Exhibit 99.2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our interim unaudited condensed consolidated financial statements and the related notes for the six months ended June 30, 2024 and the audited consolidated financial statements and accompanying notes for the year ended December 31, 2023 included in our annual report on Form 20-F filed with the SEC on April 30, 2024. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors.
Overview
X3 Holdings Co., Ltd. (hereinafter referred to as “we,” “our,” or the “Company”), formerly known as Powerbridge Technologies Co., Ltd., is a company that was established under the laws of the Cayman Islands on July 27, 2018 as a holding company.
We are a provider of software application and technology services to corporate and government customers engaged in global trade. All of our customers are located in China. We currently generate revenues from application development services, which represented 17.7% and 33.1% of total revenue for the six months ended June 30, 2024 and 2023, respectively. We generate revenue from consulting and technical support services, which represented 47.7% and 22.4% of our revenue for the six months ended June 30, 2024 and 2023, respectively. In addition, we also earn subscription service revenue from customers accessing our SaaS, which represented 4.3% and 4.5% of our revenue for the six months ended June 30, 2024 and 2023. Revenue from trading business, which represented 27.5% and 39.6% of total revenue for the six months ended June 30, 2024 and 2023, respectively. Other revenue represented 2.7% and 0.4% of our revenue for the six months ended June 30, 2024 and 2023, respectively.
Recent Developments
On May 1, 2024, we acquired 100% equity interest in Hong Kong Hongyi Holdings Limited (“Hongyi”) and its 100% held subsidiary Shenzhen Hongchuangxin Technology Co., Ltd. (“Hongchuangxin”) is engaged in AI education and hardware equipment sales. The fair value of the consideration for this acquisition was approximately $13.9 million.
On May 16, 2024, we entered into a standby equity purchase agreement (the “SEPA”) with YA II PN, LTD. (“YA”), pursuant to which YA purchased convertible promissory notes (the “Notes”) in the principal amount of $8,000,000 (the “Principal”), which shall be convertible into the Company’s ordinary shares, with par value US$0.40 per share (the “Offering”), for gross proceeds of approximately $7,425,000. The Offering will be conducted in four closings. The first closing consists of offer and sale of a Note in the principal amount of $4,756,986. The first closing occurred on May 16, 2024. The second closing consists of offer and sale of a Note in the principal amount of $1,500,000. The second closing occurred on June 17, 2024.
Key Factors that Affect Operating Results
We currently derive a majority of revenues from our application development services, consulting and technical support services, subscription services and trading. We intend to continually enhance our services and cross-sell new services to our existing customers and acquire new customers by increasing our market penetration with a deeper market coverage and a broader geographical reach. Our ability to maintain and expand our customer base with our application development services as well as consulting and technical support services significantly affect our operating results. We intend to expand the scope of our offerings to serve the existing customers and acquire new customers by continually making significant investments in R&D as well as sales marketing activities to increase our subscription revenue and profit. Our ability to drive increased customer adoption and usage of our SaaS services affects our operating results.
Our business of providing digital solutions and technology services spanning diverse industries. We harness cutting edge technologies to forge agile, innovative business models by integrating pivotal resources in technology applications, financial prowess, and streamlined operations. We target accelerated and transformative growth across digital technologies and crypto mining operations.
We intend to pursue strategic acquisitions and investments in selective technologies and businesses that will enhance our technology capabilities, expand our offerings and increase our market penetration. We believe our strategic acquisitions and investment strategies are critical for us to accelerate our growth and strengthen our competitive position. Our ability to identify and execute strategic acquisitions and investments will have a vital effect on our operating results.
For the six months ended June 30, 2024 and 2023
The following table summarizes the results of our operations for the six months ended June 30, 2024 and 2023, respectively, and provides information regarding the dollar and percentage increase or (decrease) during such periods.
| | | For the Six Months Ended | | | | | | | |
| | | June 30, | | | | | | % | |
| | | 2024 | | | 2023 | | | Change | | | Change | |
| REVENUES: | | | | | | | | | | | | |
| Application development services | | $ | 884,538 | | | $ | 2,179,167 | | | $ | (1,294,629 | ) | | | (59.4 | )% |
| Consulting and technical support services | | | 2,383,000 | | | | 1,477,740 | | | | 905,260 | | | | 61.3 | % |
| Subscription services | | | 215,355 | | | | 294,528 | | | | (79,173 | ) | | | (26.9 | )% |
| Trading revenue | | | 1,375,319 | | | | 2,605,970 | | | | (1,230,651 | ) | | | (47.2 | )% |
| Other revenue | | | 135,832 | | | | 27,324 | | | | 108,508 | | | | 397.1 | % |
| Total revenues | | | 4,994,044 | | | | 6,584,729 | | | | (1,590,685 | ) | | | (24.2 | )% |
| | | | | | | | | | | | | | | | | |
| COST OF REVENUES: | | | | | | | | | | | | | | | | |
| Application development services | | | 301,601 | | | | 1,497,466 | | | | (1,195,865 | ) | | | (79.9 | )% |
| Consulting and technical support services | | | 1,019,261 | | | | 607,587 | | | | 411,674 | | | | 67.8 | % |
| Subscription services | | | 27,749 | | | | 37,293 | | | | (9,544 | ) | | | (25.6 | )% |
| Trading | | | 1,371,067 | | | | 2,559,490 | | | | (1,188,423 | ) | | | (46.4 | )% |
