Parent Company granted certain employees and a service provider options to purchase
|
3. | On March 24, 2022, the Parent Company granted one employee options to purchase |
4. | On June 30, 2022, the Parent Company granted one employee options to purchase |
5. | On June 30, 2022, the Parent Company granted one employee options to purchase |
6. | On September 21, 2022, the Parent Company granted one employee options to purchase |
7. | On October 18, 2022, the Parent Company granted one employee options to purchase |
8. | On November 30, 2022, the Parent Company committed to grant, and subsequently in 2023 issued, options
to its independent directors to purchase |
9. | On January 19, 2023, certain employees, directors and service providers received |
10. | On January 19, 2023, an officer, through his wholly owned entity, and a service provider, received |
F-41
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 19: SHARE-BASED PAYMENT (Cont.)
11. | On May 12, 2023, the Parent Company granted to certain employees options to purchase |
12. | On November 19, 2023, the Parent Company granted one employee options to purchase |
c. | For years ended December 31, 2023, 2022 and 2021, the Company recorded share-based compensation expenses
of $ |
d. |
December 31, 2023 | December 31, 2022 | |||||||
Expected term (years) | ||||||||
Expected volatility | ||||||||
Exercise price | $ | $ | ||||||
Risk-free interest rate | ||||||||
Dividend yield |
The weighted average fair value of the
options granted during years ended December 31, 2023 and 2022, based on the exercise price as of the grant date, was at $
NOTE 20: INCOME (LOSS) PER SHARE
December 31, 2023 | December 31, 2022 | December 31, 2021 | ||||||||||
$ | ( | ) | $ | $ | ( | ) |
Year ended December 31 | ||||||||||||
2023 | 2022 | 2021 | ||||||||||
$ | ( | ) | $ | $ | ( | ) | ||||||
F-42
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 21: FINANCIAL RISKS AND RISK MANAGEMENT
Financial risk management objectives and policies
Activities of the Company may expose it to a variety of financial and related risks: credit risk, market risk, liquidity risk, digital asset risk, loss of access risk, irrevocability of transactions, and regulatory oversight risk, among others. The Company seeks to mitigate potential adverse effects of these risks on performance and the Company’s financial position by employing experienced personnel, monitoring of market events, maintaining sufficient liquidity, implementing appropriate policies and procedures addressing significant financial risks and diversifying the Company’s business strategy within the constraints of the Company’s objectives.
Credit risk
Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into, causing the other party to incur a financial loss. The Company’s cash and cash equivalents, investments and digital assets are exposed to credit risk. The Company limits its credit risk by placing its assets with high credit quality banks, financial institutions and digital assets custodians that are believed to have sufficient capital to meet their obligations. While the Company intends to only transact with counterparties that it believes to be creditworthy there can be no assurance that a counterparty will not default and that the Company will not sustain a material loss as a result. It is the Company’s policy to monitor the creditworthiness of its counterparties and to minimize the concentration of credit risk to mitigate significant loss caused by potential counterparty’s failure.
Market risk
Market risk is the risk that the value of financial instruments will fluctuate as a result of changes in market prices (other than those arising from interest rate risk or foreign currency risk), whether caused by factors specific to an individual investment, its issuer, or factors affecting all instruments traded in a market or market segment. All investments present a risk of loss of capital. The maximum risk resulting from financial instruments is equivalent to their fair value. The Company’s investments are susceptible to also market risk arising from uncertainties about future prices of the instruments. The Company moderates this risk through the various investment strategies within the parameters of the Company’s investment guidelines.
As of December 31, 2023, management’s estimate
of the effect on equity investments due to a +/-
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they come due, as well as the risk of not being able to liquidate invested assets at reasonable prices. The Company manages liquidity risk by maintaining sufficient cash balances and investing capital reserves in highly rated, marketable financial instruments that allow meeting liquidity obligations in the ordinary course of business as well as under increased liquidity demands.
Foreign currency risk
Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate as a result of changes in foreign currency exchange rates. The Company’s exposure to foreign currency risk relates primarily to the Company’s continuing operation (when revenue or expense is recognized in a different currency from the Company’s presentation currency). As of December 31, 2023 and 2022, management’s estimate of the Company’s exposure related to the price fluctuation in foreign currency is not material.
Geopolitical risk
Significant portion of Company’s operations and management is based in Israel. On October 7, 2023, Hamas launched an attack on Israel and a war started. As of the date of issuance of the consolidated financial statements, there has been no interruption or adverse impact on the Company’s business activities resulting from the war. The Company maintains a comprehensive business continuity plan, and has taken necessary steps in line with such plan, in an effort to ensure that operations and service to customers remain consistent.
F-43
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 22: OPERATING SEGMENTS
a. | Reportable segments represent the two lines of business for which the Company expects to earn income, incur costs and allocate resources. Operating segments are identified based on information that is reviewed by the chief operating decision maker (“CODM”) and senior management to make decisions about resources to be allocated and assess operational and financial performance. Accordingly, for management purposes, the Company is organized into operating segments as follows: |
1. | Brokerage segment - facilitates financial transactions between banks and offers a full range of brokerage services to banks worldwide. |
2. | Digital assets segment - development and operation of an integrated, regulated solutions for trading of blockchain assets, and providing related services for products utilizing blockchain technology. |
b. |
Brokerage Segment | Digital Asset Segment | Total | ||||||||||
Year ended December 31, 2023: | ||||||||||||
Revenue | $ | $ | $ | |||||||||
Total income | $ | $ | $ | |||||||||
Segment net income (loss) | ( | ) | ( | ) | ||||||||
Unallocated corporate expenses: | ||||||||||||
Other income, net | ||||||||||||
Net loss before taxes | $ | ( | ) | |||||||||
Year ended December 31, 2022: | ||||||||||||
Revenue | $ | $ | $ | |||||||||
Total income | $ | $ | $ | |||||||||
Segment net loss | ( | ) | ( | ) | ( | ) | ||||||
Unallocated corporate expenses: | ||||||||||||
Other income, net | ||||||||||||
Net income before taxes | $ |
F-44
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 22: OPERATING SEGMENTS (Cont.)
Brokerage Segment | Digital Asset Segment | Total | ||||||||||
Year ended December 31, 2021: | ||||||||||||
Revenue | $ | $ | $ | |||||||||
Total income | $ | $ | $ | |||||||||
Segment net income (loss) | ( | ) | ( | ) | ||||||||
Unallocated corporate expenses: | ||||||||||||
Other expense, net | ( | ) | ||||||||||
Net loss before taxes | $ | ( | ) |
Unallocated corporate expenses for years ended December 31, 2023, 2022 and 2021 include the change in fair value of INX Tokens.
c. |
Brokerage Segment | Digital Asset Segment | Total | ||||||||||
As of December 31, 2023: | ||||||||||||
Segment assets | $ | $ | $ | |||||||||
Segment liabilities | $ | $ | $ | |||||||||
As of December 31, 2022: | ||||||||||||
Segment assets | $ | $ | $ | |||||||||
Segment liabilities | $ | $ | $ |
d. |
Non-current assets | December 31, 2023 | December 31, 2022 | ||||||
United States | $ | $ | ||||||
State of Israel | $ | $ | ||||||
Gibraltar | $ | $ |
F-45
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 22: OPERATING SEGMENTS (Cont.)
e. | Revenue based on geographic locations: |
Year ended December 31 | ||||||||||||
2023 | 2022 | 2021 | ||||||||||
Brokerage Segment: | ||||||||||||
United Kingdom | $ | $ | $ | |||||||||
State of Israel | $ | $ | $ | |||||||||
United States | $ | $ | $ | |||||||||
Gibraltar | $ | $ | $ | |||||||||
Other | $ | $ | $ | |||||||||
Digital Asset Segment: | ||||||||||||
Gibraltar | $ | $ | $ | |||||||||
Switzerland | $ | $ | $ | |||||||||
United States | $ | $ | $ | |||||||||
Japan | $ | $ | $ | |||||||||
State of Israel | $ | $ | $ | |||||||||
United Kingdom | $ | $ | $ | |||||||||
Other | $ | $ | $ |
f. |
Revenue from major customers which account
for
Year ended December 31 | ||||||||||||
2023 | 2022 | 2021 | ||||||||||
Brokerage Segment: | ||||||||||||
Customer A | $ | $ | $ | |||||||||
Customer B | $ | $ | $ |
F-46
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 23: EMPLOYEE BENEFITS EXPENSE
Year ended December 31 | ||||||||||||
2023 | 2022 | 2021 | ||||||||||
Cost of service | ||||||||||||
Compensation and benefits | $ | $ | $ | |||||||||
Share-based compensation | ||||||||||||
Token-based compensation | ||||||||||||
$ | $ | $ | ||||||||||
Research and development | ||||||||||||
Compensation and benefits | $ | $ | ||||||||||
Share-based compensation | ||||||||||||
Token-based compensation | ||||||||||||
$ | $ | $ | ||||||||||
Sales and marketing | ||||||||||||
Compensation and benefits | ||||||||||||
Share-based compensation | ||||||||||||
Token-based compensation | ||||||||||||
$ | $ | $ | ||||||||||
General and administrative | ||||||||||||
Compensation and benefits | ||||||||||||
Share-based compensation | ||||||||||||
Token-based compensation | ||||||||||||
$ | $ | $ |
During the years ended December 31, 2023, 2022
and 2021, the Company incurred cost of $
F-47
INX LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2023, 2022 AND 2021
U.S. Dollars in thousands (except share, token, per share and per token data)
NOTE 24: TAXES ON INCOME
The Company is an Israeli company for tax purposes and as such, subject to Israeli taxes. Subsidiary entities are generally subject to taxes in the jurisdictions where they are located or have the majority of operations and management control, therefore income taxes are calculated as if the Company filed separate income tax returns. The following tax rates were applicable to the individual entities based on the country of their organization:
● | Israel corporate income tax rate - |
● | United States federal weighted tax rate - |
● | Gibraltar tax rate - |
a. | Tax assessments: |
INX, ILSB and Midgard are subject to the tax assessment evaluation by the Israeli Tax Authority. After the receipt of such tax assessment the entity is no longer subject to the tax examination by the tax authority. The Company’s subsidiary, ILSB received the final tax assessment through 2017 tax year, whereas, Midgard and INX, has not received the final tax assessment since its incorporation.
b. | Carryforward losses for tax purposes and other temporary differences: |
Carryforward operating tax losses of the Group
total approximately $
c. | Theoretical tax: |
As the Company and its subsidiaries incurred operating losses during the years ended December 31, 2023, 2022 and 2021 for which deferred income taxes were not recorded, as mentioned above in Note 24b, the reconciliation between the tax expense, assuming that all the income and expenses, gains and losses in the statement of income were taxed at the statutory tax rate, and the taxes on income recorded in profit or loss, does not provide significant information and therefore is not presented.
During years ended December 31, 2023, 2022 and
2021, the Company recognized income tax expense of $
NOTE 25: SUBSEQUENT EVENTS
Grants under Equity and Token Incentive Compensation Plan of the Parent Company:
On January 8, 2024, a key officer, through his
wholly owned entity, was awarded
On February 13, 2024, a former service provider
filed a lawsuit against one of the Company’s subsidiaries for a breach of contract. The total amount value of the claim is approximately
$
F-48
Exhibit 12.1
RULE 15d-14(a) CERTIFICATION
I, | Shy Datika, certify that: |
1. | I have reviewed this annual report on Form 20-F of INX Limited; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report; |
4. | The other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the issuer and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | [Omitted]; |
(c) | Evaluated the effectiveness of the issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the issuer’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting; and |
5. | The issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer’s auditors and the audit committee of the issuer’s board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal control over financial reporting. |
Date: April 18, 2024 | /s/ Shy Datika |
Shy Datika | |
President and CEO |
Exhibit 12.2
RULE 15d-14(a) CERTIFICATION
I, | Renata K. Szkoda, certify that: |
1. | I have reviewed this annual report on Form 20-F of INX Limited; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report; |
4. | The other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the issuer and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | [Omitted]; |
(c) | Evaluated the effectiveness of the issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the issuer’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting; and |
5. | The issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer’s auditors and the audit committee of the issuer’s board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal control over financial reporting. |
Date: April 18, 2024 | /s/ Renata K. Szkoda |
Renata K. Szkoda | |
Chief Financial Officer |
Exhibit 13.1
SECTION 1350 CERTIFICATIONS
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350 of chapter 63 of title 18 of the United States Code), the undersigned officer of INX Limited (the “Company”), hereby certifies, to such officer’s knowledge, that:
This annual report on Form 20-F for the fiscal year ended December 31, 2023 (the “Report”) of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: April 18, 2024 | /s/ Shy Datika |
Shy Datika | |
President and CEO |
Exhibit 13.2
SECTION 1350 CERTIFICATIONS
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350 of chapter 63 of title 18 of the United States Code), the undersigned officer of INX Limited (the “Company”), hereby certifies, to such officer’s knowledge, that:
This annual report on Form 20-F for the fiscal year ended December 31, 2023 (the “Report”) of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: April 18, 2024 | /s/ Renata K. Szkoda |
Renata K. Szkoda | |
Chief Financial Officer |
Exhibit 15.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-266445) pertaining to the Employee’s share option plans of INX Limited of our reports dated April 18, 2024, with respect to the consolidated financial statements of INX Limited, included in this Annual Report (Form 20-F) for the year ended December 31, 2023.
KOST FORER GABBAY & KASIERER | |
April 18, 2024 | /s/ KOST FORER GABBAY & KASIERER |
Tel-Aviv, Israel | A Member Firm of Ernst & Young Global |
Consolidated Statements of Financial Position (Parentheticals) - £ / shares |
Dec. 31, 2023 |
Dec. 31, 2022 |
---|---|---|
Statement of Financial Position [Abstract] | ||
Ordinary shares, par value (in Pounds per share) | £ 0.001 | £ 0.001 |
Ordinary shares, authorized | 100,000,000 | 100,000,000 |
Ordinary shares, issued | 47,635,875 | 47,635,875 |
Ordinary shares, outstanding | 47,635,875 | 47,635,875 |
Consolidated Statements of Profit and Loss and Comprehensive Income (Loss) (Parentheticals) - $ / shares |
12 Months Ended | ||
---|---|---|---|
Dec. 31, 2023 |
Dec. 31, 2022 |
Dec. 31, 2021 |
|
Consolidated Statements Of Profit And Loss And Comprehensive Income Loss Abstract | |||
Earnings (loss) per share, diluted | $ (0.25) | $ 4.52 | $ (14.30) |
Weighted average number of shares outstanding, diluted | 47,635,875 | 46,767,930 | 15,048,576 |
Nature of Operations |
12 Months Ended | |||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2023 | ||||||||||||||||||||||||||||||||||
Nature of Operations [Abstract] | ||||||||||||||||||||||||||||||||||
NATURE OF OPERATIONS | NOTE 1: NATURE OF OPERATIONS
INX Limited (the “Company” or “INX”) was incorporated under the Gibraltar Companies Act on November 27, 2017 with registered office at 57/63 Line Wall Road, Gibraltar GX11 1AA, Gibraltar. The Company is wholly owned by The INX Digital Company Inc., a company incorporated under the provincial Business Corporations Act in British Columbia, Canada, with publicly listed shares on Cboe Canada under the symbol INXD and The OTCQB Venture Market under the symbol INXDF.
The consolidated financial statements of the Company as of December 31, 2023 and 2022 and for each of the three years in the period ended December 31, 2023, were authorized for issuance in accordance with a resolution of the board of directors on April __, 2024.
Nature of Operations
The Company, through its subsidiaries, is engaged in the operation and ongoing development of comprehensive infrastructure and regulated solutions for trading and investing in blockchain assets as well as utilizing digital assets as a form of payment. The Company operates INX.One, a single point of entry platform that offers primary listings of regulated security tokens and trading of security tokens and digital assets in the secondary market.
The Company charges fees at a transaction level. The transaction fee is calculated based on volume and the value of the transaction. The transaction fee is collected from customers at the time the transaction is executed.
The Company, through one of the subsidiaries, also facilitates financial transactions between global banks and offers a full range of brokerage services to several leading banking institutions worldwide, mainly in foreign exchange and interest rate derivatives.
The Company operates in the following reportable segments:
INX Token
As part of the Company’s blockchain ecosystem, INX created the INX Token (the “INX Token”), and on August 20, 2020, the U.S Securities and Exchange Commission (the “SEC”) acknowledged the effectiveness of the F-1 Registration Statement that was filed by INX with the SEC and declared the effectiveness of the initial public offering of INX Tokens (“The INX Token Offering” or “the Offering”) pursuant to which INX offered up to 130 million INX Tokens at a price of $0.90 per INX Token.
The INX Token was offered to the public on August 24, 2020, and closed on April 22, 2021, when the Offering was completed.
In July 2021, INX listed the INX Token for trading on the trading platform for “digital securities,” i.e., digital assets that constitute securities under the applicable law, operated through INX’s subsidiary, INX Securities, LLC (formerly the “INX Securities Trading Platform”, rebranded as INX.One in 2022).
INX has not allocated for issuance and does not intend to issue 35 million of the 200 million INX Tokens that have been created. These tokens may be used to fund acquisitions, address regulatory requirements or fund the operations of INX if the Board of Directors of INX determines that INX has net cash balances sufficient to fund less than nine months of its operations. INX intends to restrict issuances of the reserved INX Tokens to these or similar extraordinary situations to limit dilution to INX Token holders. In addition, INX maintains 29.4 million INX Tokens in its treasury. As of December 31, 2023, the Company held approximately 64.4 million INX Tokens in aggregate.
Following an amendment to the INX Token rights which was approved by the Board of Directors of the Company on May 17, 2019 (the “Token Rights Amendment”), the holders of INX Tokens (other than INX) are entitled to receive a pro rata distribution of 40% of INX’s net cash flow from operating activities, excluding any cash proceeds from an initial sale by INX of an INX Token (the “Adjusted Operating Cash Flow”). The distribution is based on INX’s cumulative Adjusted Operating Cash Flow, net of cash flows which have already formed a basis for a prior distribution, calculated as of December 31 of each year. The distribution is to be paid to parties (other than INX) holding INX Tokens as of March 31 of the following year on April 30th, commencing with the first distribution to be paid, if at all. As of December 31, 2023, the INX cumulative adjusted operating cash flow activity was negative, and therefore no distribution is expected on April 30, 2024.
Holders of INX Tokens are also entitled, at a minimum, to a 10% discount on the payment of transaction fees on the INX.One Trading Platform.
Securities Exchange Agreement
On January 10, 2022, the Company completed the definite securities exchange agreement (the “Transaction”) with The INX Digital Company, Inc. (formerly - Valdy Investments Ltd.) (the “Parent Company”), whereby the Parent Company acquired all issued and outstanding securities of INX. The Transaction resulted in a reverse takeover transaction whereby pre-transaction shareholders of INX became majority shareholders of the Parent Company and INX became a wholly owned subsidiary of the Parent Company. The Parent Company continues the business of INX.
Organizational Structure
The Company operates through the following wholly owned subsidiaries:
The following subsidiaries are currently dormant:
Capital management
These consolidated financial statements have been prepared on a going concern basis, which contemplates that the Company will continue in operation for the foreseeable future and be able to realize its assets and discharge its liabilities and commitments in the normal course of business. As of December 31, 2023, the Company had an accumulated deficit of $48,623. During the year ended December 31, 2023, the Company incurred an operating loss of $16,475 and negative cash flow from operating activities of $7,781. Based on the Company’s existing cash funds and the working capital in the amount of $22,731 as of December 31, 2023 (excluding assets held in the Reserve Fund and the INX Token liability), and management’s projections of the operating results for the next twelve months, management concluded that the Company has sufficient funds to continue its operations and meet its obligations for a period of at least twelve months from the date the financial statements were authorized for issuance. |
Material Accounting Policies |
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Material Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
MATERIAL ACCOUNTING POLICIES | NOTE 2: MATERIAL ACCOUNTING POLICIES
The following accounting policies have been applied consistently in these consolidated financial statements for the periods presented, unless otherwise stated.
