| 2. | Summary of Significant Accounting Policies |
Basis of preparation
The unaudited consolidated financial statements of the Company have
been prepared in accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”)
for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for the
complete consolidated financial statements. The unaudited consolidated financial statements have been prepared on the same basis as the
audited consolidated financial statements and include all adjustments as necessary for the fair statement of the Company’s financial
position as of June 30, 2023, results of operations and cash flows for the six months ended June 30, 2022 and 2023. These unaudited consolidated
financial statements should be read in conjunction with the audited consolidated financial statements and related footnotes thereto contained
in the Company’s most recent consolidated annual financial statements filed with the SEC on Form 20-F. Results for the six months
ended June 30, 2023 are not necessarily indicative of the results expected for the full fiscal year or for any future period.
Use of estimates
The preparation of the Company’s unaudited consolidated financial
statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant accounting estimates reflected in the Company’s unaudited
consolidated financial statements include, but not limited to, inventory write-down, valuation allowance for deferred tax assets and share-based
compensation. Principles of consolidation
The Company’s unaudited consolidated financial statements include
the financial statements of the Company and its subsidiaries. All transactions and balances among the Company and its subsidiaries have
been eliminated upon consolidation.
Functional currency and foreign currency translation
The Company uses Renminbi (“RMB”) as its reporting currency.
The functional currency of the Company and its subsidiaries incorporated outside of PRC is the United States dollar (“US$”),
while the functional currency of the PRC entities in the Company is RMB as determined based on the criteria of ASC 830, “Foreign
Currency Matters”.
Transactions denominated in other than the functional currencies are
re-measured into the functional currency of the entity at the exchange rates prevailing on the transaction dates. Financial assets and
liabilities denominated in other than the functional currency are re-measured at the balance sheet date exchange rate. The resulting exchange
differences are included in the unaudited consolidated statements of operations and comprehensive income (loss).
The financial statements of the Company are translated from the functional
currency to the reporting currency, RMB. Assets and liabilities of the Company and its subsidiaries incorporated outside of PRC are translated
into RMB at fiscal year-end exchange rates. Income and expense items are translated at average exchange rates prevailing during the fiscal
year, representing the index rates stipulated by the People’s Bank of China. Translation adjustments arising from these are reported
as foreign currency translation adjustments and are shown as a separate component of shareholders’ equity (deficit) on the unaudited
consolidated financial statement.
Convenience translation
The United States dollar (“US$”) amounts disclosed in the
accompanying financial statements are presented solely for the convenience of the readers. Translations of amounts from RMB into US$ were
calculated at the rate of US$1.00=RMB7.2258 on June 30, 2023, representing the central parity rate on June 30, 2023 published by the People’s
Bank of China. No representation is made that the RMB amounts could have been, or could be, converted into US$ at that rate on June 30,
2023, or at any other rate.
Concentration of credit risk
Financial instruments that potentially expose the Company to concentrations
of credit risk consist primarily of cash and cash equivalents. The Company places its cash and cash equivalents with financial institutions
with high credit ratings and quality.
Fair value measurement
The Company adopted the guidance of Accounting Standards Codification
(“ASC”) 820 for fair value measurements which clarifies the definition of fair value, prescribes methods for measuring fair
value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:
Level 1: Quoted prices (unadjusted) in active markets for identical
assets or liabilities.
Level 2: Observable, market-based inputs, other than quoted prices,
in active markets for similar assets or liabilities.
Level 3: Unobservable inputs to the valuation methodology that are
significant to the measurement of the fair value of the assets or liabilities. ASC 820 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 instruments included in current assets and current liabilities
are reported in the unaudited consolidated balance sheets at face value or cost, which approximate to fair value because of their short-term
maturities.
Related party transactions
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 operational
decisions. Parties are also considered to be related if they are subject to common control or common significant influence. A transaction
is considered to be a related party transaction when there is a transfer of resources or obligations between related parties. Related
parties may be individuals or corporate entities.