| Others | | | 53,626 | | | | 37,913 | | | | 15,713 | | | | 41.4 | % |
| Total cost of revenues | | | 2,773,304 | | | | 4,739,749 | | | | (1,966,445 | ) | | | (41.5 | )% |
| | | | | | | | | | | | | | | | | |
| GROSS PROFIT | | | 2,220,740 | | | | 1,844,980 | | | | 375,760 | | | | 20.4 | % |
| | | | | | | | | | | | | | | | | |
| OPERATING EXPENSES: | | | | | | | | | | | | | | | | |
| Selling and marketing | | | 548,885 | | | | 698,587 | | | | (149,702 | ) | | | (21.4 | )% |
| General and administrative | | | 3,773,296 | | | | 8,999,287 | | | | (5,225,991 | ) | | | (58.1 | )% |
| Provision for credit losses | | | 3,773,492 | | | | 483,137 | | | | 3,290,355 | | | | 681.0 | % |
| Research and development | | | 2,156,721 | | | | 2,516,986 | | | | (360,265 | ) | | | (14.3 | )% |
| Share-based compensation | | | 3,654,999 | | | | 3,576,470 | | | | 78,529 | | | | 2.2 | % |
| Total operating expenses | | | 13,907,393 | | | | 16,274,467 | | | | (2,367,074 | ) | | | (14.5 | )% |
| OPERATING LOSS FROM OPERATIONS | | | (11,686,653 | ) | | | (14,429,487 | ) | | | 2,742,834 | | | | (19.0 | )% |
| | | | | | | | | | | | | | | | | |
| OTHER INCOME (EXPENSES) | | | | | | | | | | | | | | | | |
| Change in fair value of convertible debt | | | 1,048,271 | | | | (530,501 | ) | | | 1,578,772 | | | | (297.6 | )% |
| Gain from long term investment | | | - | | | | 70,947 | | | | (70,947 | ) | | | (100.0 | )% |
| Gain from fair value change in equity investments | | | - | | | | 2,402,943 | | | | (2,402,943 | ) | | | (100.0 | )% |
| Fair value loss on financial instruments | | | - | | | | (45,063,404 | ) | | | 45,063,404 | | | | (100.0 | )% |
| Loss from deregistering subsidiary | | | (113,361 | ) | | | - | | | | (113,361 | ) | | | - | |
| Other expenses | | | (585,759 | ) | | | (85,537 | ) | | | (500,222 | ) | | | 584.8 | % |
| Total other income (expenses) | | | 349,151 | | | | (43,205,552 | ) | | | 43,554,703 | | | | (100.8 | )% |
| | | | | | | | | | | | | | | | | |
| LOSS BEFORE INCOME TAXES | | | (11,337,502 | ) | | | (57,635,039 | ) | | | 46,297,537 | | | | (80.3 | )% |
| | | | | | | | | | | | | | | | | |
| INCOME TAX BENEFIT | | | (144,951 | ) | | | (74,856 | ) | | | (70,095 | ) | | | 93.6 | % |
| | | | | | | | | | | | | | | | | |
| NET LOSS | | $ | (11,192,551 | ) | | $ | (57,560,183 | ) | | $ | 46,367,632 | | | | (80.6 | )% |
Revenues
We derive revenues from five sources: (1) application development services; (2) consulting and technical support services; (3) subscription services; (4) trading; and (5) others.
For the six months ended June 30, 2024, our total revenue was approximately $5.0 million as compared to $6.6 million for the six months ended June 30, 2023. Our total revenue decreased by approximately $1.6 million, or 24.2%. The overall decrease in the total revenue was primarily attributable to approximately $1.3 million decrease in revenue from application development services and approximately $1.2 million decrease in trading business, partially offset by approximately $0.9 million increase in the revenue from consulting and technical support services.
Revenue from application development services
Our application development service contracts are primarily on a fixed-price basis, which require the Company to perform services including project planning, project design, application development and system integration based on customers’ specific needs. These services also require significant production and customization. Revenue from application development service is recognized as work is performed based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligations.
For the six months ended June 30, 2024, our application development service revenue was approximately $0.9 million as compared to approximately $2.2 million for the six months ended June 30, 2023. The decrease in application development service revenue was approximately $1.3 million or 59.4% due to fewer new projects during such period. In certain application development service arrangements, the contracts also included the sales of IT equipment. Such revenue was approximately $0.3 million for the six months ended June 30, 2024, which decreased from approximately $1.3 million of the related revenue for the six months ended June 30, 2023.
Revenue from consulting and technical support services
Revenue from consulting and technical support services is primarily comprised of fixed-fee contracts, which require the Company to provide professional consulting and technical support services over contract terms beginning on the commencement date of each contract, which is the date its service is made available to customers. Billings to the customers are generally on a monthly or quarterly basis over the contract term, which is typically 12 to 24 months. The consulting and technical support services contracts typically include a single performance obligation. The revenue from consulting and technical support services is recognized over the contract term on a straight-line basis as customers receive and consume benefits of such services.
For the six months ended June 30, 2024, our consulting and technical support service revenue was approximately $2.4 million as compared to approximately $1.5 million for the six months ended June 30, 2023. The increase in consulting and technical support service revenue was approximately $0.9 million or 61.3% due to more new projects during such period.
Revenue from subscription services
Revenue from subscription services is comprised of subscription fees from customers accessing our software-as-a-service applications. Our monthly or quarterly billings to customers are on the basis of the number of uses or the actual usage by the customers. The subscription services contracts typically include a single performance obligation. The revenue from subscription services is recognized over the contract term on a straight-line basis or based on the actual usage as customers receive and consume benefits of such services.
For the six months ended June 30, 2024, our subscription service revenue was approximately $0.2 million as compared to approximately $0.3 million for the six months ended June 30, 2023.