These consolidated financial statements have been prepared in accordance with International Accounting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and interpretations of the International Reporting Interpretations Committee (“IFRIC”).
The consolidated financial statements have been prepared on a historical cost basis, except for certain financial instruments which are measured at fair value and digital assets characterized as inventory which are measured at fair value less cost to sell recognized through profit or loss.
The consolidated financial statements comprise the financial statements of the Company and companies that are controlled by the Company (subsidiaries). Control is achieved when the Company is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Potential voting rights are considered when assessing whether an entity has control. The consolidation of the financial statements commences on the date on which control is obtained and ends when such control ceases.
The financial statements of the Company and of the subsidiaries are prepared as of the same dates and periods. The consolidated financial statements are prepared using uniform accounting policies by all companies in the group. Significant intra group balances and transactions and gains or losses resulting from intragroup transactions are eliminated in full in the consolidated financial statements.
The consolidated financial statements are presented in U.S. Dollars.
The Company determines the functional currency of each entity through an analysis of the consideration factors identified in International Accounting Standard (“IAS”) 21.
Assets, including fair value adjustments upon acquisition, and liabilities of an investee which is a foreign operation, are translated at the closing rate at each reporting date. Profit or loss items are translated at average exchange rates for all periods presented. The resulting translation differences are recognized in other comprehensive income (loss).
Transactions denominated in foreign currency are recorded upon initial recognition at the exchange rate at the date of the transaction. After initial recognition, monetary assets and liabilities denominated in foreign currency are translated at each reporting date into the functional currency at the exchange rate at that date. Exchange rate differences, other than those capitalized to qualifying assets or accounted for as hedging transactions in equity, are recognized in profit or loss. Non-monetary assets and liabilities denominated in foreign currency and measured at cost are translated at the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currency and measured at fair value are translated into the functional currency using the exchange rate prevailing at the date when the fair value was determined.
Monetary assets and liabilities linked to the changes in the Israeli Consumer Price Index (“Israeli CPI”) are adjusted at the relevant index at each reporting date according to the terms of the agreement.
The preparation of the consolidated financial statements in accordance with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. Actual results may differ from those estimates.
Key assumptions made in the consolidated financial statements concerning uncertainties at the reporting date that may result in a material adjustment to the carrying amount of the INX Token liability and INX Token warrant liability within the next financial year are discussed in Note 14 and Note 15.
Many aspects of the digital currency and blockchain industry have not yet been addressed by the current IFRS guidance. The Company is required to make assumptions and judgments as to its accounting policies and the application thereof, which is disclosed in the notes to the consolidated financial statements. If specific guidance is enacted by the IASB in the future, the impact may result in changes to the Company’s profit or loss and financial position as currently presented.
Determining the fair value of share-based payment transactions
The fair value of share-based payment transactions is determined upon initial recognition by an acceptable option pricing model. The inputs to the model include share price, exercise price and assumptions regarding expected volatility, expected life of share option and expected dividend yield.
Discount rate for a lease liability
When the Company is unable to readily determine the discount rate implicit in a lease in order to measure the lease liability, the Company uses an incremental borrowing rate. That rate represents the rate of interest that the Company would have to pay to borrow over a similar term and with similar security, the funds necessary to obtain an asset of similar economic environment. When there are no financing transactions that can serve as a basis, the Company determines the incremental borrowing rate based on its credit risk, the lease term and other economic variables deriving from the lease contract’s conditions and restrictions. In certain situations, the Company is assisted by an external valuation expert in determining the incremental borrowing rate.
Impairment of goodwill
The Company reviews goodwill for impairment once a year, on December 31, or more frequently if events or changes in circumstances indicate that there is an impairment. This requires management to make an estimate of the projected future cash flows from the continuing use of the cash-generating unit (or a group of cash-generating units) to which the goodwill is allocated and also to choose a suitable discount rate for those cash flows.
Deferred tax assets
Deferred tax assets are recognized for unused carryforward tax losses and deductible temporary differences to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the timing and level of future taxable profits, its source and the tax planning strategy.
Determining the fair value of an unquoted financial liability
The fair value of unquoted warrant liability in Level 3 of the fair value hierarchy is determined using the Black and Scholes option pricing model. The inputs to the model include share price, exercise price and assumptions regarding expected volatility, expected life of and expected dividend yield.
The Company classifies and measures debt instruments in the financial statements based on the following criteria:
The Company’s business model is to hold the financial assets in order to both collect their contractual cash flows and to sell the financial assets, and the contractual terms of the financial assets give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
After initial recognition, instruments in this category are measured at fair value. Gains or losses from fair value adjustments, excluding interest and exchange rate differences, are recognized in other comprehensive income.
A financial asset which is a debt instrument does not meet the criteria for measurement at amortized cost or at fair value through other comprehensive income. After initial recognition, the financial asset is measured at fair value and gains or losses from fair value adjustments are recognized in profit or loss.
As part of its risk management activities, the Company held positions in derivatives such as digital currency forwards. A digital currency forward is an exchange traded contract which represents a legal agreement to either buy or sell a referenced digital asset at a predetermined price at some time in the future. Digital assets forwards utilized by the Company settle in a stable coin. Derivative assets are carried at fair value and any realized and unrealized gains (losses) are recognized through profit and loss.
Impairment of financial assets:
At the end of each reporting period, the Company evaluates the loss allowance for financial debt instruments which are not measured at fair value through profit or loss.
The Company has short-term financial assets such as trade receivables for which the Company applies the simplified approach in IFRS 9 and measures the loss allowance in an amount equal to the expected lifetime credit losses.
With regards to trade receivables, the Company grants its customers interest-free credit for periods of 30-90 days. As of December 31, 2023 and 2022, there were no material past-due accounts and no allowance for doubtful accounts was recorded.
A financial asset is derecognized only when:
Financial liabilities are initially recognized at fair value. After initial recognition, the accounting treatment of financial liabilities is based on their classification as follows:
After the initial recognition, loans and other liabilities are measured based on their terms at amortized cost less directly attributable transaction costs using the effective interest method.
These liabilities include financial liabilities held for trading (including the INX Token warrant liability) and financial liabilities designated upon initial recognition as at fair value through profit or loss. Changes in the fair value of liabilities held for trading are recognized in profit or loss in financial expenses. Based on the terms of the INX Token, as described in Note 1, the INX Token is a hybrid financial instrument. The host instrument is a financial liability due to the right of the INX Token holder to use the INX Token to pay transactions fees on the INX.One Trading Platform. The INX Token is considered a puttable instrument which is a financial liability in accordance with IAS 32, Financial Instruments: Presentation.
INX’s obligation to make a pro rata distribution annually to the INX Token holders from INX’s Adjusted Operating Cash Flow is an embedded derivative. The Company views INX’s operating cash flows as a financial variable, and therefore, the embedded derivative requires bifurcation pursuant to IFRS 9. The Company elected, in accordance with IFRS 9, to designate the entire financial liability (including the embedded derivative) at fair value through profit and loss. Accordingly, the INX Token liability and the INX Token warrant liability are remeasured to fair value at the end of each reporting period.
The change in the fair value of the INX Token liability that is attributable to changes in credit risk, excluding those changes in credit risk attributable to the embedded derivative, to the extent there are any, would be presented in other comprehensive income. The remaining amount of the change in the fair value of the INX Token liability would be presented in profit or loss. At December 31, 2023, the change in fair value of the INX Token liability is included in profit or loss.
Should the INX Token be used to pay for services provided by INX, revenue would be recognized and the respective portion of the INX Token liability would be derecognized. Additionally, the fair value of INX Tokens issued in consideration for services provided to the Company would be recognized as compensation expense when services are provided.
Financial assets and financial liabilities are offset, and the net amount is presented in the statement of financial position if there is a legally enforceable right to set off the recognized amounts and there is an intention either to settle on a net basis or to realize the asset and settle the liability simultaneously. The right of set-off must be legally enforceable not only during the ordinary course of business of the parties to the contract but also in the event of bankruptcy or insolvency of one of the parties.
Convertible debt which contains both an equity component and a liability component are separated into two components. This separation is performed by first determining the liability component based on the fair value of an equivalent non-convertible liability. The value of the conversion component is determined to be the residual amount. Directly attributable transaction costs are apportioned between the equity component and the liability component based on the allocation of proceeds to the equity and liability components.
INX has entered into equity funding agreements (SAFEs) pursuant to which funds received by INX from investors have been automatically converted into the same class of share capital of INX that were issued in a qualifying financing, as defined in the SAFEs. INX is not obligated to complete a qualifying financing or to approve the issuance of shares or dilutive securities within the term specified in the SAFE that would result in the issuance of a variable number of the INX’s equity instruments. Accordingly, as the SAFEs are a non-derivative for which the conversion price into the Company’s equity instruments is fixed at the end of its term, the consideration received from investors pursuant to the SAFEs is classified as equity. As of December 31, 2023, all INX SAFE’s have been converted into ordinary shares.
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. Fair value measurement is based on the assumption that the transaction will take place in the asset’s or the liability’s principal market, or in the absence of a principal market, in the most advantageous market.
The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.
Fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.
The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.
All assets and liabilities measured at fair value or for which fair value is disclosed are categorized into levels within the fair value hierarchy based on the lowest level input that is significant to the entire fair value measurement.
The Company classifies the bases used to measure certain assets and liabilities at their fair value. Assets and liabilities carried or measured at fair value have been classified into three levels based upon a fair value hierarchy that reflects the significance of the inputs used in making the measurements.
The levels are as follows:
For details of the fair value of the INX Token liability, see Note 14. For the fair value of INX Token warrant liability, see Note 15. The fair values of current financial assets and financial liabilities, other than the INX Token and INX Token warrant liability, approximate their carrying amounts due to the short-term maturity of these instruments.
Investments, other than the investment in an associate, are accounted for as financial assets, which are initially recognized at fair value and subsequently measured at fair value through other comprehensive income (loss).
The Company’s investment in an associate represents an ownership share in an entity in which the Company has significant influence and that is accounted for under the equity method in accordance with IAS 28 Investments in Associates. Under the equity method, the investment is presented at cost with the addition of post-acquisition changes in the Company’s share of net assets, including other comprehensive income of the associate. Gains and losses resulting from transactions between the Company and the associate are eliminated to the extent of the interest in the associate.
Losses of an associate are recognized by the Company to the extent of its investment in the associate plus any losses that the Company may incur as a result of its legal or constructive obligations on behalf of the associate. As of December 31, 2023, the Company’s share of losses incurred by the associate exceeds its investment amount and is reflected in the profit or loss as loss on investment in associate. Loss in excess of the Company’s investment amount is recognized as a non-current liability.
The equity method is applied until the loss of significant influence or the classification of the investment as held for sale. On the date of loss of significant influence, the Company would measure any remaining investment in the associate at fair value and recognize in profit or loss the difference between the fair value of any remaining investment plus any proceeds from the sale of the investment in the associate and the carrying amount of the investment on that date.
Digital assets are measured at cost on the initial recognition.
Digital assets characterized as inventory (current assets):
The Company has assessed that it acts in a capacity as a commodity broker trader as defined in IAS 2, Inventories, in characterizing its holdings of digital assets as inventory. Such digital assets held by the Company are principally acquired for the purpose of selling in the near future and generating a profit from fluctuations in price or broker-traders’ margin, therefore, they are accounted for as inventory, and changes in fair value (less cost to sell) are recognized in profit or loss.
Digital assets characterized as intangible assets (non-current assets):
Digital assets not characterized as inventory are classified as indefinite life intangible assets and are tested for impairment annually or whenever there is an indication that the intangible asset may be impaired. An impairment loss is recognized if the carrying amount exceeds its fair value less cost of sale. The Company recorded impairment of digital assets in the amount of $72 and $80, for the year ended December 31, 2022 and 2021, respectively. As of December 31, 2023 and 2022, the Company did not hold any digital assets characterized as intangible assets.
The fair value of digital assets is based on quoted prices in the principal market as of 12:00 AM UTC.
Customer funds represent cash and digital assets that are held for the exclusive benefit of customers. The Company safeguards these assets on behalf of its customers and is subject to security risks for loss, theft or misuse. The Company restricts the use of the assets underlying the customer funds to meet regulatory requirements and classifies them as current based on their purpose and availability to fulfill its direct obligation to customers. Due to the Company’s custodial obligation to safeguard customer assets, consistent with the SEC Staff Accounting Bulletin No. 121 guidance, the Company recognizes a liability to reflect its obligation to safeguard assets held for its customers and the corresponding customer assets, measured at the fair value upon the initial recognition and subsequently at each reporting period.
Intangible assets acquired in a business combination are measured at fair value at the acquisition date.
Intangible assets with a finite useful life are amortized on a straight-line basis over their useful life and reviewed for impairment whenever there is an indication that the asset may be impaired. The amortization period and the amortization method for an intangible asset are reviewed at least at each year-end.
Intangible assets with indefinite useful lives are not systematically amortized and are tested for impairment annually or whenever there is an indication that the intangible asset may be impaired. The useful life of these assets is reviewed annually to determine whether their indefinite life assessment continues to be supportable. If the events and circumstances do not continue to support the assessment, the change in the useful life assessment from indefinite to finite is accounted for prospectively as a change in the accounting estimate and on that date the asset is tested for impairment. Commencing from that date, the asset is amortized systematically over its useful life.
Business combinations are accounted for by applying the acquisition method. The cost of the acquisition is measured at the fair value of the consideration transferred on the acquisition date with the addition of non-controlling interests in the acquiree. In each business combination, the Company chooses whether to measure the non-controlling interests in the acquiree based on their fair value on the acquisition date or at their proportionate share in the fair value of the acquiree’s net identifiable assets. Direct acquisition costs are recorded in the statement of comprehensive income as incurred. Contingent consideration is recognized at fair value on the acquisition date and classified as a financial asset or liability in accordance with IAS 39. Subsequent changes in the fair value of the contingent consideration are recognized in profit or loss.
Goodwill is initially measured at cost which represents the excess of the acquisition consideration and the amount of non-controlling interests over the net identifiable assets acquired and liabilities assumed. If the resulting amount is negative, the acquirer recognizes the resulting gain on the acquisition date.
The Company evaluates the need to record an impairment of non-financial assets whenever events or changes in circumstances indicate that the carrying amount is not recoverable. If the carrying amount of non-financial assets exceeds their recoverable amount, the assets are reduced to their recoverable amount. The recoverable amount is the higher of fair value less costs of sale and value in use. In measuring value in use, the expected future cash flows are discounted using a pre-tax discount rate that reflects the risks specific to the asset. The recoverable amount of an asset that does not generate independent cash flows is allocated to the cash-generating unit to which the asset belongs. Impairment losses are recognized in profit or loss.
An impairment loss of an asset, other than goodwill, is reversed only if there have been changes in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized. Reversal of an impairment loss, as above, shall not be increased above the lower of the carrying amount that would have been determined (net of depreciation or amortization) had no impairment loss been recognized for the asset in prior years and its recoverable amount. The reversal of impairment loss of an asset presented at cost is recognized in profit or loss.
The following criteria are applied in assessing impairment of these specific assets:
The Company reviews goodwill for impairment once a year, on December 31, or more frequently if events or changes in circumstances indicate that there is an impairment.
Goodwill is tested for impairment by assessing the recoverable amount of the cash-generating unit (or group of cash-generating units) to which the goodwill has been allocated. An impairment loss is recognized if the recoverable amount of the cash-generating unit (or group of cash-generating units) to which goodwill has been allocated is less than the carrying amount of the cash-generating unit (or group of cash-generating units). Any impairment loss is allocated first to goodwill. Impairment losses recognized on goodwill cannot be reversed in subsequent periods.
The impairment test is performed annually, on December 31, or more frequently if events or changes in circumstances indicate that there is an impairment (see Note 12e).
The Company accounts for a contract as a lease when the contract terms convey the right to control the use of an identified asset for a period of time in exchange for consideration.
The Company as a lessee:
For leases in which the Company is the lessee, the Company recognizes on the commencement date of the lease a right-of-use asset and a lease liability, excluding leases whose term is up to 12 months and leases for which the underlying asset is of low value. For these excluded leases, the Company has elected to recognize the lease payments as an expense in profit or loss on a straight-line basis over the lease term.
In measuring the lease liability, the Company has elected to apply the practical expedient in the Standard and does not separate the lease components from the non-lease components (such as management and maintenance services, etc.) included in a single contract. On the commencement date, the lease liability includes all unpaid lease payments discounted at the interest rate implicit in the lease, if that rate can be readily determined, or otherwise using the Company’s incremental borrowing rate. After the commencement date, the Company measures the lease liability using the effective interest rate method.
On the commencement date, the right-of-use asset is recognized in an amount equal to the lease liability plus lease payments already made on or before the commencement date and initial direct costs incurred. The right-of-use asset is measured applying the cost model and depreciated over the shorter of its useful life and the lease term.
The Company tests for impairment of the right-of-use asset whenever there are indications of impairment pursuant to the provisions of IAS 36.
The Company determines revenue recognition from contracts with customers through the following steps:
In determining the amount of revenue from contracts with customers, the Company evaluates whether it is a principal or an agent in the arrangement. The Company is a principal when the Company controls the promised goods or services before transferring them to the customer. In these circumstances, the Company recognizes revenue for the gross amount of the consideration. When the Company is an agent, it recognizes revenue for the net amount of the consideration, after deducting the amount due to the principal.
Transaction fees revenue includes revenue from transaction and trading fees charged to customers utilizing the Company’s trading platform and are presented on a net basis. The Company’s service is comprised of a single performance obligation to provide a matching service when customers buy, sell, or convert digital assets. The Company does not control the digital asset being provided before it is transferred to the buyer, does not have inventory risk related to the digital asset, and is not responsible for the settlement of the digital asset. The Company also does not set the price for the digital asset as the price is a market rate established by users of the platform. As a result, the Company acts as an agent in facilitating the ability for a customer to purchase digital assets from another customer.
Transaction fees charged on the INX.One trading platform are recognized as revenue when the Company’s obligation is satisfied, promised services are transferred to the customer and the customer obtains control. Brokerage fees revenue is recorded according to the date the service was provided, or the operation was carried out. Relevant to brokerage and transaction fees, contracts with customers are usually open-ended and can be terminated by either party without a termination penalty. Therefore, these contracts are defined at the transaction level and do not extend beyond the service already provided. The transaction price is the amount of the consideration that is expected to be received based on the contract terms, excluding amounts collected on behalf of third parties (such as taxes).
Service revenue represents fees for technology consultation and advisory, as well as listing services performed by the Company under written agreements and is recognized upon the delivery of promised goods or services to the customer and when Company’s performance obligation to the customer is satisfied. The revenue is recognized in an amount that reflects the fair value of the consideration to which the Company expects to be entitled to, upon completion of the Company’s performance obligation for those services, as stated in the contract. As of December 31, 2023, the Company received payments prior to the completion of its performance obligation under contracts with customers, which are recognized as deferred revenue.
The Company also recognizes revenue from buying and selling digital assets it owns. Such revenue is recognized in the gross amount of consideration received on sales less the cost of digital assets sold. The profit/loss on the sale is included in the changes in the revaluation of the digital assets to fair value.
