Quarterly Report (10-q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2023.

 

or

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

Commission File Number: 001-40024

 

MicroAlgo Inc.

 

(Exact name of registrant as specified in its charter)

 

Cayman Islands		Not Applicable
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

Unit 507, Building C, Taoyuan Street, Long Jing High and New Technology Jingu Pioneer Park, Nanshan District, Shenzhen, People’s Republic of China		518052
(Address of principal executive offices)		(Zip Code)

 

+(86)0755-88600589

(Registrant’s telephone number, including area code)

 

N/A

 

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Ordinary share, $0.001 par value		MLGO		The Nasdaq Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes   ☐ No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes   ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
Emerging growth company	☒

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes   ☒ No

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

As of March 31, 2023 there were 43,856,706 shares of ordinary share issued and outstanding.

 

 

 

 

 

 

MicroAlgo Inc.

QUARTERLY REPORT ON FORM 10-Q

 

TABLE OF CONTENTS

 

				Page
Part I.		Financial Information		1
Item 1.		Financial Statements (Unaudited)		1
		Unaudited Condensed Consolidated Balance Sheets		1
		Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)		2
		Unaudited Condensed Consolidated Statements of Stockholders’ Equity		3
		Unaudited Condensed Consolidated Statements of Cash Flows		4
		Notes to Unaudited Condensed Consolidated Financial Statements		5
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		30
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		41
Item 4.		Controls and Procedures		42
Part II.		Other Information		43
Item 1.		Legal Proceedings		43
Item 1A.		Risk Factors		43
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		43
Item 3.		Defaults Upon Senior Securities		43
Item 4.		Mine Safety Disclosures		43
Item 5.		Other Information		43
Item 6.		Exhibits		44
Signatures				45

 

 

 

Unless the context suggests otherwise, references in this Quarterly Report on Form 10-Q (the “Quarterly Report”) to “MicroAlgo,” the “Company,” “we,” “us” and “our” refer to MicroAlgo Inc. and, where appropriate, its subsidiaries.

 

i

 

 

FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Such forward-looking statements reflect, among other things, our business plans and strategy, market trends, beliefs regarding our competitive strengths, current expectations, future capital expenditures, and anticipated results of operations, all of which are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements, market trends, or industry results to differ materially from those expressed or implied by such forward-looking statements. Therefore, any statements contained herein that are not statements of historical fact may be forward-looking statements and should be evaluated as such, including statements regarding future financial and operational results, our business strategy, the future impact of macroeconomic trends, such as inflation and increased interest rates, and the ongoing COVID-19 pandemic on our business, financial results, and financial condition, benefits of acquisitions, and planned capital expenditures. Without limiting the foregoing, the words “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “might,” “plans,” “projects,” “should,” “would,” “targets,” “will” and the negative thereof and similar words and expressions are intended to identify forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or our present expectations. Known material risk factors applicable to us are described in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (“Form 10-K”), other than risks that could apply to any issuer or offering. All forward-looking statements speak only as of the date made, and we undertake no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this report except as required by law.

 

As used in this report, the terms “MicroAlgo Inc.,” “Company,” “we,” “us,” and “our” mean MicroAlgo Inc. and its subsidiaries unless the context indicates otherwise.

 

ii

 

 

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)

 

MICROALGO INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts expressed in US dollars (“$”) except for numbers of shares and par value)

 

		December 31,				March 31,
		2022				2023
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	42,746,270			$	21,008,606
Accounts receivable, net			2,602,448				1,649,463
Inventories			130,524				-
Prepaid services fees			3,722,985				10,181,004
Other receivables and prepaid expenses			266,855				57,459
Amount due from Parent			5,741,573				25,822,519
Total current assets			55,210,655				58,719,051
PROPERTY AND EQUIPMENT, NET			145,320				133,854
OTHER ASSETS
Prepaid expenses and deposits			184,054				12,166
Cost method investment			172,300				174,629
Intangible assets, net			964,341				923,079
Operating lease right-of-use assets			150,895				207,767
Goodwill			15,259,169				15,465,461
Total non-current assets			16,730,759				16,783,102
Total assets		$	72,086,734			$	75,636,007
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable		$	2,041,951			$	2,393,486
Deferred revenues			1,608,977				4,563,799
Other payables and accrued liabilities			793,143				1,117,856
Amount due to a related party			153,333				153,333
Operating lease liabilities-current			150,666				164,863
Taxes payable			55,365				21,062
Total current liabilities			4,803,435				8,414,399
OTHER LIABILITIES
Operating lease liabilities - noncurrent			30,754				54,769
Deferred tax liabilities, net			241,085				251,666
Total other liabilities			271,839				306,435
Total liabilities			5,075,274				8,720,834
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY
Preferred shares, $0.001 par value; 1,000,000 shares authorized; no share issued
Ordinary shares, $0.001 par value, 50,000,000 shares authorized, 43,856,706 issued and outstanding as of December 31, 2022 and March 31, 2023			43,857				43,857
Additional paid-in capital			47,394,442				47,394,442
Retained earnings			19,141,699				17,882,858
Statutory reserves			1,798,310				1,798,310
Accumulated other comprehensive loss			(1,622,503	)			(453,807	)
Total MicroAlgo Inc. shareholders’ equity			66,755,805				66,665,660
NONCONTROLLING INTERESTS			255,655				249,513
Total equity			67,011,460				66,915,173
Total liabilities and shareholders’ equity		$	72,086,734			$	75,636,007

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

1

 

 

MICROALGO INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)
(Amounts expressed in US dollars (“$”) except for numbers of shares and par value)

 