Trading revenue
The Company began to sell products to its customers since the year ended December 31, 2021. Revenue from trading revenue was approximately $1.4 million and approximately $2.6 million for the six months ended June 30, 2024 and 2023, respectively.
Others revenue
The Company began to receive income from other fields, such as membership fee, the revenue of which was approximately $0.1 million and approximately $0.03 million for the sixth months ended June 30, 2024 and 2023, respectively, and represented 2.7% and 0.4% of our total revenue for the six months ended June 30, 2024 and 2023, respectively.
Cost of Revenues
Our cost of revenues mainly consisted of compensation benefit expenses for our professionals, material cost, travel expenses related to revenue contracts and purchase cost of products.
Our total cost of revenues decreased by approximately $2.0 million or 41.5% to approximately $2.8 million for the six months ended June 30, 2024 from approximately $4.7 million for the six months ended June 30, 2023, which was in line with the decreased revenue, mainly attributable to a decrease of approximately $1.2 million in the cost of revenue from application development services and a decrease of approximately $1.2 million in the cost of revenue from trading business, partially offset by approximately $0.4 million increase in the cost of consulting and technical support services. Our cost of revenue from application development services, consulting and technical support services, subscription services, trading and other services was approximately $0.3 million, approximately $1.0 million, approximately $0.03 million, approximately $1.4 million and approximately $0.1 million for the six months ended June 30, 2024, respectively, as compared to approximately $1.5 million, approximately $0.6 million, approximately $0.04 million, approximately $2.6 million and approximately $0.04 million for the six months ended June 30, 2023 respectively.
Gross profit
| | | For the Six Months Ended | |
| | | June 30, | |
| | | 2024 | | | 2023 | |
| GROSS PROFIT | | Gross
Profit | | | Gross
Margin | | | Gross
Profit (Loss) | | | Gross
Margin | |
| Application development services | | $ | 582,937 | | | | 65.9 | % | | $ | 681,701 | | | | 31.3 | % |
| Consulting and technical support services | | | 1,363,739 | | | | 57.2 | % | | | 870,153 | | | | 58.9 | % |
| Subscription services | | | 187,606 | | | | 87.1 | % | | | 257,235 | | | | 87.3 | % |
| Trading revenue | | | 4,252 | | | | 0.3 | % | | | 46,480 | | | | 1.8 | % |
| Others revenue | | | 82,206 | | | | 60.5 | % | | | (10,589 | ) | | | (38.8 | )% |
| Total gross profit | | $ | 2,220,740 | | | | 44.5 | % | | $ | 1,844,980 | | | | 28.0 | % |
Our total gross profit increased by approximately $0.4 million or 20.4% from approximately $1.8 million for the six months ended June 30, 2023 to approximately $2.2 million for the six months ended June 30, 2024. Gross margin as a percent of overall revenue for the six months ended June 30, 2024 and 2023 was 44.5% and 28.0%, respectively.
Gross profit for application development services decreased by approximately $0.1 million or 14.5% from approximately $0.7 million for the six months ended June 30, 2023 to approximately $0.6 million for the six months ended June 30, 2024. The decrease was driven by less application development services revenue generated during such period. Gross profit margin for the six months ended June 30, 2024 and 2023 was 65.9% and 31.3%, respectively.
Gross profit for consulting and technical support services increased by approximately $0.5 million or 56.7% from approximately $0.9 million for the six months ended June 30, 2023 to approximately $1.4 million for the six months ended June 30, 2024. The increase was due to more consulting and technical support services revenue generated during such period. Gross profit margin for the six months ended June 30, 2024 and 2023 was 57.2% and 58.9%, respectively.
Gross profit for subscription services decreased by approximately $0.1 million or 27.1% from approximately $0.3 million for the six months ended June 30, 2023 to approximately $0.2 million for the six months ended June 30, 2024. Gross profit margin was 87.1% and 87.3% for the six months ended June 30, 2024 and 2023 respectively.
Gross profit for trading revenue decreased by approximately $0.04 million or 90.9% from approximately $0.05 million for the six months ended June 30, 2023 to approximately $0.004 million for the six months ended June 30, 2024. Gross profit margin was 0.3% and 1.8% for the six months ended June 30, 2024 and 2023, respectively.
Gross profit for others revenue was approximately $82,000 for the six months ended June 30, 2024 as compared to a gross loss of approximately $11,000 for the six months ended June 30, 2023. Gross profit (loss) margin was 60.5% and (38.8)% for the six months ended June 30, 2024 and 2023, respectively.
Operating Expenses
| | | For the Six Months Ended | | | | | | | |
| | | June 30, | | | | | | % | |
| | | 2024 | | | 2023 | | | Change | | | Change | |
| OPERATING EXPENSES: | | | | | | | | | | | | |
| Selling and marketing | | $ | 548,885 | | | $ | 698,587 | | | $ | (149,702 | ) | | | (21.4 | )% |
| General and administrative | | | 3,773,296 | | | | 8,999,287 | | | | (5,225,991 | ) | | | (58.1 | )% |
| Provision for credit losses | | | 3,773,492 | | | | 483,137 | | | | 3,290,355 | | | | 681.0 | % |
| Research and development | | | 2,156,721 | | | | 2,516,986 | | | | (360,265 | ) | | | (14.3 | )% |
| Share based compensation | | | 3,654,999 | | | | 3,576,470 | | | | 78,529 | | | | 2.2 | % |
| Total operating expenses | | $ | 13,907,393 | | | $ | 16,274,467 | | | $ | (2,367,074 | ) | | | (14.5 | )% |
Our operating expenses consisted of selling and marketing, general and administrative, research and development (“R&D”) expenses, provision for credit losses and share based compensation. The total operating expenses decreased by approximately $2.4 million, or 14.5%, from approximately $16.3 million for the six months ended June 30, 2023 to approximately $13.9 million for the six months ended June 30, 2024. The decrease in our operating expenses was primarily due to approximately $5.2 million decrease in general and administrative expenses and approximately $0.4 million decrease in research and development expenses, partially offset by approximately $3.3 million increase in provision for credit losses.