Certain of the Company’s employees and other service providers are entitled to compensation in the form of equity settled share-based payment. The cost of the transactions is measured at the fair value of the equity instruments granted at the grant date, using an appropriate valuation model, further details of which are provided in Note 19. The cost of share-based grants is recognized in profit or loss together with a corresponding increase in equity during the period during which the performance and/or service conditions are to be satisfied ending on the date on which the relevant employee or service provider becomes entitled to the award (the “vesting period”). The cumulative expense is recognized at the end of each reporting period until the vesting period expires, reflecting the number of instruments that will ultimately vest at the end of the vesting period.
Until December 31, 2021, the Company granted options exercisable into its ordinary shares. Commencing in 2022, subsequent to the completion of the Transaction (see Note 1), options are granted to the Company’s employees and other service providers by the Parent Company and are exercisable into the Common shares of the Parent Company.
Research expenses are recognized in profit or loss when incurred. An intangible asset arising from a development project or from the development phase of an internal project is recognized if the Company can demonstrate all of the following: the technical feasibility of completing the intangible asset so that it will be available for use or sale; the Company’s intention to complete the intangible asset and use or sell it; the Company’s ability to use or sell the intangible asset; how the intangible asset will generate future economic benefits; the availability of adequate technical, financial and other resources to complete the intangible asset; and the Company’s ability to measure reliably the expenditure attributable to the intangible asset during its development. Through December 31, 2023, the Company has not met all the aforementioned criteria and therefore all development costs have been recognized in profit or loss.
The consolidated financial statements include estimates and assumptions for determining the future tax rates applicable to subsidiaries and identifying temporary differences that relate to each subsidiary. Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities using the tax rates used enacted or substantively enacted at the reporting date. Deferred tax is provided using a liability method on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date. Deferred tax assets are recognized for deductible temporary differences and the carryforward of any unused tax losses. Deferred tax assets are recognized to the extent it is probable that taxable profit will be available against the deductible temporary differences and that the carryforward of unused tax losses can be utilized. The carrying amount of deferred tax assets is reviewed at each reporting date and adjusted accordingly.
Basic income (loss) per share is computed by dividing the net income (loss) attributable to equity holders of the Company by the weighted average number of ordinary shares outstanding during the period. Diluted income (loss) per share is computed by dividing the net income (loss) by the weighted average number of ordinary shares outstanding, plus the weighted average number of ordinary shares that would be issued on conversion of stock options and warrants.
Potential ordinary shares are included in the computation of diluted earnings per share when their conversion decreases earnings per share from continuing operations. Potential ordinary shares that are converted during the period are included in diluted earnings per share only until the conversion date and from that date in basic earnings per share. |
New Accounting Policies and Recent Accounting Pronouncements |
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New Accounting Policies and Recent Accounting Pronouncements [Abstract] | |||||||
NEW ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS | NOTE 3: NEW ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS
Amendment to IAS 1, “Disclosure of Accounting Policies”:
In February 2021, the IASB issued amendments to IAS 1 Presentation of Financial Statements, amendments to IFRS Practice Statement 2 Making Materiality Judgements and amendments to IAS 8 Definition of Accounting Estimate. The amendments require companies to disclose material accounting policies rather than their significant accounting policies. This amendment is effective for annual periods starting on or after January 1, 2023.
The application of the above Amendment did not have a material impact on the Company’s consolidated financial statements.
Amendment to IAS 8, “Accounting Policies, Changes to Accounting Estimates and Errors”:
In February 2021, the IASB issued an amendment to IAS 8, “Accounting Policies, Changes to Accounting Estimates and Errors” (“the Amendment”), in which it introduces a new definition of “accounting estimates”.
Accounting estimates are defined as “monetary amounts in financial statements that are subject to measurement uncertainty”. The Amendment clarifies the distinction between changes in accounting estimates and changes in accounting policies and the correction of errors.
The Amendment is applied prospectively for annual reporting periods beginning on January 1, 2023 and is applicable to changes in accounting policies and changes in accounting estimates that occur on or after the start of that period.
The application of the Amendment did not have a material impact on the Company’s consolidated financial statements.
Amendment to IAS 12, “Income Taxes”:
In May 2021, the IASB issued an amendment to IAS 12, “Income Taxes” (“IAS 12”), which narrows the scope of the initial recognition exception under IAS 12.15 and IAS 12.24 (“the Amendment”).
According to the recognition guidelines of deferred tax assets and liabilities, IAS 12 excludes recognition of deferred tax assets and liabilities with respect to certain temporary differences arising from the initial recognition of certain transactions. This exception is referred to as the “initial recognition exception”. The Amendment narrows the scope of the initial recognition exception and clarifies that it does not apply to the recognition of deferred tax assets and liabilities arising from transactions that are not a business combination and that give rise to equal taxable and deductible temporary differences, even if they meet the other criteria of the initial recognition exception.
The Amendment applies for annual reporting periods beginning on or after January 1, 2023, with earlier application permitted. In relation to leases and decommissioning obligations, the Amendment is to be applied commencing from the earliest reporting period presented in the financial statements in which the Amendment is initially applied. The cumulative effect of the initial application of the Amendment should be recognized as an adjustment to the opening balance of retained earnings (or another component of equity, as appropriate) at that date.
The application of the Amendment did not have a material impact on the Company’s consolidated financial statements.
Amendment to IAS 1, “Disclosure of Accounting Policies”:
In January 2020, which was further amended in October 2022, the IASB issued an amendment to IAS 1, Classification of Liabilities as Current or Non-Current to clarify the requirements for classifying liabilities as current or non-current.
The new guidance will be effective for annual periods starting on or after January 1, 2024 and must be applied retrospectively. Early adoption is permitted.
The above Amendment is not expected to have a material impact on the Company’s consolidated financial statements.
Amendments to IAS 7, “Statement of Cash Flows”, and IFRS 7, “Financial Instruments: Disclosures”:
In May 2023, the IASB issued amendments to IAS 7, “Statement of Cash Flows”, and IFRS 7, “Financial Instruments: Disclosures” (“the Amendments”) to address the presentation of liabilities and the associated cash flows arising out of supplier finance arrangements, as well as disclosures required for such arrangements.
The disclosure requirements in the Amendments are intended to assist users of financial statements in understanding the effects of supplier finance arrangements on an entity’s liabilities, cash flows and exposure to liquidity risk.
The Amendments are effective for annual reporting periods beginning on or after January 1, 2024. Early adoption is permitted but will need to be disclosed.
The Company believes that the Amendments are not expected to have a material impact on its consolidated financial statements.
Amendments to IAS 21, “The Effects of Changes in Foreign Exchange Rates”:
In August 2023, the IASB issued “Amendments to IAS 21: Lack of Exchangeability (Amendments to IAS 21, “The Effects of Changes in Foreign Exchange Rates”)” (“the Amendments”) to clarify how an entity should assess whether a currency is exchangeable and how it should measure and determine a spot exchange rate when exchangeability is lacking.
The Amendments set out the requirements for determining the spot exchange rate when a currency lacks exchangeability. The Amendments require disclosure of information that will enable users of financial statements to understand how a currency not being exchangeable affects or is expected to affect the entity’s financial performance, financial position and cash flows.
The Amendments apply for annual reporting periods beginning on or after January 1, 2025. Earlier adoption is permitted, in which case, an entity is required to disclose that fact. When applying the Amendments, an entity should not restate comparative information. Instead, if the foreign currency is not exchangeable at the beginning of the annual reporting period in which the Amendments are first applied (the initial application date), the entity should translate affected assets, liabilities and equity as required by the Amendments and recognize the differences as of the initial application date as an adjustment to the opening balance of retained earnings and/or to the foreign currency translation reserve, as required by the Amendments.
The Company believes that the Amendments are not expected to have a material impact on its consolidated financial statements. |
Business Combinations |
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BUSINESS COMBINATIONS | NOTE 4: BUSINESS COMBINATIONS
I.L.S. Brokers Ltd.
On June 9, 2021, INX entered into a share purchase agreement with the shareholders of I.L.S. Brokers Ltd., a Company incorporated under the laws of the State of Israel (“ILSB”) for the purchase of all of the issued outstanding shares of ILSB (the “ILSB Acquisition”). The consideration paid by INX as part of the ILSB Acquisition to the shareholders was $4,327.
Mr. Datika was a shareholder of ILSB and sold his shares to INX as part of the ILSB Acquisition. Immediately prior to the ILSB Acquisition, Mr. Datika held, directly and indirectly, approximately 20% of the outstanding share capital of ILSB. Mr. Datika waived his right to receive full consideration under the ILSB Acquisition and received only an amount equal to the tax payments due by him and by his affiliated entity in connection with the ILSB Acquisition. As a result of such waiver, the consideration paid by INX as part of the ILSB Acquisition was reduced from $4,909 to $4,327. Mr. Datika is one of the founding shareholders of INX (through the wholly owned company Triple-V (1999) Ltd. (“Triple-V”)) and is also the CEO of INX. The waiver of the partial consideration by Mr. Datika in the amount of $582 was recorded as a contribution to equity.
The following are the estimated fair values of the identifiable assets and liabilities assumed of ILSB as of the date of the acquisition:
Intangible assets include Customer Relationships, Trade Name and License. See Note 12.
The Company estimated fair values allocated to the assets and liabilities of ILSB with the assistance of an external independent expert. From the acquisition date to December 31, 2021, ILSB has contributed net income of $254 to the consolidated net loss, and $2,278 to the consolidated revenue.
If the business combination had taken place at the beginning of the calendar year 2021, the effect on consolidated net loss would have been immaterial and the consolidated revenue would have been increased by $4,164.
Acquisition costs that are directly attributable to the transaction were immaterial.
INX Securities LLC (formerly Openfinance Securities LLC)
On January 12, 2021, INX entered into an asset purchase agreement (the “OFN Asset Purchase Agreement”) with Openfinance Holdings, Inc. and certain subsidiaries of Openfinance Holdings, Inc. (collectively, “OFN”). The consideration paid by INX as part of the OFN Acquisition to the shareholders was $3,253. Pursuant to the OFN Asset Purchase Agreement, on May 9, 2021, INX acquired various assets of OFN, including the entire share capital of Openfinance Securities, LLC. Following the completion of the Asset Purchase Agreement on May 9, 2021, OFN Securities, LLC was renamed to INX Securities, LLC (“INXS”).
The following are the estimated fair values of the identifiable assets and liabilities of OFN assumed as of May 9, 2021, the date of the acquisition:
Intangible assets include License, Core Technology and Customer Relationships – see Note 12.
The Company estimated the fair values allocated to the assets and liabilities of OFN with the assistance of an external independent expert. During the year ended December 31, 2021, OFN has contributed a net loss of $133 to the consolidated net loss, and $193 to the consolidated revenue. If the business combination had taken place at the beginning of the year, the effect on consolidated net loss and on consolidated revenue would have been immaterial.
Acquisition costs that are directly attributable to the transaction were immaterial.
Contingent consideration:
As part of the purchase agreement with the previous owner of Open Finance securities, LLC., it was agreed that the previous owner would be entitled to an additional consideration (“the contingent consideration”) as follows:
As of December 31, 2021, the first installment was paid and the fair value of the second installment of the contingent consideration was estimated at $400 (measured at level 3 of the fair value hierarchy), which is presented as Contingent consideration liability. The second installment was paid during the year ended December 31, 2022.
Token warrant grant:
As part of the consideration for the acquisition, the Company granted the shareholders of OFN, 885,000 INX Token warrants which are exercisable at a price of $0.07 per warrant. The fair value of these warrants in the amount of $735 was determined using the Black-Scholes option pricing method. These warrants were exercised in 2021. |
Reserve Fund |
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Reserve Fund [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
RESERVE FUND | NOTE 5: RESERVE FUND
In connection with the INX Token Offering, INX committed to reserve 75% of the gross proceeds less payments to underwriters in excess of $25,000 to be available to cover customer and INX’s losses, if any, that result from cybersecurity breaches or theft, errors in execution of the trading platform or its technology, and counterparty defaults, including instances where counterparties lack sufficient collateral to cover losses. INX refers to this amount as the “Reserve Fund”.
As of December 31, 2022, INX had segregated $36,023 as the Reserve Fund. In December 2023, the Company learned of a cyber-attack that occurred on the computer system of a third-party service provider of one of the Company’s subsidiaries. As a result, the malicious party managed to cause a loss of funds of the Company’s subsidiary in the amount of $1,618, recognized as Other expense. Upon the discovery of the breach, the Company took an immediate action to eliminate the security vulnerability, subsequently put in place additional security measures designed to prevent such cyber-attack incidents in the future, and continues to work with relevant law enforcements seeking to recover lost funds. The Company utilized funds set aside in the Reserve Fund to cover the loss, as a result, as of December 31, 2023, the balance of the Reserve Fund was reduced to $34,405.
On July 13, 2021, the INX’s Board of Directors approved the Investment Policy of the Reserve Fund. Per the approved Policy, as amended on August 11, 2022, the Reserve Fund, post the amendment, shall be invested as follows: minimum 15% in cash and bank deposits, up to 70% in U.S Treasury securities, up to 20% shall be invested in exchange traded funds and up to 50% in corporate bonds and other instruments with the lowest investment grade rating of BBB.
The Reserve Fund is comprised of cash and cash equivalents, U.S. Treasury securities and corporate bonds held at banks and brokerage firms as follows:
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Investments |
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INVESTMENTS | NOTE 6: INVESTMENTS
On December 31, 2023 and 2022, the Company held the following investments:
Investments in Private Equity
Investments in private equity are not traded in public markets and include Company’s holdings in private companies under share purchase agreements and a simple agreement for future equity (SAFE), which entitle the Company to receive common stock of the issuing companies at a future date.
As of December 31, 2023, INX holds investments in three separate private companies. Under the share purchase agreement dated March 20, 2021, one of the investments of $150 entitles the Company to receive 95,411 ordinary shares of the private company based in the United Kingdom at a price of $1.57 per share. The second investment of $250 was made on September 9, 2021 in a private company based in Gibraltar under a SAFE. The SAFE entitles the Company to receive the most senior class of shares issued by the private company upon the completion of the qualified or non-qualified equity financing, as defined in the SAFE, at the SAFE conversion price.
During 2023, INX invested $90 in a private company based in the United States, in return for preferred shares to be issued by the private company at the time of the closing in the amount of the investment, plus a warrant to purchase newly issued by the private company security tokens valued at $300 as of the date of the primary issuance at $0.01 per token. The preferred shares are convertible to security tokens.
Investment in Associate
In June 2023, INX entered into a shareholders’ and joint venture agreement (“SICPA Agreement”), whereby parties to the agreement have agreed to joint their expertise and collaborate to develop central bank digital currency solutions with the utilization of blockchain technology. Subsequently, for the purpose of executing joint objectives under the SICPA Agreement, the parties formed SICPA INX SA, subsequently renamed as NABATECH SA, (“Nabatech”), an entity organized under the laws of Switzerland. During the year ended December 31, 2023, the Company made the initial capitalization investment in Nabatech of $32 and owns 33 percent of the issued and outstanding share capital of Nabatech. In addition, INX entered into a service agreement with Nabatech to provide technology support and advisory services to the entity.
As of December 31, 2023, the Company recorded loss on the investment in associate of $591 and loss on the foreign currency translation of $38, to reflect its share of Nabatech’s net loss for the year then ended, which is $597 in excess of Company’s investment amount. |
Digital Assets |
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DIGITAL ASSETS | NOTE 7: DIGITAL ASSETS
The Company held the following digital assets as of December 31, 2023 and 2022:
Digital assets are classified as Level 2 in the fair value hierarchy, based on quoted prices in the principal market at 12:00 UTC. |
Derivative Assets |
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Dec. 31, 2023 | |
Derivative Assets [Abstract] | |
DERIVATIVE ASSETS | NOTE 8: DERIVATIVE ASSETS
The Company used derivative assets for risk management and economic hedging of digital assets owned. On December 31, 2022, the Company held $905 in collateral related to open digital assets forwards positions with fair value of $1,072, utilizing level 2 inputs in the fair value hierarchy. During the year ended December 31, 2023, the Company incurred a loss on derivative contracts of $1,618 as a result of the cyber breach incident (see Note 5). The net loss recognized from the hedging activity during the year ended on December 31, 2023 was $253. As of December 31, 2023, there are no open derivative positions. |
Customer Funds |
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Dec. 31, 2023 | |
Customer Funds [Abstract] | |
CUSTOMER FUNDS | NOTE 9: CUSTOMER FUNDS
As of December 31, 2023 and 2022, customer funds include cash balances of $360 and $448 and digital asset balances of $2,882 and $2,161, respectively, that are maintained in bank and custodial accounts and are held for the exclusive benefit of customers. The Company safeguards these assets, and might be subject to security risks of loss, theft or misuse. Accordingly, consistent with the SEC Staff Accounting Bulletin No. 121 guidance, the Company records the liability reflecting the obligation to safeguard digital assets held on behalf of its customers and the corresponding customer assets, reflected at fair value upon initial recognition and subsequently at each reporting period. |
Prepaid Expenses and Other Receivables |
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PREPAID EXPENSES AND OTHER RECEIVABLES | NOTE 10: PREPAID EXPENSES AND OTHER RECEIVABLES
As of December 31, 2023 and 2022, prepaid expenses and other receivables include the following:
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PROPERTY AND EQUIPMENT | NOTE 11: PROPERTY AND EQUIPMENT
The following table presents activity of the Company’s property and equipment during the years ended December 31, 2023 and 2022:
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Schedule of Useful Life of Intangible Assets | NOTE 12: GOODWILL AND OTHER INTANGIBLE ASSETS
The following table presents activity in goodwill and intangible assets during the years ended December 31, 2023 and 2022.
The useful life of intangible assets is as follows:
Licenses don’t have a fixed term and do not require a renewal. Consequently, licenses have an indefinite useful life.
Amortization of intangible assets of $168, $220 and $130 for the years ended December 31, 2023, 2022 and 2021, respectively, is recorded in profit or loss within General and administrative expenses.
During the year ended December 31, 2022, the Company recorded $361 loss on impairment related to certain legacy components of the INXS middle office system that became obsolete and were replaced by a newly developed software. There was no impairment during years ended on December 31, 2023 and 2021.
As of December 31, 2023, the net carrying amounts of goodwill, licenses, trade name and customer relationships were allocated as follows (each representing a cash-generating unit):
The recoverable amounts of goodwill and intangible assets related to ILSB (brokerage segment), prepared by an independent valuation specialist, were determined based on the value in use which is calculated at the expected estimated future cash flows from the cash-generating unit, as determined according to the budget for the next five years and approved by the Company’s management. The projected cash flows for the period exceeding five years are estimated using a fixed growth rate of 2%, representing the long-term average growth rate for the cash generating unit. The pre-tax discount rate of the cash flows is estimated at 24.3 percent.
The recoverable amounts of goodwill and intangible assets related to INXS (digital assets segment), prepared by an independent valuation specialist, were determined based on the value in use which is calculated at the expected estimated future cash flows from the cash-generating unit, as determined according to the budget for the next five years and approved by the Company’s management. The projected cash flows for the period exceeding five years are estimated using a fixed growth rate of 3%, representing the long-term average growth rate for the cash generating unit. The pre-tax discount rate of the cash flows is estimated at 29.8 percent.
The recoverable amounts as determined above exceed the carrying amounts of goodwill and intangible assets of both ILSB and INXS.
The value in use for all cash-generating units may change if any changes occur in the following key assumptions:
Discount rate: The discount rate reflects management’s assumptions regarding each unit’s specific risk. In determining the appropriate discount rate for each unit, the Company relied on the rate of return of long-term government bonds relevant for each unit.