		For the Three Months Ended March 31,
		2022				2023
OPERATING REVENUES
Products		$	8,680,504			$	1,434,690
Services			14,675,711				16,397,686
Total operating revenues			23,356,215				17,832,376
COST OF REVENUES			(17,959,832	)			(12,876,344	)
GROSS PROFIT			5,396,383				4,956,032
OPERATING EXPENSES
Selling expenses			(207,223	)			(95,631	)
General and administrative expenses			(809,248	)			(1,017,386	)
Research and development expenses			(3,203,060	)			(5,227,067	)
Impairment loss for long lived assets			-				(29,232	)
Total operating expenses			(4,219,531	)			(6,369,316	)
INCOME (LOSS) FROM OPERATIONS			1,176,852				(1,413,284	)
OTHER INCOME (EXPENSES)
Interest income			27,646				3,806
(Loss)/Gain from short term investment			(357,795	)			124,104
Finance expenses			(16,370	)			(14,707	)
Other income			69,500				40,337
Total other (expense)/income			(277,019	)			153,540
INCOME (LOSS) BEFORE INCOME TAXES			899,833				(1,259,744	)
PROVISION FOR INCOME TAX
Current			(72,488	)			(5,239	)
Deferred			61,012				-
Total provision for income tax			(11,476	)			(5,239	)
NET INCOME / (LOSS)			888,357				(1,264,983	)
Less: Net income (loss) attributable to non-controlling interests			14,889				(6,142	)
NET INCOME (LOSS) ATTRIBUTABLE TO MICRO ALGO INC.		$	873,468			$	(1,258,841	)
NET INCOME / (LOSS)			888,357				(1,264,983	)
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustment			(13,469	)			1,168,696
COMPREHENSIVE INCOME (LOSS)			874,888				(96,287	)
Less: Comprehensive income (loss) attributable to noncontrolling interests			14,889				(6,142	)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO MICRO ALGO INC.		$	859,999			$	(90,145	)
WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES
Basic and diluted			300,000,000				43,856,706
EARNINGS PER SHARE
Basic and diluted		$	0			$	(0.03	)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

2

 

 

MICROALGO INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Amounts expressed in US dollars (“$”) except for numbers of shares and par value)

 

																						Accumulated
		Ordinary shares								Additional				Retained earnings								other
		Shares				Amount				paid-in capital				Statutory reserves				Unrestricted				comprehensive loss				Noncontrolling interests				Total
BALANCE, December 31, 2021			300,000,000			$	32,148			$	29,360,172			$	1,483,996			$	28,184,167			$	(407,310	)		$	244,219			$	58,897,392
Net income			-				-				-				-				873,468				-				14,889				888,357
Statutory reserves			-				-				-				149,217				(149,217	)			-				-				-
Foreign currency translation			-				-				-				-				-				(13,469	)			-				(13,469	)
BALANCE, March 31, 2022			300,000,000			$	32,148			$	29,360,172			$	1,633,213			$	28,908,418			$	(420,779	)		$	259,108			$	59,772,280

 

 

																						Accumulated
		Ordinary shares								Additional				Retained earnings								other
		Shares				Amount				paid-in capital				Statutory reserves				Unrestricted				comprehensive loss				Noncontrolling interests				Total
BALANCE, December 31, 2022			43,856,706			$	43,857			$	47,394,442			$	1,798,310			$	19,141,699			$	(1,622,503	)		$	255,655			$	67,011,460
Net loss			-				-				-				-				(1,258,841	)			-				(6,142	)			(1,264,983	)
Foreign currency translation			-				-				-				-				-				1,168,696				-				1,168,696
BALANCE, March 31, 2023			43,856,706			$	43,857			$	47,394,442			$	1,798,310			$	17,882,858			$	(453,807	)		$	249,513			$	66,915,173

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3

 

 

MICROALGO INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts expressed in US dollars (“$”) except for numbers of shares and par value)

 

		For the Three Months Ended March 31,
		2022				2023
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income / (loss)		$	888,357			$	(1,264,983	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			343,364				107,192
(Reversal) / Provision for doubtful accounts, net			(312,713	)			641,685
Deferred tax (liability) / benefit			(61,012	)			10,581
Loss / (Income) from short term investment			357,795				(124,104	)
Amortization of Deferred merger costs			(20,248	)			-
Change in operating assets and liabilities:
Accounts receivables			(1,075,167	)			952,985
Prepaid services fees			(78,152	)			(6,458,019	)
Other receivables and prepaid expenses			(38,414	)			(1,626	)
Inventories			367,361				130,524
Prepaid expenses and deposits			6,696				-
Operating lease right-of-use assets			58,084				67,232
Accounts payable			(555,007	)			351,535
Deferred revenues			407,777				2,954,822
Other payables and accrued liabilities			73,064				(133,370	)
Operating lease liabilities			(50,792	)			38,212
Taxes payable			145,603				(34,303	)
Net cash provided by (used in) operating activities			456,596				(2,761,637	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short term investments			(24,609,538	)			(12,693,858	)
Sale of short term investments			8,893,860				12,700,000
Purchases of cost method investment			(94,515	)			(208,621	)
Purchases of property and equipment			(185,733	)			(54,464	)
Net cash used in investing activities			(15,995,926	)			(256,943	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advance to Parent			-				(20,339,722	)
Repayment to Parent			(5,513,374	)			-
Proceeds from banking facility			-				727,622
Net cash used in financing activities			(5,513,374	)			(19,612,100	)
EFFECT OF EXCHANGE RATE ON CASH AND CASH EQUIVALENTS			(42,226	)			1,162,555
CHANGE IN CASH AND CASH EQUIVALENTS			(21,094,930	)			(21,737,664	)
CASH AND CASH EQUIVALENTS, beginning of period			42,904,855				42,746,270
CASH AND CASH EQUIVALENTS, end of period		$	21,809,925			$	21,008,606
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income tax		$	47,733			$	41
Cash paid for interest		$	864			$	5,997
NON-CASH INVESTING AND FINANCING ACTIVITIES:

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4

 

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in US dollars (“$”) except for numbers of shares and par value)

 

Note 1 — Nature of business and organization

 

MicroAlgo Inc. (“MicroAlgo” or the “Company”) (f/k/a Venus Acquisition Corporation (“Venus”)), a Cayman Islands exempted company, entered into the Business Combination and Merger Agreement dated June 10, 2021 (as amended on January 24, 2022, August 2, 2022, August 3, 2022 and August 10, 2022, the “Merger Agreement”), by and among WiMi Hologram Cloud Inc. (“WiMi” or the “Majority Shareholder”), Venus, Venus Merger Sub Corporation (“Venus Merger Sub”), a Cayman Islands exempted company incorporated for the purpose of effectuating the Business Combination, and VIYI Algorithm Inc. (“VIYI”), a Cayman Islands exempted company.

 

On December 9, 2022, the parties consummated the Business Combination. As a result, VIYI is now a wholly owned subsidiary of MicroAlgo Inc.

 

On December 23, 2022, Zheyi Hu and Xiaofei Han transferred 100% equity interest of Younike and subsidiaries to SZ VIWOTONG. The aggregate purchase price was 0. As a result, Younike became wholly owned subsidiaries of SZ VIWOTONG.

