MICROCLOUD HOLOGRAM INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)
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 I, Item 1A "Risk Factors" of this Quarterly Report and our Annual Report on Form 10-K.
Insight
We are a leading holographic digitalization technology service provider inChina . We are committed to providing first-class holographic technology services to our customers worldwide. Our holographic technology services include high-precision holographic light detection and ranging ("LiDAR") solutions, based on holographic technology, exclusive holographic LiDAR point cloud algorithms architecture design, breakthrough technical holographic imaging solutions, holographic LiDAR sensor chip design and holographic vehicle intelligent vision technology to service customers that provide reliable holographic advanced driver assistance systems ("ADAS"). We also provide holographic digital twin technology services for customers and has built a proprietary holographic digital twin technology resource library. Our holographic digital twin technology resource library captures shapes and objects in 3D holographic form by utilizing a combination of Our holographic digital twin software, digital content, spatial data-driven data science, holographic digital cloud algorithm, and holographic 3D capture technology. Our holographic digital twin technology and resource library has the potential to become the new norm for the digital twin augmented physical world in the near future. We are also a distributer of holographic hardware and generates revenue through resale.
Trade suit
Golden Path Acquisition Corporation ("Golden Path") was a former blank check company incorporated inCayman Island onMay 9, 2018 . Golden Path was formed for the purpose of effecting a merger, share exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. For additional detail regarding Golden Path's initial public offering and related transactions, see Item 1 of Part I "Financial statements-Note 1-Nature of Business and Organization-Reverse Recapitalization withGolden Path Acquisition Corporation ."
exempt company incorporated with a view to carrying out the business combination, and MC, a company
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"). OnSeptember 8, 2022 , Golden Path held an Extraordinary General Meeting (the "Extraordinary General Meeting") to approve the Merger and the transactions contemplated by the Merger Agreement. As ofAugust 17, 2022 , the record date for the Extraordinary General Meeting ("Record Date"), there were 7,458,000 Golden Path ordinary shares issued and outstanding and entitled to vote. 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 theSEC onAugust 12, 2022 . The proposal to approve the adjournment of the Extraordinary General Meeting to a later date or dates, if necessary or appropriate, to permit further solicitation and vote of proxies was deemed not necessary and not acted upon at the Extraordinary General Meeting. 50
OnSeptember 16, 2022 , in accordance with the Merger Agreement, the closing of the Business Combination (the "Closing") occurred, pursuant to which Golden Path issued 44,554,455 ordinary shares to MC shareholders. As a result of the consummation of the Business Combination, MC became a wholly owned subsidiary of Golden Path which changed its name toMicroCloud Hologram Inc.
After the Closing, the
Immediately after giving effect to the business combination, MicroCloud had 50,812,035 common shares issued and outstanding and 6,020,500 warrants outstanding.
A description of the Business Combination and the terms of the Merger Agreement are included in the Proxy Statement in the section entitled "The Business Combination Proposal" beginning on page 79 of the Proxy Statement. The description of the Merger Agreement is a summary only and is qualified in their entirety by the full text of the Merger Agreement, including the subsequent amendments, copies of which are attached as Exhibit 2.1, Exhibit 2.2 and Exhibit 2.3 on Form 8-K filed by MicroCloud onSeptember 22, 2022 , and are incorporated herein by reference. Key Components Operating Revenues
EffectiveJanuary 1, 2019 , we adopted ASC 606, Revenue from Contracts with Customers ("Topic 606"), applying the modified retrospective method to all contracts that were not completed as ofJanuary 1, 2019 . Results for the nine endedSeptember 30, 2021 and 2022 are presented under Topic 606. Based on the requirements of ASC Topic 606, revenue is recognized when control of the promised goods or services is transferred to the customers in an amount that reflects the consideration we expect to be entitled to receive in exchange for those goods or services. 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 September 30, 2021 2022 RMB % RMB US$ % (Unaudited) Operating revenues Products 16,361,712 30.3 19,996,659 2,811,086 11.6 Services 37,682,675 69.7 152,456,502 21,431,996 88.4 Total operating revenues 54,044,387 100.0 172,453,161 24,243,082 100.0 For the nine months ended September 30, 2021 2022 RMB % RMB US$ % (Unaudited) Operating revenues Products 85,344,274 31.4 106,275,662 14,939,996 25.0 Services 186,612,702 68.6 318,324,137 44,749,299 75.0 Total operating revenues 271,956,976 100.0 424,599,799 59,689,295 100.0 51 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
September 30,
2021 2022
RMB % RMB US$ %
(Unaudited)
Cost of revenues
Products 13,033,962 24.1 14,988,401 2,107,036 8.7
Services 4,606,996 8.5 90,454,228 12,715,854 52.5
Total cost of revenues 17,640,958 32.6 105,442,629 14,822,890 61.2
For the nine months ended
September 30,
2021 2022
RMB % RMB US$ %
(Unaudited)
Cost of revenues
Products 69,255,267 25.5 94,874,546 13,337,253 22.3
Services 14,060,155 5.1 136,944,352 19,251,332 32.3
Total cost of revenues 83,315,422 30.6 231,818,898 32,588,585 54.6
Selling Expenses
As of September 30, 2022 , our selling expenses consist primarily of (i)
compensation for selling personnel, (ii) travel expenses of our sales
representatives, and (iii) advertising and promotion cost, etc. Our selling
expenses as a percentage of revenues were 2.6% and 1.3% for the three months
ended September 30, 2021 and 2022, respectively. Our selling expenses as a
percentage of revenues were 1.4% and 1.3% for the nine months ended September
30, 2021 and 2022, respectively.
