Microcloud Hologram Inc. quarterly report, Q3 FY2022

MicroCloud Hologram Inc. — Form 10-Q Summary

Business context and reporting period

Unaudited consolidated results cover the three and nine months ended September 30, 2022, with comparisons to the same 2021 periods. MicroCloud is a Cayman Islands holding company whose operating subsidiaries are primarily based in China and provide holographic solutions and holographic technology services, including LiDAR-related products, ADAS software and development, holographic content, hardware resale, advertising, SDK services and game promotion.

On September 16, 2022, the company completed its business combination with Golden Path Acquisition Corporation, formerly the registrant. The transaction was accounted for as a reverse recapitalization, and the company began trading on Nasdaq under HOLO and HOLOW on September 19, 2022. The company received net proceeds of approximately $33.2 million and had 50,812,035 ordinary shares and 6,020,500 warrants outstanding immediately after closing.

Key financial metrics

Metric	Q3 2021	Q3 2022	9M 2021	9M 2022
Revenue	RMB54.0m	RMB172.5m	RMB272.0m	RMB424.6m
Gross profit	RMB36.4m	RMB67.0m	RMB188.6m	RMB192.8m
Gross margin	67.4%	38.9%	69.4%	45.4%
Operating income	RMB6.7m	RMB7.3m	RMB54.2m	RMB41.4m
Net income	RMB7.0m	RMB11.8m	RMB55.7m	RMB48.5m
Net income attributable to MicroCloud shareholders	RMB7.0m	RMB9.1m	RMB55.7m	RMB45.9m
Basic and diluted EPS	RMB0.73	RMB0.62	RMB1.10	RMB0.90

For convenience, the filing translates 9M 2022 results at RMB1.00 to $0.1406: revenue was approximately $59.7 million, gross profit $27.1 million, operating income $5.8 million and net income attributable to shareholders $6.4 million.

• Q3 revenue increased 219.1%, driven primarily by services revenue, which rose 304.6% to RMB152.5 million. Product revenue increased 22.2% to RMB20.0 million.
• 9M revenue increased 56.1%; products increased 24.5% to RMB106.3 million and services increased 70.6% to RMB318.3 million.
• Gross profit increased only 2.2% for 9M despite revenue growth because service costs, particularly outsourcing and content-provider costs, increased substantially.
• Q3 operating expenses were RMB59.7 million, including RMB49.0 million of research and development. 9M operating expenses were RMB151.3 million, including RMB124.8 million of research and development.
• Q3 and 9M 2022 included a RMB4.7 million gain from the change in fair value of private warrant liabilities.

Cash flow, liquidity, debt and balance sheet

• Cash and cash equivalents at September 30, 2022 were RMB334.1 million, or approximately $47.0 million, compared with RMB48.0 million at December 31, 2021.
• Working capital was approximately RMB350.5 million, or $49.3 million. Management stated that existing working capital and expected operating cash flows should support operations and debt obligations for at least the next 12 months.
• 9M 2022 operating cash flow was RMB34.7 million, down from RMB126.6 million in 9M 2021. The decline primarily reflected increases in accounts receivable and prepayments.
• Investing cash flow was RMB15.2 million in 9M 2022, including RMB23.7 million of third-party loan repayments, partly offset by RMB10.3 million of new third-party loans and RMB1.8 million of capital expenditures.
• Financing cash flow was RMB234.7 million, primarily reflecting RMB236.3 million of reverse-recapitalization proceeds.
• Current liabilities were RMB93.8 million, including RMB4.4 million of short-term bank borrowings. The borrowings carry stated interest rates of 3.0% to 5.4% and mature between March and May 2023.
• Operating lease liabilities totaled approximately RMB5.5 million at present value. Total lease payments were approximately RMB6.0 million.
• Accounts receivable, net, increased to RMB95.2 million from RMB68.3 million at December 31, 2021. The allowance for doubtful accounts increased to RMB5.2 million.

Material changes versus the prior comparable period

• Revenue growth was concentrated in services, while service cost increased much faster than service revenue. This reduced gross margin by 28.5 percentage points in Q3 and 24.0 percentage points for 9M.
• R&D expense increased 150.6% in Q3 and 9.1% for 9M. The filing attributes the increase to continued development activities supporting business expansion.
• Operating income declined 23.5% for 9M to RMB41.4 million despite higher revenue. Net income attributable to shareholders declined 17.6% to RMB45.9 million, and EPS declined from RMB1.10 to RMB0.90.
• The company adopted ASC 842 leases in 2022 and recognized approximately RMB5.7 million of right-of-use assets and lease liabilities at adoption.
• The company acquired Beijing Weixiaohai for nominal cash consideration on July 31, 2022. It subsequently determined the acquisition did not meet expectations and transferred the business to a third party for RMB1 on October 1, 2022.

Guidance, outlook, commentary, risks and unusual items

The filing does not provide quantitative revenue, earnings or margin guidance. Management expects revenues and operations to continue growing and believes current liquidity is sufficient for the next 12 months, but cautions that future results may vary and that additional capital could be required.

• Management identified material weaknesses in disclosure controls and procedures as of September 30, 2022, including an ineffective control environment and the lack of formal risk-assessment and internal-control frameworks, an audit committee and an internal-audit function. Remediation plans include hiring technical accounting personnel, improving reporting procedures, implementing reporting systems and formalizing control activities.
• The company has significant exposure to China, including PRC regulatory, cybersecurity, data-protection, foreign-exchange, tax, dividend-repatriation and cross-border financing risks.
• COVID-19 restrictions, particularly in China, may reduce demand for entertainment, advertising and other services and may disrupt customers, suppliers and collections.
• Customer concentration remains material: one customer represented 15.7% of 9M 2022 revenue, and the five largest customers represented approximately 44.7%. One vendor represented 54.0% of accounts payable at September 30, 2022.
• The company relies on preferential PRC tax treatments, including high-tech enterprise, small-enterprise and regional tax incentives. Loss or non-renewal of these benefits could increase the effective tax rate.
• Private warrants are carried as Level 3 liabilities and are remeasured through earnings. The company also has 5.75 million public warrants and 270,500 private warrants, generally exercisable at $11.50 per share subject to their terms.
• Goodwill totaled RMB21.2 million and intangible assets, net, totaled RMB17.0 million. No long-lived-asset impairment was recorded for the periods presented.
• Legal proceedings and asserted or unasserted claims may arise in the ordinary course of business, but management states that currently accrued and reasonably possible losses are not material.

Important facts for investors to verify

• Reconcile the reverse-recapitalization share count, ownership percentages, warrant terms and the use of the approximately $33.2 million of net proceeds.
• Assess whether the rapid shift toward lower-margin services is sustainable and whether outsourcing costs can be controlled.
• Monitor accounts receivable growth, the higher doubtful-account allowance and the company’s ability to convert reported earnings into operating cash flow.
• Review the maturity and refinancing requirements of the RMB4.4 million bank loans and the company’s lease obligations.
• Track remediation of the disclosed material weaknesses and the risk of future accounting errors, restatements or delayed filings.
• Verify the regulatory status of the PRC operating subsidiaries, including cybersecurity and data-protection compliance, overseas-listing requirements and the ability to transfer funds from China.
• Confirm the October 1, 2022 disposal of Beijing Weixiaohai and whether it creates any additional accounting, tax or contractual obligations.