Selling and marketing expenses primarily consisted of salary and compensation expenses relating to our sales and marketing personnel, and also included entertainment, travel and transportation, and other expenses relating to our sales and marketing activities. Selling and marketing expenses decreased by approximately $0.1 million or 21.4% from approximately $0.7 million for the six months ended June 30, 2023 to approximately $0.5 million for the six months ended June 30, 2024, as a result of decreased miscellaneous expenses.
General and administrative expenses primarily consisted of salary and compensation expenses relating to our accounting, human resources and executive office personnel, and included rental expenses, depreciation and amortization expenses, office overhead, professional service fees and travel and transportation costs. General and administrative expenses decreased by approximately $5.2 million or 58.1% from approximately $9.0 million for the six months ended June 30, 2023 to approximately $3.8 million for the six months ended June 30, 2024, due to less depreciation and amortization expenses, professional consulting fees and salaries. As a percentage of revenues, general and administrative expenses were 75.6% and 136.7% of our total revenue for the six months ended June 30, 2024 and 2023, respectively.
Provision for credit losses increased by approximately $3.3 million from approximately $0.5 million for the six months ended June 30, 2023 to approximately $3.8 million for the six months ended June 30, 2024, due to slower collection.
R&D expenses primarily consisted of compensation and benefit expenses relating to our R&D personnel as well as office overhead and other expenses relating to our R&D activities. Our R&D expenses decreased by approximately $0.4 million from approximately $2.5 million for the six months ended June 30, 2023 to approximately $2.2 million for the six months ended June 30, 2024, representing 43.2% and 38.2% of our total revenues for the six months ended June 30, 2024 and 2023, respectively. We expect to continue to invest in R&D. We expect that our ability to effectively utilize our R&D capabilities significantly affect our results of operations in the future.
Share-based compensation increased by approximately $0.1 million from approximately $3.6 million for the six months ended June 30, 2023 to approximately $3.7 million for the six months ended June 30, 2024.
Other Income (Expense), net
Change in fair value of convertible debt
We elected the fair value option to account for convertible notes with Streeterville Capital, LLC. For the six months ended June 30, 2024 and 2023, we recognized an unrealized gain of approximately $1.0 million and an unrealized loss of approximately $0.5 million, respectively.
Gain from fair value change in equity investments
Gain from fair value change in equity investments derived from two step acquisitions. On January 5, 2023, the Company completed acquisition of 50.99% equity interest in Smartconn, consisting of an acquisition of 31% equity interest of Smartconn acquired from the previous shareholder and an investment of 19.99% equity interest in Smartconn which the Group has already held prior to January 5, 2023. The company recognized a loss of approximately $0.3 million in fair value change for the previous 19.99% equity interests. On March 28, 2023, the Company completed acquisition of 100% equity interest in Boxirui, consisting of an acquisition of 65% equity interest of Boxinrui acquired from the previous shareholder and an investment of 35% equity interest in Boxinrui which the Group has already held prior to March 28, 2023. The company recognized a gain of approximately $2.7 million in fair value change for the previous 35% equity interests. No such gain recognized for the six months ended June 30, 2024.
Fair value loss on financial instruments
Fair value loss on financial instrument is derived from acquisition of Smartconn on January 5, 2023, and acquisition of Boxinrui on March 28, 2023 which involved payments of future financial instrument upon the shares price is lower than the payment date price. Put options liabilities are recorded for the estimated fair value of the financial instrument on the merger date. The fair value of the financial instrument is re-measured at each reporting period, and the change in fair value is recognized as either income or expense. The Company recorded an unrealized loss of approximately $45.1 million for the six months ended June 30, 2023. No such loss incurred for the six months ended June 30, 2024.
Income Tax Benefit
Income tax benefit was approximately $0.1 million for the six months ended June 30, 2024, compared to approximately $0.1 million for the six months ended June 30, 2023. Under the Income Tax Laws of the PRC, companies are generally subject to income tax at a rate of 25%. However, our major operating subsidiary - Powerbridge Zhuhai was recognized as the “high-tech enterprise” status, which reduced its statutory income tax rate to 15%. The rest of our subsidiaries in PRC are subject to income tax rate of 25%.
Net Loss
As a result of the foregoing, our net loss decreased by approximately $46.4 million, or 80.6%, from approximately $57.6 million for the six months ended June 30, 2023 to approximately $11.2 million for the six months ended June 30, 2024. The decreased net loss was the result of decreased operation expenses, fair value loss on financial instruments and financial assets and fair value loss on financial instruments and financial assets as discussed above.
Impact of Foreign Currency Fluctuations
Foreign currency translation loss was approximately $1.1 million and approximately $2.7 million for the six months ended June 30, 2024 and 2023, respectively. The balance sheet amounts with the exception of equity as of June 30, 2024 were translated at RMB7.2672 to USD1.00 as compared to RMB 7.0999 to USD1.00 as of December 31, 2023. The equity accounts were stated at their historical rate. The average translation rates applied to the income statements accounts for the six months ended June 30, 2024 and 2023 were RMB7.2150 to USD1.00 and RMB7.0809 to USD1.00, respectively. The change in the value of the RMB relative to the U.S. dollar may affect our financial results reported in the U.S. dollar terms without giving effect to any underlying change in our business or results of operation.