General and administrative expenses
As ofSeptember 30, 2022 , our general and administrative expenses consist primarily of (i) compensation for our management and administrative personnel, (ii) expenses in connection with our operation supporting functions such as legal, accounting, consulting and other professional service fees, and (iii) office rental, depreciation, and other administrative related expenses. Our general and administrative expenses as a percentage of revenues were 14.8% and 3.6% for the three months endedSeptember 30, 2021 and 2022, respectively. Our general and administrative expenses as a percentage of revenues were 5.7% and 4.1% for the nine months endedSeptember 30, 2021 and 2022, respectively. 52
Research and development expenses (“R&D expenses”)
As ofSeptember 30, 2022 , our R&D expenses include salaries and other compensation-related expenses to MC's research and product development personnel, outsourced subcontractors, as well as office rental, depreciation, and related expenses for MC's research and product development team. Our R&D expenses as a percentage of revenues were 36.2% and 28.4% for the three months endedSeptember 30, 2021 and 2022, respectively. Our R&D expenses as a percentage of revenues were 42.1% and 29.4% for the nine months endedSeptember 30, 2021 and 2022, respectively.
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. The Private Warrants are valued using a Black Scholes model. TaxationCayman Islands
We are incorporated into the
Quantum Edge HK Limited , our subsidiary incorporated inHong Kong , is subject to a two-tiered income tax rate for taxable income earned inHong Kong . The firstHK$2 million of profits earned by a company is subject to be taxed at an income tax rate of 8.25%, while the remaining profits will continue to be taxed at the existing tax rate of 16.5%. No provision forHong Kong profits tax has been made in the unaudited consolidated financial statements as it has no assessable profit for the nine months endedSeptember 30, 2021 and 2022.
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 andForeign Investment Enterprises (the "FIE") are subject to a unified 25% enterprise income tax rate while preferential tax rates, tax holidays and even tax exemptions may be granted on a case-by-case basis. EIT grants preferential tax treatment to certain High andNew Technology Enterprises ("HNTEs"). Under this preferential tax treatment, HNTEs are entitled to an income tax rate of 15%, subject to a requirement that they re-apply for HNTE status every three years. Shanghai Mengyun obtained the "high-tech enterprise" tax status inOctober 2017 and further renewed inDecember 2020 , which reduced its statutory income tax rate to 15% fromJanuary 2017 toDecember 2023 . Shenzhen Mengyun obtained the "high-tech enterprise" tax status inNovember 2018 and further renewed inDecember 2021 , which reduced its statutory income tax rate to 15% fromJanuary 2018 toDecember 2024 . Beijing Weixiaohai obtained the "high-tech enterprise" tax status inDecember 2021 , which reduced its statutory income tax rate to 15% fromJanuary 2021 toDecember 2023 . As ofSeptember 30, 2022 , Beijing Weixiaohai was also eligible for small enterprises. Horgos Weiyi, Horgos Youshi, Horgos Bowei and Horgos Tianyuemeng were formed and registered in Horgos inXinjiang Province ,China from 2016 to 2020, and Kashgar Youshi was formed and registered in Kashgar in Xinjiang Provence,China in 2016. These companies are not subject to income tax for 5 years and can obtain another two years of tax-exempt status and three years at reduced income tax rate of 12.5% after the 5 years due to the local tax policies to attract companies
in
various industries.
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The Ministry of Finance ("MOF") and State Administration of Taxation ("SAT") on
January 17, 2019 jointly issued Cai Shui 2019 No. 13. This clarified that from
January 1, 2019 to December 31, 2021 , eligible small enterprises whose RMB
1,000,000 of annual taxable income is eligible for a 75% reduction on a rate of
20% (i.e., effective rate is 5%) and the income between RMB 1,000,000 and RMB
3,000,000 is eligible for 50% reduction on a rate of 20% (i.e. effective rate is
10%). On March 14, 2022 , MOF and SAT further jointly issued Cai Shui 2022
No. 13, which clarified that from January 1, 2022 to December 31, 2022 , eligible
small enterprises whose income between RMB 1,000,000 and RMB 3,000,000 is
eligible for 75% reduction on a rate of 20% (i.e. effective rate is 5%). For the
nine months ended September 30, 2021 and 2022, Shenzhen Tianyuemeng, Yijia
Network, and Qianhai Youshi were eligible to employ this policy.