Transactions involving related parties cannot be presumed to be carried
out on an arm’s-length basis, as the requisite conditions of competitive, free market dealings may not exist. Representations about
transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to
those that prevail in arm’s-length transactions unless such representations can be substantiated. It is not, however, practical
to determine the fair value of amounts due from/to related parties due to their related party nature. There was no related party transaction
incurred during the six months ended June 30, 2022 and 2023.
Cash and cash equivalents
Cash and cash equivalents include cash in bank and time deposits placed
with banks or other financial institutions, which have original maturities of three months or less and are readily convertible to known
amounts of cash. As of December 31, 2022 and June 30, 2023, cash and cash equivalents in banks was RMB87,811,272 and RMB16,839,750, respectively.
Restricted cash
Restricted cash mainly represents the bank deposit frozen by the court
as a result of legal proceedings. As of December 31, 2022 and June 30, 2023, the Company had restricted cash balance of RMB48,112 and
RMB417,565, respectively. Inventories, net
Inventories, consist of raw materials, work in process and finished
goods. Inventories are stated at the lower of cost and net realizable value. Cost of inventory is determined using the weighted average
cost method. Adjustments are recorded to write down the cost of inventory to the estimated net realizable value due to slow-moving and
obsolete inventory, which is dependent upon factors such as historical and forecasted consumer demand, and promotional environment.
Prepayments
Prepayments primarily consist of advances to suppliers for future inventory
purchases and prepaid processing fees.
Property, plant and equipment, net
Property, plant and equipment are stated at historical cost less accumulated
depreciation and impairment loss, if any. Depreciation is calculated using the straight-line method over their estimated useful lives.
The estimated useful lives are as follows:
| Computers and electronic equipment |
|
2 to 3 years |
| Office furniture |
|
5 years |
| Transportation equipment |
|
4 years |
Leasehold improvements are depreciated using the straight-line method
over the shorter of the estimated useful life of the asset or the remaining lease term.
Construction in progress represents assets under construction. All
direct costs relating to the construction are capitalized as construction in progress. Construction in progress is not depreciated until
the asset is placed in service.
Intangible asset, net
The Company’s intangible asset with definite useful lives primarily
consists of a franchise right and land use right. According to the law of PRC, the government owns all the land in the PRC. Companies
or individuals are authorized to possess and use the land only through land use rights granted by the Chinese government for a specified
period of time. The Company amortizes its franchise right and land use right on a straight-line basis over the contractual term. The estimated
useful lives are as follows:
| Franchise right |
|
2 years |
| Land use right |
|
50 years |
Impairment of long-lived assets
For long-lived assets including property and equipment, right-of-use
assets, and intangible assets with finite lives, the Company evaluates for impairment whenever events or changes (triggering events) indicate
that the carrying amount of an asset may no longer be recoverable. The Company recognizes an impairment loss when the sum of expected
undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between
the asset’s estimated fair value and its book value. For the six months ended June 30, 2022 and 2023, no impairment of long-lived
assets was recognized.
Revenue from contracts with customers
Consistent with the criteria of ASC 606 “Revenue from Contracts
with Customers”, the Company recognizes revenue to depict the transfer of promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to receive in exchange for those goods or services. Revenue consists of the invoiced
value for the sales net of value-added tax (“VAT”), business tax and applicable local government levies. Product sales revenue
The Company generates revenue primarily from the sale of product solutions
by integrating its self-designed IC products (e.g., high throughput computing, or HTC, solutions) directly to a customer, such as a business
or individual engaged in mining activities.
The Company recognizes revenue at a point in time when the control
of the products has been transferred to customers. The transfer of control is considered complete when products have been picked up by
or shipped to customers. The Company’s sales arrangements usually require prepayment before the delivery of products. The advance
payment is not considered a significant financing component. The Company elected to account for shipping and handling fees as a fulfillment
cost. The product sales contracts generally include product warranty provisions. The Company did not accrue warranty liabilities for the
product sales as the financial impacts of the warranty have historically been and are expected to continue to be immaterial.