Non-GAAP Financial Measures
The Company uses non-GAAP measures, such as adjusted net loss in evaluating its operating results and for financial and operational decision-making purposes. The Company believes that the non-GAAP financial measures help to identify underlying trends in its business by excluding the impact of share-based compensation expenses, loss/gain on fair value change on financial instruments and convertible debt and fair value loss on financial instruments and financial assets. The Company believes that the non-GAAP financial measures provide useful information about our results of operations, enhance the overall understanding of our past performance and future prospects and allow for greater visibility with respect to key metrics used by our management in its financial and operational decision-making.
The non-GAAP financial measures are not defined under U.S. GAAP and are not presented in accordance with U.S. GAAP. The non-GAAP financial measures have limitations as analytical tools, and when assessing our operating performance, cash flows or liquidity, investors should not consider them in isolation, or as a substitute for net loss, cash flows provided by operating activities or other consolidated statements of operations and cash flows data prepared in accordance with U.S. GAAP.
The Company mitigates these limitations by reconciling the non-GAAP financial measures to the most comparable U.S. GAAP performance measures, all of which should be considered when evaluating our performance.
The following table sets forth unaudited reconciliation of GAAP and non-GAAP results for the periods indicated.
| | | For the Six Months ended | |
| | | June 30, | |
| | | 2024 | | | 2023 | |
| | | | | | | |
| Net loss: | | $ | (11,192,551 | ) | | $ | (57,560,183 | ) |
| Add: | | | | | | | | |
| Share-based compensation expenses | | | 3,654,999 | | | | 3,576,470 | |
| Change in fair value of convertible debt | | | (1,048,271 | ) | | | 530,501 | |
| Fair value change in financial instrument | | | - | | | | 45,063,404 | |
| Adjusted net loss | | $ | (8,585,823 | ) | | $ | (8,389,808 | ) |
Our adjusted net losses increased by approximately $0.2 million or 2.3% from approximately $8.4 million for the six months ended June 30, 2023 to approximately $8.6 million for the six months ended June 30, 2024.
Recently issued accounting pronouncements
A list of recent relevant accounting pronouncements is included in Note 2 “Summary of Principal Accounting Policies” of our Unaudited Condensed Consolidated Financial Statements.
B. Liquidity and Capital Resources
Substantially all of our operations are conducted in China and all of our revenue, expenses, and cash are denominated in RMB. RMB is subject to the exchange control regulation in China, and, as a result, we may have difficulty distributing any dividends outside of China due to PRC exchange control regulations that restrict our ability to convert RMB into U.S. dollars. As of June 30, 2024, cash, cash equivalents and restricted cash of approximately $2.7 million were held by the Company and its subsidiary in mainland PRC.
The Cayman holding company is a holding company with no material operations of its own. We conduct our operations primarily through our subsidiary in China. As a result, our ability to pay dividends depends upon dividends paid by our subsidiary. Our subsidiaries in China are permitted to pay dividends to us only out of its retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC law, our subsidiary is required to set aside at least 10% of its after-tax profits each year based on PRC accounting standards, if any, to fund certain statutory reserve funds until such reserve funds reach 50% of its registered capital. The statutory reserve funds are not distributable as cash dividends. Remittance of dividends by our subsidiary out of China is subject to examination by the banks designated by SAFE. Our subsidiary has not paid dividends and will not be able to pay dividends until it generates accumulated profits and meet the requirements for statutory reserve funds. In addition, we would need to accrue and pay withholding taxes if we were to distribute funds from our subsidiary in China to us. We do not intend to repatriate such funds in the foreseeable future, as we plan to use existing cash balance in PRC for general corporate purposes.
For the six months ended June 30, 2024, we had a net loss of approximately $11.2 million and negative operation cash flow of approximately $1.1 million. We have historically funded our working capital needs primarily from public offering, operations, bank loans, advance payments from customers and shareholders. The working capital requirements are affected by the efficiency of operations, the numerical volume and dollar value of revenue contracts, the progress or execution on customer contracts, and the timing of accounts receivable collections.
In assessing its liquidity, we monitor and analyzes its cash on hand, its ability to generate sufficient revenue sources in the future and its operating and capital expenditure commitments. As of June 30, 2024, we had cash and cash equivalents of approximately $1.5 million.
On November 24, 2023, the Group entered into purchase agreements with twelve investors. The investors agreed to purchase an aggregate of $40,000,000 of the Group’s Class A ordinary shares at a share price of $0.3 (split-adjusted $6.0) per share. The Group issued 130,463,140 (split-adjusted 6,523,157) Class A ordinary shares on November 24, 2023.
On May 16, 2024, we entered into a standby equity purchase agreement (the “SEPA”) with YA II PN, LTD. (“YA”), pursuant to which YA purchased convertible promissory notes (the “Notes”) in the principal amount of $8,000,000 (the “Principal”), which shall be convertible into the Company’s ordinary shares, with par value US$0.40 per share (the “Offering”), for gross proceeds of approximately $7,425,000. The Offering will be conducted in four closings. The first closing consists of offer and sale of a Note in the principal amount of $4,756,986. The first closing occurred on May 16, 2024. The second closing consists of offer and sale of a Note in the principal amount of $1,500,000. The second closing occurred on June 17, 2024.
We believe that our cash on hand and financing cash flows will be sufficient to fund our operations over at least the next 12 months from the date of this report. However, we may need additional cash resources in the future if the Company experiences changed business conditions or other developments, and we may also need additional cash resources in the future if we wish to pursue opportunities for investment, acquisition, strategic cooperation or other similar actions. If it is determined that the cash requirements exceed our amounts of cash on hand, we may seek to issue debt or equity securities or obtain a credit facility.