Tax savings for those entities in Xinjiang province includes Horgos Weiyi,
Horgos Youshi, Horgos Bowei, Kashgar Youshi and Horgos Tianyuemeng and for those
entities eligible for small enterprises includes Shenzhen Tianyuemeng, Yijia
Network, Qianhai Youshi and Beijing Weixiaohai, and HNTEs includes Shanghai
Mengyun and Shenzhen Mengyun.
Our PRC subsidiaries are subject to value added tax, or VAT, at a rate of 6% on
services and 13% on goods in China . We are also subject to surcharges on VAT
payments in accordance with PRC laws.
Significant Accounting Policies and Estimates
Our unaudited consolidated financial statements are prepared in accordance with accounting principles generally accepted inthe United States of America , which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting periods and the related disclosures in the unaudited consolidated financial statements and accompanying footnotes. Out of our significant accounting policies, which are described in "Note 2-Summary of principal accounting policies" of our unaudited consolidated financial statements included under Item 1 of Part I in this Quarterly Report, certain accounting policies are deemed "critical," as they require our management's highest degree of judgment, estimates and assumptions. While our management believes our judgments, estimates and assumptions are reasonable, they are based on information presently available and actual results may differ significantly from those estimates under different assumptions and conditions.
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 withU.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the unaudited consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Significant accounting estimates reflected in our unaudited consolidated financial statements include the useful lives of property and equipment and intangible assets, impairment of long-lived assets and goodwill, allowance for doubtful accounts, revenue recognition, inventory reserve, purchase price allocation for business combination, uncertain tax position, and deferred taxes. Actual results could differ from these estimates. 54
Conversion and transaction in foreign currencies
The functional currency of MicroCloud, Menyun HK, Broadvision HK, and Mcloudvr
HK is in US dollars and the functional currency of other subsidiaries of us are
Renminbi ("RMB"), as determined based on the criteria of Accounting Standards
Codification ("ASC") 830 "Foreign Currency Matters". Our reporting currency
is also the RMB. 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 nine months endedSeptember 30, 2022 are solely for the convenience of the reader and were calculated at the rate ofRMB 1.00 toUSD 0.1406 , representing the mid-point reference rate set byPeoples' Bank of China onSeptember 30, 2022 . No representation is made that the RMB amounts represent or could have been, or could be, converted, realized or settled into USD at that rate, or at any other rate.
Goodwill represents the excess of the consideration paid for an acquisition over the fair value of the net identifiable assets of the acquired subsidiaries at the date of acquisition.Goodwill is not amortized and is tested for impairment at least annually, more often when circumstances indicate impairment may have occurred.Goodwill is carried at cost less accumulated impairment losses. If impairment exists, goodwill is immediately written down to its fair value and the loss is recognized in the consolidated statements of income and comprehensive income. Impairment losses on goodwill are not reversed. 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 of 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 nine months endedSeptember 30, 2021 and 2022, no impairment of long-lived assets was recognized. 55
Investments in non-consolidated entities
Our investments in unconsolidated entities consist of equity investments with no readily determinable fair value.
We follow ASC Topic 321,Investments Equity Securities ("ASC 321") to account for investments that do not have readily determinable fair value and over which we do not have significant influence. We use the measurement alternative to measure those investments at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer, if any.
An impairment loss is recognized if the carrying amount of the investment exceeds its fair value and this condition is deemed to be durable.
Trade suit
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
U.S. GAAP regarding fair value of financial instruments and related fair value measurements defines financial instruments and requires disclosure of the fair value of financial instruments held by us.U.S. GAAP defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The three levels are defined as follow:
Valuation Method Level 1 inputs are quoted prices (unadjusted) for
identical assets or liabilities in active markets.
Valuation Method Level 2 inputs include quoted prices for
assets and liabilities in active markets, and observable data
for the asset or the liability, directly or indirectly, for
virtually the entire duration of the financial instruments.
Level 3 inputs for the valuation method are unobservable and material 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.
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 nine months endedSeptember 30, 2022 between noncontrolling interest holders and
our
shareholders.
56
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 1 of Part I
"Financial statements-Note 20-Warrant liabilities".
