i(x) Net Zero Plc

Notes to Financial Statements

December 31, 2021

(Expressed in US dollars)

 

1.   Organization and Nature of Business

 

i(x) Net Zero, PLC (the "Company") is a company incorporated and domiciled in Jersey, British Isles. The Company's shares are admitted to trading on the AIM market of the London Stock Exchange (ticker: IX). The Company is an investment company that provides its shareholders with an opportunity to create long-term capital growth with sustainable impact on the environment and communities it serves. The Company was founded as i(x) investments, LLC ("i(x) investments"), a limited liability company formed in the United States of America under the laws of the State of Delaware on October 6, 2015.

 

On February 9, 2022, the Company completed its initial public offering ("IPO") on the AIM market. The Company issued 14,056,811 ordinary shares at no par value in the IPO. The shares were issued at £0.76 per share, resulting in total share capital of £10,683,000 ($14,481,736) from the IPO. In addition, the members' capital in i(x) investments was converted to 65,000,000 shares in the Company as of the date of the IPO, bringing the total shares issued and outstanding as of February 9, 2022 to 79,481,736.

 

Prior to the IPO, the Company undertook a reorganisation in which i(x) Merger LLC, a wholly owned subsidiary of the Company merged with i(x) investments, with i(x) investments continuing as the surviving entity and as a wholly owned subsidiary of the Company. Prior to the reorganisation of the Company, i(x) Financial Services, LLC ("i(x) Financial Services"), (a wholly owned subsidiary of ix investments), i(x) Securities, LLC (a wholly owned subsidiary of i(x) Financial Services) and certain other assets held by i(x) investments were transferred to i(x) Sustainable Holdings, LLC ("i(x) Sustainable Holdings"), an entity owned by the members of i(x) investments, prior to the reorganisation.

 

 

                                The Company is governed in accordance with Companies (Jersey) Law 1991.

 

2. Summary of Significant Accounting Policies and Key Accounting Estimates

 

Basis of Presentation

 

The Company's financial statements have been prepared on a going concern basis and in accordance with International Financial Reporting Standards ("IFRS").  The Company adopted IFRS as its reporting standard effective January 1, 2018 and did not issue financial statements prior to this date. The financial statements have been prepared on the historical cost basis, as modified by the revaluation of financial assets and financial liabilities at fair value through profit or loss. The Company reports cash flows from operating activities using the indirect method.

 

                     Group reorganisation accounting

 

The Company acquired its 100% interest in i(x) investments on February 9, 2022 by way of a reverse merger. This is a business combination involving entities under common control and the consolidated financial statements are issued in the name of i(x) Net Zero, but they are a continuance of those of i(x) investments. Therefore, the assets and liabilities of i(x) investments have been recognised and measured in these consolidated financial statements at their pre combination carrying values. The retained earnings and other equity balances recognised in these consolidated financial statements are the retained earnings and other equity balances of the Company and i(x) investments. The equity structure appearing in these consolidated financial statements (the number and the type of equity instruments issued) reflect the equity structure of the Company including equity instruments issued by the Company to effect the consolidation.

 

The audited financial statements of the Company for 2021 and the unaudited financial statements for the period ended June 30, 2021 represent the results of operations of i(x) investments. Comparative consolidated statements of profit and loss and cash flows for the six month period ended June 30, 2021 were restated to separate results of discontinued operations in order to comply with the current period presentation.  

 

                   Judgments and Key Sources of Estimation Uncertainty

 

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Company's accounting policies and making any estimates. Changes in assumptions might have a significant impact on the financial statements in the period in which the assumptions changed. Management believes that the underlying assumptions are appropriate and that the Company's financial statements are fairly presented. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in Note 2 under Fair Value Estimation.

 

As of December 31, 2021, management determined that the transfer of the Company's broker/dealer subsidiary should be treated as a discontinued operation.