 

On March 27, 2023, Weidong established a fully owned subsidiary Shenzhen Weidong Technology Co., Ltd. (“SZ Weidong”) in Shenzhen. SZ Weidong had no material operation as of March 31, 2023.

 

The accompanying condensed consolidated financial statements reflect the activities of MicroAlgo and each of the following entities as of March 31, 2023:

 

Name		Background			Ownership
VIYI Algorithm Inc. (f/k/a VIYI Technology Inc.) (“VIYI”)		●	A Cayman Islands company Incorporated on September 24, 2020		100% owned by MicroAlgo
VIYI Technology Ltd. (“VIYI Ltd”)		●	A Hong Kong company		100% owned by VIYI
		●	Incorporated on October 9, 2020
		●	A holding company
Shenzhen Weiyixin Technology Co., Ltd. (“Shenzhen Weiyixin”or “VIYI WFOE”)		●	A PRC limited liability company and deemed a wholly foreign owned enterprise (“WFOE”)		100% owned by VIYI Ltd
		●	Incorporated on November 18, 2020
		●	A holding company
Shenzhen Yitian Internet Technology Co., Ltd. (“Shenzhen Yitian”)		●	A PRC limited liability company		100% owned by Beijing WiMi before December 24, 2020 VIE of Shenzhen Weiyixin starting on December 24, 2020. 100% owned by Shenzhen Weiyixin starting April 1, 2022
		●	Incorporated on March 08, 2011
		●	Primarily engages central processing algorithm in mobile games industry
Korgas 233 Technology Co., Ltd. (“Korgas 233”)		●	A PRC limited liability company		100% owned by Shanghai Guoyu
		●	Incorporated on September 15, 2017
		●	Primarily engages in central processing algorithm in mobile games industry

 

5

 

 

Shenzhen Qianhai Wangxin Technology Co., Ltd. (“Shenzhen Qianhai”)		●	A PRC limited liability company		100% owned by Shenzhen Yitian
		●	Incorporated on October 16, 2015
		●	Primarily engages in central processing algorithm in advertising industry
Shenzhen Yiyou Online Technology Co., Ltd. (“YY Online”)		●	A PRC limited liability company		100% owned by Weidong
		●	Incorporated on January 14, 2019
		●	Primarily engages in central processing algorithm in advertising industry
Weidong Technology Co., Ltd. (“Weidong”)		●	A PRC limited liability company		100% owned by Shenzhen Weiyixin
		●	Incorporated on October 28, 2020
		●	Primarily engages in central processing algorithm in advertising industry
Korgas Weidong Technology Co., Ltd. (“Korgas Weidong”)		●	A PRC limited liability company		100% owned by Shanghai Guoyu
		●	Incorporated on October 30, 2020
		●	Primarily engages in central processing algorithm in advertising industry
Fe-da Electronics Company Private Limited (“Fe-da Electronics”)		●	A Singapore company		100% owned by VIYI Acquired in September 2020
		●	Incorporated on January 21, 2009
		●	Primarily engages in resale of intelligent chips and customization of central processing units
Excel Crest Limited (“Excel Crest”)		●	A Hong Kong company		100% owned by Fe-da Electronics
		●	Incorporated on September 11, 2020
		●	Support the daily operations of Fe-da Electronics in Hong Kong
Shanghai Weimu Technology Co., Ltd. (“Shanghai Weimu”)		●	A PRC limited liability company		58% owned by Shenzhen Weiyixin
		●	Incorporated on November 30, 2020
		●	Engages in providing software support services
Wisdom Lab Inc. (“Wisdom Lab”)		●	A Cayman Islands company		100% owned by Fe-Da Electronics
		●	Incorporated on May 12, 2021
		●	Engages in software solution for intelligent chips
Viwo Technology Limited. (“Viwo Tech”)		●	A Hong Kong company		55% owned by VIYI Ltd
		●	Incorporated on April 15, 2021
		●	Engages in intelligent chips design
		●	No activities as of March 31, 2023
Shenzhen Viwotong Technology Co., Ltd. (“Viwotong Tech”)		●	A PRC limited liability company		100% owned by Viwo Tech
		●	Incorporated on July 19, 2021

 

6

 

 

Shanghai Guoyu Information Technology Co., Ltd. (“Shanghai Guoyu”)		●	A PRC limited liability company		99% owned by Weidong, 1% owned by YY Online
		●	Incorporated on March 18, 2019
		●	Engages in R&D and application of intelligent visual algorithm technology
Kashi Guoyu Information Technology Co., Ltd. (“Kashi Guoyu”)		●	A PRC limited liability company		100% owned by Shanghai Guoyu
		●	Incorporated on July 23, 2021
		●	Engages in R&D and application of intelligent visual algorithm technology
Guangzhou Tapuyu Internet Technology Co., Ltd. (“Tapuyu”)		●	A PRC limited liability company		100% owned by Viwotong Tech
		●	Incorporated on June 22, 2021
		●	Engages in central processing algorithm in advertising industry
ViZe Technology Limited (“ViZe”)		●	A Hong Kong company		55% owned by VIYI Ltd.
		●	Incorporated on April 12, 2022
		●	No activities as of March 31, 2023
Shenzhen ViZeTong Technology Co., Ltd. (“ViZeTong”)		●	A PRC limited liability company		100% owned by ViZe
		●	Incorporated on August 15, 2022
		●	No activities as of March 31, 2023
Beijing Younike Information Technology Co., Ltd. (“Younike”)		●	A PRC limited liability company		100% owned by Viwotong Tech
		●	Incorporated on July 22, 2022
		●	Engages in central processing algorithm in advertising industry
Shenzhen Weidong Technology Co., Ltd. (“SZ Weidong”)		●	A PRC limited liability company		100% owned by Weidong
		●	Incorporated on March 27, 2023
		●	No activities as of March 31, 2023

 

Note 2 — Summary of significant accounting policies

 

Basis of presentation

 

The accompanying condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”), regarding financial reporting, and include all normal and recurring adjustments that management of the Company considers necessary for a fair presentation of its financial position and operation results.

 

Principles of consolidation

 

The condensed consolidated financial statements include the financial statements of the Company and its subsidiaries, which include the wholly-foreign owned enterprise (“WFOE”) and variable interest entity (“VIE”) and VIE’s subsidiaries over which the Company exercises control and, when applicable, entities for which the Company has a controlling financial interest or is the primary beneficiary. All transactions and balances among the Company and its subsidiaries have been eliminated upon consolidation.