Sensitivity analysis of changes in assumptions: With respect to assumptions used in determining the value in use as described above, management believes that there are no reasonably expected changes in the key assumptions detailed above, which might lead to a significant change in the recoverable amounts of goodwill and intangible assets related to ILSB and INXS. |
Right-Of-Use Assets and Lease Liabilities |
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Right-Of-Use Assets and Lease Liabilities [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
RIGHT-OF-USE ASSETS AND LEASE LIABILITIES | NOTE 13: RIGHT-OF-USE ASSETS AND LEASE LIABILITIES
The Company has entered into agreements to lease office spaces, which are used for the Company’s operations. Leases of office space have lease terms of between 2 and 5 years.
On June 19, 2023, the Company entered into an office space sublease agreement with a third party. The agreement terminates on May 31, 2024 and provides for a monthly lease payment of $18. As of December 31, 2023, the Company recognized a net receivable for lease payments due under the sublease agreement of $90, which is included in other receivables.
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Inx Token Liability |
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Inx Token Liability [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
INX TOKEN LIABILITY | NOTE 14: INX TOKEN LIABILITY
Based on the terms of the INX Token, as described in Note 1, the INX Token is a hybrid financial instrument and is accounted for as a financial liability. The number of INX Tokens that the Company has issued as of December 31, 2023 and 2022, or has an obligation to issue is as follows:
The Company’s significant shareholder is Triple-V, wholly owned by Mr. Shy Datika, the CEO of the Company, who, as of December 31, 2023 on a combined basis, owns 5.5 percent of the outstanding INX Tokens.
During the year ended on December 31, 2022, the Company granted 168,000 INX Tokens to a service provider and employees and recorded a corresponding expense of $29. Additionally, 2,534,618 INX Token warrants were exercised.
During the year ended on December 31, 2023, the Company granted 11,000 INX Tokens to a service provider and an advisor, and recorded a corresponding expense of $6. Additionally, 2,149,210 INX Token warrants were exercised.
On August 9, 2023, INX’s Board of Directors authorized the management to repurchase INX Tokens (the “Repurchased Tokens”) from their holders as the management deems required or desirable for the benefit of INX, provided that the aggregate purchase amount of Repurchased Tokens and common shares of the Parent Company repurchased through August 10, 2024 will not exceed $5,000. Such repurchase shall be subject to the provisions of any applicable laws and regulations, and to the advice of the Company’s legal advisors. As of December 31, 2023, there were no repurchases of the INX Tokens by the Company.
The fair value of INX Tokens free of, or subject to lock-up agreements and the discount rates applied as of December 31, 2023, are as follows:
The fair value of INX Tokens free of, or subject to lock-up agreements and the discount rates applied as of December 31, 2022, are as follows:
The fair value per INX Token as of December 31, 2023 and 2022, for tokens that are not subject to lock-up agreement was $0.40 and $0.43 respectively, based on the closing market price. The level in the fair value hierarchy is level 1.
For INX Tokens which are subject to lock-up agreement, the Company used the Finnerty model to determine the discount rates applying for such INX Tokens during their lock-up agreements. Significant inputs and assumptions are volatility and the period under the lock up, as follows:
The level in the fair value hierarchy applied to tokens under lock-up agreements is level 2.
For the years ended December 31, 2023 and 2022, the re-measurement to fair value of the INX Token liability with respect to INX Tokens issued by the Company resulted in unrealized gain of $3,775 and $226,044, respectively, and unrealized loss of $161,173 for the year ended December 31, 2021, which were recorded in profit or loss.
The changes in the fair value of the INX Token liability attributable to changes in credit risk, excluding those changes in credit risk attributable to the embedded derivative, are immaterial for all reported periods and therefore no amounts have been included in other comprehensive income with respect of the credit risk. |
Inx Token Warrant Liability |
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Inx Token Warrant Liability [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
INX TOKEN WARRANT LIABILITY | NOTE 15: INX TOKEN WARRANT LIABILITY
The Company may grant restricted INX Token awards or INX Token warrants to directors, advisors, employees or service providers as compensation. As of December 31, 2023 and 2022, directors, advisors, employees and service providers held 5,574,292 and 6,972,192 restricted INX Tokens or INX Token warrants, respectively. The warrant grantees have a right to purchase INX Tokens upon the completion of the term set forth in each warrant agreement.
The liability related to INX Token warrants is presented at fair value based on the below inputs. The level in the fair value hierarchy is level 3.
The following table lists the inputs to the Black-Scholes pricing model used for the fair value measurement of INX Token warrants:
The following table presents changes in the number of INX Token warrants and restricted INX Token awards during the years ended December 31, 2023, and 2022:
Token-based compensation for years ended December 31, 2023, 2022 and 2021 is included within the following expenses:
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Related Parties |
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Related Parties [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
RELATED PARTIES | NOTE 16: RELATED PARTIES
The Company’s related parties include the Parent Company, Company’s subsidiary, associates and service providers over which the Company exercises significant influence, and key management personnel. Key management personnel are those persons having the authority and responsibility, directing and controlling the activities of the Company, directly and indirectly. Key management personnel include officers, directors and companies controlled by officers and directors.
The following balances are held with or by related parties as of December 31, 2023 and 2022:
Receivable from Parent Company includes general and administrative expenses incurred by the Parent Company and paid by INX.
Revenue and expense items recognized in transactions with related parties during the years ended December 31, 2023, 2022 and 2021 include service revenue earned from Nabatech and compensation provided to key management personnel and directors, as follows:
Each of the Company’s independent directors is entitled to receive an option to purchase 3,500 INX Tokens each month at an exercise price equal to the fair market value of the INX Token at the date of the grant.
Service Agreement with Nabatech
Effective on January 1, 2023, as part of the joint venture SICPA Agreement, the Company entered into a service agreement with Nabatech, under which it provides technology support and advisory services to Nabatech, an entity formed for the development of central bank digital currency solutions with the utilization of blockchain technology, and in which the Company holds 33 percent ownership. During the year ended December 31, 2023, the Company recognized service revenue and cost of sales of $976 and $976, respectively, for providing services to Nabatech. As of December 31, 2023, prepaid expenses and other receivables includes $976 due from Nabatech.
Agreement with A-Labs Finance and Advisory Ltd. (“A-Labs”)
Under a service agreement dated September 26, 2017, as amended in December 2017 and January 31, 2018, A-Labs, a shareholder of the Company, provided services to the Company which included, among others, development, planning, management, execution, branding and marketing outside of the US with relation to the Offering of the INX Tokens on behalf of the Company (the “A-Labs Agreement”). In consideration for these services, during 2021, the Company paid A-Labs $4,140, which is recorded in general and administrative expenses.
A-Labs also received a grant of 4,550,000 INX Tokens at a fair value of $6. In addition, pursuant to an agreement signed contemporaneously with the A-Labs Agreement in 2017, the Company issued 1,120,000 Ordinary shares to A-Labs. The fair value of the shares issued of $136 ($175 less the payment of $39 required for those shares), is deemed as additional consideration for the services to be provided by A-Labs and was recorded during the year ended December 31, 2021.
In addition, on July 29, 2021, the Company made a payment to A-Labs of $1,001 and granted A-Labs with an option to purchase 1,527,084 Tokens. These options were exercised during 2022 and vest on July 12, 2024. During the year ended December 31, 2021, the Company recognized an expense related to token options of $4,140, which is recorded in general and administrative expenses.
Agreement with Weild Capital, LLC (“Weild Capital”)
On January 2, 2023, the Parent Company entered into and advisory services agreement with Weild Capital LLC (dba Weild & Co.) (“Weild Agreement”), a wholly owned subsidiary of Weild & Co., Inc., of which Mr. David Weild is Chairman & CEO. Mr. Weild serves as the Chairman of the board of the Company. Under the advisory agreement, the Parent Company agreed to pay Weild Capital a nonrefundable advisory fee of $90 plus in a sale transaction a transaction fee of three and a half percent (3.5%) of the aggregate transaction value up to $60,000, and four and a half percent (4.5%) of the aggregate transaction value in excess of $60,000, subject to a minimum transaction fee of $1,400, to be paid upon closing. In addition, under the terms of the agreement, in the event that an investment transaction is consummated during the term of the agreement or within 12 months after the termination of the Weild Agreement, the Parent Company is obligated to pay a financing placement fee equal to five and half percent (5.5%) of gross proceeds received, excluding any proceeds provided by existing shareholders of the Parent Company. Further, Weild Capital shall receive warrants to purchase the equivalent securities on comparable terms subject to such investment transaction in an amount equal to three percent (3%) of the gross proceeds received by the Parent Company under the investment transaction. |
Convertible Loans |
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Dec. 31, 2023 | |
Convertible Loans [Abstract] | |
CONVERTIBLE LOANS | NOTE 17: CONVERTIBLE LOANS
The Company entered into convertible loan agreements dated November 27, 2017 (“Convertible Loans”) with three individuals, of which one is an officer of the Company (the “Lenders”), for an aggregate amount of $144. The loans are convertible at any time and at each Lender’s sole discretion, into an aggregate total of 10,029,193 Ordinary shares of the Company or repaid at the earlier of (i) the lapse of five years; (ii) an initial public offering of the Company’s shares or (iii) upon a Deemed Liquidation Event as defined in the Company’s Articles of Association. The loans bear 2% interest compounded annually. In addition, the Lenders were granted the right to purchase a total of 2,690,623 INX Tokens.
Until 2018, the Company received $144, in consideration for the convertible loans and INX Tokens, of which $5 were attributed to the fair value of the INX Tokens. The fair value of the loans received until 2018, amounted to $93, resulting in an effective interest rate of 60% and the balance of $46, was attributed to the conversion option, which was recorded in equity.
During the year ended December 31, 2021, interest and amortization of discount on the convertible loans amounted to $0.
On February 25, 2021, holders of Convertible loans exercised their right under their loan agreements and converted the outstanding amounts provided by them to the Company under such loan agreements into an aggregate of 956,333 Ordinary Shares of the Company. |
Equity |
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EQUITY | NOTE 18: EQUITY
Composition of share capital:
Conversions of Simple Agreements for Future Equity
On February 21, 2020, the Board of Directors of the Company approved capital raise of up to $1,500 in the form of a Simple Agreements for Future Equity (the “Third SAFE”). The Third SAFE was to be automatically converted into Company’s ordinary shares of capital stock at a price per share equal to the lower of, (i) 25% discount on the base (undiscounted) price per share of the qualifying financing, and (ii) $1.526 per share. An aggregate amount of $579 has been raised by the Company pursuant to the Third SAFE in 2020, including $100 and $30 from Triple V and A-Labs, respectively. In March 2021, in the absence of the qualified financing during the 12 months following March 2020, the effective date of such Third SAFE, the Company converted the investment received under the Third SAFE into 379,593 Ordinary Shares at a price per share of $1.526.
Exercise of Options under SAFE Agreements
During 2021, several investors exercised equity options that were granted to them under the SAFE agreement dated August 30, 2019, and were issued 268,179 ordinary shares of the Company at a price of $1.953 per share.
During 2021, several investors exercised equity options that were granted to them under the SAFE dated March 31, 2020, and were issued 115,661 ordinary shares of the Company at a price of $1.696 per share.
On September 13, 2020, the Company entered into a subscription agreement with a new investor pursuant to which the investor invested in the Company $1,500 in consideration for 621,375 ordinary shares. The new investor was also entitled to receive, for no additional consideration a warrant to purchase 596,659 ordinary shares of the Company, at a price of $2.514 per share, until the warrant’s first-year anniversary. On December 31, 2021 the new investor exercised the options that was granted 596,659 ordinary shares at a price of $2.514 per share. Proceeds from option exercise of $1,500 were received on January 4, 2022.
Private Placement
As part of the Transaction (see Note 1), on January 10, 2022, the Company completed a private placement of 31,680,000 INX subscription receipts (units) for gross proceeds of $31,283. Each unit consists of one Ordinary share and one-half of one Ordinary share purchase warrant exercisable for two years at an exercise price of CAD1.88 ($1.49) per share. As the exercise price of the warrants is denominated in CAD while the functional currency of the Company is the U.S. Dollar, the warrants are accounted for as a derivative liability.
The warrants were valued at $4,255 as of the date of the private placement. The balance of gross proceeds from the private placement in the amount of $27,028 was allocated to ordinary shares with the addition to equity of $25,336, net of the issuance cost of $1,692.
Agents of the private placement collectively received cash commissions of $1,951, of which $259 was allocated to the warrants and remaining amount was recorded as transaction fees in profit or loss.
The placement agents also received 1,810,740 agent compensation options exercisable into one common share of the Parent Company at an exercise price of CAD1.25 ($0.99). The options were valued at $515.
As a result of the Transaction (see Note 1), effective on January 10, 2022, options granted and warrants issued by INX prior to such date were surrendered and cancelled, and new options and warrants of the Parent Company were issued to holders with equivalent terms, adjusted for the Exchange Ratio, as defined under the agreement. Upon the cancellation of the private placement warrants, the warrant liability in the amount of $4,255 was derecognized and recorded as a contribution to equity.
Composition of other comprehensive income (loss) (OCI):
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Share-Based Payment |
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Share-Based Payment [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
SHARE-BASED PAYMENT | NOTE 19: SHARE-BASED PAYMENT
INX’s board of directors adopted the INX Limited Share Ownership and Award Plan (2021) on February 22, 2021, as amended from time to time (the “Share Ownership and Award Plan” or the “INX Plan”), and INX shareholders approved the INX Plan on March 18, 2021.
In connection with the Transaction (see Note1), the INX Plan was terminated and replaced by the Parent Company Omnibus Equity Incentive Compensation Plan (the “Plan”). The Plan provides for grants of options to purchase the Parent Company’s common shares and restricted share units to employees, directors and service providers of the Company. The Plan includes U.S. and Israeli appendices that further specify the terms and conditions of grants of options and restricted share units to such grantees.
Upon closing of the Transaction, Awards granted pursuant to the INX Plan were exchanged for equivalent awards under the Plan. As of closing of the Transaction, 25,352,832 common shares of the Parent Company were authorized for issuance pursuant to the Plan.
On June 22, 2022, the Parent Company shareholders approved further increase of the common shares reserved for the purpose of the Plan. Subject to certain capitalization adjustments, the aggregate number of common shares that may be issued pursuant to share awards under the Plan may not exceed 37,408,948 common shares of the Parent Company.
The weighted average fair value of the options granted during years ended December 31, 2023 and 2022, based on the exercise price as of the grant date, was at $0.12 and $0.37 per option, respectively. |
Income (Loss) Per Share |
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Income (Loss) Per Share [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
INCOME (LOSS) PER SHARE | NOTE 20: INCOME (LOSS) PER SHARE
The table below presents basic and diluted net income (loss) per Ordinary Share for the years ended December 31, 2023, 2022 and 2021, respectively:
The net income (loss) and weighted average number of ordinary shares used in the calculation of basic income (loss) per share are as follows:
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Financial Risks and Risk Management |
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Financial Risks and Risk Management [Abstract] | |
FINANCIAL RISKS AND RISK MANAGEMENT | NOTE 21: FINANCIAL RISKS AND RISK MANAGEMENT
Financial risk management objectives and policies
Activities of the Company may expose it to a variety of financial and related risks: credit risk, market risk, liquidity risk, digital asset risk, loss of access risk, irrevocability of transactions, and regulatory oversight risk, among others. The Company seeks to mitigate potential adverse effects of these risks on performance and the Company’s financial position by employing experienced personnel, monitoring of market events, maintaining sufficient liquidity, implementing appropriate policies and procedures addressing significant financial risks and diversifying the Company’s business strategy within the constraints of the Company’s objectives.
Credit risk
Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into, causing the other party to incur a financial loss. The Company’s cash and cash equivalents, investments and digital assets are exposed to credit risk. The Company limits its credit risk by placing its assets with high credit quality banks, financial institutions and digital assets custodians that are believed to have sufficient capital to meet their obligations. While the Company intends to only transact with counterparties that it believes to be creditworthy there can be no assurance that a counterparty will not default and that the Company will not sustain a material loss as a result. It is the Company’s policy to monitor the creditworthiness of its counterparties and to minimize the concentration of credit risk to mitigate significant loss caused by potential counterparty’s failure.
Market risk
Market risk is the risk that the value of financial instruments will fluctuate as a result of changes in market prices (other than those arising from interest rate risk or foreign currency risk), whether caused by factors specific to an individual investment, its issuer, or factors affecting all instruments traded in a market or market segment. All investments present a risk of loss of capital. The maximum risk resulting from financial instruments is equivalent to their fair value. The Company’s investments are susceptible to also market risk arising from uncertainties about future prices of the instruments. The Company moderates this risk through the various investment strategies within the parameters of the Company’s investment guidelines.
As of December 31, 2023, management’s estimate of the effect on equity investments due to a +/- 20% change in the market prices of the Company’s investments, with all other variables held constant, is +/- $5,575. (December 31, 2022 - $8,000).
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they come due, as well as the risk of not being able to liquidate invested assets at reasonable prices. The Company manages liquidity risk by maintaining sufficient cash balances and investing capital reserves in highly rated, marketable financial instruments that allow meeting liquidity obligations in the ordinary course of business as well as under increased liquidity demands.
Foreign currency risk
Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate as a result of changes in foreign currency exchange rates. The Company’s exposure to foreign currency risk relates primarily to the Company’s continuing operation (when revenue or expense is recognized in a different currency from the Company’s presentation currency). As of December 31, 2023 and 2022, management’s estimate of the Company’s exposure related to the price fluctuation in foreign currency is not material.
Geopolitical risk
Significant portion of Company’s operations and management is based in Israel. On October 7, 2023, Hamas launched an attack on Israel and a war started. As of the date of issuance of the consolidated financial statements, there has been no interruption or adverse impact on the Company’s business activities resulting from the war. The Company maintains a comprehensive business continuity plan, and has taken necessary steps in line with such plan, in an effort to ensure that operations and service to customers remain consistent. |
Operating Segments |
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Operating Segments [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
OPERATING SEGMENTS | NOTE 22: OPERATING SEGMENTS
Unallocated corporate expenses for years ended December 31, 2023, 2022 and 2021 include the change in fair value of INX Tokens.
Revenue reported in the financial statements are attributed to countries based on the location of customers, as follows:
Revenue from major customers which account for 10 percent or more of total revenue as reported in the financial statements:
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Employee Benefits Expense |
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Employee Benefits Expense [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
EMPLOYEE BENEFITS EXPENSE | NOTE 23: EMPLOYEE BENEFITS EXPENSE
Share-based and token-based compensation, and short-term employee benefits included in consolidated statements of comprehensive income (loss) are as follows:
During the years ended December 31, 2023, 2022 and 2021, the Company incurred cost of $931, $899 and $608, respectively, related to employee post-retirement benefit plans contributions. |
Taxes on Income |
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Taxes on Income [Abstract] | |||||||||||||||||||
TAXES ON INCOME | NOTE 24: TAXES ON INCOME
The Company is an Israeli company for tax purposes and as such, subject to Israeli taxes. Subsidiary entities are generally subject to taxes in the jurisdictions where they are located or have the majority of operations and management control, therefore income taxes are calculated as if the Company filed separate income tax returns. The following tax rates were applicable to the individual entities based on the country of their organization:
INX, ILSB and Midgard are subject to the tax assessment evaluation by the Israeli Tax Authority. After the receipt of such tax assessment the entity is no longer subject to the tax examination by the tax authority. The Company’s subsidiary, ILSB received the final tax assessment through 2017 tax year, whereas, Midgard and INX, has not received the final tax assessment since its incorporation.