 

                     Foreign Currency

 

The financial statements are presented in the functional currency of US Dollars, since the majority of its revenue and operating expenditure is denominated in this currency. Foreign currency transactions are translated into the functional currency using the rates of exchange prevailing at the dates of the transactions. At each end of each reporting period, monetary assets and liabilities that are denominated in foreign currencies, if any, are translated at the rates prevailing on the reporting end date. Gains and losses arising on translation, if any, are included in other income in the statement of profit or loss for the period.

 

 

Assessment as an Investment Entity

 

Management of the Company has determined that it meets the definition of an investment entity within IFRS 10 and, therefore, is required to measure its subsidiaries held as investments at fair value through profit and loss rather than consolidate them. Management of the Company considered exit strategies and all the Company's activities to conclude whether the following criteria are satisfied:

·     The entity obtains funds from one or more investors for the purpose of providing those investors with investment services;

·     The entity commits to its investors that its business purpose is to invest funds solely for returns from capital appreciation, investment income or both;

·     The entity measures and evaluates the performance of substantially all of its investments on a fair value basis.

Management determined that the Company meets the definition of investment entity in accordance with IFRS 10, Consolidated Financial Statements, as all of the above criteria are met by the Company.

 

The Company was established to obtain funds from its investors and with a view to manage the investments made from those funds.

 

·     The only sources of profit for the Company are capital appreciation and investment income. The Company aims to maximize value of its investments and to monetize this value through dividend inflow, interest revenue and disposal of investments at the right time and at the right price. The Company does not obtain any other benefit from its investments that are not available to other parties that are not related to the respective investee.

 

In addition to the above, while assessing whether the Company meets the definition of investment entity, management considered the following typical characteristics of the investment entity (as indicated in IFRS 10):

 

·     investment entity has more than one investment;

·     investment entity has more than one investor;

·     investment entity has investors that are not related parties of the entity;

·     investment entity has ownership interests in the form of equity or similar interests.

 

Assessment as an Investment Entity

 

The Company has all of the above typical characteristics of an investment entity.

 

Management has concluded that the Company meets the definition of an investment entity. This conclusion will be reassessed on an annual basis, if any of these criteria or characteristics change.

 

                    Basis of Consolidation and Control of Subsidiary Entity

 

As of December 31, 2021, the statement of financial position of the Company includes the unconsolidated accounts of the Company. The Company's subsidiary, i(x) Financial Services is not consolidated with the Company due to the Company's plan as of December 31, 2021, to distribute i(x) Financial Services and certain other assets, to a newly formed entity. The assets to be distributed are reported as assets held for disposal on the statement of financial position as of December 31, 2021.  These assets were distributed to a newly formed entity on February 2, 2022, and are no longer included in the i(x) Net Zero balance sheet at June 30, 2022.

 

The Statement of Profit or Loss for the period ended June 30, 2021 and the year ended December 31, 2021 are  not consolidated and reflect the profit or loss from i(x) Financial Services as a discontinued operation.

 

                    Valuation of Investments

 

The Company's investments consist of investments in private operating companies. These investments are valued by the Company's management at the end of each financial reporting period at fair value. As of June 30, 2022 and 2021 and December 31, 2021, the fair values of these investments were determined by the Company's management, as described under Fair Value Estimation.

 

The fair value of all other assets and liabilities held by the Company are determined at their fair value as reasonably determined in good faith by the Company's management.

 

Although the Company's management uses its best judgment in determining the fair value of its investments, there are inherent limitations in any such process. The fair value presented is not necessarily indicative of an amount the Company could realize in a current transaction and the differences could be material.

 

New Standards and Interpretations

 

The following new standard was adopted by the Company as of January 1, 2018.