Revenue recognition
EffectiveJanuary 1, 2019 , we adopted ASC Topic 606 using the modified retrospective adoption method. Based on the requirements of ASC Topic 606, revenue is recognized when control of the promised goods or services is transferred to the customers in an amount that reflects the consideration we expect to be entitled to receive in exchange for those goods or services. We primarily sell our products to hospitals and medical equipment companies. Revenue is recognized when the following 5-step revenue recognition criteria are met: 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 adoption of ASC 606 are as follows:
(i) Holographic Solutions
a. LiDAR products with holographic technology
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 ofDecember 31, 2021 andSeptember 30, 2022 , our aggregate amount of transaction price allocated to unsatisfied performance obligation isRMB2,450,000 andRMB465,800 . Assumptions, risks and uncertainties inherent in the estimates used to measure progress could affect the amount of revenues, receivables and deferred revenues at each reporting period. We have a long history of developing various ADAS software resulting in its ability to reasonably estimate the progress toward completion on each fixed price customized contracts. 57
vs.
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 at the time of provision to the customer. Content products are delivered through its website or offline using a hard drive.
Revenues from licensing and content products are recognized when control of the products or services is transferred to customers. No upgrades, maintenance or other post-contract customer support is 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 discount, rebate or other incentive. Revenue is recognized at a time when we have delivered the products and acceptance by our customer without future obligation. We generally allow product returns due to shortages; however, the 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.
58
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 recognize product-related receivables when we have an unconditional right to invoice and receive payment.
Payments received from customers before all relevant revenue recognition criteria are met are recognized as deferred revenue.
Our disaggregated revenue streams are summarized and disclosed in “Note 22 – Segments” to our unaudited consolidated financial statements included in item 1 of Part I of this quarterly report.
Operating leases
EffectiveJanuary 1, 2022 , we adopted ASU 2016-02, "Leases" (Topic 842), and elected the practical expedients that does not require us to reassess: (1) whether any expired or existing contracts are, or contain, leases, (2) lease classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases. For lease terms of twelve months or fewer, a lessee is permitted to make an accounting policy election not to recognize lease assets and liabilities. We also adopted the practical expedient that allows lessees to treat the lease and non-lease components of a lease as a single lease component. OnJanuary 1, 2022 , we recognized approximatelyRMB 5.7 million (USD 0.8 million ) of right of use ("ROU") assets and approximatelyRMB 5.7 million (USD 0.8 million ) of operating lease liabilities based on the present value of the future minimum rental payments of leases, using incremental borrowing rate of 5.6% to 7%. OnSeptember 30, 2022 , after the acquisition ofBeijing Weixiaohai, we recognized approximatelyRMB 0.9 million (USD 0.1 million ) of right of use ("ROU") assets and approximatelyRMB 0.9 million (USD 0.1 million ) of operating lease liabilities based on the present value of the future minimum rental payments of leases, using incremental borrowing rate of 4.3%. 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. 59 Results of Operations
The results of operations presented below should be reviewed in conjunction with
the unaudited consolidated financial statements and notes included elsewhere in
this Report. The following table sets forth our unaudited consolidated results
of operations data for the periods presented:
For the three months ended For the nine months ended
September 30, September 30,
2021 2022 2022 2021 2022 2022
RMB RMB USD RMB RMB USD
(Unaudited)
OPERATING REVENUES
Products 16,361,712 19,996,659
2,811,086 85,344,274 106,275,662 14,939,996 Services
37,682,675 152,456,502
21,431,996 186,612,702 318,324,137 44,749,299 Total operating income
54,044,387 172,453,161 24,243,082 271,956,976 424,599,799 59,689,295 COST OF REVENUES Products (13,033,962 ) (14,988,401 ) (2,107,036 ) (69,255,267 ) (94,874,546 ) (13,337,253 ) Services (4,606,996 ) (90,454,228 )
(12,715,854 ) (14,060,155 ) (136,944,352 ) (19,251,332 ) Total revenue cost
(17,640,958 ) (105,442,629 ) (14,822,890 ) (83,315,422 ) (231,818,898 ) (32,588,585 ) GROSS PROFIT 36,403,429 67,010,532 9,420,192 188,641,554 192,780,901 27,100,710 OPERATING EXPENSES Provision for doubtful accounts (763,479 ) (2,108,156 )
(296,360 ) (772,728 ) (3,345,438 ) (470,294 ) Selling expenses
(1,385,863 ) (2,316,053 )
(325,586 ) (3,813,409 ) (5,679,054 ) (798,349 ) General and administrative expenses
(8,019,119 ) (6,258,991 )