Carryforward operating tax losses of the Group total approximately $67,137 as of December 31, 2023. Deferred tax assets relating to these losses and to other deductible temporary differences were not recognized because their utilization in the foreseeable future is not probable.
As the Company and its subsidiaries incurred operating losses during the years ended December 31, 2023, 2022 and 2021 for which deferred income taxes were not recorded, as mentioned above in Note 24b, the reconciliation between the tax expense, assuming that all the income and expenses, gains and losses in the statement of income were taxed at the statutory tax rate, and the taxes on income recorded in profit or loss, does not provide significant information and therefore is not presented.
During years ended December 31, 2023, 2022 and 2021, the Company recognized income tax expense of $205, $119 and $0, respectively. |
Subsequent Events |
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Dec. 31, 2023 | |
Subsequent Events [Abstract] | |
SUBSEQUENT EVENTS | NOTE 25: SUBSEQUENT EVENTS
Grants under Equity and Token Incentive Compensation Plan of the Parent Company:
On January 8, 2024, a key officer, through his wholly owned entity, was awarded 2,337,212 restricted share units of the Parent Company. All shares shall fully vest on January 8, 2028. In addition, the officer was also awarded 1,000,000 restricted INX Tokens subject to a lock-up agreement until January 8, 2027.
On February 13, 2024, a former service provider filed a lawsuit against one of the Company’s subsidiaries for a breach of contract. The total amount value of the claim is approximately $184. Management of the Company intends to vigorously defend its position against this claim and believes that its resolution will not result in a material adverse effect on the Company’s financial position. |
Accounting Policies, by Policy (Policies) |
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Basis of presentation of the financial statements |
These consolidated financial statements have been prepared in accordance with International Accounting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and interpretations of the International Reporting Interpretations Committee (“IFRIC”). The consolidated financial statements have been prepared on a historical cost basis, except for certain financial instruments which are measured at fair value and digital assets characterized as inventory which are measured at fair value less cost to sell recognized through profit or loss. |
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Consolidated financial statements |
The consolidated financial statements comprise the financial statements of the Company and companies that are controlled by the Company (subsidiaries). Control is achieved when the Company is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Potential voting rights are considered when assessing whether an entity has control. The consolidation of the financial statements commences on the date on which control is obtained and ends when such control ceases.
The financial statements of the Company and of the subsidiaries are prepared as of the same dates and periods. The consolidated financial statements are prepared using uniform accounting policies by all companies in the group. Significant intra group balances and transactions and gains or losses resulting from intragroup transactions are eliminated in full in the consolidated financial statements. |
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Functional and presentation currencies |
The consolidated financial statements are presented in U.S. Dollars. The Company determines the functional currency of each entity through an analysis of the consideration factors identified in International Accounting Standard (“IAS”) 21. Assets, including fair value adjustments upon acquisition, and liabilities of an investee which is a foreign operation, are translated at the closing rate at each reporting date. Profit or loss items are translated at average exchange rates for all periods presented. The resulting translation differences are recognized in other comprehensive income (loss).
Transactions denominated in foreign currency are recorded upon initial recognition at the exchange rate at the date of the transaction. After initial recognition, monetary assets and liabilities denominated in foreign currency are translated at each reporting date into the functional currency at the exchange rate at that date. Exchange rate differences, other than those capitalized to qualifying assets or accounted for as hedging transactions in equity, are recognized in profit or loss. Non-monetary assets and liabilities denominated in foreign currency and measured at cost are translated at the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currency and measured at fair value are translated into the functional currency using the exchange rate prevailing at the date when the fair value was determined.
Monetary assets and liabilities linked to the changes in the Israeli Consumer Price Index (“Israeli CPI”) are adjusted at the relevant index at each reporting date according to the terms of the agreement. |
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Use of material estimates and judgements |
The preparation of the consolidated financial statements in accordance with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. Actual results may differ from those estimates. Key assumptions made in the consolidated financial statements concerning uncertainties at the reporting date that may result in a material adjustment to the carrying amount of the INX Token liability and INX Token warrant liability within the next financial year are discussed in Note 14 and Note 15. Many aspects of the digital currency and blockchain industry have not yet been addressed by the current IFRS guidance. The Company is required to make assumptions and judgments as to its accounting policies and the application thereof, which is disclosed in the notes to the consolidated financial statements. If specific guidance is enacted by the IASB in the future, the impact may result in changes to the Company’s profit or loss and financial position as currently presented.
Determining the fair value of share-based payment transactions The fair value of share-based payment transactions is determined upon initial recognition by an acceptable option pricing model. The inputs to the model include share price, exercise price and assumptions regarding expected volatility, expected life of share option and expected dividend yield. Discount rate for a lease liability When the Company is unable to readily determine the discount rate implicit in a lease in order to measure the lease liability, the Company uses an incremental borrowing rate. That rate represents the rate of interest that the Company would have to pay to borrow over a similar term and with similar security, the funds necessary to obtain an asset of similar economic environment. When there are no financing transactions that can serve as a basis, the Company determines the incremental borrowing rate based on its credit risk, the lease term and other economic variables deriving from the lease contract’s conditions and restrictions. In certain situations, the Company is assisted by an external valuation expert in determining the incremental borrowing rate. Impairment of goodwill The Company reviews goodwill for impairment once a year, on December 31, or more frequently if events or changes in circumstances indicate that there is an impairment. This requires management to make an estimate of the projected future cash flows from the continuing use of the cash-generating unit (or a group of cash-generating units) to which the goodwill is allocated and also to choose a suitable discount rate for those cash flows. Deferred tax assets Deferred tax assets are recognized for unused carryforward tax losses and deductible temporary differences to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the timing and level of future taxable profits, its source and the tax planning strategy. Determining the fair value of an unquoted financial liability The fair value of unquoted warrant liability in Level 3 of the fair value hierarchy is determined using the Black and Scholes option pricing model. The inputs to the model include share price, exercise price and assumptions regarding expected volatility, expected life of and expected dividend yield. |
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Financial instruments |
The Company classifies and measures debt instruments in the financial statements based on the following criteria:
The Company’s business model is to hold the financial assets in order to both collect their contractual cash flows and to sell the financial assets, and the contractual terms of the financial assets give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
After initial recognition, instruments in this category are measured at fair value. Gains or losses from fair value adjustments, excluding interest and exchange rate differences, are recognized in other comprehensive income.
A financial asset which is a debt instrument does not meet the criteria for measurement at amortized cost or at fair value through other comprehensive income. After initial recognition, the financial asset is measured at fair value and gains or losses from fair value adjustments are recognized in profit or loss.
As part of its risk management activities, the Company held positions in derivatives such as digital currency forwards. A digital currency forward is an exchange traded contract which represents a legal agreement to either buy or sell a referenced digital asset at a predetermined price at some time in the future. Digital assets forwards utilized by the Company settle in a stable coin. Derivative assets are carried at fair value and any realized and unrealized gains (losses) are recognized through profit and loss.
Impairment of financial assets: At the end of each reporting period, the Company evaluates the loss allowance for financial debt instruments which are not measured at fair value through profit or loss. The Company has short-term financial assets such as trade receivables for which the Company applies the simplified approach in IFRS 9 and measures the loss allowance in an amount equal to the expected lifetime credit losses. With regards to trade receivables, the Company grants its customers interest-free credit for periods of 30-90 days. As of December 31, 2023 and 2022, there were no material past-due accounts and no allowance for doubtful accounts was recorded.
A financial asset is derecognized only when:
Financial liabilities are initially recognized at fair value. After initial recognition, the accounting treatment of financial liabilities is based on their classification as follows:
After the initial recognition, loans and other liabilities are measured based on their terms at amortized cost less directly attributable transaction costs using the effective interest method.
These liabilities include financial liabilities held for trading (including the INX Token warrant liability) and financial liabilities designated upon initial recognition as at fair value through profit or loss. Changes in the fair value of liabilities held for trading are recognized in profit or loss in financial expenses. Based on the terms of the INX Token, as described in Note 1, the INX Token is a hybrid financial instrument. The host instrument is a financial liability due to the right of the INX Token holder to use the INX Token to pay transactions fees on the INX.One Trading Platform. The INX Token is considered a puttable instrument which is a financial liability in accordance with IAS 32, Financial Instruments: Presentation. INX’s obligation to make a pro rata distribution annually to the INX Token holders from INX’s Adjusted Operating Cash Flow is an embedded derivative. The Company views INX’s operating cash flows as a financial variable, and therefore, the embedded derivative requires bifurcation pursuant to IFRS 9. The Company elected, in accordance with IFRS 9, to designate the entire financial liability (including the embedded derivative) at fair value through profit and loss. Accordingly, the INX Token liability and the INX Token warrant liability are remeasured to fair value at the end of each reporting period. The change in the fair value of the INX Token liability that is attributable to changes in credit risk, excluding those changes in credit risk attributable to the embedded derivative, to the extent there are any, would be presented in other comprehensive income. The remaining amount of the change in the fair value of the INX Token liability would be presented in profit or loss. At December 31, 2023, the change in fair value of the INX Token liability is included in profit or loss. Should the INX Token be used to pay for services provided by INX, revenue would be recognized and the respective portion of the INX Token liability would be derecognized. Additionally, the fair value of INX Tokens issued in consideration for services provided to the Company would be recognized as compensation expense when services are provided.
Financial assets and financial liabilities are offset, and the net amount is presented in the statement of financial position if there is a legally enforceable right to set off the recognized amounts and there is an intention either to settle on a net basis or to realize the asset and settle the liability simultaneously. The right of set-off must be legally enforceable not only during the ordinary course of business of the parties to the contract but also in the event of bankruptcy or insolvency of one of the parties.
Convertible debt which contains both an equity component and a liability component are separated into two components. This separation is performed by first determining the liability component based on the fair value of an equivalent non-convertible liability. The value of the conversion component is determined to be the residual amount. Directly attributable transaction costs are apportioned between the equity component and the liability component based on the allocation of proceeds to the equity and liability components.
INX has entered into equity funding agreements (SAFEs) pursuant to which funds received by INX from investors have been automatically converted into the same class of share capital of INX that were issued in a qualifying financing, as defined in the SAFEs. INX is not obligated to complete a qualifying financing or to approve the issuance of shares or dilutive securities within the term specified in the SAFE that would result in the issuance of a variable number of the INX’s equity instruments. Accordingly, as the SAFEs are a non-derivative for which the conversion price into the Company’s equity instruments is fixed at the end of its term, the consideration received from investors pursuant to the SAFEs is classified as equity. As of December 31, 2023, all INX SAFE’s have been converted into ordinary shares.
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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. Fair value measurement is based on the assumption that the transaction will take place in the asset’s or the liability’s principal market, or in the absence of a principal market, in the most advantageous market. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. Fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs. All assets and liabilities measured at fair value or for which fair value is disclosed are categorized into levels within the fair value hierarchy based on the lowest level input that is significant to the entire fair value measurement. The Company classifies the bases used to measure certain assets and liabilities at their fair value. Assets and liabilities carried or measured at fair value have been classified into three levels based upon a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The levels are as follows:
For details of the fair value of the INX Token liability, see Note 14. For the fair value of INX Token warrant liability, see Note 15. The fair values of current financial assets and financial liabilities, other than the INX Token and INX Token warrant liability, approximate their carrying amounts due to the short-term maturity of these instruments. |
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Investments |
Investments, other than the investment in an associate, are accounted for as financial assets, which are initially recognized at fair value and subsequently measured at fair value through other comprehensive income (loss). The Company’s investment in an associate represents an ownership share in an entity in which the Company has significant influence and that is accounted for under the equity method in accordance with IAS 28 Investments in Associates. Under the equity method, the investment is presented at cost with the addition of post-acquisition changes in the Company’s share of net assets, including other comprehensive income of the associate. Gains and losses resulting from transactions between the Company and the associate are eliminated to the extent of the interest in the associate.
Losses of an associate are recognized by the Company to the extent of its investment in the associate plus any losses that the Company may incur as a result of its legal or constructive obligations on behalf of the associate. As of December 31, 2023, the Company’s share of losses incurred by the associate exceeds its investment amount and is reflected in the profit or loss as loss on investment in associate. Loss in excess of the Company’s investment amount is recognized as a non-current liability. The equity method is applied until the loss of significant influence or the classification of the investment as held for sale. On the date of loss of significant influence, the Company would measure any remaining investment in the associate at fair value and recognize in profit or loss the difference between the fair value of any remaining investment plus any proceeds from the sale of the investment in the associate and the carrying amount of the investment on that date. |
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Digital assets |
Digital assets are measured at cost on the initial recognition. Digital assets characterized as inventory (current assets): The Company has assessed that it acts in a capacity as a commodity broker trader as defined in IAS 2, Inventories, in characterizing its holdings of digital assets as inventory. Such digital assets held by the Company are principally acquired for the purpose of selling in the near future and generating a profit from fluctuations in price or broker-traders’ margin, therefore, they are accounted for as inventory, and changes in fair value (less cost to sell) are recognized in profit or loss. Digital assets characterized as intangible assets (non-current assets): Digital assets not characterized as inventory are classified as indefinite life intangible assets and are tested for impairment annually or whenever there is an indication that the intangible asset may be impaired. An impairment loss is recognized if the carrying amount exceeds its fair value less cost of sale. The Company recorded impairment of digital assets in the amount of $72 and $80, for the year ended December 31, 2022 and 2021, respectively. As of December 31, 2023 and 2022, the Company did not hold any digital assets characterized as intangible assets. The fair value of digital assets is based on quoted prices in the principal market as of 12:00 AM UTC. |
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Customer funds and funds due to customers |
Customer funds represent cash and digital assets that are held for the exclusive benefit of customers. The Company safeguards these assets on behalf of its customers and is subject to security risks for loss, theft or misuse. The Company restricts the use of the assets underlying the customer funds to meet regulatory requirements and classifies them as current based on their purpose and availability to fulfill its direct obligation to customers. Due to the Company’s custodial obligation to safeguard customer assets, consistent with the SEC Staff Accounting Bulletin No. 121 guidance, the Company recognizes a liability to reflect its obligation to safeguard assets held for its customers and the corresponding customer assets, measured at the fair value upon the initial recognition and subsequently at each reporting period. |
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Intangible assets |
Intangible assets acquired in a business combination are measured at fair value at the acquisition date. Intangible assets with a finite useful life are amortized on a straight-line basis over their useful life and reviewed for impairment whenever there is an indication that the asset may be impaired. The amortization period and the amortization method for an intangible asset are reviewed at least at each year-end. Intangible assets with indefinite useful lives are not systematically amortized and are tested for impairment annually or whenever there is an indication that the intangible asset may be impaired. The useful life of these assets is reviewed annually to determine whether their indefinite life assessment continues to be supportable. If the events and circumstances do not continue to support the assessment, the change in the useful life assessment from indefinite to finite is accounted for prospectively as a change in the accounting estimate and on that date the asset is tested for impairment. Commencing from that date, the asset is amortized systematically over its useful life.
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Business combinations and goodwill |
Business combinations are accounted for by applying the acquisition method. The cost of the acquisition is measured at the fair value of the consideration transferred on the acquisition date with the addition of non-controlling interests in the acquiree. In each business combination, the Company chooses whether to measure the non-controlling interests in the acquiree based on their fair value on the acquisition date or at their proportionate share in the fair value of the acquiree’s net identifiable assets. Direct acquisition costs are recorded in the statement of comprehensive income as incurred. Contingent consideration is recognized at fair value on the acquisition date and classified as a financial asset or liability in accordance with IAS 39. Subsequent changes in the fair value of the contingent consideration are recognized in profit or loss. Goodwill is initially measured at cost which represents the excess of the acquisition consideration and the amount of non-controlling interests over the net identifiable assets acquired and liabilities assumed. If the resulting amount is negative, the acquirer recognizes the resulting gain on the acquisition date. |
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Impairment of non-financial assets |
The Company evaluates the need to record an impairment of non-financial assets whenever events or changes in circumstances indicate that the carrying amount is not recoverable. If the carrying amount of non-financial assets exceeds their recoverable amount, the assets are reduced to their recoverable amount. The recoverable amount is the higher of fair value less costs of sale and value in use. In measuring value in use, the expected future cash flows are discounted using a pre-tax discount rate that reflects the risks specific to the asset. The recoverable amount of an asset that does not generate independent cash flows is allocated to the cash-generating unit to which the asset belongs. Impairment losses are recognized in profit or loss. An impairment loss of an asset, other than goodwill, is reversed only if there have been changes in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized. Reversal of an impairment loss, as above, shall not be increased above the lower of the carrying amount that would have been determined (net of depreciation or amortization) had no impairment loss been recognized for the asset in prior years and its recoverable amount. The reversal of impairment loss of an asset presented at cost is recognized in profit or loss. The following criteria are applied in assessing impairment of these specific assets:
The Company reviews goodwill for impairment once a year, on December 31, or more frequently if events or changes in circumstances indicate that there is an impairment. Goodwill is tested for impairment by assessing the recoverable amount of the cash-generating unit (or group of cash-generating units) to which the goodwill has been allocated. An impairment loss is recognized if the recoverable amount of the cash-generating unit (or group of cash-generating units) to which goodwill has been allocated is less than the carrying amount of the cash-generating unit (or group of cash-generating units). Any impairment loss is allocated first to goodwill. Impairment losses recognized on goodwill cannot be reversed in subsequent periods.
The impairment test is performed annually, on December 31, or more frequently if events or changes in circumstances indicate that there is an impairment (see Note 12e).
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Leases |
The Company accounts for a contract as a lease when the contract terms convey the right to control the use of an identified asset for a period of time in exchange for consideration. The Company as a lessee: For leases in which the Company is the lessee, the Company recognizes on the commencement date of the lease a right-of-use asset and a lease liability, excluding leases whose term is up to 12 months and leases for which the underlying asset is of low value. For these excluded leases, the Company has elected to recognize the lease payments as an expense in profit or loss on a straight-line basis over the lease term. In measuring the lease liability, the Company has elected to apply the practical expedient in the Standard and does not separate the lease components from the non-lease components (such as management and maintenance services, etc.) included in a single contract. On the commencement date, the lease liability includes all unpaid lease payments discounted at the interest rate implicit in the lease, if that rate can be readily determined, or otherwise using the Company’s incremental borrowing rate. After the commencement date, the Company measures the lease liability using the effective interest rate method. On the commencement date, the right-of-use asset is recognized in an amount equal to the lease liability plus lease payments already made on or before the commencement date and initial direct costs incurred. The right-of-use asset is measured applying the cost model and depreciated over the shorter of its useful life and the lease term. The Company tests for impairment of the right-of-use asset whenever there are indications of impairment pursuant to the provisions of IAS 36. |
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Revenue recognition |
The Company determines revenue recognition from contracts with customers through the following steps:
In determining the amount of revenue from contracts with customers, the Company evaluates whether it is a principal or an agent in the arrangement. The Company is a principal when the Company controls the promised goods or services before transferring them to the customer. In these circumstances, the Company recognizes revenue for the gross amount of the consideration. When the Company is an agent, it recognizes revenue for the net amount of the consideration, after deducting the amount due to the principal. Transaction fees revenue includes revenue from transaction and trading fees charged to customers utilizing the Company’s trading platform and are presented on a net basis. The Company’s service is comprised of a single performance obligation to provide a matching service when customers buy, sell, or convert digital assets. The Company does not control the digital asset being provided before it is transferred to the buyer, does not have inventory risk related to the digital asset, and is not responsible for the settlement of the digital asset. The Company also does not set the price for the digital asset as the price is a market rate established by users of the platform. As a result, the Company acts as an agent in facilitating the ability for a customer to purchase digital assets from another customer. Transaction fees charged on the INX.One trading platform are recognized as revenue when the Company’s obligation is satisfied, promised services are transferred to the customer and the customer obtains control. Brokerage fees revenue is recorded according to the date the service was provided, or the operation was carried out. Relevant to brokerage and transaction fees, contracts with customers are usually open-ended and can be terminated by either party without a termination penalty. Therefore, these contracts are defined at the transaction level and do not extend beyond the service already provided. The transaction price is the amount of the consideration that is expected to be received based on the contract terms, excluding amounts collected on behalf of third parties (such as taxes).