The following summarizes the key components of our cash flows for the six months ended June 30, 2024 and 2023.
| | | For the Six Months Ended
June 30, | |
| | | 2024 | | | 2023 | |
| | | | | | | |
| Net cash used in operating activities | | $ | (1,095,791 | ) | | $ | (7,018,648 | ) |
| Net cash used in provided by investing activities | | | (1,295,319 | ) | | | (2,630,858 | ) |
| Net cash provided by financing activities | | | 930,802 | | | | 6,792,048 | |
| Effect of exchange rate change on cash, cash equivalents and restricted cash | | | (102,431 | ) | | | (427,274 | ) |
| Net decrease in cash, cash equivalents and restricted cash | | $ | (1,562,739 | ) | | $ | (3,284,732 | ) |
Operating Activities
Net cash used in operating activities was approximately $1.1 million for the six months ended June 30, 2024. Cash used in operating activities for the six months ended June 30, 2024 mainly consisted of approximately $11.2 million of net loss, adjustment of approximately $10.0 million non-cash items, an increase of approximately $0.4 million in accounts receivable and a decrease of approximately $0.5 million in deferred revenue, offset by an increase of approximately $1.1 million in accrued expenses and other current liabilities.
Net cash used in operating activities was approximately $7.0 million for the six months ended June 30, 2023. Cash used in operating activities for the six months ended June 30, 2023 mainly consisted of approximately $57.6 million of net loss, adjustment of approximately $52.3 million non-cash items, a decrease of approximately $0.6 million in accrued expenses and other current liabilities, an increase of approximately $0.5 million in accounts receivable, a decrease of approximately $0.5 million in accounts payable and an increase of approximately $0.5 million in prepayments, deposits and other assets.
Investing Activities
Net cash used in investing activities was approximately $1.3 million for the six months ended June 30, 2024. Cash used in investing activities for the six months ended June 30, 2024 consisted of approximately $1.0 million spending on purchases of intangible assets and property and equipment, loans to related party of approximately $0.2 million.
Net cash used in investing activities was approximately $2.6 million for the six months ended June 30, 2023. Cash used in investing activities for the six months ended June 30, 2023 consisted of approximately $2.2 million net loans to third parties and approximately $0.5 million purchase of intangible assets and property and equipment.
Financing Activities
Net cash provided by financing activities was approximately $0.9 million for the six months ended June 30, 2024. Net cash provided by financing activities for the six months ended June 30, 2024 mainly consisted of approximately $2.1 million from bank loan, net proceeds of approximately $1.4 million from convertible notes and proceeds of approximately $0.6 million from private placements and approximately $3.2 million repayment to bank loans.
Net cash provided by financing activities was approximately $6.8 million for the six months ended June 30, 2023. Net cash provided by financing activities for the six months ended June 30, 2023 consisted of approximately $5.5 million net proceeds from private placements, approximately $3.3 million proceeds from bank loans, offset by approximately $1.9 million repayment of bank loans and approximately $0.2 million payment to related parties.
Capital Expenditures
The Company made capital expenditures of approximately $1.0 million and $0.5 million for the six months ended June 30, 2024 and 2023, respectively. In these periods, our capital expenditures were mainly used for purchases of office equipment, furniture and payments for capitalized development cost. The Company will continue to make capital expenditures to meet the expected growth of its business.
C. Research and Development, Patents and Licenses
See “Item 4. Information on the Company — B. Business Overview — Research and Development” and “Item 4. Information on the Company — B. Business Overview — Intellectual Property” of our annual report on Form 20-F for the year ended December 31, 2023 filed with the SEC on April 30, 2024.
D. Trend Information
Save as disclosed elsewhere in this interim report, we are not aware of any trends, uncertainties, demands, commitments or events for the six months ended June 30, 2024 and for the year ended December 31, 2023 that are reasonably likely to have a material and adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future results of operations or financial condition.
E. Critical Accounting Estimates
We prepare our unaudited condensed consolidated financial statements in conformity with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect our reported amount of assets, liabilities, revenue, costs and expenses, and any related disclosures. Although there were no material changes made to the accounting estimates and assumptions in the past two years, we continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates.
We believe that the following accounting policies involve a higher degree of judgment and complexity in their application and require us to make significant accounting estimates. Accordingly, these are the policies we believe are the most critical to understanding and evaluating our consolidated financial condition and results of operations.
Use of estimates
The preparation of unaudited condensed consolidated financial statements in conformity with U.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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Significant accounting estimates reflected in our unaudited condensed consolidated financial statements include but not limited to capitalized development cost, valuation of accounts receivables, impairment of long-lived assets and goodwill, revenue recognition and realization of deferred tax assets and uncertain tax positions. Actual results could differ from these estimates.
Accounts receivable, net
Accounts receivable, net, is stated at the original invoiced amount net of write-offs and allowance for credit losses. The Company estimated allowance for credit losses to reserve for potentially uncollectible receivable amounts periodically, considering factors in assessing the collectability of its accounts receivable, such as historical distribution of the age of the amounts due, payment history, creditworthiness, forward-looking factor, historical collections data of the customers, to assess the credit risk characteristics. If there is strong evidence indicating that the accounts receivable is likely to be unrecoverable, the Group also makes specific allowance in the period in which a loss is determined to be probable. Accounts receivable are considered impaired and written-off when it is probable that all contractual payments due will not be collected after all collection efforts have been exhausted.