(879,875 ) (15,400,176 ) (17,473,403 ) (2,456,372 ) Research and development expenses
(19,565,308 ) (49,023,855 )
Total operating expenses ) (218.27 )
INCOME FROM OPERATIONS 6,669,660 7,303,477
1,026,707 54,213,186 41,446,962 5,826,522
CHANGE IN FAIR VALUE OF WARRANT LIABILITY - 4,686,893 658,873 - 4,686,893 658,873 OTHER INCOME (EXPENSE) Finance income (expenses), net (33,995 ) (120,294 ) (16,911 ) (135,430 ) 157,193 22,098 Other (expenses) income, net (11,826 ) 347,463
48,846 1,337,826 927,313 130,360 Total other income, net (45,821 ) 227,169 31,935 1,202,396 1,084,506 152,458 INCOME BEFORE INCOME TAXES 6,623,839 12,217,539 1,717,515 55,415,582 47,218,361 6,637,853 BENIFIT (PROVISION) FOR INCOME TAX 418,198 (407,650 ) (57,307 ) 265,707 1,262,111 177,425 NET INCOME 7,042,037 11,809,889
1,660,208 55,681,289 48,480,472 6,815,278 LESS: NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTERESTS
- 2,662,315 374,262 - 2,599,285 365,402 NET INCOME ATTRIBUTABLE TO MC HOLOGRAM INC. ORDINARY SHAREHOLDERS 7,042,037 9,147,574
1,285,946 55,681,289 45,881,187 6,449,876
OTHER COMPREHENSIVE INCOME (LOSS) Foreign currency translation adjustment (4,570 ) 734,234 103,217 (18,150 ) 1,357,877 190,887 COMPREHENSIVE INCOME 7,037,467 12,544,123 1,763,425 55,663,139 49,838,349 7,006,165 LESS: COMPREHENSIVE INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST - 2,662,315 374,262 - 2,599,285 365,402 COMPREHENSIVE INCOME ATTRIBUTABLE TO MICROCLOUD HOLOGRAM INC. ORDINARY SHAREHOLDERS 7,037,467 9,881,808
1,389,163 55,663,139 47,239,064 6,640,763
WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES Weighted average number of ordinary shares outstanding-Basic and diluted* 50,812,035 50,812,035
50,812,035 50,812,035 50,812,035 50,812,035
EARNINGS PER SHARE
ATTRIBUTABLE TO MC HOLOGRAM
INC. ORDINARY SHAREHOLDERS
Earnings per ordinary share -
Basic and diluted* 0.73 0.62 0.09 1.10 0.90 0.13
60
The three months ended
Operating Revenues. Our total operating revenues increased by approximately 219.1% fromRMB54.0 million for the three months endedSeptember 30, 2021 toRMB172.5 million (US$24.2 million ) for the three months endedSeptember 30, 2022 . The products revenues increased by approximately 22.2% fromRMB16.4 million for the three months endedSeptember 30, 2021 toRMB20.0 million (US$2.8 million ) for the three months endedSeptember 30, 2022 , primarily due to the demands increased from our customers on the holographic solutions. The services revenues increased by approximately 304.6% fromRMB37.7 million for the three months endedSeptember 30, 2021 toRMB152.5 million (US$21.4 million ) for the three months endedSeptember 30, 2022 , primarily due to the increase of the demand increased from our customers for the advertising and promotion services. Cost of Revenue. Our cost of revenue increased by approximately 497.7% fromRMB17.6 million for the three months endedSeptember 30, 2021 toRMB105.4 million (US$14.8 million ) for the three months endedSeptember 30, 2022 . The cost of products sales increased by approximately 15.0% fromRMB13.0 million for the three months endedSeptember 30, 2021 toRMB15.0 million (US$2.1 million ) for the three months endedSeptember 30, 2022 . The cost of services increased by approximately 1,863.4% fromRMB4.6 million for the three months endedSeptember 30, 2021 toRMB90.5 million (US$12.7 million ) for the three months endedSeptember 30, 2022 , primarily due to our significant increased service cost paid to our outsourcing suppliers and content providers as a result of the demand increased from our customers for the advertising and promotion services. Gross Profit and Gross Margin. As a result of the factors set out above, our gross profit increased by approximately 84.1% fromRMB36.4 million for the three months endedSeptember 30, 2021 toRMB67.0 million (US$9.4 million ) for the three months endedSeptember 30, 2022 . However, our gross margin decreased from 67.4% for the three months endedSeptember 30, 2021 to 38.9% for the three months endedSeptember 30, 2022 as the increase of our outsourcing costs exceeded the increase in revenues on our advertising and promotion business. Provision for doubtful accounts. Our provision for doubtful accounts increased by approximately 176.1% fromRMB0.8 million for the three months endedSeptember 30, 2021 toRMB2.1 million (US$0.3 million ) for the three months endedSeptember 30, 2022 , primarily due to the allowance accrued based on management's best estimates of specific losses on individual customer exposures. Selling Expenses. Our selling and marketing expenses increased by approximately 67.1% fromRMB1.4 million for the three months endedSeptember 30, 2021 toRMB2.3 million (US$0.3 million ) for the three months endedSeptember 30, 2022 . This increase was primarily due to the increase of sales and marketing activities for our business development. General and Administrative Expenses. Our general and administrative expenses decreased by approximately 21.9% fromRMB8.0 million for the three months endedSeptember 30, 2021 toRMB6.3 million (US$0.9 million ) for the three months endedSeptember 30, 2022 . This decrease was primarily due to the cost control for the management and other supporting departments.