Service revenue represents fees for technology consultation and advisory, as well as listing services performed by the Company under written agreements and is recognized upon the delivery of promised goods or services to the customer and when Company’s performance obligation to the customer is satisfied. The revenue is recognized in an amount that reflects the fair value of the consideration to which the Company expects to be entitled to, upon completion of the Company’s performance obligation for those services, as stated in the contract. As of December 31, 2023, the Company received payments prior to the completion of its performance obligation under contracts with customers, which are recognized as deferred revenue. The Company also recognizes revenue from buying and selling digital assets it owns. Such revenue is recognized in the gross amount of consideration received on sales less the cost of digital assets sold. |
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Share-based payment transactions |
Certain of the Company’s employees and other service providers are entitled to compensation in the form of equity settled share-based payment. The cost of the transactions is measured at the fair value of the equity instruments granted at the grant date, using an appropriate valuation model, further details of which are provided in Note 19. The cost of share-based grants is recognized in profit or loss together with a corresponding increase in equity during the period during which the performance and/or service conditions are to be satisfied ending on the date on which the relevant employee or service provider becomes entitled to the award (the “vesting period”). The cumulative expense is recognized at the end of each reporting period until the vesting period expires, reflecting the number of instruments that will ultimately vest at the end of the vesting period. Until December 31, 2021, the Company granted options exercisable into its ordinary shares. Commencing in 2022, subsequent to the completion of the Transaction (see Note 1), options are granted to the Company’s employees and other service providers by the Parent Company and are exercisable into the Common shares of the Parent Company. |
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Research and development expenses |
Research expenses are recognized in profit or loss when incurred. An intangible asset arising from a development project or from the development phase of an internal project is recognized if the Company can demonstrate all of the following: the technical feasibility of completing the intangible asset so that it will be available for use or sale; the Company’s intention to complete the intangible asset and use or sell it; the Company’s ability to use or sell the intangible asset; how the intangible asset will generate future economic benefits; the availability of adequate technical, financial and other resources to complete the intangible asset; and the Company’s ability to measure reliably the expenditure attributable to the intangible asset during its development. Through December 31, 2023, the Company has not met all the aforementioned criteria and therefore all development costs have been recognized in profit or loss. |
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Income taxes |
The consolidated financial statements include estimates and assumptions for determining the future tax rates applicable to subsidiaries and identifying temporary differences that relate to each subsidiary. Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities using the tax rates used enacted or substantively enacted at the reporting date. Deferred tax is provided using a liability method on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date. Deferred tax assets are recognized for deductible temporary differences and the carryforward of any unused tax losses. Deferred tax assets are recognized to the extent it is probable that taxable profit will be available against the deductible temporary differences and that the carryforward of unused tax losses can be utilized. The carrying amount of deferred tax assets is reviewed at each reporting date and adjusted accordingly.
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Net income (loss) per share |
Basic income (loss) per share is computed by dividing the net income (loss) attributable to equity holders of the Company by the weighted average number of ordinary shares outstanding during the period. Diluted income (loss) per share is computed by dividing the net income (loss) by the weighted average number of ordinary shares outstanding, plus the weighted average number of ordinary shares that would be issued on conversion of stock options and warrants. Potential ordinary shares are included in the computation of diluted earnings per share when their conversion decreases earnings per share from continuing operations. Potential ordinary shares that are converted during the period are included in diluted earnings per share only until the conversion date and from that date in basic earnings per share. |
Business Combinations (Tables) |
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Schedule of Liability in Contingent Consideration |
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Schedule of Estimated Fair Value of the Identifiable Assets and Liabilities | The following are the estimated fair values of
the identifiable assets and liabilities assumed of ILSB as of the date of the acquisition:
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Schedule of Estimated Fair Value of the Identifiable Assets and Liabilities | The following are the estimated fair values of
the identifiable assets and liabilities of OFN assumed as of May 9, 2021, the date of the acquisition:
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Reserve Fund (Tables) |
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Schedule of Reserve Fund is Comprised of Cash and Cash Equivalents | The Reserve Fund is comprised of cash and cash
equivalents, U.S. Treasury securities and corporate bonds held at banks and brokerage firms as follows:
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Investments (Tables) |
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Schedule of Investments | On December 31, 2023 and 2022, the Company held
the following investments:
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Digital Assets (Tables) |
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Dec. 31, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Digital Assets [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Digital Asset | The Company held the following digital assets as of December 31, 2023
and 2022:
|
Prepaid Expenses and Other Receivables (Tables) |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Prepaid Expenses and Other Receivables [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Prepaid Expenses and Other Receivables | As of December 31, 2023 and 2022, prepaid expenses
and other receivables include the following:
|
Property and Equipment (Tables) |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Property, Plant and Equipment [Line Items] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Property and Equipment | The following table presents activity of the Company’s
property and equipment during the years ended December 31, 2023 and 2022:
|
Goodwill and Other Intangible Assets (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Goodwill and Other Intangible Assets [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Net Carrying Amounts of Goodwill, Licenses, Trade Name and Customer Relationships | The following table presents activity in goodwill and intangible assets
during the years ended December 31, 2023 and 2022.
|
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Schedule of Useful Life of Intangible Assets | The useful life of intangible assets is as follows:
|
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Schedule of Net Carrying Amounts of Goodwill, Licenses, Trade Name and Customer Relationships | As of December 31, 2023, the net carrying amounts
of goodwill, licenses, trade name and customer relationships were allocated as follows (each representing a cash-generating unit):
|
Right-Of-Use Assets and Lease Liabilities (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Right-Of-Use Assets and Lease Liabilities [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Right-of-Use Assets |
|
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Schedule of Maturity Analysis of Undiscounted Lease Payments | Maturity of undiscounted lease payments receivable for operating
leases:
|
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Lease liability [Member] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Right-Of-Use Assets and Lease Liabilities [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Respect of Lease Liability | Activity with respect to the lease liability:
|
Inx Token Liability (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Inx Token Liability [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of the Number of Inx Tokens that the Company has Distributed | The number of INX Tokens that
the Company has issued as of December 31, 2023 and 2022, or has an obligation to issue is as follows:
|
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Schedule of Fair Values of Inx Tokens Free of, or Subject to Lock-Up Agreements and the Discount Rates | The fair value of INX Tokens free of, or subject to lock-up agreements
and the discount rates applied as of December 31, 2023, are as follows:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Inputs and Assumptions are Volatility and the Period under the Lock Up | For INX Tokens which are subject to lock-up agreement,
the Company used the Finnerty model to determine the discount rates applying for such INX Tokens during their lock-up agreements. Significant
inputs and assumptions are volatility and the period under the lock up, as follows:
|
Inx Token Warrant Liability (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Inx Token Warrant Liability [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Warrant Liability Composition | As of December 31, 2023 and 2022, directors,
advisors, employees and service providers held 5,574,292 and 6,972,192 restricted INX Tokens or INX Token warrants, respectively. The
warrant grantees have a right to purchase INX Tokens upon the completion of the term set forth in each warrant agreement.
|
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Schedule of Black-Scholes Pricing Model used for Fair Value Measurement of INX Tokens Warrants | The following table lists the inputs to the Black-Scholes
pricing model used for the fair value measurement of INX Token warrants:
|
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Schedule of Changes in Number of INX Token Warrants | The following table presents changes in the number
of INX Token warrants and restricted INX Token awards during the years ended December 31, 2023, and 2022:
|
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Schedule of Token-Based Compensation | Token-based compensation for years ended December
31, 2023, 2022 and 2021 is included within the following expenses:
|
Related Parties (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Related Parties [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Balances are Held with or by Related Parties | The following balances are held with or by related parties as of December
31, 2023 and 2022:
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Schedule of Revenue and Expense Items Recognized in Transactions with Related Parties | Revenue and expense items recognized in transactions
with related parties during the years ended December 31, 2023, 2022 and 2021 include service revenue earned from Nabatech and compensation
provided to key management personnel and directors, as follows:
|
Equity (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Composition of Share Capital | Composition of share capital:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Other Comprehensive Income (Loss) | Composition of other comprehensive income (loss)
(OCI):
|
Share-Based Payment (Tables) |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share-Based Payment [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Fair Value of the Options Granted Under the Plan Using the Black- Scholes Option Pricing Model | The table below summarizes the assumptions that were used to estimate the fair value of the options granted
under the Plan using the Black- Scholes option pricing model:
|
Income (Loss) Per Share (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Income (Loss) Per Share [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Income (Loss) Per Share | The table below presents basic and diluted net
income (loss) per Ordinary Share for the years ended December 31, 2023, 2022 and 2021, respectively:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Income (Loss) Per Share | The net income (loss) and weighted average number
of ordinary shares used in the calculation of basic income (loss) per share are as follows:
|
Operating Segments (Tables) |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Operating Segments [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Revenue and Net Income (Loss) by the Reporting Operating Segment | Revenue and net income (loss) by the reporting operating segment:
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Revenue Reported in Financial Statements are Attributed to Countries Based on Location of Customer | Select information by reporting operating segment:
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Non-Current Assets, Other Than Financial Assets | Non-current assets, other than financial assets, located in the country of domicile and in foreign countries:
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Revenue Reported in Financial Statements are Attributed to Countries Based on Location of Customer | Revenue reported in the financial statements
are attributed to countries based on the location of customers, as follows:
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Revenue From Major Customers | Revenue from major customers:
|
Employee Benefits Expense (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Employee Benefits Expense [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Consolidated Statements of Comprehensive Loss | Share-based and token-based compensation, and
short-term employee benefits included in consolidated statements of comprehensive income (loss) are as follows:
|
Nature of Operations (Details) - USD ($) $ / shares in Units, $ in Thousands, shares in Millions |
12 Months Ended | |
---|---|---|
May 17, 2019 |
Dec. 31, 2023 |
|
Nature of Operations (Details) [Line Items] | ||
Issuance of tokens has not allocated | $ 35,000 | |
Issuance of tokens does not intend | 200,000 | |
Company held tokens | $ 64,400 | |
Percentage of discount payment on transaction fees | 10.00% | |
Accumulated deficit | $ 48,623 | |
Company incurred an operating loss | 16,475 | |
Negative cash flow from operating activities | 7,781 | |
Working capital | $ 22,731 | |
INX Token [Member] | ||
Nature of Operations (Details) [Line Items] | ||
Number of tokens (in Shares) | 130 | |
Price per token (in Dollars per share) | $ 0.9 | |
Company held tokens | $ 29,400 | |
Receive pro rata distribution | 40.00% |
Material Accounting Policies (Details) - USD ($) $ in Thousands |
12 Months Ended | |
---|---|---|
Dec. 31, 2022 |
Dec. 31, 2021 |
|
Material Accounting Policies [Abstract] | ||
Impairment of digital assets | $ 72 | $ 80 |
Business Combinations (Details) - Schedule of Estimated Fair Value of the Identifiable Assets and Liabilities - Business Combinations [Member] $ in Thousands |
Jun. 09, 2021
USD ($)
|
---|---|
Schedule of Estimated Fair Value of the Identifiable Assets and Liabilities [Line Items] | |
Cash and cash equivalents | $ 810 |
Accounts receivable | 1,031 |
Property and equipment | 37 |
Right-of-use-assets | 416 |
Intangible assets | 2,491 |
Total assets | 4,785 |
Accounts payable and accrued expenses | (745) |
Lease liability | (501) |
Total liabilities | (1,246) |
Net identifiable assets | 3,539 |
Goodwill arising on acquisition | 1,370 |
Total cost of acquisition | 4,909 |
Cash paid | 4,327 |
Cash and cash equivalents acquired | 810 |
Net cash outflow | 3,517 |
Equity contribution by shareholder | $ 582 |
Business Combinations (Details) - Schedule of Estimated Fair Value of the Identifiable Assets and Liabilities - Business Combinations [Member] $ in Thousands |
May 09, 2021
USD ($)
|
---|---|
Schedule of Estimated Fair Value of the Identifiable Assets and liabilities [Line Items] | |
Cash and cash equivalents | $ 307 |
Other current assets | 18 |
Intangible assets | 1,914 |
Total Assets | 2,239 |
Accounts payable | (3) |
Total Liabilities | (3) |
Net identifiable assets | 2,236 |
Goodwill arising on acquisition | 1,017 |
Total cost of acquisition | 3,253 |
Cost of Acquisition: | |
Cash paid | 2,022 |
Cash and cash equivalents acquired | 307 |
Net cash outflow | 1,715 |
Token warrant liability | 735 |
Contingent consideration liability | $ 496 |
Business Combinations (Details) - Schedule of Liability in Contingent Consideration - USD ($) $ in Thousands |
12 Months Ended | |
---|---|---|
Dec. 31, 2022 |
Dec. 31, 2021 |
|
Schedule of Liability in Contingent Consideration [Abstract] | ||
Balance as of January 1 | $ 400 | |
Liability arising as result of business combination | 496 | |
Payment | (400) | (400) |
Change in fair value of contingent liability recognized in profit or loss | 304 | |
Balance as of December 31 | $ 400 |
Reserve Fund (Details) - USD ($) $ in Thousands |
12 Months Ended | ||
---|---|---|---|
Dec. 31, 2023 |
Dec. 31, 2022 |
Dec. 31, 2021 |
|
Reserve Fund [Abstract] | |||
Gross proceeds percentage | 75.00% | ||
Initial public offering in excess | $ 25,000 | ||
Reserve fund | $ 36,023 | ||
Other expense | 1,618 | ||
Balance of reserve fund | $ 34,405 | ||
Investment policy of reserve funds, description | the INX’s Board of Directors approved the Investment Policy of the Reserve Fund. Per the approved Policy, as amended on August 11, 2022, the Reserve Fund, post the amendment, shall be invested as follows: minimum 15% in cash and bank deposits, up to 70% in U.S Treasury securities, up to 20% shall be invested in exchange traded funds and up to 50% in corporate bonds and other instruments with the lowest investment grade rating of BBB. |
