| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(a). Basis of presentation The
accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United
States of America (“US GAAP”). The
consolidated financial statements include the financial statements of the Company and its subsidiaries. All intercompany transactions
and balances among the Company and its subsidiaries have been eliminated upon consolidation. For consolidated subsidiaries where the
Group’s ownership in the subsidiary is less than 100%, the equity interest not held by the Group is shown as non-controlling interests.
(b). Basis
of presentation The preparation of the consolidated financial
statements in accordance with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities, related disclosures of contingent assets and liabilities at the balance sheet date, and the reported revenues and expenses
during the reported periods in the consolidated financial statements and accompanying notes. Significant accounting estimates include,
but not limited to, the allowance for credit losses, useful lives and impairment of long-lived assets, valuation allowances of deferred
tax assets, and warrant liabilities. Changes in facts and circumstances may result in revised estimates. Actual results could differ from
those estimates, and as such, differences may be material to the consolidated financial statements.
(c). Cash Cash
consist of cash on hand and cash in banks. The Group maintains cash with various financial institutions in China. The Group has not experienced
any losses in bank accounts and believes it is not exposed to any risks on its cash in bank accounts.
(d). Restricted cash Restricted
cash represented a guaranteed deposit required by China Banking and Insurance Regulatory Commission (“CBIRC”) in order to
protect insurance premium appropriation by insurance agency which is restricted as to withdrawal for other than current operations.
(e). Accounts receivable, net Accounts receivable, net are stated at the original
amount less allowances for credit losses. Accounts receivable are recognized in the period when the Group has provided services to its
customers and when its right to consideration is unconditional. The Group reviews the accounts receivable on a periodic basis and makes
general and specific allowances when there is doubt as to the collectability of individual balances. The Group considers many factors
in assessing the collectability of its receivables, such as the age of the amounts due, the customer’s payment history, credit-worthiness
and other specific circumstances related to the accounts. An allowance for credit losses is recorded in the period in which a loss is
determined to be probable. Accounts receivable balances are written off after all collection efforts have been exhausted.
Adoption
of Accounting Standards Update (“ASU”) 2016-13 In
June 2016, the FASB issued ASU 2016-13: Financial Instruments-Credit Losses (Topic 326), which requires entities to measure all expected
credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and
supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial
assets measured at amortized cost. The Group adopted ASU 2016-13 from January 1, 2023 using modified-retrospective transition approach
with a cumulative-effect adjustment to shareholders’ equity amounting to $507 recognized as of January 1, 2023.
(f). Short-term investment The
Group invested in certain trust products and bank financial products, with various interest rates and are restricted as to withdrawal
and use before maturity. The Group classifies the trust and financial products as held-to-maturity securities. The original maturities
of the short-term investments are longer than three-months, but shorter than one year. The carrying amount of these short-term investments
approximate their fair values due to the short-term maturities of these investments. The
Group reviews its short-term investments for other-than-temporary impairment (“OTTI”) based on the specific identification
method. The Group considers available quantitative and qualitative evidences in evaluating the potential impairment of its short-term
investments. If the carrying amount of an investment exceeds the investment’s fair value, the Group considers, among other factors,
general market conditions, expected future performance of the investees, the duration and the extent to which the fair value of the investment
is less than the carrying amount, and the Group’s intent and ability to hold the investments. OTTI is recognized as a loss in the
consolidation statements of operations. No impairment charge was recognized for the years ended December 31, 2021, 2022 and 2023.
(g). Prepaid expenses and other current assets Prepaid expenses and other current assets primarily consist of advances
to suppliers, value-added tax receivables, and other current assets. Advances to suppliers are prepayment to suppliers in the procurement
of services from auto service providers, technology service providers, and promotion service providers. Advance payment depends on specific
circumstances, including the industry practice, negotiations with suppliers, security for steady supply of service, and the delivery time
of services received from suppliers after the advance payment. Advance to suppliers is settled when the services are provided and accepted
by the Group. The Group reviews its advance to suppliers on a periodic basis and makes general and specific allowances when amounts outstanding
are not likely to be collected in cash or utilized against receive of services.