Research and development expenses. Our research and development expenses increased by approximately 150.6%
Income from operations. Due to the factors stated above, we had approximately
Change in Fair Value of Warrant Liability We recorded change in fair value of warrant liability of nil andRMB4.7 million (US$0.7 million ) for the three months endedSeptember 30, 2021 and 2022, respectively. We classified the Private Warrants as liabilities at their fair value and adjusts the Private Warrants to fair value at each presented period. Warrant liability is subject to re-measurement at each unaudited consolidated Balance Sheet until exercised, and any change in fair value is recognized in our unaudited consolidated Statements of Income. The Private Warrants are valued using a Black Scholes model. Financial Expenses, net. We had net financial expenses of approximatelyRMB0.03 million andRMB0.1 million (US$ 0.02 million ) which consisted primarily of bank charges and interest expenses for the three months endedSeptember 30, 2021
and
2022, respectively.
61
Other Income, net. We recorded net other expenses of approximatelyRMB0.01 million and net other income ofRMB0.3 million (US$0.05 million ) for the three months endedSeptember 30, 2021 and 2022, respectively. Other income was mainly attributable to government subsidies in the form of cash and taxation award during COVID-19 pandemic period. However, government subsidies in the form of cash and taxation award are discretionary in nature and we do not believe that the increase in government subsidies during the referenced period is reflective of a known trend. Benefit (Expenses) for Income Tax. Our income tax benefit was approximatelyRMB0.4 million for the three months endedSeptember 30, 2021 . Our income tax expense was approximatelyRMB0.4 million (US$0.1 million ) for the three months endedSeptember 30, 2022 primarily due to the increase of taxable income generated from operations in our subsidiaries in PRC. Net Income. As a result of the foregoing, we had net income of approximatelyRMB7.0 million andRMB11.8 million (US$1.7 million ) for the three months endedSeptember 30, 2021 and 2022, respectively.
The nine months ended
Operating Revenues. Our total operating revenues increased by approximately 56.1% fromRMB272.0 million for the nine months endedSeptember 30, 2021 toRMB424.6 million (US$60.0 million ) for the nine months endedSeptember 30, 2022 . The products revenues increased by approximately 24.5% fromRMB85.3 million for the nine months endedSeptember 30, 2021 toRMB106.3 million (US$14.9 million ) for the nine months endedSeptember 30, 2022 , primarily due to the demands increased from our customers on the holographic solutions and our successful business development in 2022. The services revenues increased by approximately 70.6% fromRMB186.6 million for the nine months endedSeptember 30, 2021 toRMB318.3 million (US$44.7 million ) for the nine months endedSeptember 30, 2022 , primarily due to the business development on the advertising and promotion services in 2022. Cost of Revenue. Our cost of revenue increased by approximately 178.2% fromRMB83.3 million for the nine months endedSeptember 30, 2021 toRMB231.8 million (US$32.6 million ) for the nine months endedSeptember 30, 2022 . The cost of products sales increased by approximately 37.0% fromRMB69.3 million for the nine months endedSeptember 30, 2021 toRMB94.9 million (US$13.3 million ) for the nine months endedSeptember 30, 2022 . The cost of services increased by approximately 874.0% fromRMB14.1 million for the nine months endedSeptember 30, 2021 toRMB136.9 million (US$19.3 million ) for the nine months endedSeptember 30, 2022 , primarily due to our significant increased service cost paid to our outsourcing suppliers and content providers as a result of the demand increased from our customers for the advertising and promotion services developed in 2022. Gross Profit and Gross Margin. As a result of the factors set out above, our gross profit increased by approximately 2.2% fromRMB188.6 million for the nine months endedSeptember 30, 2021 toRMB192.8 million (US$27.1 million ) for the nine months endedSeptember 30, 2022 . However, our gross margin decreased from 69.4% for the nine months endedSeptember 30, 2021 to 45.4% for the nine months endedSeptember 30, 2022 as the increase of our outsourcing costs exceeded the increase in revenues on our advertising and promotion business. Provision for doubtful accounts. Our provision for doubtful accounts increased by approximately 332.9% fromRMB0.8 million for the nine months endedSeptember 30, 2021 toRMB3.3 million (US$0.5 million ) for the nine months endedSeptember 30, 2022 , primarily due to the allowance accrued in 2022 based on management's best estimates of specific losses on individual customer exposures. Selling Expenses. Our selling and marketing expenses increased by approximately 48.9% fromRMB3.8 million for the nine months endedSeptember 30, 2021 toRMB5.7 million (US$0.8 million ) for the nine months endedSeptember 30, 2022 . This increase was primarily due to the increase of sales and marketing activities for our business development in 2022. 62 General and Administrative Expenses. Our general and administrative expenses increased by approximately 13.5% fromRMB15.4 million for the nine months endedSeptember 30, 2021 toRMB17.5 million (US$2.5 million ) for the nine months endedSeptember 30, 2022 . This increase was primarily due to the increasing costs for supporting our expanding business in 2022. Research and Development Expenses. Our research and development expenses increased by approximately 9.1% fromRMB114.4 million for the nine months endedSeptember 30, 2021 toRMB124.8 million (US$17.5 million ) for the nine months endedSeptember 30, 2022 . The increase was primarily due to the continued research and development activities to supporting our business development in 2022.