Reserve Fund (Details) - Schedule of Reserve Fund is Comprised of Cash and Cash Equivalents - USD ($) $ in Thousands |
12 Months Ended | |||
---|---|---|---|---|
Dec. 31, 2023 |
Dec. 31, 2022 |
|||
Reserve Fund (Details) - Schedule of Reserve Fund is Comprised of Cash and Cash Equivalents [Line Items] | ||||
Cash and cash equivalents | $ 16,522 | $ 5,824 | ||
Short-term investments (*) | ||||
Total long-term investments | [1] | 901 | 11,726 | |
Total short-term investments | [1] | 16,982 | 18,473 | |
Total Reserve Fund | 34,405 | 36,023 | ||
Short-term investments [Member] | ||||
Short-term investments (*) | ||||
U.S. Treasury securities | [1] | 986 | 6,141 | |
Corporate bonds – marketable investments | [1] | 15,996 | 12,332 | |
Long-term investments [Member] | ||||
Short-term investments (*) | ||||
U.S. Treasury securities | [1] | 901 | 474 | |
Corporate bonds and loans (principally) – marketable investments | [1] | $ 11,252 | ||
|
Investments (Details) $ / shares in Units, $ in Thousands |
12 Months Ended | ||||||
---|---|---|---|---|---|---|---|
Dec. 31, 2023
USD ($)
$ / shares
shares
|
Dec. 31, 2023
£ / shares
|
Dec. 31, 2022
£ / shares
shares
|
Sep. 09, 2021
USD ($)
|
Mar. 20, 2021
USD ($)
$ / shares
shares
|
Feb. 25, 2021
shares
|
Nov. 27, 2017
shares
|
|
Investments (Details) [Line Items] | |||||||
Initial capitalization investment | $ 90 | $ 250 | $ 150 | ||||
Ordinary shares (in Shares) | shares | 47,635,875 | 47,635,875 | 956,333 | 10,029,193 | |||
Price per share (in Dollars per share) | £ / shares | £ 0.001 | £ 0.001 | |||||
Purchase warrant | $ 300 | ||||||
Percentage of issued and outstanding | 33.00% | ||||||
Investment loss | $ 591 | ||||||
Foreign currency translation | $ 38 | ||||||
United Kingdom [Member] | |||||||
Investments (Details) [Line Items] | |||||||
Ordinary shares (in Shares) | shares | 95,411 | ||||||
Price per share (in Dollars per share) | $ / shares | $ 0.01 | $ 1.57 | |||||
Investment in Associate [Member] | |||||||
Investments (Details) [Line Items] | |||||||
Initial capitalization investment | $ 32 | ||||||
Foreign currency translation | $ 597 |
Investments (Details) - Schedule of Investments - USD ($) $ in Thousands |
Dec. 31, 2023 |
Dec. 31, 2022 |
||||
---|---|---|---|---|---|---|
Short-term investments (*) | ||||||
Short-term investments | [1] | $ 10,493 | $ 5,033 | |||
Long-term investments | ||||||
Long-term investments | 893 | 4,654 | ||||
Total investments | 11,386 | 9,687 | ||||
U.S. Treasury securitie [Member] | ||||||
Short-term investments (*) | ||||||
Short-term investments | [1] | 4,604 | 3,444 | |||
Corporate bonds – marketable investments [Member] | ||||||
Short-term investments (*) | ||||||
Short-term investments | [1] | 5,889 | 1,589 | |||
Long-term investments | ||||||
Long-term investments | [1] | 403 | 4,254 | |||
Investments in private equity [Member] | ||||||
Long-term investments | ||||||
Long-term investments | [2] | $ 490 | $ 400 | |||
|
Derivative Assets (Details) - USD ($) $ in Thousands |
12 Months Ended | |
---|---|---|
Dec. 31, 2023 |
Dec. 31, 2022 |
|
Derivative Assets [Abstract] | ||
Collateral amount of open digital assets | $ 905 | |
Fair value | $ 1,072 | |
Loss on derivative | $ 1,618 | |
Net loss | $ 253 |
Customer Funds (Details) - USD ($) $ in Thousands |
Dec. 31, 2023 |
Dec. 31, 2022 |
---|---|---|
Customer Funds [Abstract] | ||
Cash balance | $ 360 | $ 448 |
Digital asset balance | $ 2,882 | $ 2,161 |
Prepaid Expenses and Other Receivables (Details) - Schedule of Prepaid Expenses and Other Receivables - USD ($) $ in Thousands |
Dec. 31, 2023 |
Dec. 31, 2022 |
---|---|---|
Prepaid Expenses and Other Receivables [Abstract] | ||
Receivable from related parties (see Note 16) | $ 1,213 | $ 1,254 |
Prepaid expenses and advances to service providers | 668 | 1,015 |
Receivable from government agencies | 390 | 219 |
Office space sublease receivable | 90 | |
Other receivables | 265 | 120 |
Total | $ 2,626 | $ 2,608 |
Goodwill and Other Intangible Assets (Details) - USD ($) $ in Thousands |
12 Months Ended | ||
---|---|---|---|
Dec. 31, 2023 |
Dec. 31, 2022 |
Dec. 31, 2021 |
|
Goodwill and Other Intangible Assets [Line Items] | |||
Amortization of intangible assets | $ 168 | $ 220 | $ 130 |
Impairment loss | $ 0 | $ 0 | |
Amortized period | 5 years | ||
Fixed growth rate | 5.00% | ||
Pre-tax discount rate of the cash flows | 24.30% | ||
Cash-generating units [member] | |||
Goodwill and Other Intangible Assets [Line Items] | |||
Amortized period | 5 years | ||
Software [Member] | |||
Goodwill and Other Intangible Assets [Line Items] | |||
Impairment loss | $ 361 | ||
ILSB [Member] | |||
Goodwill and Other Intangible Assets [Line Items] | |||
Amortized period | 5 years | ||
OFN [Member] | |||
Goodwill and Other Intangible Assets [Line Items] | |||
Fixed growth rate | 2.00% | ||
INXS [Member] | |||
Goodwill and Other Intangible Assets [Line Items] | |||
Amortized period | 5 years | ||
Fixed growth rate | 3.00% | ||
Pre-tax discount rate of the cash flows | 29.80% |
Goodwill and Other Intangible Assets (Details) - Schedule of Useful Life of Intangible Assets |
12 Months Ended |
---|---|
Dec. 31, 2023 | |
Licenses [Member] | |
Schedule of Useful Life of Intangible Assets [Line Items] | |
Useful life | Indefinite |
Amortization method | Not amortized |
Customers relationship [Member] | |
Schedule of Useful Life of Intangible Assets [Line Items] | |
Useful life | Definite 10.58 years |
Amortization method | Straight-line |
Trade name [Member] | |
Schedule of Useful Life of Intangible Assets [Line Items] | |
Useful life | Definite 10.58 years |
Amortization method | Straight-line |
Goodwill and Other Intangible Assets (Details) - Schedule of Net Carrying Amounts of Goodwill, Licenses, Trade Name and Customer Relationships - USD ($) $ in Thousands |
Dec. 31, 2023 |
Dec. 31, 2022 |
---|---|---|
Schedule of Net Carrying Amounts of Goodwill, Licenses, Trade Name and Customer Relationships [Line Items] | ||
Goodwill | $ 2,253 | $ 2,290 |
Licenses | 1,648 | |
Trade Name | 304 | |
Customer Relationships | 1,345 | |
Total Intangible Assets | 3,297 | |
ILSB [Member] | ||
Schedule of Net Carrying Amounts of Goodwill, Licenses, Trade Name and Customer Relationships [Line Items] | ||
Goodwill | 1,236 | |
Licenses | 448 | |
Trade Name | 304 | |
Customer Relationships | 1,062 | |
Total Intangible Assets | 1,814 | |
INXS [Member] | ||
Schedule of Net Carrying Amounts of Goodwill, Licenses, Trade Name and Customer Relationships [Line Items] | ||
Goodwill | 1,017 | |
Licenses | 1,200 | |
Trade Name | ||
Customer Relationships | 283 | |
Total Intangible Assets | $ 1,483 |
Right-Of-Use Assets and Lease Liabilities (Details) - USD ($) $ in Thousands |
12 Months Ended | |||
---|---|---|---|---|
Jun. 19, 2023 |
Dec. 31, 2023 |
Dec. 31, 2022 |
Dec. 31, 2021 |
|
Right-Of-Use Assets and Lease Liabilities (Details) [Line Items] | ||||
Lease payment | $ 18 | $ 564 | $ 578 | $ 68 |
Sublease agreement | $ 90 | |||
Agreement terminates, date | May 31, 2024 | |||
Bottom of range [member] | ||||
Right-Of-Use Assets and Lease Liabilities (Details) [Line Items] | ||||
Lease term | 2 years | |||
Top of range [member] | ||||
Right-Of-Use Assets and Lease Liabilities (Details) [Line Items] | ||||
Lease term | 5 years |
Right-Of-Use Assets and Lease Liabilities (Details) - Schedule of Right-of-Use Assets - USD ($) $ in Thousands |
12 Months Ended | |
---|---|---|
Dec. 31, 2023 |
Dec. 31, 2022 |
|
At cost [member] | ||
Schedule of Right-of-Use Assets [Line Items] | ||
Balance at Beginning | $ 1,927 | $ 1,083 |
Disposal | (656) | |
Lease modification | (18) | |
New leases | 827 | |
Adjustments arising from translating financial statements from functional currency to presentation currency | 55 | (46) |
CPI and revaluation differences | 63 | |
Balance at Ending | 1,338 | 1,927 |
Accumulated depreciation [Member] | ||
Schedule of Right-of-Use Assets [Line Items] | ||
Balance at Beginning | 618 | 96 |
Disposal | (430) | |
Depreciation and amortization | 411 | 522 |
Balance at Ending | 599 | 618 |
Right-of-use assets | $ 739 | $ 1,309 |
Right-Of-Use Assets and Lease Liabilities (Details) - Schedule of Respect of Lease Liability - USD ($) $ in Thousands |
12 Months Ended | |
---|---|---|
Dec. 31, 2023 |
Dec. 31, 2022 |
|
Schedule of Respect of Lease Liability [Abstract] | ||
Beginning balance | $ 1,387 | $ 1,140 |
Changes during the year: | ||
New leases | 827 | |
Lease payments | (564) | (578) |
Interest expense | 60 | 83 |
Lease modification | (18) | |
CPI and revaluation differences | 4 | (85) |
Ending balance | 869 | 1,387 |
Current lease liability | 390 | 519 |
Non-current lease liability | $ 479 | $ 868 |
Inx Token Liability (Details) - USD ($) $ / shares in Units, $ in Thousands |
12 Months Ended | |||
---|---|---|---|---|
Aug. 10, 2023 |
Dec. 31, 2023 |
Dec. 31, 2022 |
Dec. 31, 2021 |
|
Inx Token Liability [Line Items] | ||||
Percent of the outstanding | 5.50% | |||
Company granted | $ 11,000 | $ 168,000 | ||
Employees expense | $ 6 | $ 29 | ||
Warrants exercised (in Shares) | 2,149,210 | 2,534,618 | ||
Aggregate purchase amount | $ 5,000 | |||
Expenses | $ 3,775 | $ 226,044 | $ 161,173 | |
Level 1 of fair value hierarchy [Member] | ||||
Inx Token Liability [Line Items] | ||||
Lock up agreement (in Dollars per share) | $ 0.4 | $ 0.43 |
Inx Token Liability (Details) - Schedule of the Number of Inx Tokens that the Company has Distributed - USD ($) $ in Thousands |
Dec. 31, 2023 |
Dec. 31, 2022 |
---|---|---|
Schedule Of The Number Of Inx Tokens That The Company Has Distributed Abstract | ||
Total number of INX Tokens | 135,570,986 | 133,410,776 |
INX Token liability | $ 54,120 | $ 56,847 |
Inx Token Liability (Details) - Schedule of Inputs and Assumptions are Volatility and the Period under the Lock Up |
12 Months Ended | |
---|---|---|
Dec. 31, 2023 |
Dec. 31, 2022 |
|
Bottom of range [member] | ||
Inx Token Liability (Details) - Schedule of Inputs and Assumptions are Volatility and the Period under the Lock Up [Line Items] | ||
Expected term (years) | 14 days | 1 month 17 days |
Expected volatility | 89.05% | 71.56% |
Top of range [member] | ||
Inx Token Liability (Details) - Schedule of Inputs and Assumptions are Volatility and the Period under the Lock Up [Line Items] | ||
Expected term (years) | 6 months 10 days | 1 year 6 months 10 days |
Expected volatility | 90.16% | 103.37% |
Inx Token Warrant Liability (Details) - USD ($) $ in Thousands |
12 Months Ended | |
---|---|---|
Dec. 31, 2023 |
Dec. 31, 2022 |
|
Inx Token Warrant Liability [Abstract] | ||
Token warrants shares | 5,574,292 | 6,972,192 |
Warrants new exercise price shares | 1,801,500 | |
Token warrants (in Dollars) | $ 8 |
Inx Token Warrant Liability (Details) - Schedule of Warrant Liability Composition - USD ($) $ in Thousands |
12 Months Ended | |
---|---|---|
Dec. 31, 2023 |
Dec. 31, 2022 |
|
INX Token warrant liability: | ||
Warrants granted to employees, advisors and service providers | $ 1,240 | $ 1,580 |
Inx Token Warrant Liability (Details) - Schedule of Black-Scholes Pricing Model used for Fair Value Measurement of INX Tokens Warrants - INX Tokens Warrants [Member] - $ / shares |
12 Months Ended | |
---|---|---|
Dec. 31, 2023 |
Dec. 31, 2022 |
|
Bottom of range [member] | ||
Schedule of Black-Scholes Pricing Model used for Fair Value Measurement of INX Tokens Warrants [Line Items] | ||
Expected volatility of the token prices (%) | 89.05% | 67.51% |
Risk-free interest rate (%) | 3.88% | 3.88% |
Expected life of warrant (years) | 6 months 7 days | 29 days |
Exercise price (in Dollars per share) | $ 0.01 | $ 0.01 |
Top of range [member] | ||
Schedule of Black-Scholes Pricing Model used for Fair Value Measurement of INX Tokens Warrants [Line Items] | ||
Expected volatility of the token prices (%) | 108.38% | 86.39% |
Risk-free interest rate (%) | 5.40% | 4.69% |
Expected life of warrant (years) | 10 years | 10 years |
Exercise price (in Dollars per share) | $ 2.81 | $ 2.86 |
Inx Token Warrant Liability (Details) - Schedule of Token-Based Compensation - USD ($) $ in Thousands |
12 Months Ended | ||
---|---|---|---|
Dec. 31, 2023 |
Dec. 31, 2022 |
Dec. 31, 2021 |
|
Operating expenses (income): | |||
Research and development | $ 166 | $ 135 | $ 262 |
Sales and marketing | 268 | 437 | 177 |
General and administrative | 464 | 820 | 6,736 |
Change in fair value of INX Token warrant liability | (204) | (8,294) | 12,626 |
Total token-based compensation expense (income) | $ 694 | $ (6,902) | $ 19,801 |
Related Parties (Details) $ / shares in Units, $ in Thousands |
12 Months Ended | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Nov. 19, 2023 |
Jan. 02, 2023
USD ($)
|
Jan. 01, 2023 |
Oct. 18, 2022 |
Sep. 21, 2022 |
Jun. 30, 2022 |
Mar. 24, 2022 |
Dec. 31, 2023
USD ($)
$ / shares
shares
|
Dec. 31, 2022
USD ($)
$ / shares
shares
|
Dec. 31, 2021
USD ($)
|
Jul. 29, 2021
USD ($)
|
Feb. 25, 2021
shares
|
Nov. 27, 2017
shares
|
|
Related Parties [Line Items] | |||||||||||||
Service revenue | $ 976 | ||||||||||||
Cost of sales | 976 | ||||||||||||
Prepaid expenses and other receivables | 976 | ||||||||||||
General and administrative expenses | $ 13,316 | $ 15,450 | $ 33,136 | ||||||||||
Grant received | 520,000 | 254,808 | 1,325,946 | 1,334,322 | 509,617 | ||||||||
Fair value of grants (in Dollars per share) | $ / shares | $ 0.12 | $ 0.37 | |||||||||||
Ordinary shares issued (in Shares) | shares | 47,635,875 | 47,635,875 | 956,333 | 10,029,193 | |||||||||
Fair value of shares | 136 | ||||||||||||
Payment for shares issued | 175 | ||||||||||||
Aggregate transaction value | $ 60,000 | $ 1,001 | |||||||||||
Advisory fee | $ 90 | ||||||||||||
Percentage of aggregate transaction | 4.50% | ||||||||||||
Transaction fee | $ 1,400 | ||||||||||||
Percentage of gross proceeds received. | 5.50% | ||||||||||||
Directors [Member] | |||||||||||||
Related Parties [Line Items] | |||||||||||||
Purchase of option | 3,500 | ||||||||||||
A-Labs [Member] | |||||||||||||
Related Parties [Line Items] | |||||||||||||
Purchase of option | 1,527,084 | ||||||||||||
General and administrative expenses | 4,140 | ||||||||||||
Grant received | 4,550,000 | ||||||||||||
Fair value of grants (in Dollars per share) | $ / shares | $ 6,000 | ||||||||||||
Ordinary shares issued (in Shares) | shares | 1,120,000 | ||||||||||||
Payment for shares issued | 39 | ||||||||||||
Weild Capital, LLC. [Member] | |||||||||||||
Related Parties [Line Items] | |||||||||||||
Aggregate transaction value | $ 60,000 | ||||||||||||
Percentage of aggregate transaction | 3.50% | ||||||||||||
Percentage of gross proceeds received. | 3.00% | ||||||||||||
Token Options [Member] | A-Labs [Member] | |||||||||||||
Related Parties [Line Items] | |||||||||||||
General and administrative expenses | $ 4,140 | ||||||||||||
Nabatech [Member] | |||||||||||||
Related Parties [Line Items] | |||||||||||||
Percentage of ownership | 33.00% |
Related Parties (Details) - Schedule of Balances are Held with or by Related Parties - Related Parties [Member] - USD ($) $ in Thousands |
Dec. 31, 2023 |
Dec. 31, 2022 |
---|---|---|
Assets: | ||
Receivable from Parent Company | $ 216 | $ 1,205 |
Receivable from Nabatech | 976 | |
Prepaid expenses | 21 | 49 |
Total | 1,213 | 1,254 |
Liabilities: | ||
Accounts payable and accrued expenses | 240 | 308 |
INX Token liability | 4,485 | 5,531 |
INX Token warrant liability | 671 | 1,140 |
Total | $ 5,396 | $ 6,979 |
Related Parties (Details) - Schedule of Revenue and Expense Items Recognized in Transactions with Related Parties - USD ($) $ in Thousands |
12 Months Ended | ||||
---|---|---|---|---|---|
Dec. 31, 2023 |
Dec. 31, 2022 |
Dec. 31, 2021 |
|||
Related Parties (Details) - Schedule of Revenue and Expense Items Recognized in Transactions with Related Parties [Line Items] | |||||
Service revenue | $ 976 | ||||
Total compensation and benefits | 5,723 | $ 4,409 | $ 23,213 | ||
Change in fair value of INX Token and warrant liabilities | (830) | (20,133) | 24,673 | ||
Cost of service: | |||||
Cost of revenue | 976 | ||||
Service revenue [Member] | |||||
Related Parties (Details) - Schedule of Revenue and Expense Items Recognized in Transactions with Related Parties [Line Items] | |||||
Service revenue | 976 | ||||
Total compensation and benefits | 976 | ||||
Cost of service [Member] | |||||
Related Parties (Details) - Schedule of Revenue and Expense Items Recognized in Transactions with Related Parties [Line Items] | |||||
Total compensation and benefits | 226 | ||||
Cost of service: | |||||
Cost of revenue | 226 | ||||
Research and Development [Member] | |||||
Related Parties (Details) - Schedule of Revenue and Expense Items Recognized in Transactions with Related Parties [Line Items] | |||||
Total compensation and benefits | 465 | 541 | 1,437 | ||
Research and Development: | |||||
Compensation and benefits | 234 | 465 | 598 | ||
Share-based compensation | [1] | 190 | 70 | 391 | |
INX Token-based compensation | 41 | 6 | 448 | ||
Sales and marketing [Member] | |||||
Related Parties (Details) - Schedule of Revenue and Expense Items Recognized in Transactions with Related Parties [Line Items] | |||||
Total compensation and benefits | 843 | 11,067 | |||
Research and Development: | |||||
Compensation and benefits | 369 | 4,406 | |||
Share-based compensation | [1] | 176 | 2,783 | ||
INX Token-based compensation | 298 | 3,878 | |||
General and administrative [Member] | |||||
Related Parties (Details) - Schedule of Revenue and Expense Items Recognized in Transactions with Related Parties [Line Items] | |||||
Total compensation and benefits | 5,032 | 3,025 | 10,709 | ||
Research and Development: | |||||
Compensation and benefits | 2,934 | 2,204 | 1,577 | ||
Share-based compensation | [1] | 1,702 | 543 | 6,883 | |
INX Token-based compensation | $ 396 | $ 278 | $ 2,249 | ||
|
Convertible Loans (Details) - USD ($) $ in Thousands |
1 Months Ended | 12 Months Ended | |||
---|---|---|---|---|---|
Nov. 27, 2017 |
Dec. 31, 2023 |
Dec. 31, 2021 |
Dec. 31, 2022 |
Feb. 25, 2021 |
|
Convertible Loans [Line Items] | |||||
Aggregate amount of convertible loans | $ 144 | $ 0 | |||
Aggregate ordinary shares (in Shares) | 10,029,193 | 47,635,875 | 47,635,875 | 956,333 | |