(h). Software and equipment, net Software
and equipment are stated at cost less accumulated depreciation and impairment, if any, and depreciated on a straight-line basis over
the estimated useful lives of the assets. Cost represents the purchase price of the asset and other costs incurred to bring the asset
into its intended use. Estimated useful lives and residual value are as follows:
Category Estimated
useful lives Residual
Vehicles 3-5 years 5 %
Office equipment and furniture 3-5 years 5 %
Electronic equipment 3 years 5 %
Computer software 5, 10 years nil
Leasehold improvements Over the shorter of lease term or the estimated useful lives of the assets nil
Others 3-10 years 5 % Computer
software Acquisition
costs associated with internal-use software are capitalized and include external direct costs of services principally related to platform
development, including support systems, software coding, designing system interfaces, and installation and testing of the software. These
costs are recorded as software and equipment and are generally amortized beginning when the asset is substantially ready for use. Costs
incurred for enhancements that are expected to result in additional features or functionalities are capitalized and amortized over the
estimated useful life of the enhancements. Costs incurred during the preliminary project stage, as well as maintenance and training costs,
are expensed as incurred. Repair
and maintenance costs are charged to expenses as incurred, whereas the cost of renewals and betterment that extends the useful lives
of software and equipment are capitalized as additions to the related assets. Retirements, sales and disposals of assets are recorded
by removing the costs, accumulated depreciation and impairment with any resulting gain or loss recognized in the consolidated statements
of operations and comprehensive loss. (i). Other non-current assets The Group recognizes other non-current assets,
which primarily consisted of private clouds in construction and prepayment for equipment, at their initial cost. Private clouds in construction
are recorded at the cumulative cost incurred, including the purchase price and any directly attributable costs to it.
(j). Impairment of long-lived assets The
Group reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an
asset may no longer be recoverable. When these events occur, the Group measures impairment by comparing the carrying value 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 flow is less than the carrying amount of the assets, the Group would recognize an impairment
loss, which is the excess of carrying amount over the fair value of the assets, which is determined
through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals,
as considered necessary.
(k). Long-term investments Beginning
on January 1, 2018, the Group’s equity investments without readily determinable fair values, which do not qualify for the existing
practical expedient in ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), to estimate fair value using the
net asset value per share (or its equivalent) of the investment (“NAV practical expedient”), and over which the Group does
not have the ability to exercise significant influence through the investments in common stock or in substance common stock, are accounted
for under the measurement alternative upon the adoption of ASU 2016-01 (the “Measurement Alternative”). Under the Measurement
Alternative, the carrying value is measured 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. All gains and losses on these investments, realized
and unrealized, are recognized in the consolidated statements of operations and comprehensive income/(loss). The Group makes assessment
of whether an investment is impaired based on performance and financial position of the investee as well as other evidence of market
value at each reporting date. Such assessment includes, but is not limited to, reviewing the investee’s cash position, recent financing,
as well as the financial and business performance. The Group recognizes an impairment loss equal to the difference between the carrying
value and fair value in the consolidated statements of operations and comprehensive income/(loss) if any. On
November 20, 2019, Jiaxing Hanchao Equity Investment Partnership (L.P.) (“Jiaxing Hanchao”) was incorporated. Pursuant to
the partnership agreement, SUNCAR Online invested $290, accounting for 5% of the total investment as a limited partner. The investment
was accounted for under the cost method as the Group had no significant influence over the investee and Jiaxing Hanchao had no readily
determinable fair value.
(l). Accounts payable Accounts payable is payable to suppliers in the procurement of service
to auto service providers to customized services for end consumers of the enterprise clients, and promotional service to channels.
(m). Short-term loan Short-term
loan represents the Group’s borrowings from commercial banks for the Group’s working capital. Short-term loan includes borrowings
with maturity terms shorter than one year.
(n). Related party Parties
are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant
influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject
to common control or significant influence, such as a family member or relative, stockholder, or a related corporation.
(o). Warrant The
Group accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s
specific terms and applicable authoritative guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) 480, “Distinguishing Liabilities from Equity” (“ASC 480”) and ASC 815, “Derivatives
and Hedging” (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant
to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity
classification under ASC 815, including whether the warrants are indexed to the Company’s own ordinary shares and whether the warrant
holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other
conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant
issuance and as of each subsequent quarterly period end date while the warrants are outstanding. For
issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component
of equity at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants
are required to be recorded as liabilities at their initial fair value on the date of issuance, and each balance sheet date thereafter.
Changes in the estimated fair value of the warrants are recognized as a non-cash gain or loss on the statements of operations. The fair
value of the Private Warrants was estimated using a Black-Scholes model. For the years ended December 31, 2023, the Group recognized
change of fair value of the Private Warrants of $629.
