MICROCLOUD HOLOGRAM INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs that involve significant risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to those differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements."
Overview
We are one of the leading holographic digitalization technology service
providers in
Business Combination
Pursuant to the Merger Agreement, MC would merge with 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").
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On
At the Extraordinary General Meeting, a total of 6,106,914 (or 81.88%) of Golden
Path's issued and outstanding ordinary shares, in each case held as of the
Record Date, were present either in person or by proxy, which collectively
constituted a quorum for the transaction of business. Golden Path's shareholders
voted on and approved each of the proposals (except on the proposal of
adjournment, as explained below), including the business combination proposal.
Detailed descriptions of each proposal are included in Golden Path's Definitive
Proxy Statement filed on Schedule 14A (File No. 001-40519) with the
On
Following the Closing, on
Key Components of Results of Operations
Revenues
Effective
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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 years ended December 31,
2022 2021
$ % $ %
Operating revenues
Products 18,518,305 25.5 16,040,124 28.5
Services 53,994,530 74.5 40,244,193 71.5
Total operating revenues 72,512,835 100.0 56,284,317 100.0
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 years ended December 31,
2022 2021
$ % $ %
Cost of revenues
Products 15,334,302 39.0 12,920,058 75.8
Services 23,999,856 61.0 4,126,606 24.2
Total cost of revenues 39,334,158 100.0 17,046,664 100.0
Selling expenses
As of
General and administrative expenses
As of
Research and Development Expenses ("R&D expenses")
Our research and development expenses include salaries and other
compensation-related expenses to our research and product development personnel,
outsourced subcontractors, as well as office rental, depreciation, and related
expenses for our research and product development team. Our research and
development expenses as a percentage of revenues were 67.9% and 40.5% for the
years ended
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Change in Fair Value of Warrant Liabilities
We account for the 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 audited consolidated Balance Sheet until exercised, and any change in fair value is recognized in our audited consolidated Statements of Income. The Private Warrants are valued using a Black Scholes model.
TaxationCayman Islands
We are incorporated in the
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
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Tax savings for those entities in
Critical Accounting Policies and Estimates
Our audited consolidated financial statements are prepared in accordance with
accounting principles generally accepted in
Principles of consolidation
The audited 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 audited consolidated financial statements in conformity with
We account for our outstanding Warrants in accordance with the guidance contained in ASC 815-40-15-7D and 7F. Management has determined that under the Private Warrants do not meet the criteria for equity treatment and must be recorded as liabilities. Accordingly, we classify the Private Warrants as liabilities at their fair value and adjusts the Private Warrants to fair value at each reporting period. Management has further determined that its Public Warrants qualify for equity treatment. Warrant liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in our statements of operations. The Private Warrants are valued using a Black Scholes model.
Foreign currency translation and transaction
Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing on the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates on the date of the balance sheet. The resulting exchange differences are recorded in the statement of operations.
The reporting currency of the Company and its subsidiaries is
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In general, for consolidation purposes, assets and liabilities of the Company and its subsidiaries whose functional currency is not the US$, are translated into US$, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements of the Company and its subsidiaries and former VIEs are recorded as a separate component of accumulated other comprehensive loss within the consolidated statements of changes in stockholders' equity.
Translation of amounts from RMB into US$ has been made at the following exchange rates for the respective periods:
As of
December 31,
2022 2021
Balance sheet items, except for equity accounts 6.8972 6.3721
For the
Years Ended
December 31,
2022 2021
Items in the statements of income and comprehensive income,
and statements of cash flows 6.7290 6.3721
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.
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 years ended
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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. For the years ended of
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 audited 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.
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 year
ended
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Common Stock Warrants
We account for common stock 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 8 of Part II "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 are 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 three 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. 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.
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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.
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 22-Segments" of our audited consolidated financial statements included under Item 8 of Part II in this Annual Report.
Operating leases
Effective
Under the new lease standard, we determine if an arrangement is or contains a lease at inception. Right-of-use assets and liabilities are recognized at lease commencement date based on the present value of remaining lease payments over the lease terms. We consider only payments that are fixed and determinable at the time of lease commencement.
