MICROCLOUD HOLOGRAM INC. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report. This discussion and other parts of this report contain forward-looking statements that involve risks 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 Part II, Item 1A "Risk Factors" of this Quarterly Report and our Quarterly Report on Form 10-Q.
Overview
We are a leading holographic digitalization technology service provider in
Business Combination
Pursuant to the Merger Agreement, MC would merge with the Golden Path Merger Sub and survive the merger and continue as the surviving company and a wholly owned subsidiary of Golden Path and continue its business operations (the "Merger", and, collectively with the other transactions described in the Merger Agreement, the "Business Combination").
On
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On
Following the Closing, on
Immediately after giving effect to the Business Combination, MicroCloud had 50,812,035 ordinary shares issued and outstanding, and 6,020,500 warrants outstanding.
Key Components Operating Revenues
Effective
We generate revenues primarily through (i) sales of product related to holographic solutions services, which include LiDAR and other holographic technology hardware products, licensing and content products, and technology development service, and (ii) services related to holographic technology services, which include holographic technology advertising, software development kit ("SDK") service, and game promotion services. The following table presents our revenues disaggregated by revenue sources, both in absolute amount and as a percentage of our revenues, for the periods presented.
For the three months ended March 31,
2023 2022
US$ % US$ %
(Unaudited)
Operating revenues
Products 1,055,701 16.0 11,678,900 48.2
Services 5,524,030 84.0 12,536,311 51.8
Total operating revenues 6,579,731 100.0 24,215,211 100.0
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Cost of Revenues
Our cost of revenues primarily includes (i) the costs of hardware products sold and cost paid to outsourced content providers, cost of third-party software development, and compensation expenses paid to our professionals related to the product sales and (ii) the costs paid to channel distributors of advertising services and compensation expenses paid to our professionals related to our service revenues. The table below sets forth a breakdown of our cost of revenues for the periods indicated, both in absolute amount and as a percentage of our revenues:
For the Three Months Ended March 31,
2023 2022
US$ % US$ %
(Unaudited)
Cost of revenues
Products 721,648 11.0 11,090,989 45.8
Services 1,973,061 30.0 2,338,023 9.7
Total cost of revenues 2,694,709 41.0 13,429,012 55.5
Selling Expenses
As of
General and Administrative Expenses
As of
Research and Development Expenses ("R&D expenses")
As of
Change in Fair Value of Warrant Liabilities
We account for our outstanding warrants in accordance with the guidance contained in ASC 815-40-15-7D and 7F. We have determined that the Private Warrants do not meet the criteria for equity treatment and is recorded as liabilities. We classified the Private Warrants as liabilities at their fair value and adjusts the Private Warrants to fair value at each presented period. We determined that our Public Warrants qualify for equity treatment. Warrant liability is subject to re-measurement at each unaudited consolidated Balance Sheet until exercised, and any change in fair value is recognized in our unaudited consolidated Statements of Income.
TaxationCayman Islands
We are incorporated in the
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Hong Kong PRC
The subsidiaries incorporated in the PRC are governed by the income tax laws of
the PRC and the income tax provision for operations in the PRC is calculated at
the applicable tax rates on the taxable income for the periods based on existing
legislation, interpretations and practices in respect thereof. Under the
Enterprise Income Tax Laws of the PRC (the "EIT Laws"), domestic enterprises and
Horgos Weiyi, Horgos Youshi, Horgos Bowei and Horgos Tianyuemeng were formed and
registered in Horgos in
Tax savings for those entities in
Our PRC subsidiaries are subject to value added tax, or VAT, at a rate of 6% on
services and 13% on goods in
Critical Accounting Policies and Estimates
Our unaudited consolidated financial statements are prepared in accordance with
accounting principles generally accepted in
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Principles of consolidation
The unaudited consolidated financial statements include the financial statements of MicroCloud and its subsidiaries. All significant intercompany transactions and balances between MicroCloud and its subsidiaries are eliminated upon consolidation.
Subsidiaries are those entities in which MicroCloud, directly or indirectly, controls more than one half of the voting power; or has the power to govern the financial and operating policies, to appoint or remove the majority of the members of the board of directors, or to cast a majority of votes at the meeting of directors.
Use of estimates and assumptions
The preparation of unaudited consolidated financial statements in conformity
with
Foreign currency translation and transaction
The functional currency of MicroCloud, MC, Mengyun HK, Mcloudvr HK and Broadvision HK is in US dollars and the functional currency of the Company's other subsidiaries are Renminbi ("RMB"), as determined based on the criteria of Accounting Standards Codification ("ASC") 830 "Foreign Currency Matters".
Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at the rates of exchange in place at the balance sheet date. Transactions in currencies other than the functional currency during the year are converted into the functional currency at the applicable rates of exchange prevailing when the transactions occurred. Transaction gains and losses are recognized in the unaudited consolidated statement of operations.
In the unaudited consolidated financial statements, the financial information of MicroCloud and other entities located outside of the PRC has been translated into RMB. Our assets and liabilities translated from their respective functional currencies to the reporting currency at the exchange rates at the balance sheet dates, equity accounts are translated at historical exchange rates and revenues and expenses are translated at the average exchange rates in effect during the reporting period. The resulting foreign currency translation adjustment are recorded in other comprehensive income (loss).
Convenience translation
Translations of balances in the unaudited consolidated balance sheets,
consolidated statements of income and consolidated statements of cash flows from
RMB into USD as of and for the three months ended
Goodwill
We have the option to assess qualitative factors to determine whether it is necessary to perform further impairment testing in accordance with ASC 350-20, as amended by ASU 2017-04. If we believe, as a result of the qualitative assessment, that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, then the impairment test described below is required. We compare the fair values of each reporting unit to its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered to be impaired. If the carrying amount of a reporting unit exceeds its fair value, impairment is recognized for the difference, limited to the amount of goodwill recognized for the reporting unit. Estimating fair value is performed by utilizing various valuation techniques, with the primary technique being discounted cash flows.
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Impairment for long-lived assets
Long-lived assets, including property and equipment and intangible assets with
finite lives are reviewed for impairment whenever events or changes in
circumstances (such as a significant adverse change to market conditions that
will impact the future use of the assets) indicate that the carrying value of an
asset may not be recoverable. We assess the recoverability of the assets based
on the undiscounted future cash flows the assets are expected to generate and
recognize an impairment loss when estimated undiscounted future cash flows
expected to result from the use of the asset plus net proceeds expected from
disposition of the asset, if any, are less than the carrying value of the asset.
If an impairment is identified, we would reduce the carrying amount of the asset
to its estimated fair value based on a discounted cash flows approach or, when
available and appropriate, to comparable market values. For the three months
ended
Investments in unconsolidated entities
Our investments in unconsolidated entities consist of equity investments without readily determinable fair value.
We follow ASC Topic 321,
An impairment charge is recorded if the carrying amount of the investment exceeds its fair value and this condition is determined to be other-than temporary.
Business combination
The purchase price of an acquired company is allocated between tangible and intangible assets acquired and liabilities assumed from the acquired business based on their estimated fair values, with the residual of the purchase price recorded as goodwill. Transaction costs associated with business combinations are expensed as incurred, and are included in general and administrative expenses in our consolidated statements of income and comprehensive income. The results of operations of the acquired business are included in our operating results from the date of acquisition.
Fair value measurement
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active markets.
Level 2 inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable
for the assets or liability, either directly or indirectly, for
substantially the full term of the financial instruments.
Level 3 inputs to the valuation methodology are unobservable and significant to
the fair value.
Financial instruments included in current assets and current liabilities are reported in the unaudited consolidated balance sheets at face value or cost, which approximate fair value because of the short period of time between the origination of such instruments and their expected realization and their current market rates of interest.
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Noncontrolling Interests
Our noncontrolling interests represent the minority shareholders' ownership
interests related to our subsidiaries, including 44% for Ocean HK and its
subsidiaries. The noncontrolling interests are presented in the consolidated
balance sheets separately from equity attributable to our shareholders.
Noncontrolling interests in the results of us are presented on the consolidated
statement of income as allocations of the total income or loss for the three
months ended
Ordinary share Warrants
We account for ordinary share warrants as either equity instruments or liabilities in accordance with ASC 480, Distinguishing Liabilities from Equity ("ASC 480"), depending on the specific terms of the warrant agreement. See Item 1 of Part I "Financial statements-Note 20-Warrant liabilities".
Revenue recognition
Effective
1) Identify the contract with a customer 2) Identify the performance obligations in the contract 3) Determine the transaction price 4) Allocate the transaction price 5) Recognize revenue when or as the entity satisfies a performance obligation
Our revenue recognition policies effective upon the adoption of ASC 606 are as follows:
(i) Holographic Solutions
a. Holographic Technology LiDAR Products
We generate LiDAR revenue through selling integrated circuit board embedded with holographic software. We typically enter into written contracts with its customer where the rights of the parties, including payment terms, are identified and sales prices to the customers are fixed with no separate sales rebate, discount, or other incentive and no right of return exists on sales of inventory. Our performance obligation is to deliver products according to contract specifications. We recognize product revenues at a point in time when the control of products is transferred to customers.
b. Holographic Technology Intelligence Vision software and Technology Development Service
We generate revenue by developing ADAS software and technology, which are
generally on a fixed-priced basis. We have no alternative use for the customized
software and we have an enforceable right to payment for performance completed
to date. Revenues from ADAS software development contracts are recognized over
time during the contract period based on our measurement of progress towards
completion using input method, which is usually measured by comparing labor
hours expended to date to total estimated labor hours needed to satisfy the
performance obligation. As of
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c.