Income from operations. Due to the factors stated above, we had approximately
Change in Fair Value of Warrant Liability We recorded change in fair value of warrant liability of nil andRMB4.7 million (US$0.7 million ) for the nine months endedSeptember 30, 2021 and 2022, respectively. We classified the Private Warrants as liabilities at their fair value and adjusts the Private Warrants to fair value at each presented period. Warrant liability is subject to re-measurement at each unaudited consolidated Balance Sheet until exercised, and any change in fair value is recognized in our unaudited consolidated Statements of Income. The Private Warrants are valued using a Black Scholes model. Financial (Expenses) Income, net. We had net financial expenses of approximatelyRMB0.1 million and net interest income ofRMB0.2 million (US$ 0.02 million ) which consisted primarily of interest earned from our cash and cash equivalents for the nine months endedSeptember 30, 2021 and 2022, respectively. Other Income, net. We recorded net other income of approximatelyRMB1.3 million andRMB0.9 million (US$0.1 million ) for the nine months endedSeptember 30, 2021 and 2022, respectively. Other income was mainly attributable to government subsidies in the form of cash and taxation award during COVID-19 pandemic period. However, government subsidies in the form of cash and taxation award are discretionary in nature and we do not believe that the increase in government subsidies during the referenced period is reflective of a known trend. Benefit for Income Tax. Our income tax benefit was approximatelyRMB0.3 million andRMB1.3 million (US$0.2 million ) for the nine months endedSeptember 30, 2021 and 2022, respectively, primarily due to the decrease of taxable income generated from operations in our subsidiaries in PRC for the nine months endedSeptember 30, 2022 compared with for the nine months endedSeptember 30, 2021 . Net Income. As a result of the foregoing, we had net income of approximatelyRMB55.7 million andRMB48.5 million (US$6.8 million ) for the nine months endedSeptember 30, 2021 and 2022, respectively. 63
Recently issued accounting pronouncements
InMay 2019 , the FASB issued ASU 2019-05, which is an update to ASU Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced the expected credit losses methodology for the measurement of credit losses on financial assets measured at amortized cost basis, replacing the previous incurred loss methodology. The amendments in Update 2016-13 added Topic 326, Financial Instruments - Credit Losses, and made several consequential amendments to the Codification. Update 2016-13 also modified the accounting for available-for-sale debt securities, which must be individually assessed for credit losses when fair value is less than the amortized cost basis, in accordance with Subtopic 326-30, Financial Instruments - Credit Losses -Available-for-Sale Debt Securities . The amendments in this Update address those stakeholders' concerns by providing an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. For those entities, the targeted transition relief will increase comparability of financial statement information by providing an option to align measurement methodologies for similar financial assets. Furthermore, the targeted transition relief also may reduce the costs for some entities to comply with the amendments in Update 2016-13 while still providing financial statement users with decision-useful information. InNovember 2019 , the FASB issued ASU No. 2019-10, which to update the effective date of ASU No. 2016-02 for private companies, not-for-profit organizations and certain smaller reporting companies applying for credit losses, leases, and hedging standard. The new effective date for these preparers is for fiscal years beginning afterDecember 15, 2022 . We are still evaluating the impact of the adoption of this ASU on our unaudited consolidated financial statements. InOctober 2020 , the FASB issued ASU 2020-08, "Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs". The amendments in this Update represent changes to clarify the Codification. The amendments make the Codification easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. ASU 2020-08 is effective for us for annual and interim reporting periods beginningJuly 1, 2021 . Early application is not permitted. All entities should apply the amendments in this Update on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities. These amendments do not change the effective dates for Update 2017-08. The adoption of this new standard does not have material impact on Company's unaudited consolidated financial statements and related disclosures.
Except as noted above, we do not believe that any other recently issued but not yet effective accounting standards, if currently adopted, would have a material impact on our consolidated balance sheets, income statements and comprehensive income and our statements of cash flows.