(p). Fair value measurement Accounting
guidance defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required
or permitted to be recorded at fair value, the Group considers the principal or most advantageous market in which it would transact and
it considers assumptions that market participants would use when pricing the asset or liability. Accounting
guidance establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based
upon the lowest level of input that is significant to the fair value measurement. The three levels of inputs are:
● Level
1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or
liabilities in active markets.
● Level
2—Include other inputs that are directly or indirectly observable in the marketplace.
● Level
3—Unobservable inputs which are supported by little or no market activity. Accounting
guidance also describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income
approach and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving
identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present
value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach
is based on the amount that would currently be required to replace an asset. Financial
assets and liabilities of the Group primarily consist of cash, accounts receivable, other receivables included in prepayments and other
current assets, short-term borrowings, accounts payable, other payables included in accrued expenses and other current liabilities, and
warrant liabilities. As of December 31, 2022 and 2023, the carrying amounts of other financial instruments approximated to their fair
values due to the short-term maturity of these instruments. The warrant liabilities were measured at fair value using unobservable inputs
and categorized in Level 3 of the fair value hierarchy. The
Group’s non-financial assets, such as software and equipment, would be measured at fair value only if they were determined to be
impaired. The
following table details the fair value measurements of liabilities that were measured at fair value on a recurring basis based on the
following three-tiered fair value hierarchy per ASC 820, Fair Value Measurement, as of December 31 and May 17, 2023.
Fair
Value Measurement
Level
1 Level
2 Level
3 Total
fair value
Warrant liabilities:
As of December 31, 2023 $ - $ - $ 661 $ 661
As of May 17, 2023 $ - $ - $ 32 $ 32 The
fair value of the Private Warrants (See Note 12) is considered a Level 3 valuation and is determined using the Black-Scholes valuation
model. As of December 31, 2023, the fair value of the Private Warrants was $3.78 per share, with an exercise price of $11.50 per share.
The changes for Level 3 items measured at fair value on a recurring basis using significant unobservable inputs are as follows:
Private
Warrants
Fair value as of December 31, 2022 $ -
Acquired from the Business Combination 32
Settlements -
Change in fair value 629
Fair value as of December
31, 2023 $ 661 The
significant unobservable inputs used in the measurement of fair value of Private Warrant as of December 31, 2023 are as follows:
As
of December 31, 2023
Expected term (in years) 4.38
Volatility 64.34 %
Risk-free interest rate 3.90 %
Dividend yield -
(q). Revenue recognition The Group’s revenues are mainly generated from providing auto
service, auto eInsurance service and technology service. The
Group recognizes revenue pursuant to ASC 606, Revenue from Contracts with Customers (“ASC 606”). In accordance with ASC 606,
revenues from contracts with customers are recognized when control of the promised goods or services is transferred to the Group’s
customers, in an amount that reflects the consideration the Group expects to be entitled to in exchange for those goods or services,
reduced by Value Added Tax (“VAT”). To achieve the core principle of this standard, we applied the following five steps:
1. Identification
of the contract, or contracts, with the customer;
2. Identification
of the performance obligations in the contract;
3. Determination
of the transaction price;
4. Allocation
of the transaction price to the performance obligations in the contract; and
5. Recognition
of the revenue when, or as, a performance obligation is satisfied. Auto service The Group defines enterprise clients as the Group’s customers
and the Group sells auto service coupons to enterprise clients, which each coupon represents one specific auto service. There are various
service types including vehicle washing, waxing, maintenance, driving service and road assistance, and the Group only provides one specific
service among various service types for each specific service coupon. The Group identifies each specific service coupon as a contract
that establishes enforceable rights and obligations for each party. The Group charges the service fee at a fixed price per service when
the service is performed. For service coupons with limited duration, the Group either charges the service fee at a fixed price per service
when the service is performed or when the coupon expires, whether or not the service has been performed. The Group considers each service
coupon is a distinct service that is capable of providing a benefit to the customer on its own according to ASC 606-10-25-14(a). Therefore,
the Group identifies only one performance obligation under a contract, which is to provide a specific service or to stand-ready to perform
a specific service within a limited duration. The Group acts as a principal as the Group controls the right to services before the services
are provided to customers and the Group has the ability to direct other parties to provide the services to customers on the Group’s