 

                     IFRS 15 Revenue from Contracts with Customers

 

This standard is based on the principle that revenue is recognised when control of a good or service transfers to a customer. An entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Revenue from contracts with customers is recognised when, or as, the entity believes it has satisfied its performance obligations by transferring the promised goods or services to its customers. Revenue is recognised in the amount which the entity expects to receive in exchange for such goods or services. A distinct good or service, referred to as a performance obligation, is transferred to a customer when the customer obtains control of, or derives benefit from, that good or service. Revenue from a performance obligation satisfied over time is recognised by measuring progress towards satisfying the performance obligation in a manner that depicts the transfer of the goods or services to the customer. The guidance provides for a five-step process to be applied before revenue can be recognised and provides disclosure requirements for revenue recognition.

 

The following new standard was adopted by the Company retrospectively, as of January 1, 2018.

 

                    IFRS 16 Leases

 

This standard, which is effective January 1, 2019, requires a lessee to recognize a right-of- use asset representing its right to use the underlying leased asset and a lease liability, representing its obligation to make lease payments.

 

The following new standards or modifications to existing standards have been adopted by the Company as of January 1, 2020.

 

IFRIC 23 Uncertainty over Income Tax Treatments

 

IFRIC 23 addresses the accounting for income taxes (current and deferred) when tax treatments involve uncertainty that affects the application of IAS 12 (often referred to as "uncertain tax positions").

 

The interpretation does not apply to taxes or levies outside the scope of IAS 12, nor does it specifically include requirements relating to interest and penalties associated with uncertain tax treatments.

 

The interpretation specifically addresses (i) whether an entity considers uncertain tax treatments separately; (ii) the assumptions an entity makes about the examination of tax treatments by taxation authorities; (iii) how an entity determines taxable profits or tax losses, tax bases, unused tax losses, unused tax credits and tax rates; and (iv) how an entity considers changes in facts and circumstances.

 

Upon adoption of the interpretation, the Company considered whether it has any uncertain tax positions arising from the investment activities. However, the interpretation did not have any significant impact on the Company's consolidated financial statements.

 

                   Amendments to References to the Conceptual Framework in IFRS Standards

 

The Conceptual Framework is not a standard, and none of the concepts contained therein override the concepts or requirements in any standard. The purpose of the Conceptual Framework is to assist the IASB in developing standards, to help preparers develop consistent accounting policies where there is no applicable standard in place and to assist all parties to understand and interpret the standards. This will affect those entities which developed their accounting policies based on the Conceptual Framework. The revised Conceptual Framework includes some new concepts, updated definitions and recognition criteria for assets and liabilities and clarifies some important concepts.

 

Financial Assets and Liabilities

 

Financial assets includes cash and cash equivalents, investments, cash advances for future investments, accounts receivable, prepaid expenses and other assets.

 

Financial liabilities include accounts payable and accrued expenses, and professional fees payable.

 

Financial Assets and Liabilities at Fair Value through Profit or Loss

 

The Company classifies all of its investment portfolio as financial assets at fair value through profit or loss. The portfolio of financial assets is managed and performance is evaluated on a fair value basis. The Company is primarily focused on fair value information, and it uses that information to assess the assets' performance and to make decisions. The Company has not taken the option to irrevocably designate any equity securities as fair value through other comprehensive income. The contractual cash flows of the Company's debt securities are solely principal and interest, but these securities are neither held for the purpose of collecting contractual cash flows nor held both for collecting contractual cash flows and for sale. The collection of contractual cash flows is only incidental to achieving the objective of the Company's business model. Consequently, all investments are measured at fair value through profit or loss. The Company recognizes net changes in fair value on financial assets at fair value through profit or loss on the statement of profit or loss. The Company's accounting policies for measurement and fair value estimation of financial assets are discussed under Measurement and Fair Value Estimation in the notes to the consolidated financial statements.

 

Recognition

 

The Company recognizes financial assets and financial liabilities on the date it becomes a party to the contractual provisions of the instrument.

 

Purchases and sales of financial assets are recognised on the trade date. From this date any gains and losses arising from changes in fair value of the financial assets or financial liabilities are recorded in the statements of profit or loss.