At the commencement date, the lease liability is recognized at the present value
of the lease payments not yet paid, discounted using the interest rate implicit
in the lease or, if that rate cannot be readily determined, our incremental
borrowing rate for the same term as the underlying lease. The right-of-use asset
is recognized initially at cost, which primarily comprises the initial amount of
the lease liability, plus any initial direct costs incurred. All
right-of-use assets are reviewed for impairment annually. There is no impairment
for right-of-use lease assets as of
Upon adoption, we recognized ROU assets of
As of
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Valuation allowance of deferred tax assets
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. We consider positive and negative evidence when determining whether a portion or all of its deferred tax assets will more likely than not be realized. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carry-forward periods, its experience with tax attributes expiring unused, and its tax planning strategies. The ultimate realization of deferred tax assets is dependent upon its ability to generate sufficient future taxable income within the carry-forward periods provided for in the tax law and during the periods in which the temporary differences become deductible. When assessing the realization of deferred tax assets, we consider possible sources of taxable income including (i) future reversals of existing taxable temporary differences, (ii) future taxable income exclusive of reversing temporary differences and carry-forwards, (iii) future taxable income arising from implementing tax planning strategies, and (iv) specific known trend of profits expected to be reflected within the industry.
Results of Operations
The results of operations presented below should be reviewed in conjunction with
the audited consolidated financial statements and notes included elsewhere in
this Annual Report. The following table sets forth our audited consolidated
results of operations data and as percentages of total operating revenues for
the periods presented:
For the
years ended
December 31,
2022 2021
OPERATING REVENUES
Products $ 18,518,305 16,040,124
Services 53,994,530 40,244,193
Total Operating Revenues 72,512,835 56,284,317
COST OF REVENUES
Products (15,334,302 ) (12,920,058 )
Services (23,999,856 ) (4,126,606 )
Total Cost of Revenues (39,334,158 ) (17,046,664 )
GROSS PROFIT 33,178,677 39,237,653
OPERATING EXPENSES
Provision for doubtful accounts (442,335 ) (80,875 )
Selling expenses (1,311,399 ) (825,055 )
General and administrative expenses (3,408,608 ) (3,147,858 )
Research and development expenses (49,230,916 ) (22,809,775 )
Total operating expenses (54,393,258 ) (26,863,563 )
(LOSS)/INCOME FROM OPERATION (21,214,581 ) 12,374,090
CHANGE IN FAIR VALUE OF WARRANT LIABILITY 656,164 -
OTHER INCOME/(EXPENSE)
Finance income, net 248,043 98,366
Impairment loss for unconsolidated entities (237,777 ) -
Other income, net 146,154 152,843
Total other income, net 156,420 251,209
(LOSS)/INCOME BEFORE INCOME TAXES (20,401,997 ) 12,625,299
BENEFIT FOR INCOME TAX 122,773 124,732
NET (LOSS)/INCOME $ (20,279,224 ) 12,750,031
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Fiscal Year Ended
Operating Revenues. Our total operating revenues increased by approximately
28.8% from
Cost of Revenue. Our cost of revenue increased by approximately 130.7% from
Gross Profit and Gross Margin. As a result of the factors set out above, our
gross profit decreased by approximately 15.4% from
Provision for doubtful accounts. Our provision for doubtful accounts increased
by approximately 446.9% from
Selling Expenses. Our selling and marketing expenses increased by approximately
58.9% from
General and Administrative Expenses. Our general and administrative expenses
increased by approximately 8.3% from
Research and Development Expenses. Our research and development expenses
increased by approximately 115.8% from
Income/(loss) from Operations. As a result of the factors set out above, we had
approximately
Change in Fair Value of Warrant Liability. We recorded change in fair value of
warrant liability of
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Interest Income, net. We had net interest income of approximately
Impairment loss for unconsolidated entities. We recorded impairment loss for
unconsolidated entities of
Other Income/(loss), net. We recorded net other income of approximately
Benefit 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
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.
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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 our 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.
The following table sets forth a summary of our cash flows for the periods
presented:
For the
years end
December 31,
2022 2021
Net cash (used in)/provided by operating activities $ (20,011,706 ) 16,163,402
Net cash provided by/(used in) investing activities 1,710,139 (13,197,753 )
Net cash provided by/(used in) financing activities 33,271,309 (204,237 )
Effect of exchange rate on cash and cash equivalents (593,338 ) (42,590 )
Change in cash and cash equivalents 14,376,404 2,718,822
Cash and cash equivalents, at the beginning of the period 7,533,934 4,815,112 Cash and cash equivalents, at the end of the period
$ 21,910,338 7,533,934
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 used in operating activities of
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Net cash provided by operating activities for the year ended
Investing Activities
Net cash provided by investing activities was
Net cash used in investing activities was
Financing Activities
Net cash provided by financing activities for the year ended
Net cash used in financing activities for the year ended
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that are currently material or reasonably likely to be material to our financial position or results of operations.
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