Cash 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 ofSeptember 30, 2022 , we had cash ofRMB 334.1 million (USD 47.0 million ). Our working capital was approximatelyRMB 350.5 million (USD 49.3 million ) as ofSeptember 30, 2022 . We believe our revenues and operations will continue to grow and the current working capital is sufficient to support our operations and debt obligations as they become due one year through report date. Following the approval of the Business Combination, onSeptember 16, 2022 , we received net cash proceeds of$33.2 million from then closing of the Business Combination, net of certain transaction costs. 64 We are subject to risks and uncertainties frequently encountered by early-stage companies including, but not limited to, the uncertainty of successfully developing products, securing certain contracts, building a customer base, successfully executing business and marketing strategies, and hiring appropriate personnel. To date, we have been funded primarily by cash flow generated from operations, interest-free advances by from MC shareholders prior to the closing of the Business Combination, and the net proceeds we received through the Business Combination. Failure to generate sufficient revenues, achieve planned gross margins and operating profitability, control operating costs, or secure additional funding may require us to modify, delay, or abandon some of our planned future expansion or development, or to otherwise enact operating cost reductions available to management, which could have a material adverse effect on our business, operating results, financial condition, and ability to achieve our intended business objectives. The following table sets forth a summary of our cash flows for the periods presented For the nine months ended September 30, 2021 2022 RMB RMB US$ (Unaudited)
Net cash provided by operating activities 126,556,259 34,733,966 4,882,826 Net cash (used in)/provided by investing activities (111,158,980 ) 15,211,999 2,138,470 Net cash (used in)/provided by financing activities (1,804,496 ) 234,692,574 32,992,560 Effect of exchange rate on cash and cash equivalents (70,212 ) 1,431,337 201,211 Change in cash and cash equivalents 13,522,571
286,069,876 40,215,067 Cash and cash equivalents, beginning of period
30,682,374 48,006,979 6,748,714 Cash and cash equivalents, at the end of the period 44,204,945 334,076,855 46,963,781
Operational 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 ofRMB34.7 million (US$4.9 million ) for the nine months endedSeptember 30, 2022 . The difference between our net income ofRMB48.4 million (US$6.8 million ) and the net cash provided by operating activities was primarily due to (i) an adjustment ofRMB3.7 million (US$0.5 million ) in non-cash items, which mainly consisted of depreciation and amortization ofRMB6.3 million (US$0.9 million ), provision for doubtful accounts ofRMB3.3 million (US$0.5 million ), deferred tax benefits ofRMB1.3 million (US$0.2 million ) and change in fair value of warrant liabilities ofRMB4.7 million (US$0.7 million ), (ii) an increase of accounts payable ofRMB6.7 million (US$0.9 million ), and (iii) an increase of advance from customers ofRMB17.7 million (US$2.5 million ), and was partially offset by an increase of accounts receivable ofRMB29.7 million (US$4.2 million ) and prepayments and other current assets ofRMB12.2 million (US$1.7 million ). Net cash generated from operating activities for the nine months endedSeptember 30, 2021 wasRMB126.6 million . The difference between our net income ofRMB55.7 million and the net cash generated from operating activities was primarily due to (i) an adjustment ofRMB5.5 million in non-cash items, which mainly consisted of depreciation and amortization ofRMB5.0 million , (ii) a decrease of accounts receivable ofRMB21.2 million , (iii) an increase of accounts payable ofRMB40.4 million , and (iv) a decrease of inventories ofRMB3.0 million . 65 Investing Activities Net cash provided by investing activities wasRMB15.2 million (US$2.1 million ) for the nine months endedSeptember 30, 2022 , primarily due to the loan repayment from third parties ofRMB23.7 million (US$3.3 million ) and the net cash received on acquisition ofRMB3.7 million (US$0.5 million ) partially offset by the loan proceeds to third parties ofRMB10.3 million (US$1.5 million ) and purchase of property and equipment ofRMB1.8 million (US$0.3 million ). Net cash used in investing activities wasRMB111.2 million for the nine months endedSeptember 30, 2021 , primarily due to (i) payments to related parties for the business acquisition ofRMB50.0 million , (ii) loan proceeds to third parties ofRMB61.0 million . Financing Activities Net cash provided by financing activities for the nine months endedSeptember 30, 2022 wasRMB234.7 million (US$33.0 million ), primarily due to an increase in the proceeds from capital contribution in reverse capitalization ofRMB236.3 million (US$33.2 million ). Net cash used in financing activities for the nine months endedSeptember 30, 2021 wasRMB1.8 million , primarily due to (i) an increase in the repayments to related parties ofRMB10.6 million , and (ii) an increase in the repayments to third parties ofRMB1.2 million , partially offset by repayments from third party ofRMB8.7 million and amounts advanced from related parties ofRMB1.8 million .
Off-balance sheet arrangements
From
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