 

7

 

 

Use of estimates and assumptions

 

The preparation of 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Significant accounting estimates reflected in the Company’s condensed consolidated financial statements include the useful lives of property and equipment and intangible assets, impairment of long-lived assets and goodwill, allowance for doubtful accounts, provision for contingent liabilities, revenue recognition, right-of-use assets and lease liabilities, deferred taxes and uncertain tax position, the fair value of contingent consideration related to business acquisitions and allocation of expenses from the Parent and Beijing WiMi. Actual results could differ from these estimates.

 

Foreign currency translation and other comprehensive income (loss)

 

The Company uses U.S. dollar (“USD”) as its reporting currency. The functional currency of VIYI Ltd. is Hong Kong Dollar, its subsidiary in Singapore is U.S. dollar, and its other subsidiaries which are incorporated in PRC are RMB, respectively, which are their respective local currencies based on the criteria of ASC 830, “Foreign Currency Matters”.

 

In the condensed consolidated financial statements, the financial information of the Company and other entities located outside of the PRC has been translated into USD. Assets and liabilities are translated at the exchange rates on the balance sheet date, equity amounts are translated at historical exchange rates, and revenues, expenses, gains and losses are translated using the average rate for the period.

 

Translation adjustments included in accumulated other comprehensive income amounted to negative $453,807 as of March 31, 2023. The balance sheet amounts, with the exception of shareholders’ equity as on December 31, 2022, and March 31, 2023 were translated at USD 1.00 to HKD 7.7965 and to HKD 7.8493 respectively. The average translation rates applied to statement of income accounts for the three months ended March 31, 2022 and 2023 were USD 1.00 to HKD 7.8064 and to HKD 7.8370, respectively. The balance sheet amounts, with the exception of shareholders’ equity at December 31, 2022 and March 31, 2023 were translated at USD 1.00 to RMB 6.9646 and to RMB 6.8717 respectively. The average translation rates applied to statement of income accounts for the three months ended March 31, 2022 and 2023 were USD 1.00 to RMB 6.3505 and to RMB 6.8418 respectively. The shareholders’ equity accounts were stated at their historical rate. Cash flows are also translated at average translation rates for the periods, therefore, amounts reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets.

 

Cash and cash equivalents

 

Cash and cash equivalents primarily consist of bank deposits with original maturities of three months or less, which are unrestricted as to withdrawal and use. Cash and cash equivalents also consist of funds earned from the Company’s operating revenues which were held at third party platform fund accounts which are unrestricted as to immediate use or withdraw. The Company maintains most of its bank accounts in the PRC, HK and Singapore.

 

Accounts receivable, net

 

Accounts receivable include trade accounts due from customers. Accounts are considered overdue after 90 days. Management reviews its receivables on a regular basis to determine if the bad debt allowance is adequate and provides allowance when necessary. The allowance is based on management’s best estimates of specific losses on individual customer exposures, as well as the historical trends of collections. Account balances are charged off against the allowance after all means of collection have been exhausted and the likelihood of collection is not probable. As of March 31, 2023, the company has $1,218,672 allowance.

 

8

 

 

Inventories

 

Inventories are comprised of finished goods and are stated at the lower of cost or net realizable value using the weighted average method. Management reviews inventories for obsolescence and cost in excess of net realizable value periodically when appropriate and records a reserve against the inventory when the carrying value exceeds net realizable value. As of March 31, 2023, the Company determined that no allowance was necessary.

 

Prepaid services fees

 

Prepaid services fees are mainly payments made to vendors or services providers for future services. These amounts are refundable and bear no interest. Prepaid services fees also include money advance deposited with certain channel providers to ensure the contents of the advertisement do not violate the terms of the channel providers. The advances usually have one year term and are refundable upon contract termination. Management reviews its prepaid services fees on a regular basis to determine if the allowance is adequate and adjusts the allowance when necessary. As of March 31, 2023, no allowance was deemed necessary.

 

Other receivables and prepaid expenses

 

Other receivables that are short term in nature include employee advances to pay certain of the Company’s expenses in the normal course of business and certain short-term deposits. Prepaid expenses included utilities or system services. An allowance for doubtful accounts may be established and recorded based on management’s assessment of the likelihood of collection. Management reviews these items on a regular basis to determine if the allowance for doubtful accounts is adequate and adjusts the allowance when necessary. Delinquent account balances are written-off against the allowance for doubtful accounts after management has determined that the likelihood of collection is not probable. No allowance was required as of March 31, 2023.

 

Property and equipment, net

 

Property and equipment are stated at cost less accumulated depreciation and impairment if applicable. Depreciation is computed using the straight-line method over the estimated useful lives of the assets with 5% residual value. The estimated useful lives are as follows:

 

		Useful Life
Office equipment		3 years
Office furniture and fixtures		3 – 5 years
Leasehold improvements		lesser of lease term or expected useful life

 

 

9

 

 

Cost method investments

 

The Company accounts for investments with less than 20% of the voting shares and does not have the ability to exercise significant influence over operating and financial policies of the investee using the cost method. The Company records cost method investments at the historical cost in its condensed consolidated financial statements and subsequently records any dividends received from the net accumulated earnings of the investee as income. Dividends received in excess of earnings are considered a return of investment and are recorded as reduction in the cost of the investments.

 

Cost method investments are evaluated for impairment when facts or circumstances indicate that the fair value of the long-term investments is less than its carrying value. An impairment is recognized when a decline in fair value is determined to be other-than-temporary. The Company reviews several factors to determine whether a loss is other-than-temporary. These factors include, but are not limited to, the: (i) nature of the investment; (ii) cause and duration of the impairment; (iii) extent to which fair value is less than cost; (iv) financial condition and near term prospects of the investments; and (v) ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. No event had occurred and indicated that other-than-temporary impairment existed and therefore the Company did not record any impairment charges for its investments for the three months ended March 31, 2023.