behalf. Specifically, the Group has the ability to choose service providers, is primarily responsible for the acceptability for the service
meeting customer specifications, bears inventory risk after transfer of control of services to customers, and has the discretion in establishing
the price with customers and with service providers and bears credit risk. The Group recognizes revenue in the gross amount of consideration
at a point of time when the service is provided, or when the service coupon expires. The Group does not provide refunds to customers when
a coupon is expired but not used. Auto eInsurance Service The Group provides auto eInsurance service
distributing primarily vehicle insurance on behalf of the insurance companies and charges insurance companies for intermediation
service commissions. Auto eInsurance services are considered to be rendered and completed, and revenue is recognized, at the time an
insurance policy becomes effective, that is, when the signed insurance policy is in place and the premium is collected from the
insured. The Group has satisfied the performance obligation to recognize revenue when the premiums are collected by the respective
insurance companies and not before, because collectability is not ensured until receipt of the premium. Accordingly, the Group does
not accrue any auto eInsurance service commission and fees prior to the receipt of the related premiums. No allowance for
cancellation has been provided for intermediation services as cancellation of policies rarely occurs. Technology
service The
Group provides technology service including technical software and consulting related to automobile services and insurance, such as customer
relationship management (CRM), order management, finance management and visual analysis systems. The Group charges service fee based
on fixed price per month for service provided, and recognizes revenue over time during the service period. The
Group’s revenues are disaggregated by timing of revenue recognition as follows:
For
the years ended December 31,
2021 2022 2023
Revenue recognized at a point in
time $ 244,646 $ 266,934 $ 333,088
Revenue recognized over
time 4,589 15,479 30,658
Total revenues $ 249,235 $ 282,413 $ 363,746 Contract
Balances Timing
of revenue recognition may differ from the timing of invoicing to customers. Accounts receivable represent revenue recognized for the
amounts invoiced and/or prior to invoicing when the Group has satisfied its performance obligation and has an unconditional right to
the payment. Contract assets represent the Group’s right to consideration in exchange for goods or services that the Group has
transferred to a customer. The Group has no contract assets as of December 31, 2022 and 2023. The
contract liabilities consist of deferred revenue, which represents the billings or cash received for services in advance of revenue recognition
and is recognized as revenue the performance obligation is satisfied. The Group’s deferred revenue amounted to $3,569 and $3,050
as of December 31, 2022 and 2023, respectively. During the years ended December 31, 2021, 2022 and 2023, the Group recognized $1,053,
$1,901 and $3,569 that was included in deferred revenue balance at January 1, 2021, 2022 and 2023, respectively.
(r). Integrated service cost Integrated
service cost primarily includes the service fee paid to suppliers undertaking and performing the automobile service to the users of customer,
and outsourcing service fee paid to the third party for technological development. The service fee is determined based on the actual
services rendered and recognized in the period incurred.
(s). Promotional service expenses Promotional service expenses represent (i)
promotional service fee to explore extensive networks of auto service and auto eInsurance service; and (ii) service fees to promotion
channels, including but not limited to offline after-sales networks, online platforms, and emerging new energy vehicle original
equipment manufacturers (“NEV OEMs”) and service providers. These channels have their own users, who are potential
business customers. Promotional service expenses are recognized in the period incurred.
(t). Research and development expense Research
and development expenses consist primarily of payroll and employee benefit for research and development employees, rental expense, utilities
and other related expenses related to design, develop and maintain technology service platform to support the Group’s internal
and external business. Research and development expenses are expensed as incurred. Software development costs are recorded in “Research
and development” as incurred as the costs qualifying for capitalization have been insignificant.
(u). Government grants Government
grant is recognized when there is reasonable assurance that the Group will comply with the conditions attach to it and the grant will
be received. Government grant for the purpose of giving immediate financial support to the Group with no future related costs or obligation
is recognized in “other income” in the Group’s consolidated statements of comprehensive loss when the grant is received. For
the years ended December 31, 2021, 2022 and 2023, the Group received government grants from the local PRC government authorities aggregately
of $1,897, $3,753, $4,959, respectively, among which the government grants related to achievement of annual income tax filling target
and value-added tax deduction were $1,729, $3,426, $4,733, respectively, and the awards to high-tech enterprises were $168, $327, $226,
respectively.
(v). Share-based compensation The
Group grants restricted share units (“RSUs”) of SunCar’s subsidiary, SunCar Online, to eligible employees and management.
The Group accounts for share-based awards issued to employees and non-employees in accordance with ASC Topic 718 Compensation –
Stock Compensation. The Group recognizes compensation cost for an equity classified award using the straight-line method over the applicable
vesting period based on the fair value of restricted shares granted on the date of the grant. Awards of subsidiary equity is recognized
in “non-controlling interest” in the consolidated entity. The
consideration for the business combination closed on May 17, 2023 included totally 4,800,000 earnout shares (“Earnout Shares”)
granted to the management upon the achievement of revenue targets in 2022, 2023 and 2024. Earnout Shares in 2022 was accounted for as
part of the consideration of the business combination. The Group recognizes Earnout Shares in 2023 and 2024 for an equity classified
award using the graded vesting method over the applicable vesting period based on the fair value of the Earnout Shares on the grant date.
(w). Employee benefits The
Group’s subsidiaries in PRC participate in a government mandated, multiemployer, defined contribution plan, pursuant to which certain
retirement, medical, housing and other welfare benefits are provided to employees. PRC labor laws require the entities incorporated in
the PRC to pay to the local labor bureau a monthly contribution calculated at a stated contribution rate on the monthly basic compensation
of qualified employees. The Group has no further commitments beyond its monthly contribution.
(x). Leases The
Group leases facilities in the PRC under non-cancellable operating leases expiring on different dates. On January 1, 2022, the Company
adopted ASU No. 2016-02 (Topic 842) “Leases” using the optional transition method. Results and disclosure requirements for
reporting periods beginning after January 1, 2022 are presented under Topic 842, while prior period amounts have not been adjusted and
continue to be reported in accordance with our historical accounting under Topic 840. Under Topic 842, lessees are required to recognize
assets and liabilities on the balance sheet for most leases. At inception of a contract, the Group assesses whether a contract is, or
contains, a lease. A contract is or contains a lease if it conveys the right to control the use of an identified asset for a period of
time in exchange of a consideration. To assess whether a contract is or contains a lease, the Group assesses whether the contract involves
the use of an identified asset, whether it has the right to obtain substantially all the economic benefits from the use of the asset
and whether it has the right to control the use of the asset. The
main impact of the adoption of the standard is that assets and liabilities amounting to $972 and $939, respectively, were recognized
beginning January 1, 2022 for leased office space with terms of more than 12 months. The Company accounts for short-term leases with
terms less than 12 months in accordance with ASC 842-20-25-2 to recognize the lease payments in profit or loss on a straight-line basis
over the lease term and variable lease payments in the period in which the obligation for those payments is incurred. The adoption of
the standard did not have a significant impact on the Group’s consolidated financial statements. Right-of-use
(“ROU”) assets represent the Group’s rights to use underlying assets for the lease term and lease liabilities represent
the Group’s obligation to make lease payments arising from the lease. Operating lease ROU assets and lease liabilities are recognized
at commencement date. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Operating
lease ROU assets The
right-of-use assets are initially measured at cost, which comprise the initial amounts of the lease liabilities adjusted for any lease
payments made at or before the commencement date, plus any initial direct costs incurred and less any lease incentive received. Operating
lease liabilities Lease
liabilities are initially measured at the present value of the outstanding lease payments at the commencement date, discounted using
the discount rate for the leases. As most of the Group’s leases do not provide an implicit rate, the Group uses its incremental
borrowing rate based on the information available at lease commencement date in determining the present value of lease payments. The
Group’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Group will exercise
that option. Lease
liabilities are measured at amortized cost using the effective interest rate method. They are re-measured when there is a change in future
lease payments, if there is a change in the estimate of the amount expected to be payable under a residual value guarantee, or if there
is any change in the Group assessment of option purchases, contract extensions or termination options.
(y). Income taxes The
Group accounts for income taxes under ASC 740. Deferred tax assets and liabilities are recognized for the future tax consequences attributable
to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective
tax bases. 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. Deferred
tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The Group considers positive and negative evidence when determining whether a portion
or all of its deferred tax assets will more likely than not be realized. This assessment considers, among other matters, the nature,
frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carry-forward periods,
its experience with tax attributes expiring unused, and its tax planning strategies. The ultimate realization of deferred tax assets
is dependent upon its ability to generate sufficient future taxable income within the carry-forward periods provided for in the tax law
and during the periods in which the temporary differences become deductible. When assessing the realization of deferred tax assets, the
Group has considered possible sources of taxable income including (i) future reversals of existing taxable temporary differences, (ii)
future taxable income exclusive of reversing temporary differences and carry-forwards, (iii) future taxable income arising from implementing
tax planning strategies, and (iv) specific known trend of profits expected to be reflected within the industry. The
provisions of ASC 740-10-25, “Accounting for Uncertaint |