Percentage of loans interest rate | 2.00% | ||||
Total right to purchase (in Shares) | 2,690,623 | ||||
Convertible loans received | $ 144 | ||||
fair value of convertible loans | 5 | ||||
Fair value of loans received | $ 93 | ||||
Percentage of effective interest rate | 60.00% | ||||
Loans balances | $ 46 |
Equity (Details) $ / shares in Units, $ in Thousands |
1 Months Ended | 12 Months Ended | |||||||
---|---|---|---|---|---|---|---|---|---|
Jan. 10, 2022
USD ($)
shares
|
Jan. 04, 2022
USD ($)
|
Sep. 13, 2020
USD ($)
$ / shares
shares
|
Mar. 31, 2020
$ / shares
shares
|
Feb. 21, 2020
USD ($)
$ / shares
|
Mar. 31, 2021
$ / shares
shares
|
Dec. 31, 2023
USD ($)
$ / shares
shares
|
Dec. 31, 2023
USD ($)
$ / shares
|
Dec. 31, 2021
$ / shares
shares
|
|
Equity (Details) [Line Items] | |||||||||
Discount rate percentage | 25.00% | ||||||||
Ordinary price per share (in Dollars per share) | $ / shares | $ 1.526 | $ 1.526 | $ 2.514 | ||||||
Amount Received | $ 579 | ||||||||
Converted shares (in Shares) | shares | 379,593 | ||||||||
Exercised granted shares (in Shares) | shares | 596,659 | ||||||||
Private placement units (in Shares) | shares | 31,680,000 | ||||||||
Gross proceeds | $ 31,283 | ||||||||
Description of warrant exercisable | Each unit consists of one Ordinary share and one-half of one Ordinary share purchase warrant exercisable for two years at an exercise price of CAD1.88 ($1.49) per share. | ||||||||
Warrant | $ 259 | ||||||||
Cash commissions | $ 1,951 | ||||||||
Agent compensation options (in Shares) | shares | 1,810,740 | ||||||||
Exercise price | (per share) | $ (0.99) | $ 1.25 | |||||||
Option value | $ 515 | $ 515 | |||||||
Triple V [Member] | |||||||||
Equity (Details) [Line Items] | |||||||||
Amount Received | 100 | ||||||||
A-Labs [Member] | |||||||||
Equity (Details) [Line Items] | |||||||||
Amount Received | 30 | ||||||||
New Investor [Member] | |||||||||
Equity (Details) [Line Items] | |||||||||
Amount Received | $ 1,500 | ||||||||
Consideration amount | $ 1,500 | ||||||||
Ordinary shares, issued (in Shares) | shares | 621,375 | ||||||||
Warrant to purchase (in Shares) | shares | 596,659 | ||||||||
Ordinary shares per share price (in Dollars per share) | $ / shares | $ 2.514 | ||||||||
SAFE [Member] | |||||||||
Equity (Details) [Line Items] | |||||||||
Additional capital increased | $ 1,500 | ||||||||
SAFE agreement dated August 30, 2019 [Member] | |||||||||
Equity (Details) [Line Items] | |||||||||
Ordinary price per share (in Dollars per share) | $ / shares | $ 1.953 | ||||||||
Converted shares (in Shares) | shares | 268,179 | ||||||||
SAFE Agreement dated March 31, 2020 [Member] | |||||||||
Equity (Details) [Line Items] | |||||||||
Ordinary price per share (in Dollars per share) | $ / shares | $ 1.696 | ||||||||
Converted shares (in Shares) | shares | 115,661 | ||||||||
Private Placements [Member] | |||||||||
Equity (Details) [Line Items] | |||||||||
Gross proceeds | 27,028 | ||||||||
Warrant | 4,255 | ||||||||
Net addition to equity | 25,336 | ||||||||
Issuance cost | 1,692 | ||||||||
Warrant liability | $ 4,255 |
Equity (Details) - Schedule of Composition of Share Capital - shares |
12 Months Ended | |
---|---|---|
Dec. 31, 2023 |
Dec. 31, 2022 |
|
Schedule of Composition of Share Capital [Abstract] | ||
Number of shares, Authorized | 100,000,000 | 100,000,000 |
Number of shares, Issued and outstanding | 47,635,875 | 47,635,875 |
Equity (Details) - Schedule of Other Comprehensive Income (Loss) - USD ($) $ in Thousands |
12 Months Ended | ||
---|---|---|---|
Dec. 31, 2023 |
Dec. 31, 2022 |
Dec. 31, 2021 |
|
Equity (Details) - Schedule of Other Comprehensive Income (Loss) [Line Items] | |||
Balance beginning | $ (1,254) | $ 188 | |
Realized loss on available-for sale securities reclassification adjustment into net income (loss) | 77 | 424 | |
Unrealized gain on available-for-sale securities | 1,086 | (1,353) | |
Foreign currency translation | (53) | (513) | 188 |
Balance ending | (144) | (1,254) | 188 |
Reserve from financial assets measured at fair value through OCI [Member] | |||
Equity (Details) - Schedule of Other Comprehensive Income (Loss) [Line Items] | |||
Balance beginning | (929) | ||
Realized loss on available-for sale securities reclassification adjustment into net income (loss) | 77 | 424 | |
Unrealized gain on available-for-sale securities | 1,086 | (1,353) | |
Foreign currency translation | |||
Balance ending | 234 | (929) | |
Gain (loss) on foreign currency translation [Member] | |||
Equity (Details) - Schedule of Other Comprehensive Income (Loss) [Line Items] | |||
Balance beginning | (325) | 188 | |
Realized loss on available-for sale securities reclassification adjustment into net income (loss) | |||
Unrealized gain on available-for-sale securities | |||
Foreign currency translation | (53) | (513) | 188 |
Balance ending | $ (378) | $ (325) | $ 188 |
Share-Based Payment (Details) $ / shares in Units, $ in Thousands |
12 Months Ended | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Nov. 30, 2023
shares
|
Nov. 19, 2023
$ / shares
|
Nov. 19, 2023
$ / shares
|
May 12, 2023
$ / shares
|
May 12, 2023
$ / shares
|
Jan. 19, 2023
shares
|
Nov. 30, 2022
$ / shares
shares
|
Nov. 30, 2022
$ / shares
shares
|
Oct. 18, 2022
$ / shares
|
Oct. 18, 2022
$ / shares
|
Sep. 21, 2022
$ / shares
|
Sep. 21, 2022
$ / shares
|
Jun. 30, 2022
$ / shares
|
Jun. 30, 2022
$ / shares
|
Jun. 22, 2022
shares
|
Mar. 24, 2022
$ / shares
|
Mar. 24, 2022
$ / shares
|
Mar. 15, 2022
$ / shares
shares
|
Mar. 15, 2022
$ / shares
shares
|
Dec. 31, 2023
USD ($)
$ / shares
shares
|
Dec. 31, 2022
USD ($)
$ / shares
shares
|
Dec. 31, 2021
USD ($)
|
|
Share Based Payment [Line Items] | ||||||||||||||||||||||
Authorised shares | 100,000,000 | 100,000,000 | ||||||||||||||||||||
Issuance of restricted shares | 912,721 | |||||||||||||||||||||
Vesting period | 4 years | 4 years | 3 years | 3 years | 3 years | 3 years | 4 years | 4 years | 4 years | 4 years | ||||||||||||
Purchase of shares | 520,000 | 520,000 | 254,808 | 254,808 | 1,325,946 | 1,325,946 | 1,334,322 | 1,334,322 | 509,617 | 509,617 | ||||||||||||
Price per share | (per share) | $ 0.14 | $ 0.185 | $ 0.17 | $ 0.235 | $ 0.2 | $ 0.265 | $ 0.25 | $ 0.31 | $ 0.6 | $ 0.76 | ||||||||||||
Share-based compensation expense | $ | $ 2,724 | $ 1,135 | $ 10,899 | |||||||||||||||||||
Exercise price | $ / shares | $ 0.12 | $ 0.37 | ||||||||||||||||||||
Common Shares [Member] | ||||||||||||||||||||||
Share Based Payment [Line Items] | ||||||||||||||||||||||
Purchase of shares | 786,535 | 786,535 | ||||||||||||||||||||
Price per share | (per share) | $ 0.25 | $ 0.31 | ||||||||||||||||||||
Restricted Common Shares [Member] | ||||||||||||||||||||||
Share Based Payment [Line Items] | ||||||||||||||||||||||
Issuance of restricted shares | 1,996,430 | |||||||||||||||||||||
Vesting period | 1 year | |||||||||||||||||||||
Employee [Member] | ||||||||||||||||||||||
Share Based Payment [Line Items] | ||||||||||||||||||||||
Vesting period | 4 years | 4 years | 4 years | 4 years | ||||||||||||||||||
Purchase of shares | 3,418,034 | 3,418,034 | 5,129,334 | 5,129,334 | ||||||||||||||||||
Price per share | (per share) | $ 0.13 | $ 0.17 | $ 0.5 | $ 0.64 | ||||||||||||||||||
Directors [Member] | ||||||||||||||||||||||
Share Based Payment [Line Items] | ||||||||||||||||||||||
Purchase of shares | 928,399 | 928,399 | ||||||||||||||||||||
Price per share | (per share) | $ 0.12 | $ 0.165 | ||||||||||||||||||||
Vest share option | 530,514 | 397,886 | 397,886 | |||||||||||||||||||
Bottom of range [member] | ||||||||||||||||||||||
Share Based Payment [Line Items] | ||||||||||||||||||||||
Vesting period | 2 years | 2 years | ||||||||||||||||||||
Top of range [member] | ||||||||||||||||||||||
Share Based Payment [Line Items] | ||||||||||||||||||||||
Vesting period | 3 years | 3 years | ||||||||||||||||||||
Parent [member] | ||||||||||||||||||||||
Share Based Payment [Line Items] | ||||||||||||||||||||||
Authorised shares | 25,352,832 | |||||||||||||||||||||
Aggregate number of common shares | 37,408,948 | |||||||||||||||||||||
Restricted Shares [Member] | ||||||||||||||||||||||
Share Based Payment [Line Items] | ||||||||||||||||||||||
Issuance of restricted shares | 5,036,132 | 5,036,132 | ||||||||||||||||||||
Vesting period | 3 years | 3 years |
Share-Based Payment (Details) - Schedule of Fair Value of the Options Granted Under the Plan Using the Black- Scholes Option Pricing Model - $ / shares |
12 Months Ended | |
---|---|---|
Dec. 31, 2023 |
Dec. 31, 2022 |
|
Schedule of Fair Value of the Options Granted Under the Plan Using the Black- Scholes Option Pricing Model [Line Items] | ||
Expected term (years) | 10 years | 10 years |
Dividend yield | ||
Bottom of range [member] | ||
Schedule of Fair Value of the Options Granted Under the Plan Using the Black- Scholes Option Pricing Model [Line Items] | ||
Expected volatility | 87.05% | 89.78% |
Exercise price (in Dollars per share) | $ 0.13 | $ 0.17 |
Risk-free interest rate | 2.886% | 1.37% |
Top of range [member] | ||
Schedule of Fair Value of the Options Granted Under the Plan Using the Black- Scholes Option Pricing Model [Line Items] | ||
Expected volatility | 86.22% | 94.32% |
Exercise price (in Dollars per share) | $ 0.14 | $ 0.55 |
Risk-free interest rate | 3.684% | 3.356% |
Income (Loss) Per Share (Details) - Schedule of Basic and Diluted Net Income (Loss) Per Ordinary Share - $ / shares |
12 Months Ended | ||
---|---|---|---|
Dec. 31, 2023 |
Dec. 31, 2022 |
Dec. 31, 2021 |
|
Schedule Of Basic And Diluted Net Income Loss Per Ordinary Share Abstract | |||
Earnings (loss) per share, basic | $ (0.25) | $ 4.52 | $ (14.3) |
Income (Loss) Per Share (Details) - Schedule of Basic and Diluted Net Income (Loss) Per Ordinary Share (Parentheticals) - $ / shares |
12 Months Ended | ||
---|---|---|---|
Dec. 31, 2023 |
Dec. 31, 2022 |
Dec. 31, 2021 |
|
Schedule Of Basic And Diluted Net Income Loss Per Ordinary Share Abstract | |||
Earnings (loss) per share, diluted | $ (0.25) | $ 4.52 | $ (14.30) |
Income (Loss) Per Share (Details) - Schedule of Income (Loss) Per Share - USD ($) $ in Thousands |
12 Months Ended | ||
---|---|---|---|
Dec. 31, 2023 |
Dec. 31, 2022 |
Dec. 31, 2021 |
|
Schedule of Income (Loss) Per Share [Abstract] | |||
Net income (loss) used in the calculation of earnings (loss) per share, basic | $ (12,055) | $ 211,334 | $ (215,235) |
Weighted average number of Ordinary Shares for the purposes of earnings (loss) per share, basic | 47,635,875 | 46,767,930 | 15,048,576 |
Income (Loss) Per Share (Details) - Schedule of Income (Loss) Per Share (Parentheticals) - USD ($) $ in Thousands |
12 Months Ended | ||
---|---|---|---|
Dec. 31, 2023 |
Dec. 31, 2022 |
Dec. 31, 2021 |
|
Schedule of Income (Loss) Per Share [Abstract] | |||
Net income (loss) used in the calculation of earnings (loss) per share, diluted | $ (12,055) | $ 211,334 | $ (215,235) |
Weighted average number of Ordinary Shares for the purposes of earnings (loss) per share, diluted | 47,635,875 | 46,767,930 | 15,048,576 |
Financial Risks and Risk Management (Details) - USD ($) $ in Thousands |
Dec. 31, 2023 |
Dec. 31, 2022 |
---|---|---|
Financial Risks and Risk Management [Abstract] | ||
Percentage of estimate of the effect on equity investments | 20.00% | |
Investments variables held | $ 5,575 | $ 8,000 |
Operating Segments (Details) |
12 Months Ended |
---|---|
Dec. 31, 2023 | |
Operating Segments [Abstract] | |
Total revenues percentage | 10.00% |
Operating Segments (Details) - Schedule of Revenue and Net Income (Loss) by the Reporting Operating Segment - USD ($) $ in Thousands |
12 Months Ended | ||
---|---|---|---|
Dec. 31, 2023 |
Dec. 31, 2022 |
Dec. 31, 2021 |
|
Schedule of Revenue and Net Income (Loss) by the Reporting Operating Segment [Line Items] | |||
Revenue | $ 17,701 | $ 13,219 | $ 2,544 |
Total income | 5,580 | 4,273 | 2,544 |
Segment net income (loss) | (15,625) | (14,591) | (53,905) |
Unallocated corporate expenses: | |||
Other income (expense), net | 3,775 | 226,044 | (161,173) |
Net income (loss) before taxes | (11,850) | 211,453 | (215,078) |
Brokerage Segment [Member] | |||
Schedule of Revenue and Net Income (Loss) by the Reporting Operating Segment [Line Items] | |||
Revenue | 4,913 | 3,621 | 2,278 |
Total income | 4,913 | 3,621 | 2,278 |
Segment net income (loss) | 65 | (157) | 383 |
Digital Assets Segment [Member] | |||
Schedule of Revenue and Net Income (Loss) by the Reporting Operating Segment [Line Items] | |||
Revenue | 12,788 | 9,598 | 266 |
Total income | 667 | 652 | 266 |
Segment net income (loss) | $ (15,690) | $ (14,434) | $ (54,288) |
Operating Segments (Details) - Schedule of Reporting Operating Segment - USD ($) $ in Thousands |
Dec. 31, 2023 |
Dec. 31, 2022 |
---|---|---|
Schedule of Reporting Operating Segment [Line Items] | ||
Segment assets | $ 72,516 | $ 82,405 |
Segment liabilities | 63,053 | 64,721 |
Brokerage Segment [Member] | ||
Schedule of Reporting Operating Segment [Line Items] | ||
Segment assets | 5,652 | 2,351 |
Segment liabilities | 1,280 | 1,077 |
Digital Assets Segment [Member] | ||
Schedule of Reporting Operating Segment [Line Items] | ||
Segment assets | 66,864 | 80,054 |
Segment liabilities | $ 61,773 | $ 63,644 |
Operating Segments (Details) - Schedule of Non-Current Assets, Other Than Financial Assets - USD ($) $ in Thousands |
Dec. 31, 2023 |
Dec. 31, 2022 |
---|---|---|
United States [Member] | ||
Schedule of Non-Current Assets, Other Than Financial Assets [Line Items] | ||
Non-current assets | $ 2,500 | $ 2,848 |
State of Israel [Member] | ||
Schedule of Non-Current Assets, Other Than Financial Assets [Line Items] | ||
Non-current assets | 4,130 | 4,663 |
Gibraltar [Member] | ||
Schedule of Non-Current Assets, Other Than Financial Assets [Line Items] | ||
Non-current assets | $ 11 |
Operating Segments (Details) - Schedule of Revenue Reported in Financial Statements are Attributed to Countries Based on Location of Customer - USD ($) $ in Thousands |
12 Months Ended | ||
---|---|---|---|
Dec. 31, 2023 |
Dec. 31, 2022 |
Dec. 31, 2021 |
|
Brokerage Segment [Member] | United Kingdom [Member] | |||
Brokerage Segment: | |||
Revenue | $ 2,653 | $ 1,083 | $ 911 |
Brokerage Segment [Member] | State of Israel [Member] | |||
Brokerage Segment: | |||
Revenue | 1,984 | 1,562 | 911 |
Brokerage Segment [Member] | United States [Member] | |||
Brokerage Segment: | |||
Revenue | 16 | 652 | 248 |
Brokerage Segment [Member] | Gibraltar [Member] | |||
Brokerage Segment: | |||
Revenue | |||
Brokerage Segment [Member] | Other [Member] | |||
Brokerage Segment: | |||
Revenue | 260 | 324 | 208 |
Digital Assets Segment [Member] | United Kingdom [Member] | |||
Brokerage Segment: | |||
Revenue | 4 | 123 | 6 |
Digital Assets Segment [Member] | State of Israel [Member] | |||
Brokerage Segment: | |||
Revenue | 21 | 90 | 90 |
Digital Assets Segment [Member] | United States [Member] | |||
Brokerage Segment: | |||
Revenue | 149 | 170 | 25 |
Digital Assets Segment [Member] | Gibraltar [Member] | |||
Brokerage Segment: | |||
Revenue | 11,380 | 8,946 | |
Digital Assets Segment [Member] | Other [Member] | |||
Brokerage Segment: | |||
Revenue | 151 | 107 | 48 |
Digital Assets Segment [Member] | Switzerland [Member] | |||
Brokerage Segment: | |||
Revenue | 976 | ||
Digital Assets Segment [Member] | Japan [Member] | |||
Brokerage Segment: | |||
Revenue | $ 107 | $ 162 | $ 97 |
Operating Segments (Details) - Schedule of Revenue From Major Customers - USD ($) $ in Thousands |
12 Months Ended | ||
---|---|---|---|
Dec. 31, 2023 |
Dec. 31, 2022 |
Dec. 31, 2021 |
|
Customer A [Member] | |||
Brokerage Segment: | |||
Brokerage segment | $ 592 | $ 452 | $ 265 |
Customer B [Member] | |||
Brokerage Segment: | |||
Brokerage segment | $ 533 |
Employee Benefits Expense (Details) - USD ($) $ in Thousands |
12 Months Ended | ||
---|---|---|---|
Dec. 31, 2023 |
Dec. 31, 2022 |
Dec. 31, 2021 |
|
Employee Benefits Expense [Abstract] | |||
Employee post-retirement benefit plans contribution | $ 931 | $ 899 | $ 608 |
Employee Benefits Expense (Details) - Schedule of Consolidated Statements of Comprehensive Loss - USD ($) $ in Thousands |
12 Months Ended | ||
---|---|---|---|
Dec. 31, 2023 |
Dec. 31, 2022 |
Dec. 31, 2021 |
|
Cost of Service [Member] | |||
Employee Benefits Expense (Details) - Schedule of Consolidated Statements of Comprehensive Loss [Line Items] | |||
Compensation and benefits | $ 505 | ||
Share-based compensation | |||
Token-based compensation | |||
Total | 505 | ||
Research and development [Member] | |||
Employee Benefits Expense (Details) - Schedule of Consolidated Statements of Comprehensive Loss [Line Items] | |||
Compensation and benefits | 2,053 | 2,159 | 1,286 |
Share-based compensation | 400 | 2 | 1,105 |
Token-based compensation | 166 | 125 | 262 |
Total | 2,619 | 2,286 | 2,653 |
Sales and Marketing [Member] | |||
Employee Benefits Expense (Details) - Schedule of Consolidated Statements of Comprehensive Loss [Line Items] | |||
Compensation and benefits | 1,735 | 1,160 | 677 |
Share-based compensation | 443 | 1,022 | 2,809 |
Token-based compensation | 268 | 435 | 177 |
Total | 2,446 | 2,617 | 3,663 |
General and administration [Member] | |||
Employee Benefits Expense (Details) - Schedule of Consolidated Statements of Comprehensive Loss [Line Items] | |||
Compensation and benefits | 5,669 | 6,493 | 5,072 |
Share-based compensation | 1,882 | 111 | 6,985 |
Token-based compensation | 464 | 817 | 6,175 |
Total | $ 8,015 | $ 7,421 | $ 18,232 |
Taxes on Income (Details) - USD ($) $ in Thousands |
12 Months Ended | |||
---|---|---|---|---|
Aug. 01, 2021 |
Dec. 31, 2023 |
Dec. 31, 2022 |
Dec. 31, 2021 |
|
Taxes on Income [Abstract] | ||||
Income tax percentage | 23.00% | 23.00% | 23.00% | |
Weighted tax percentage | 21.00% | 21.00% | 30.80% | |
Gibraltar tax rate | 10.00% | 12.50% | 12.50% | |
Total amount of operating tax losses (in Dollars) | $ 67,137 | |||
Income tax expense (in Dollars) | $ 205 | $ 119 | $ 0 |
Subsequent Events (Details) - Non-adjusting events after reporting period [member] - USD ($) $ in Thousands |
Feb. 13, 2024 |
Jan. 08, 2024 |
---|---|---|
Subsequent Events [Line Items] | ||
Restricted share units | 2,337,212 | |
Amount claimed (in Dollars) | $ 184 | |
INX Token [Member] | ||
Subsequent Events [Line Items] | ||
Restricted share units | 1,000,000 |
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