 

Intangible assets, net

 

The Company’s intangible assets with definite useful lives primarily consist of copyrights, non-compete agreements, and technology know-hows. Identifiable intangible assets resulting from the acquisitions of subsidiaries accounted for using the purchase method of accounting are estimated by management based on the fair value of assets received. The Company amortizes its intangible assets with definite useful lives over their estimated useful lives and reviews these assets for impairment. The Company typically amortizes its intangible assets with definite useful lives on a straight-line basis over the shorter of the contractual terms or the estimated useful lives. The estimated useful lives are as follows:

 

		Useful Life
Customer relationship		4 years
Technology know-hows		5 years
Non-compete agreements		6 years
Software copyright		6 years

 

Goodwill

 

Goodwill represents the excess of the consideration paid of an acquisition over the fair value of the net identifiable assets of the acquired subsidiaries at the date of acquisition. Goodwill is not amortized and is tested for impairment at least annually, more often when circumstances indicate impairment may have occurred. Goodwill is carried at cost less accumulated impairment losses. If impairment exists, goodwill is immediately written off to its fair value and the loss is recognized in the consolidated statements of operations and comprehensive loss. Impairment losses on goodwill are not reversed.

 

The Company reviews the carrying value of intangible assets not subject to amortization, including goodwill, to determine whether impairment may exist annually or more frequently if events and circumstances indicate that it is more likely than not that an impairment has occurred. The Company has the option to assess qualitative factors to determine whether it is necessary to perform further impairment testing in accordance with ASC 350-20, as amended by ASU 2017-04. If the Company believes, as a result of the qualitative assessment, that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, then the impairment test described below is required. The Company compares the fair values of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired. If the carrying amount of a reporting unit exceeds its fair value, impairment is recognized for the difference, limited to the amount of goodwill recognized for the reporting unit. Estimating fair value is performed by utilizing various valuation techniques, with the primary technique being a discounted cash flow.

 

10

 

 

Impairment for long-lived assets

 

Long-lived assets, including property and equipment and intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying value of an asset may not be recoverable. The Company assesses the recoverability of the assets based on the undiscounted future cash flows the assets are expected to generate and recognize an impairment loss when estimated undiscounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. If an impairment is identified, the Company would reduce the carrying amount of the asset to its estimated fair value based on a discounted cash flows approach or, when available and appropriate, to comparable market values. For the three months ended March 31, 2023, there was $29,232 impairment of long-lived assets was recognized.

 

Business combination

 

The purchase price of an acquired company is allocated between tangible and intangible assets acquired and liabilities assumed from the acquired business based on their estimated fair values, with the residual of the purchase price recorded as goodwill. Transaction costs associated with business combinations are expensed as incurred, and are included in general and administrative expenses in the Company’s consolidated statements of operations. The results of operations of the acquired business are included in the Company’s operating results from the date of acquisition.

 

Fair value measurement

 

The accounting standard regarding fair value of financial instruments and related fair value measurements defines financial instruments and requires disclosure of the fair value of financial instruments held by the Company.

 

The accounting standards define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement and enhance disclosure requirements for fair value measures. The three levels are defined as follow:

 

●

Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

●

Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.

 

●

Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.

 

Warrants liabilities

 

The Company accounts for warrants (Public Warrants or Private 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”) 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 consolidated statements of operations. The Company has elected to account for its Public Warrants as equity and the Private Warrants as liabilities.

 

11

 

 

Revenue recognition

 

The Company adopted Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (ASC Topic 606). The ASU requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identifies the contract with the customer, (ii) identifies the performance obligations in the contract, (iii) determines the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocates the transaction price to the respective performance obligations in the contract, and (v) recognizes revenue when (or as) the Company satisfies the performance obligation.

 

(i)

Central Processing Advertising Algorithm Services

 

— Advertising display services

 

For the advertising algorithm advertising display services, the Company’s performance obligation is to identify advertising spaces, embed images or videos into films, shows and short form videos that are hosted by leading online streaming platforms in China. Revenue is recognized at a point in time when the related services have been delivered based on the specific terms of the contract, which are commonly based on specific action (i.e., cost per impression (“CPM”) for online display).

 

The Company enters into advertising contracts with advertisers where the amounts charged per specific action are fixed and determinable, the specific terms of the contracts were agreed on by the Company, the advertisers and channel providers, and collectability is probable. Revenue is recognized on a CPM basis as impressions.

 

The Company considers itself as provider of the services as it has control of the specified services and products at any time before it is transferred to the customers which is evidenced by (i) the Company is primarily responsible to its customers for products and services offered where the products were designed in house and the Company has customer services team to directly serve the customers; and (ii) having latitude in establish pricing. Therefore the Company acts as the principal of these arrangements and reports revenue earned and costs incurred related to these transactions on a gross basis.

 

12

 

 

(ii)

Mobile Games Services

 

The Company generates revenue from jointly operated mobile game publishing services and the licensed out games. In accordance with ASC 606, Revenue Recognition: Principal Agent Considerations, the Company evaluates agreements with the game developers, distribution channels and payment channels in order to determine whether or not the Company acts as the principal or as an agent in the arrangement with each party respectively. The determination of whether to record the revenues gross or net is based on whether the Company’s promise to its customers is to provide the products or services or to facilitate a sale by a third party. The nature of the promise depends on whether the Company controls the products or services prior to transferring it. Control is evidenced by if the Company is primarily responsible for fulling the provision of services and has discretion in establishing the selling price. When the Company controls the products or services, its promise is to provide and deliver the products and revenue is presented gross. When the Company does not control the products, the promise is to facilitate the sale and revenue is presented net.

 

— Jointly operated mobile game publishing services

 

The Company offers publishing services for mobile games developed by third-party game developers. The Company acted as a distribution channel that it will publish the games on their own app or a third-party owned app or website, named game portals. Through these game portals, game players can download the mobile games to their mobile devices and purchase coins, the virtual currency, for in game premium features to enhance their game playing experience. The Company contracts with third-party payment platforms for collection services offered to game players who have purchased coins. The third-party game developers, third-party payment platforms and the co-publishers are entitled to profit sharing based on a prescribed percentage of the gross amount charged to the game players. The Company’s obligation in the publishing services is completed at a point in time when the game players made a payment to purchase coins.

 

With respect to the publishing services arrangements between the Company and the game developer, the Company considered that the Company does not control the services as evidenced by (i) developers are responsible for providing the game product desired by the game players; (ii) the hosting and maintenance of game servers for running the online mobile games is the responsibility of the third-party platforms; (iii) the developers or third-party platforms have the right to change the pricing of in game virtual items. The Company’s responsibilities are publishing, providing payment solution and market promotion service, and thus the Company views the game developers to be its customers and considers itself as the facilitator of the game developers in the arrangements with game players. Accordingly, the Company records the game publishing service revenue from these games, net of amounts paid to the game developers.