Intangible assets, net
Our intangible assets mainly include capitalized development costs, purchased software and acquired software from business acquisitions. The Company follows the provisions of Accounting Standards Codification (“ASC”) 985-20, “Costs of Software to be Sold, Leased, or Marketed.” ASC 985-20 provides guidance on capitalization of the costs of software developed or obtained for sold, leased, or marketed. The Company expenses all costs incurred during the preliminary project stage of its development, and capitalizes costs incurred during the application development stage. Costs incurred relating to upgrades and enhancements to the application are capitalized if it is determined that these upgrades or enhancements add additional functionality to the application. The capitalized development cost is amortized on a straight-line basis over the estimated useful life, which is generally five years. We evaluate the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
Impairment for long-lived assets other than goodwill
Long-lived assets, including property, equipment, furniture and fixtures and intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. When these events occur, we measure impairment by comparing the carrying values of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amounts of the assets, we would recognize an impairment loss based on the excess of the carrying value over the assessed discounted cash flow amount. For the six months ended June 30, 2024 and 2023, we did not recognize any impairment for the long-lived assets.
Goodwill
Goodwill is the cost of acquired companies in excess of the fair value of identifiable net assets at acquisition date. Goodwill is not subject to amortization, but rather is evaluated for impairment at least annually. The Company evaluates its goodwill for impairment during the fourth quarter of its fiscal year or more frequently if indicators of potential impairment exist, in accordance with ASC 350, Intangibles - Goodwill and Other. Goodwill impairment is determined by comparing the estimated fair value of a reporting unit (generally defined as the businesses for which financial information is available and reviewed regularly by management) with its respective carrying value. If the estimated fair value exceeds the carrying value, goodwill at the reporting unit level is not deemed to be impaired. However, if the estimated fair value is below carrying value, further analysis is required to determine the amount of the impairment. For the six months ended June 30, 2024, we performed a qualitative assessment for the reporting unit. Based on the requirements of ASC 350-20, we evaluated all relevant qualitative and quantitative factors, weighed all factors in their entirety and concluded that it was not more-likely-than-not that the fair value of the reporting unit was less than its carrying amount. Therefore, no goodwill impairment was recognized for the six months ended June 30, 2024 and 2023.
Revenue recognition
We adopted ASC Topic 606. Under ASC 606, revenue is recognized when control of promised goods or services is transferred to Our customers in an amount of consideration to which an entity expects to be entitled to in exchange for those goods or services and is recorded net of value-added tax (“VAT”). To achieve that core principle, the Group applies the following steps:
Step 1: Identify the contract (s) with a customer
Step 2: Identify the performance obligations in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance obligations in the contract
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation
We derive its revenues from five sources: (1) revenue from application development services, (2) revenue from consulting and technical support services, (3) revenue from subscription services, (4) trading revenue. and (5) others revenue. All of our contracts with customer do not contain cancelable and refund-type provisions.
(1) Revenue from application development service
Our application development service contracts are primarily on a fixed-price basis, which require the Company to perform services including project planning, project design, application development and system integration based on customers’ specific needs. These services also require significant production and customization. Upon delivery of the services, customer acceptance is generally required. In the same contract, the Company is generally required to provide post-contract customer support (“PCS’) for a period from three months to three years (“PCS period”) after the customized application development services are delivered. The type of services for PCS clause is generally not specified in the contracts or as stand-ready services on when-and-if-available basis. The unspecified PCS is stand-ready service on when-and-if-available basis. It grants the customers on line and telephone access to technical support personnel during the term of the service. Specified PCS includes specified service term in the contract such as training.
Our application development service revenues are generated primarily from contracts with PRC government or related agencies and state-owned enterprises. The contracts contain negotiated billing terms which generally include multiple payment phases throughout the contract term and a significant portion (30% - 50%) of contract amount usually is billed upon the completion of the related projects. Pursuant to the contract terms, the Company has enforceable right on payments for the work performed.
We sometimes provide a warranty for its application development service contracts. The warranty period is typically 12-36 months upon the completion of the application development service. In accordance with ASC 606-10-25-19, the Company believes the warranty provision in the contracts generally represents service-type warranty, which is a distinct performance obligation and the Company also provides the similar service on standalone basis and customers can benefit from the related service-type warranty service. For the service warranty component, the customer simultaneously receives and consumes the benefits provided by the company performance over the warranty term, therefore, the service warranty is satisfied over time. The revenue allocated to the service warranty is recognized over the warranty period.
We assess that application development service, PCS or specific service and service-type warranty service, if applicable, are distinct performance obligations in the application development service contracts. We provide these services on standalone basis and customers are able to benefit from each of the service on its own. In addition, the timing of delivery of these performance obligations can be separately identifiable in the contracts. The transaction price is allocated to these identified performance obligations based on the relative standalone selling prices. The transaction price allocated to PCS or unspecific service and service-type warranty, if applicable, on a straight-line method over the contractual period. Revenue allocated to specified PCS is recognized as the related services are rendered. The transaction price allocated to application development service is recognized over time as our performance creates or enhances the project controlled by the customer and the control is transferred continuously to our customers. We use an input method based on cost incurred as the Company believes that this method most accurately reflects our progress toward satisfaction of the performance obligation, which usually takes less than one year. Under this method, the transaction price allocated to application development service is recognized as work is performed based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligations.