Service revenue
The Company also generates revenue from its design and technical services
under separate contracts. Revenues from the design and technical service to the customers are recognized at a point in time when services
are provided.
Revenue disaggregation
In accordance with ASC 606, the Company disaggregates revenue from
contracts with customers by revenue stream. The Company determined that disaggregating revenue into these categories meets the disclosure
objective in ASC 606 which is to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by regional
economic factors. The following table summarizes the net revenues generated from different revenue streams:
| | |
For the six months ended June 30, | |
| | |
2022 (Unaudited) | | |
2023 (Unaudited) | |
| | |
RMB | | |
RMB | |
| Product sales revenue | |
| 319,193,707 | | |
| 46,868,172 | |
| Service revenue | |
| 60,945,060 | | |
| 5,400,544 | |
| Net revenues | |
| 380,138,767 | | |
| 52,268,716 | |
Contract liabilities
Contract liabilities are recorded when consideration is received from
a customer prior to transferring the control of goods or services to the customer. As of December 31, 2022 and June 30, 2023, the Company
recorded contract liabilities of RMB124,469,097 and RMB106,012,404, respectively, which were presented as advance from customers on the
accompanying unaudited consolidated balance sheets. During the six months ended June 30, 2022 and 2023, the Company recognized RMB361,192,225
and RMB20,684,360 of contract liabilities as revenue, respectively.
Cost of revenues
Amounts recorded as cost of revenue relate to direct expenses incurred
in order to generate revenue. Such costs are recorded as incurred. Cost of revenues consists of product costs and service costs. Product
costs include costs of raw material, contract manufacturers for production, shipping and handling costs, and warehousing costs. Service
costs include labor costs. During the six months ended June 30, 2022 and 2023, the Company recorded inventory write-down of nil and RMB73,273,361
as cost of revenues, respectively.
Selling and marketing expenses
Selling and marketing expenses consist primarily of advertising and
promotion, salaries, and shipping and handling costs incurred during the selling activities. Advertising and transportation expenses are
charged to expense as incurred.
Advertising and promotion costs in the amounts of RMB3,212,940 and
RMB1,051,572 for the six months ended June 30, 2022 and 2023, respectively, are included in selling and marketing expenses.
Shipping and handling costs amounting to RMB2,891,328 and RMB1,795,735
and for the six months ended June 30, 2022 and 2023, respectively, are included in selling and marketing expenses. Research and development expenses
Research and development expenses consist primarily of salary and welfare
for research and development personnel, raw materials used, consulting and contractor expenses, testing and processing expenses and other
expenses in associated with research and development activities. The Company recognizes research and development expenses as expense when
incurred.
Leases
Right-of-use assets represent the Company’s right to use an underlying
asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease.
Right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.
When determining the lease term, the Company includes options to extend or terminate the lease when it is reasonably certain that it will
exercise that option, if any. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing
rate, which it calculates based on the credit quality of the Company and by comparing interest rates available in the market for similar
borrowings, and adjusting this amount based on the impact of collateral over the term of each lease.
The Company elected not to record assets and liabilities on its unaudited
consolidated balance sheet for lease arrangements with terms of 12 months or less. The Company recognizes lease expenses for such leases
on a straight-line basis over the lease term.
Employee social security and welfare benefits
Employees of the Company in the PRC are entitled to staff welfare benefits
including pension, work-related injury benefits, maternity insurance, medical insurance, unemployment benefit and housing fund plans through
a PRC government-mandated multi-employer defined contribution plan. The Company is required to contribute to the plan based on certain
percentages of the employees’ salaries, up to a maximum amount specified by the local government.
The PRC government is responsible for the medical benefits and the
pension liability to be paid to these employees and the Company’s obligations are limited to the amounts contributed and no legal
obligation beyond the contributions made.
Share-based compensation
Restricted shares and options granted to employees and directors are
accounted for under ASC Topic 718, “Compensation - Stock compensation” (“ASC 718”). In accordance with ASC 718,
the Company determines whether restricted shares or options should be classified and accounted for as an equity award. All grants of restricted
shares and options to employees and directors classified as equity awards are recognized in the financial statements based on their grant
date fair values. The value of the portion of the award that is ultimately expected to vest is recognized as compensation expense over
the requisite service periods in the statements of operations. In addition, compensation expense must be recognized for the change in
fair value of any awards modified, repurchased or cancelled after the grant date.
The fair value of stock options granted is estimated on the grant date
using the Binomial or Black-Scholes model.
Income taxes
The Company accounts for income taxes under the asset and liability
method. Under this method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting
and income tax bases of assets and liabilities and are measured using the tax income rates that will be in effect when the differences
are expected to reverse. A valuation allowance is recorded if it is more likely than not that some portion or all of the deferred income
tax assets will not be realized in the foreseeable future. In accordance with the provisions of ASC 740, “Income taxes”,
the Company recognizes in its financial statements the impact of a tax position if a tax return position or future tax position is “more
likely than not” to be sustained upon examination based solely on the technical merits of the position. Tax positions that meet
the recognition threshold are measured using a cumulative probability approach, at the largest amount of tax benefit that has a greater
than fifty percent likelihood of being realized upon settlement. Interest and penalties arising from underpayment of income taxes are
computed in accordance with the applicable tax law and is classified in the unaudited consolidated statements of operations as income
tax expense.
Comprehensive income (loss)
Comprehensive income (loss) is defined as the changes in equity of
the Company during a period from transactions and other events and circumstances excluding transactions resulting from investments from
shareholders and distributions to shareholders. Comprehensive income (loss) for the periods presented includes net income (loss) and foreign
currency translation adjustments.
Earnings (loss) per share
The Company computes earnings (loss) per share in accordance with ASC
260, “Earnings per Share”. ASC 260 requires companies to present basic and diluted earnings (loss) per share. Basic earnings
(loss) per share is computed by dividing net income (loss) attributable to holders of ordinary shares by the weighted average number of
ordinary shares outstanding during the period.
Diluted earnings (loss) per share is calculated by dividing net income
(loss) attributable to ordinary shareholders as adjusted for the effect of dilutive ordinary equivalent shares, if any, by the weighted
average number of ordinary and dilutive ordinary equivalents shares outstanding during the period. Dilutive equivalent shares are excluded
from the computation of diluted earnings (loss) per share if their effects would be anti-dilutive. Ordinary share equivalents consist
of the ordinary shares issuable in connection with the Company’s ordinary shares issuable upon the conversion of the share-based
awards, using the treasury stock method.
Segment Reporting
The Company uses the “management approach” in determining
reportable segments. The management approach considers the internal organization and reporting used by the Company’s chief operating
decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments.
The Company’s chief operating decision maker has been identified as the chief executive officer of the Company who reviews financial
information of operating segments based on U.S. GAAP. The chief operating decision maker now reviews results analyzed by marketing channel.
This analysis is only presented at the revenue level with no allocation of direct or indirect costs. Consequently, the Company has determined
that it has only one operating segment.
Recently adopted or issued accounting pronouncements
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit
Losses on Financial Instruments (Topic 326)”, and issued subsequent amendments to the initial guidance, transitional guidance and
other interpretive guidance between November 2018 and March 2020 within ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-11, ASU 2020-02
and ASU 2020-03. ASU 2016-13 introduces new guidance for credit losses on instruments within its scope, which significantly changes the
way entities recognize impairment of many financial assets by requiring immediate recognition of estimated credit losses expected to occur
over their remaining life, instead of when incurred. For the Company, the guidance is effective for fiscal years beginning after December
15, 2022, including interim periods within those fiscal years. All entities may adopt this ASU through a cumulative effect adjustment
to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective
approach). The Company adopted ASU 2016-13 on January 1, 2023 and the adoption did not have a material impact on its unaudited consolidated
financial statements.
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