 

Income and expense are recognised on an accrual basis. Transactions for private obligations are recorded on the date when the terms of the transaction are fully negotiated and known. Realised gains and losses from investment transactions are determined using the specific identification method.

 

Dividend income and expense are recorded on the ex-dividend date. Interest expense is recognised as incurred. Interest and dividends have not been accrued for securities or other obligations when the Company's management believes there is substantial doubt of collection.

 

Revenue is measured based on the consideration to which the Company expects to be entitled in a contract with a customer and excludes amounts collected on behalf of third parties. The Company recognizes revenue when it transfers control of a product or service to a customer.

 

Measurement

 

Financial assets and financial liabilities are measured initially at cost which is the fair value of the consideration given or received.

 

All recognised financial assets that are within the scope of IFRS 9 are required to be subsequently measured at amortized cost or fair value based on the entity's business model for managing the financial assets and the contractual cash flow characteristics of the financial assets.

 

Subsequent to initial recognition, all financial assets and financial liabilities are measured at fair value and accounted for through profit or loss. Gains and losses arising from changes in the fair value of the financial assets or financial liabilities at fair value through profit or loss are presented in the consolidated statements of profit or loss in revenue, in the period in which they arise.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with a maturity of three months or less when acquired to be cash equivalents.

 

                    Cash Advances for Future Investments

 

The Company may pay direct expenditures on behalf of a private operating company which the Company's management expects to invest in, in the future. When such expenditures are paid, they are recorded as cash advances for future investment on the Company's statements of financial position. Such expenditures may be reimbursable by the private operating company that they were paid on behalf of, or they may be converted to equity or debt securities issued by the private operating company in future periods. If the Company determines that such expenditures are not collectible from the private operating company or will not be converted to equity or debt securities, then the Company recognizes a loss on such expenditures in the year in which such loss is determined. The balance in cash advances for future investments was $86,165 as of June 30, 2022, and December 31, 2021, and $848,226 as of June 30, 2021 and is reflected on the Company's statements of financial position.

 

Prepaid Expenses

 

Prepaid expenses as of December 31, 2021, include expenses incurred in connection with the initial public offering of i(x) Net Zero, PLC ("i(x) Net Zero"). These expenses were accrued as of December 31, 2021 and deducted from the equity of i(x) Net Zero upon completion of the IPO. The total of these expense amounted to $1,416,000 as of December 31, 2021.

 

Current Liabilities

 

The balances in the accompanying statements of financial position for accounts payable and accrued expenses, professional fees payable and the current portion of the lease liability are due and payable within one year from June 30, 2022 and 2021 and December 31, 2021 respectively.

 

Lease Accounting

 

The Company accounts for leases by recognizing a right-of-use asset and a lease liability. Lease liabilities are measured at the present value of the contractual payments due to the lessor over the lease term, with the discount rate determined by reference to the rate inherent in the lease unless this rate is not readily determinable, in which case the Company's incremental borrowing rate on commencement of the lease is used. Right-of- use assets are initially measured at the amount of the lease liability, reduced for any lease incentives received, and increased for lease payments made at or before commencement of the lease, initial direct costs incurred and the amount of any provision where the Company is contractually required to dismantle, remove or restore the leased asset. Subsequent to initial measurement, lease liabilities increase as a result of interest charged at a constant rate on the balance outstanding and are reduced for lease payments made. Right-of-use assets are amortized on a straight-line basis over the remaining term of the lease.

 

 

The Company has a lease agreement with lease and non-lease components. Such non- lease components are accounted for separately.

 

The Company has elected not to recognize right-of-use assets and liabilities for short-term leases that have a lease term of 12 months or less, or leases of low value assets. These lease payments are expensed on a straight-line basis over the lease term.