Incurred costs include all direct material, labor and subcontract costs, and those indirect costs related to application development performance, such as indirect labor, supplies, and tools. Cost-based input method requires the Company to make estimates of revenues and costs to complete the construction. In making such estimates, significant judgment is required to evaluate assumptions related to the costs to complete the application development, including materials, labor, and other system costs. Our estimates are based upon the professional knowledge and experience of our engineers and project managers to assess the contract’s schedule, performance, technical matters. We have adequate cost history and estimating experience, and with respect to which management believes it can reasonably estimate total development costs. If the estimated costs are greater than the related revenues, the Company recognizes the entire estimated loss in the period the loss becomes known and can be reasonably estimated. Changes in estimates for application development services include but not limited to cost forecast changes and change orders. The cumulative effect of changes in estimates is recorded in the period in which the revisions to estimates are identified and the amounts can be reasonably estimated. To date, the Company has not incurred a material loss on any contracts. However, as a policy, provisions for estimated losses on such engagements will be made during the period in which a loss becomes probable and can be reasonably estimated. If contract modifications result in additional goods or services that are distinct from those transferred before the modification, they are accounted for prospectively as if the Company entered into a new contract. If the goods or services in the modification are not distinct from those in the original contract, sales and gross profit are adjusted using the cumulative catch-up method for revisions in estimated total contract costs and contract values.
In certain application development service arrangements, the Company sells and delivers IT equipment on standalone basis prior to the delivery of the services. In these cases, the Company controls the IT equipment before they are transferred to the customer. We have the right to direct the suppliers and control the goods or assets transferred to its customers. Thus, the Company considers it should recognize revenue as a principal in the gross amount of consideration to which it is entitled in exchange for the IT equipment delivered. We assesse the sale of equipment is separately identifiable from other promises in the contract and it is distinct performance obligation within the context of the contract. Accordingly, the revenue from the related IT equipment based on its relative standalone selling price is recognized upon customer acceptance after delivery.
(2) Revenue from consulting and technical support services
Revenue from consulting and technical support services is primarily comprised of fixed-fee contracts, which require the Company to provide professional consulting and technical support services over contract terms beginning on the commencement date of each contract, which is the date its service is made available to customers. Billings to the customers are generally on a monthly or quarterly basis over the contract term, which is typically 12 to 24 months. The consulting and technical support services contracts typically include a single performance obligation. The revenue from consulting and technical support services is recognized over the contract term on a straight-line basis as customers receive and consume benefits of such services.
(3) Revenue from subscription services
Revenue from subscription services is comprised of subscription fees from customers accessing our software-as-a-service applications for a subscribed period. Our monthly or quarterly billing to customer is on the basis of number of uses or the actual usage by the customers. The subscription arrangements are considered service contracts because customers do not have the right to take possession of the software and can only benefit from the software when provided the right to access the software. Accordingly, the subscription services contracts typically include a single performance obligation. The revenue from subscription services is recognized over the contract term on a straight-line basis or based on the actual usage as customers receive and consume benefits of such services.
(4) Trading revenue
We started trading business for the year ended December 31, 2021 and recognized revenue at a point in time when control of such products transfers to the customer, which generally occurs upon shipment or delivery depending on the terms of the contracts with the customer. Product sale contracts typically include a single performance obligation and there are no rights of return. The transaction price is based on the fixed contractual price with the customer. Billings to the customer for the sale of products occur at the time the products are transferred to the customer.
(5) Others revenue
In April 2023, the Company started regional authorization membership program to engage independent merchant to assist in developing specified geographical regions. The program grants non-exclusive geographical territory business development to the authorized distributors within that defined territory. Our services under regional cooperation agreements include marketing support to advertise as well as utilization of our trademark and copyrights for business promotion purpose. The term of cooperation agreements is typically one to two years. We charge a fixed amount authorization fee which is non-refundable and to be paid upon execution of an authorization agreement. For all our cooperation agreements, the amount of fee is fixed or determinable and no right of return provision indicated in the agreement. Since the Company provides no financing to authorized distributors and offers no guarantees on their behalf, the services provided by the Company are considered to represent a single performance obligation. The agreement price is fully allocated to the single performance obligation. The total authorization fees are recognized ratably on a straight-line basis over the term of the cooperation agreements. Other revenues accounted for 2.7% of our revenue for the six months ended June 30, 2024.
Revenue includes reimbursements of travel and out-of-pocket expense, with equivalent amounts of expense recorded in cost of revenue. We report revenues net of value added tax (“VAT”). Our subsidiaries in PRC are subject to a 3% to 13% value added tax (“VAT”) and related surcharges on the revenues earned from providing services and products.
Practical Expedient and Exemptions
We do not disclose the value of unsatisfied performance obligations within one year by applying the right to invoice practical expedient provided by ASC 606-10-55-18.
Contract balance
The accounts receivable includes both unbilled accounts receivable and billed accounts receivable. We record unbilled accounts receivable for revenue that has been recognized in advance of billing the customer, which is common for application development service contracts. The unbilled accounts receivable represents our right to consideration in exchange for the service that the Company has performed to the customer before payment is due and the unbilled account receivable will be reclassified into billed accounts receivable when the Company has the right to invoice. Contract liabilities are presented as deferred revenue on the consolidated balance sheet. Contract liabilities relate to payments received in advance of completion of performance obligations under a contract. Contract liabilities are recognized as revenue upon the completion of performance obligations. As of June 30, 2024 and December 31,2023 the balance of deferred revenue amounted to approximately $2.0 million and $2.2 million, respectively.
Income taxes
The Company accounts for current income taxes in accordance with the laws of the relevant tax authorities. Deferred income taxes are recognized when temporary differences exist between the tax bases of assets and liabilities and their reported amounts in the unaudited condensed consolidated financial statements. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period including the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
An uncertain tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred. No significant penalties or interest relating to income taxes have been incurred during the years ended June 30, 2024 and 2023. All of the tax returns of our subsidiary in China remain subject to examination by the tax authorities for five years from the date of filing.