We provide holographic content products and holographic software for music videos, shows, and commercials on a fixed-price basis. These contents and software are generally pre-developed and exist when made available to the customer. Content products are delivered through its website or offline using hard drive.
Revenues from licensing and content products are recognized at the point in time when the control of products or services is transferred to customers. No upgrades, maintenance, or any other post-contract customer support are provided.
d. Holographic Technology Hardware Sales
We are a distributer of holographic hardware and generates revenue through resale. In accordance with ASC 606, revenue recognition: principal agent consideration, an entity is a principal if it controls the specified good or service before that good or service is transferred to a customer. Otherwise, the entity is an agent in the transaction. We evaluate four indicators of control in accordance with ASU 2016-08: 1) for hardware sales, we are the most visible entity to customers and assumes fulfilment risk and risks related to the acceptability of products, including addressing customer complaints directly and handling of product returns or refunds directly; 2) we assume inventory risk after taking the title from vendors and are responsible for product damage during shipment period prior to acceptance of its customers and are also responsible for product return if the customer is not satisfied with the products; 3) we determine the resale price of hardware products; and 4) we are the party that direct the use of the inventory and can prevent the vendor from transferring the product to a customer or to redirect the products to a different customer. After evaluating the above scenario, we consider ourselves the principal of these arrangements and record hardware sales revenue on a gross basis.
Hardware sales contracts are on a fixed price basis with no separate sales rebate, discount, or other incentive. Revenue is recognized at a point in time when we have delivered products and the acceptance by our customer with no future obligation. We generally permit returns of products due to deficits; however, returns are historically insignificant.
(ii) Holographic Technology Service
Holographic advertisements are the use of holographic technology integrated into advertisements on media platforms and offline display. We enter advertising contracts with advertisers to promote merchandises and services where the price, which is generally based on cost per action ("CPA"), is fixed and determinable. We provide our advertising service to channel providers where the amounts cost per action are also fixed and determinable. Revenue is recognized at a point of time when agreed actions are performed. We consider ourselves as provider of the services under the CPA model as we have the control of the services at any time before they are transferred to the customers, which is evidenced by 1) having a right to a service to be performed by the other party, which gives us the ability to direct that party to provide the service to the customers on our behalf. 2) having discretion in setting the price for the service 3) billing monthly advertising fee directly to customers by settling valid CPA data with customers. Therefore, we act as the principal of these arrangements and reports revenue earned and costs incurred related to these transactions on a gross basis. We also provide advertisement services through influencers on social networks. We charge advertisers a fixed rate, which is generally a fixed percentage of total value of merchandise sold over a specific period ("GMV"). Revenue is recognized at a point of time when merchandise is sold through social network.
Our SDK service is a collection of software development tools in one installable package that enables customers (usually software developers) to add holographic functionality and run holographic advertisements in their APPs or software. SDK contracts are primarily on a fixed rate basis, or cost per SDK Connection. We recognize SDK service revenue at a point in time when a user completes an SDK connection via a designated portal. Service fees are generally billed monthly based on per-connection basis.
We also provide game promotion services for game developers and licensed game operators. We acted as a marketing channel that it will promote the games through in-house or third-party platforms, from which users can download the mobile and purchase virtual currency for in game premium features to enhance their game playing experience. We contract with third party payment platforms for collection services offered to game players who have purchased virtual currency. The game developers, licensed operator, payment platforms and the marketing channels are entitled to profit sharing based on a prescribed percentage of the gross amount charged to the game players. Our obligation in the promotion services is completed at a point in time when the game players made a payment to purchase virtual currency. We considered itself an agent in these arrangements since we do not control the services at any time. Accordingly, we record the game promotion service revenue on a net basis.
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Contract balances:
We record receivable related to revenue when we have an unconditional right to invoice and receive payment.
Payments received from customers before all of the relevant criteria for revenue recognition met are recorded as deferred revenues.
Our disaggregate revenue streams are summarized and disclosed in "Note 18-Segments" of our unaudited consolidated financial statements included under Item 1 of Part I in this Quarterly Report.