 

                      Income Taxes

 

The results of the corporate inversion and resulting IPO transaction result in i(x) Net Zero being treated as a U.S. domestic corporation for all purposes of the U.S. tax code under Internal Revenue Code Section 7874(b) as of the date of the transaction. As a result of the transaction, there will be deferred tax implications related to the Company's temporary difference in the book and tax basis of its assets, the most material of which is the difference between the tax basis and the fair value of the Company's investments. As of June 30, 2022, the U.S. federal and state corporate deferred tax impact of the above referenced transaction on the investments listed on the Company's schedule of investments at fair value is projected to result in a deferred tax liability of approximately $12,686,000 at the Company's effective federal and state tax rates of 21% and 3.29%, respectively.

 

Deferred Income Taxes

 

The Company recognizes a deferred tax asset for the tax benefit of a net operating loss that, in the judgement of the Company's management, is more likely than not of being realised in a future year. The tax benefit of a net operating loss will be realised if it can be offset against taxable income in a future year. Currently, federal net operating losses carryforward indefinately and the carryforward periods in the states where the Company files income tax returns is 20 years. A valuation allowance is established for any portion of a deferred tax asset that is not likely to be realised in a future year. The valuation allowance is evaluated and adjusted annually by management for changes in the estimated amount of deferred tax assets that are not likely to be realised in future years, based on evidence currently available.

 

The Company also recognizes deferred income tax liabilities for the tax effect of temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements.

 

Deferred tax assets and liabilities are determined based on enacted tax laws and income tax rates expected to be in effect at the time the deferred tax assets and liabilities are expected to affect taxable income.

A balance sheet approach is used to determine the deferred income tax provision or benefit to be recognised in the Company's statements of operations. The current year provision or benefit is determined based on the difference between the prior and current year balances in the deferred tax asset and deferred tax liability accounts. The change in valuation allowance for the deferred tax asset is determined using the same approach.

 

The following are the deferred tax liabilities of the Company as of June 30, 2022:

 

	Total	Federal	State
Deferred Tax Liability	$   12,685,897	$ 12,359,843	$ 326,054

 

There were no deferred tax assets as of June 30, 2022.

 

Accounting for Uncertainties in Income Taxes

 

The Company's management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation, and establishes provisions, where appropriate, on the basis of amounts expected to be paid to the tax authorities. The Company's management has determined that there are no uncertain tax positions and, as a result, has identified no matters that require further disclosure in the financial statements. As of December 31, 2021, the tax years that remain subject to examination by United States federal and state tax jurisdictions under the statute of limitations, are the calendar years 2018 through 2021.

 

Fair Value Estimation

 

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 in the principal market or, in its absence, the most advantageous market to which the Company has access at that date. The fair value of a liability reflects its non-performance risk.

 

When available, the Company measures the fair value of an instrument using the quoted price in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. If there is no quoted price in an active market, then the Company uses valuation techniques that maximize the use of relevant observable inputs and minimize the use of unobservable inputs. The chosen valuation technique incorporates all of the factors that market participants would take into account in pricing a transaction.

 

The Company measures fair value using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements.

 

The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

 

·     Level 1: Assets and liabilities with inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

 

·     Level 2: Assets and liabilities with inputs other than quoted prices included within Level 1, that are observable either directly or indirectly, including quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are considered less active or other valuation techniques in which all significant inputs are directly or indirectly observable from market data.

 

·     Level 3: Assets and liabilities with inputs that are unobservable. Level 3 includes all instruments for which the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument's valuation. The valuation technique used is dependent on the level of data, the circumstances and the availability of observable inputs and may include discounted cash flow analysis, market comparables and option pricing models.

 

Level 3 instruments include investments in private operating companies, which comprise 100% of the Company's investment portfolio. The Company's management determines the fair value of these investments using valuation techniques applicable to Level 3 investments. Typically, the Company's best estimate of fair value at inception is the transaction price, excluding transaction costs. When evidence supports a change to the carrying value from the transaction price, adjustments are made to reflect expected exit values in the investment's principal market under current market conditions.