 

— Licensed out mobile games

 

The Company also licenses third parties to operate its mobile games developed internally through mobile portal and receives revenue from the third-party licensee operators on a monthly basis. The Company’s performance obligation is to provide mobile games to game operators which enable players of the mobile games to make in game purchases and the Company recognized revenue at a point in time when game players completed the purchases. The Company records revenues on a net basis, as the Company does not have the control of the services provided as it does not have the primary responsibility for fulfilment nor does not have the right to change the pricing of the game services.

 

13

 

 

(iii)

Sale of intelligent chips

 

Starting in September 2020, the Company has also been engaged in resale of intelligent chips products and accessories. The Company typically enters into written contracts with its customer where the rights of the parties, including payment terms, are identified and sales prices to the customers are fixed with no separate sales rebate, discount, or other incentive and no right of return exists on sales of inventory. The Company’s performance obligation is to deliver products according to contract specifications. The Company recognizes gross product revenue at a point in time when the control of products or services are transferred to customers.

 

To distinguish a promise to provide products from a promise to facilitate the sale from a third party, the Company considers the guidance of control in ASC 606-10-55-37A and the indicators in 606-10-55-39. The Company considers this guidance in conjunction with the terms in the Company’s arrangements with both suppliers and customers.

 

In general, the Company controls the products as it has the obligation to (i) fulfil the products delivery and (ii) bear any inventory risk as legal owners. In addition, when establishing the selling prices for delivery of the resale products, the Company has control to set its selling price to ensure it would generate profit for the products delivery arrangements. The Company believes that all these factors indicate that the Company is acting as a principal in this transaction. As a result, revenue from the sales of products is presented on a gross basis.

 

Contract balances:

 

The Company records receivable related to revenue when it has an unconditional right to invoice and receive payment.

 

Payments received from customers before all the relevant criteria for revenue recognition met are recorded as deferred revenue.

 

The Company’s disaggregated revenue streams in consideration of the Company’s type of goods and services and sales channels are as follows:

 

		For The Three Months Ended March 31,
		2022				2023
Central processing advertising algorithm services		$	14,346,366			$	16,397,686
Mobile games, net			329,345				-
Sales of intelligent chips			8,680,504				1,434,690
Total revenues		$	23,356,215			$	17,832,376

 

14

 

 

The Company’s revenue by timing of transfer of goods or services are summarized below:

 

		For The Three Months Ended March 31,
		2022				2023
Goods and services transferred at a point in time		$	23,356,215			$	17,832,376
Total revenues		$	23,356,215			$	17,832,376

 

The Company’s revenue by geographic locations are summarized below:

 

		For The Three Months Ended March 31,
		2022				2023
Mainland PRC revenues		$	14,675,711			$	16,397,686
International revenues			8,680,504				1,434,690
Total revenues		$	23,356,215			$	17,832,376

 

Cost of revenues

 

Cost of revenue for central processing algorithm services comprised of costs paid to channel distributors based on the sales agreements, shared costs with content providers based on the profit sharing arrangements, third party consulting services expenses and compensation expenses for the Company’s professionals.

 

For intelligent chip and services, the cost of revenue consist primarily of the costs of products sold and third party software development costs.

 

Cost allocation

 

Cost allocation include allocation of certain general and administrative and financial expenses paid by the Parent. General and administrative expenses consist primarily salary and related expenses of senior management and employees, shared management expenses, including accounting, consulting, legal support services, and other expenses to provide operating support to the related businesses. These allocations are made using a proportional cost allocation method by considering the proportion of revenues, headcounts as well as estimates of time spent on the provision of services attributable to the Company and the related expenses resulted from the acquisition of subsidiary.

 

Research and development

 

Research and development expenses include salaries and other compensation-related expenses to the Company’s research and product development personnel, outsourced subcontractors, as well as office rental, depreciation and related expenses for the Company’s research and product development team.

 

15

 

 

Value added taxes (“VAT”) and goods and services taxes (“GST”)

 

Revenue represents the invoiced value of service, net of VAT or GST. The VAT and GST are based on gross sales price and VAT rates range up to 13% in China, depending on the type of service provided or product sold, and GST rate is generally 7% in Singapore. Entities that are VAT/GST general taxpayers are allowed to offset qualified input VAT/GST paid to suppliers against their output VAT/GST liabilities. Net VAT/GST balance between input VAT/GST and output VAT/GST is recorded in tax payable. All of the VAT/GST returns filed by the Company’s subsidiaries in China and Singapore, have been and remain subject to examination by the tax authorities for five years from the date of filing.

 

Income taxes

 

The Company accounts for current income taxes in accordance with the laws of the relevant tax authorities. The charge for taxation is based on the results for the fiscal year as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

 

Deferred taxes is accounted for using the asset and liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the condensed consolidated financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences. Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized. Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. 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. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.

 

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, with a tax examination being presumed to occur. 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. No penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred. PRC tax returns filed are subject to examination by any applicable tax authorities.

 

Other Income

 

Other Income includes government subsidies which are amounts granted by local government authorities as an incentive for companies to promote development of the local technology industry. The Company receives government subsidies related to government sponsored projects and records such government subsidies as a liability when it is received. The Company records government subsidies as other income when there is no further performance obligation. Total government subsidies amounted to $5,787 for the three months ended March 31, 2023.

 

Other income also includes $34,402 and $73,415 of input VAT credit the Company redeemed during the three months ended March 31, 2022 and 2023. As part of VAT reform in 2019, from April 1, 2019 to December 31, 2023, a taxpayer in certain service industries could claim additional 10% of input VAT credit based on total input VAT paid to suppliers, the credit was applied to offset with the Company’s VAT payable.

 

For the three months ended March 31, 2022 and 2023, the Other income amounted to $69,500 and $40,337, respectively.

 

16

 

 

Leases

 

The Company adopted FASB ASU 2016-02, “Leases” (Topic 842) from January 1, 2021, and elected the practical expedients that does not require us to reassess: (i) whether any expired or existing contracts are, or contain, leases, (ii) lease classification for any expired or existing leases and (iii) initial direct costs for any expired or existing leases. For lease terms of twelve months or fewer, a lessee is permitted to make an accounting policy election not to recognize lease assets and liabilities. The Company also adopted the practical expedient that allows lessees to treat the lease and non-lease components of a lease as a single lease component. Upon adoption, the Company recognized $207,767 right of use (“ROU”) assets and $219,632 lease liabilities based on the present value of the future minimum rental payments of leases, using an incremental borrowing rate of 7% based on the duration of lease terms.

 

Operating lease ROU assets and lease liabilities are recognized at the adoption date or the commencement date, whichever is earlier, based on the present value of lease payments over the lease term. Since the implicit rate for the Company’s leases is not readily determinable, the Company use its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow, on a collateralized basis, an amount equal to the lease payments, in a similar economic environment and over a similar term.

 

Lease terms used to calculate the present value of lease payments generally do not include any options to extend, renew, or terminate the lease, as the Company does not have reasonable certainty at lease inception that these options will be exercised. The Company generally considers the economic life of its operating lease ROU assets to be comparable to the useful life of similar owned assets. The Company has elected the short-term lease exception, therefore operating lease ROU assets and liabilities do not include leases with a lease term of twelve months or less. Its leases generally do not provide a residual guarantee. The operating lease ROU asset also excludes lease incentives. Lease expense is recognized on a straight-line basis over the lease term.

 

The Company reviews the impairment of its ROU assets consistent with the approach applied for its other long-lived assets. The Company reviews the recoverability of its long-lived assets when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on its ability to recover the carrying value of the asset from the expected undiscounted future pre-tax cash flows of the related operations. The Company has elected to include the carrying amount of operating lease liabilities in any tested asset group and include the associated operating lease payments in the undiscounted future pre-tax cash flows.

 

Employee benefit

 

The full-time employees of the Company are entitled to staff welfare benefits including medical care, housing fund, pension benefits, unemployment insurance and other welfare, which are government mandated defined contribution plans. The Company is required to accrue for these benefits based on certain percentages of the employees’ respective salaries, subject to certain ceilings, in accordance with the relevant PRC regulations, and make cash contributions to the state-sponsored plans out of the amounts accrued. Total expenses for the plans were $54,054 for the three months ended March 31, 2023.

 

Noncontrolling interests

 

Noncontrolling interest consists of an aggregate of 42% of the equity interest of Shanghai Weimu, 45% of equity interest of Viwo Tech and 45% of ViZe (no operations) held by other investors. Excess of contribution received from noncontrolling shareholders over carrying value of the entity is recorded in additional paid in capital. The noncontrolling interests are presented in the consolidated balance sheets, separately from equity attributable to the shareholders of the Company. Noncontrolling interests in the results of the Company are presented on the face of the consolidated statement of operations as an allocation of the total income or loss for the year between non-controlling interest holders and the shareholders of the Company.

 

17

 

 

Noncontrolling interests consist of the following:

 

		For The Three Months Ended March 31,
		2022				2023
Shanghai Weimu		$	245,653			$	168,511
Viwo Tech			13,455				81,002
Total		$	259,108			$	249,513

 

Earnings per share

 

The Company computes earnings per share (“EPS”) in accordance with ASC 260, “Earnings per Share”. ASC 260 requires companies to present basic and diluted EPS. Basic EPS is measured as net income divided by the weighted average ordinary share outstanding for the period. Diluted EPS presents the dilutive effect on a per share basis of the potential ordinary shares (e.g., convertible securities, options and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential ordinary shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS. During the three months ended March 31, 2023, there was no dilutive shares.

 

Statutory reserves

 

Pursuant to the laws applicable to the PRC, PRC entities must make appropriations from after-tax profit to the non-distributable “statutory surplus reserve fund”. Subject to certain cumulative limits, the “statutory surplus reserve fund” requires annual appropriations of 10% of after-tax profit until the aggregated appropriations reach 50% of the registered capital (as determined under accounting principles generally accepted in the PRC (“PRC GAAP”) at each year-end). For foreign invested enterprises and joint ventures in the PRC, annual appropriations should be made to the “reserve fund”. For foreign invested enterprises, the annual appropriation for the “reserve fund” cannot be less than 10% of after-tax profits until the aggregated appropriations reach 50% of the registered capital (as determined under PRC GAAP at each year-end). If the Company has accumulated loss from prior periods, the Company is able to use the current period net income after tax to offset against the accumulate loss.

 

Segment reporting

 

FASB ASC 280, Segment Reporting, establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organizational structure as well as information about geographical areas, business segments and major customers in financial statements for details on the Company’s business segments.

 

The Company uses the management approach to determine reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker (“CODM”) for making decisions, allocating resources and assessing performance. The Company’s CODM has been identified as the CEO, who reviews consolidated results when making decisions about allocating resources and assessing performance of the Company.

 

Based on management’s assessment, the Company determined that it has two operating segments and therefore two reportable segments as defined by ASC 280, which are (i) central processing algorithm services and (ii) intelligent chips and services. All of the Company’s net revenues were generated in the PRC and Singapore.

 

18

 

 

Recently issued accounting pronouncements

 

In May 2019, the FASB issued ASU 2019-05, which is an update to ASU Update No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced the expected credit losses methodology for the measurement of credit losses on financial assets measured at amortized cost basis, replacing the previous incurred loss methodology. The amendments in Update 2016-13 added Topic 326, Financial Instruments — Credit Losses, and made several consequential amendments to the Codification. Update 2016-13 also modified the accounting for available-for-sale debt securities, which must be individually assessed for credit losses when fair value is less than the amortized cost basis, in accordance with Subtopic 326-30, Financial Instruments — Credit Losses — Available-for-Sale Debt Securities. The amendments in this Update address those stakeholders’ concerns by providing an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. For those entities, the targeted transition relief will increase comparability of financial statement information by providing an option to align measurement methodologies for similar financial assets. Furthermore, the targeted transition relief also may reduce the costs for some entities to comply with the amendments in Update 2016-13 while still providing financial statement users with decision-useful information. In November 2019, the FASB issued ASU No. 2019-10, which to update the effective date of ASU No. 2016-02 for private companies, not-for-profit organizations and certain smaller reporting companies applying for credit losses, leases, and hedging standard. The new effective date for these preparers is for fiscal years beginning after December 15, 2022. The adoption of this ASU does not have a material effect on the Company’s condensed consolidated financial statements.

 

Except as mentioned above, the Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the Company’s consolidated balance sheets, statements of income and comprehensive income and statements of cash flows.