Operating leases
Effective
We determine if a contract contains a lease at inception. US GAAP requires that our leases be evaluated and classified as operating or finance leases for financial reporting purposes. The classification evaluation begins at the commencement date and the lease term used in the evaluation includes the non-cancellable period for which we have the right to use the underlying asset, together with renewal option periods when the exercise of the renewal option is reasonably certain and failure to exercise such option which result in an economic penalty. All of our real estate leases are classified as operating leases.
When determining the lease payments for an operating lease transitioning to ASC 842 using the effective date, it's based on future payments at the transition date, based on the present value of lease payments over the remaining lease term. Since the implicit rate for our leases is not readily determinable, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The incremental borrowing rate is the rate of interest that we would have to pay to borrow, on a collateralized basis, an amount equal to the lease payments, in a similar economic environment and over a similar term.
Lease terms used to calculate the present value of lease payments generally do not include any options to extend, renew, or terminate the lease, as we do not have reasonable certainty at lease inception that these options will be exercised. We generally consider the economic life of its operating lease ROU assets to be comparable to the useful life of similar owned assets. We have elected the short-term lease exception, therefore operating lease ROU assets and liabilities do not include leases with a lease term of twelve months or less. Its leases generally do not provide a residual guarantee. The operating lease ROU asset also excludes lease incentives. Lease expense is recognized on a straight-line basis over the lease term.
We review the impairment of its ROU assets consistent with the approach applied for its other long-lived assets. We review the recoverability of its long-lived assets when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on its ability to recover the carrying value of the asset from the expected undiscounted future pre-tax cash flows of the related operations. We have elected to include the carrying amount of operating lease liabilities in any tested asset group and include the associated operating lease payments in the undiscounted future pre-tax cash flows.
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Results of Operations
The Three Months Ended
Operating Revenues
Our total operating revenue decreased by approximately 70.7% from
Cost of Revenue
Our cost of revenue decreased by approximately 78% from
Gross Profit and Gross Margin
As a result of the factors, our gross profit decreased by approximately 64.0%
from
Provision for doubtful accounts
Our provision for doubtful accounts increased by approximately 10223% from
Selling Expenses
Our selling and marketing expenses increased by approximately 40.4% from
General and Administrative Expenses
Our general and administrative expenses increased by approximately 62.0% from
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Research and Development Expenses
Our research and development expenses decreased by approximately 37.3% from
Income/(loss) from Operations
As a result of the factors set out above, we had approximately
Financial (Expenses) Income, net
We had net financial expenses of approximately
Other Income, net
We recorded other income of approximately
Benefit (Expenses) for Income Tax
Our income tax benefit was approximately
Net Income
As a result of the foregoing, we had net loss of approximately
Recently issued accounting pronouncements
In
In
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In
Except as mentioned above, we do not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on our consolidated balance sheets, statements of income and comprehensive income and statements of cash flows.
Liquidity and Capital Resources
In assessing our liquidity, we monitor and analyze our cash on-hand and our
operating and capital expenditure commitments. Our liquidity needs are to meet
our working capital requirements, operating expenses and capital expenditure
obligations. Cash flow from operations, advance from shareholders, and proceeds
from third party loan have been utilized to finance our working capital
requirements. As of
Following the approval of the Business Combination, on
We are subject to risks and uncertainties frequently encountered by early-stage companies including, but not limited to, the uncertainty of successfully developing products, securing certain contracts, building a customer base, successfully executing business and marketing strategies, and hiring appropriate personnel.
To date, we have been funded primarily by cash flow generated from operations, interest-free advances by from MC shareholders prior to the closing of the Business Combination, and the net proceeds we received through the Business Combination. Failure to generate sufficient revenues, achieve planned gross margins and operating profitability, control operating costs, or secure additional funding may require us to modify, delay, or abandon some of our planned future expansion or development, or to otherwise enact operating cost reductions available to management, which could have a material adverse effect on our business, operating results, financial condition, and ability to achieve our intended business objectives.
Operating Activities
Historically, we have financed our operations primarily through cash generated from operations and borrowings from banks. We currently anticipate that we will be able to meet our needs to fund operations in the next twelve months with operating cash flow and existing cash balances.
We recorded net cash provided by operating activities of
Net cash generated from operating activities for the three months ended
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Investing Activities
Net cash used in investing activities was
Net cash used in investing activities was
Financing Activities
Net cash used in financing activities for the three months ended
Net cash used in financing activities for the three months ended
Off-Balance Sheet Arrangements
As of
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