 

In estimating the value of Level 3 investments, the inputs generally used by the Company's management include the original transaction price, completed or pending third-party transactions in the underlying investment or comparable issuers, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt capital markets, and changes in financial ratios or cash flows. The Company also considers specific events which may impact the fair value of investee companies, including the following:

 

·     Corporate, political or operating events that may have a material impact on the investee company's prospects and therefore, its fair value.

·     The investee company is placed into receivership or bankruptcy.

·     The investee company is unlikely to continue as a going concern.

·     Management changes at the investee company that may have a positive or negative impact on the investee company's ability to achieve its objectives and build value for shareholders.

 

Level 3 investments may also be adjusted to reflect illiquidity and/or non-transferability, with the amount of such discount estimated by the Company's management in the absence of market information. The fair value measurement of Level 3 investments does not include transaction costs that may have been capitalized as part of the security's cost basis. Assumptions used by the Company's management due to the lack of observable inputs may significantly impact the resulting fair value and therefore the Company's results of operations.

 

         Investments in Private Operating Companies

The following table presents information about the Company's assets measured at fair value as of June 30, 2022 and 2021, and December 31, 2021:

 

                                                                                                           Level 3                                     

	June 30, 2022		June 30, 2021		December 31, 2021
Investments at Fair Value
Common Stock	$  2,383,698		$  2,245,730		$      2,383,698
Convertible Note	511,000		300,000		499,955
Limited Liability Company Interests	62,299,485		52,651,058		57,357,099
Limited Partnerships	742,000		500,000		500,000
Total investments at Fair Value,
End of Period	$   65,936,183		$   55,696,788		$    60,740,752

 

The following tables present the changes in assets classified in Level 3 of the fair value hierarchy for the periods ended June 30, 2022 and 2021 and the year ended December 31, 2021:

 

		Convertible	Limited Liability	Limited
	Common Stock	Note	Company Interests	Partnerships	Totals
Balance at December 31, 2021	$   2,383,698	$       499,955	$          57,357,099	$       500,000	$ 60,740,752
Purchases of investments	-	-	500,000	-	500,000
Unrealised gain	-	11,045	4,442,386	242,000	4,695,431
Balance at June 30, 2022	$       2,383,698	$       511,000	$          62,299,485	$       742,000	$ 65,936,183

 

 

	Common	Convertible	Limited Liability	Limited
	Stock	Note	Company Interests	Partnerships	Total
Balance at December 31, 2020	$  1,338,151	$       50,000	$           14,379,697	$                 -	$ 15,767,848
Advisory fees paid-in kind	-	-	-	500,000	-
Purchases of investments	-	250,000	200,000	-	950,000
Unrealised gain	907,579	-	38,071,361	-	38,978,940
Balance at June 30, 2021	$     2,245,730	$     300,000	$           52,651,058	$      500,000	$    55,696,788

 

 

 

	Common	Convertible	Limited Liability	Limited
	Stock	Note	Company Interests	Partnerships	Total
Balance at December 31, 2020	$  1,338,151	$       50,000	$      14,379,697	$                 -	$ 15,767,848
Purchases of investments	-	499,955	3,370,000	500,000	4,369,955
Transfer to assets held for disposal	(200,000)	(50,000)	-	-	(250,000)
Unrealised gain	1,245,547	-	39,607,402	-	40,852,949
Balance at December 31, 2021	$     2,383,698	$         499,955	$        57,357,099	$         500,000	$   60,740,752

 

During the six-month periods ended June 30, 2021, and 2020, and the year ended December 31, 2021, there were no transfers of securities between Levels.

 

The following tables summarize the methods and significant assumptions used to measure investments categorized in Level 3 of the fair value hierarchy and whose values were determined by management as of June 30, 2022 and 2021, and December 31, 2021: