| 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”) for interim financial information, and with the rules and regulations of the United States
Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required
by U.S. GAAP for complete financial statements. Unaudited interim results are not necessarily indicative of the results for the full
fiscal year. The accompanying unaudited condensed financial statements should be read in conjunction with the audited consolidated financial
statements and accompanying notes for the years ended December 31, 2022 and 2023. The
unaudited condensed 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). Use of estimates The
preparation of the unaudited condensed 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 unaudited condensed 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 unaudited condensed consolidated financial statements.
(c). 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 adopted ASC Topic
326, Financial Instruments-Credit Losses (Topic 326) 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. The Group assesses collectability by reviewing
accounts receivable on a collective basis where similar characteristics exist, primarily based on similar business lines, and on an individual
basis when the Group identifies specific customers with known disputes or collectability issues. In determining the amount of the allowance
for credit losses, the Group considers historical collectability based on past due status, the age of the accounts receivable balances,
credit quality of the Group’s customers based on ongoing credit evaluations, current economic conditions, reasonable and supportable
forecasts of future economic conditions, and other factors that may affect the Group’s ability to collect from customers.
(d). 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.
(e). 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, 2023 and June 30, 2024, 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.
(f). 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
services The
Group provides technology services 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 six months ended June 30,
2023 2024
Revenue recognized at a point of time $ 146,523 $ 181,198
Revenue recognized over time 12,855 21,888
Revenues $ 159,378 $ 203,086 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, 2023 and June 30, 2024. 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 $3,050 and $1,959
as of December 31, 2023 and June 30, 2024, respectively. As of December 31, 2023 and June 30, 2024, the Group recognized $3,569 and $3,050
that was included in deferred revenue balance at January 1, 2023 and 2024, respectively.
(g). Share-based compensation The
Group grants restricted share units (“RSUs”) of the Company and its subsidiary, SunCar Online, to eligible employees and
management. The Group accounts for share-based awards issued to employees in accordance with ASC Topic 718 Compensation – Stock
Compensation. The Group recognizes compensation cost for an equity classified award using the straight-line method over the applicable
vesting period based on the fair value of restricted shares granted on the date of the grant. Awards of subsidiary equity is recognized
in “non-controlling interest” in the consolidated entity. The
consideration for the business combination closed on May 17, 2023 included totally 4,800,000 earnout shares (“Earnout Shares”)
granted to the management upon the achievement of revenue targets in 2022, 2023 and 2024. Earnout Shares in 2022 was accounted for as
part of the consideration of the business combination. The Group recognizes Earnout Shares in 2023 and 2024 for an equity classified
award using the graded vesting method over the applicable vesting period based on the fair value of the Earnout Shares on the grant date.
(h). Foreign currency transactions and translations The
Group’s principal country of operations is the PRC. The financial position and results of its operations are determined using RMB,
the local currency, as the functional currency. The Group’s financial statements are reported using U.S. Dollars (“$”).
The results of operations and the consolidated statements of cash flows denominated in foreign currency are translated at the average
rate of exchange during the reporting period. Assets and liabilities denominated in foreign currencies at the balance sheet date are
translated at the applicable rates of exchange in effect at that date. The equity denominated in the functional currency is translated
at the historical rate of exchange at the time of capital contribution. Because cash flows are translated based on the average translation
rate, amounts related to assets and liabilities reported on the consolidated statements of cash flows will not necessarily agree with
changes in the corresponding balances on the consolidated balance sheets. Translation adjustments arising from the use of different exchange
rates from period to period are included as a separate component of accumulated other comprehensive income (loss) included in consolidated
statements of changes in equity. Gains and losses from foreign currency transactions are included in the results of operations. The
value of RMB against $ and other currencies may fluctuate and Is affected by, among other things, changes in the PRC’s political
and economic conditions. Any significant revaluation of RMB may materially affect the Group’s financial condition in terms of $
reporting. The following table outlines the currency exchange rates that were used in creating the consolidated financial statements:
December 31, June 30,
2023 2024
Balance sheet items, except for equity accounts 7.0999 7.2672
For the six months ended June 30,
2023 2024
Items in the statements of operations and comprehensive loss, and statements of cash flows 6.9283 7.2150 No
representation is made that the RMB amounts could have been, or could be, converted into U.S. dollars at the rates used in translation.
(i). Recent accounting pronouncements The
Group is an “emerging growth company” (“EGC”) as defined in the Jumpstart Our Business Startups Act of 2012 (the
“JOBS Act”). Under the JOBS Act, EGC can delay adopting new or revised accounting standards issued subsequent to the enactment
of the JOBS Act until such time as those standards apply to private companies. In
August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts
in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.
ASU 2020-06 revised the guidance in Subtopic 815-40 to remove the conditions including: (i) settlement in unregistered shares; (ii) collateral;
and (iii) shareholder rights. In addition, regarding the condition about failure to timely file in the settlement guidance, ASU 2020-06
clarify that penalty payments do not preclude equity classification. For public companies not eligible to be a smaller reporting company,
the guidance is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. For all
other entities, the guidance is effective for fiscal years and interim periods beginning after December 15, 2023. Early adoption is permitted.
The Company elected to early adopted ASU 2020-06 from January 1, 2023. In
November 2023, the FASB issued ASU 2023-07, which modifies the disclosure and presentation requirements of reportable segments. The new
guidance requires the disclosure of significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”)
and included within each reported measure of segment profit and loss. In addition, the new guidance enhances interim disclosure requirements,
clarifies circumstances in which an entity can disclose multiple segment measures of profit or loss, provides new segment disclosure
requirements for entities with a single reportable segment, and contains other disclosure requirements. The update is effective for annual
periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption
permitted. The Group does not expect that the adoption of ASU 2023-07 will have a material impact on its consolidated financial statements
disclosures. In
December 2023, the FASB issued ASU 2023-09, Improvement to Income Tax Disclosure. This standard requires more transparency about income
tax information through improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid information.
This standard also includes certain other amendments to improve the effectiveness of income tax disclosures. ASU 2023-09 is effective
for public business entities, for annual periods beginning after December 15, 2024. For entities other than public business entities,
the amendments are effective for annual periods beginning after December 15, 2025. The Group is in the process of evaluation the impact
of adopting this new guidance on its consolidated financial statement. Other
accounting standards that have been issued by FASB that do not require adoption until a future date are not expected to have a material
impact on the consolidated financial statements upon adoption. The Group does not discuss recent standards that are not anticipated to
have an impact on or are unrelated to its consolidated financial condition, results of operations, cash flows or disclosures. |