 

Note 3 — Accounts receivable, net

 

Accounts receivable, net consisted of the following:

 

		December 31,				March 31,
		2022				2023
Accounts receivable		$	3,821,120			$	2,868,135
Less: allowance for doubtful accounts			(1,218,672	)			(1,218,672	)
Accounts receivable, net		$	2,602,448			$	1,649,463

 

The following table summarizes the changes in allowance for doubtful accounts:

 

		December 31,				March 31,
		2022				2023
Beginning balance		$	339,209			$	1,218,672
Addition			1,218,672				-
Recovery			(321,538	)			-
Effect of exchange rates change			(17,671	)			-
Ending balance		$	1,218,672			$	1,218,672

 

19

 

 

Note 4 — Property and equipment, net

 

Property and equipment, net consist of the following:

 

		December 31,				March 31,
		2022				2023
Office electronic equipment		$	54,681			$	25,063
Office fixtures and furniture			492				8,324
Vehicles			172,507				214,361
Leasehold improvements			72,054				55,291
Subtotal			299,734				303,039
Less: accumulated depreciation			(154,414	)			(169,185	)
Total		$	145,320			$	133,854

 

Depreciation expense for the three months ended March 31, 2022 and 2023 amounted to $12,127 and $52,656, respectively

 

Note 5 — Intangible assets, net

 

The Company’s intangible assets with definite useful lives primarily consist of copyrights, non-compete agreements and. The following table summarizes acquired intangible asset balances as of:

 

		December 31,				March 31,
		2022				2023
Non-compete agreements			2,498,349				2,532,125
Software copyright			1,285,788				1,303,171
Subtotal			3,784,137				3,835,296
Less: accumulated amortization			(2,819,796	)			(2,912,217	)
Intangible assets, net		$	964,341			$	923,079

 

Amortization expense for the three months ended March 31, 2022 and 2023 amounted to $ 331,237 and $54,536, respectively.

 

Note 6 — Cost method investments

 

Cost method investments consist of the following:

 

		December 31, 2022				March 31, 2023
5.0% Investment in a company in mobile games industry		$	94,107			$	95,379
5.0% Investment in a company in central processing advertising algorithm services			78,193				79,250
Total		$	172,300			$	174,629

 

During the years ended December 31, 2022 and the three months ended March 31, 2023, the Company’ cost method investments amounted to $172,300 and $174,629, respectively.

 

20

 

 

Note 7 — Goodwill

 

Goodwill represents the excess of the consideration paid of an acquisition over the fair value of the net identifiable assets of the acquired subsidiaries at the date of acquisition. Goodwill is not amortized and is tested for impairment at least annually, more often when circumstances indicate impairment may have occurred. The following table summarizes the components of acquired goodwill balances as of:

 

		December 31,				March 31,
		2022				2023
Goodwill from Shenzhen Yitian acquisition(a)		$	13,351,845			$	13,532,351
Goodwill from Shanghai Guoyu acquisition(b)			1,907,324				1,933,110
Goodwill		$	15,259,169			$	15,465,461

 

 

(a)	Goodwill represents the excess fair value of consideration over the identifiable assets of Shenzhen Yitian acquired by Beijing WiMi in 2015 for the central processing algorithm services segment.
(b)	Weidong and YY Online acquired Shanghai Guoyu in 2021 to acquire 100% of the capital stock of Shanghai Guoyu for a net consideration of $2.1 million. The excess fair value of consideration over the identifiable assets acquired of $16.7 million was allocated to goodwill for the central processing algorithm services segment.

 

The changes in the carrying amount of goodwill allocated to reportable segments as of March 31, 2023 are as follows:

 

		Central processing algorithm services				Total
As of December 31, 2022		$	15,259,169			$	15,259,169
Translation difference			206,292				206,292
As of March 31, 2023		$	15,465,461			$	15,465,461

 

Note 8 — Related party transactions and balances

 

Amounts due to Parent are those nontrade payables arising from transactions between the Company and the Parent, such as advances made by the Parent on behalf of the Company, and allocated shared expenses paid by the Parent. Those balances are unsecured and non-interest bearing and are payable on demand.

 

		December 31,				March 31,
		2022				2023
Amount due from Parent		$	5,741,573			$	25,822,519

 

		December 31,				March 31,
		2022				2023
Amount due to a related party-Joyous JD		$	153,333			$	153,333

 

During three months ended March 31, 2023 the Company obtained approximately $80,000 and provided additional $20 million to Parent.

 

Joyous JD is a non controlling shareholder of MicroAlgo. This amount represents advance to Venus Acquisition Corp prior to the merger. The amount was non interest bearing, unsecured, and due on demand.

 

21

 

 

Note 9 — Taxes

 

Income tax

 

Cayman Islands

 

Under the current laws of the Cayman Islands, VIYI and Wisdom Lab are not subject to tax on income or capital gain. Additionally, upon payments of dividends to the shareholders, no Cayman Islands withholding tax will be imposed.

 

Hong Kong

 

VIYI Ltd, Excel Crest and Viwo Tech and Vize are incorporated in Hong Kong and are subject to Hong Kong Profits Tax on the taxable income as reported in its statutory financial statements adjusted in accordance with relevant Hong Kong tax laws. The applicable tax rate is 16.5% in Hong Kong. The Company did not make any provisions for Hong Kong profit tax as there were no assessable profits derived from or earned in Hong Kong since inception. Under Hong Kong tax law, VIYI Ltd, Excel Crest, Viwo Tech, Vize Tech are exempted from income tax on its foreign-derived income and there are no withholding taxes in Hong Kong on remittance of dividends.

 

Singapore

 

Fe-da Electronics is incorporated in Singapore and is subject to Singapore Profits Tax on the taxable income as reported in its statutory financial statements adjusted in accordance with relevant Singapore tax laws. The applicable tax rate is 17% in Singapore, with 75% of the first SGD 10,000 (approximately $7,000) taxable income and 50% of the next SGD 190,000 (approximately $137,000) taxable income are exempted from income tax.

 

PRC

 

The subsidiaries incorporated in the PRC are governed by the income tax laws of the PRC and the income tax provision in respect to operations in the PRC is calculated at the applicable tax rates on the taxable income for the periods based on existing legislation, interpretations and practices in respect thereof. Under the Enterprise Income Tax Laws of the PRC (the “EIT Laws”), domestic enterprises and Foreign Investment Enterprises (the “FIE”) are usually subject to a unified 25% enterprise income tax rate while preferential tax rates, tax holidays and even tax exemption may be granted on case-by-case basis. EIT grants preferential tax treatment to certain High and New Technology Enterprises (“HNTEs”). Under this preferential tax treatment, HNTEs are entitled to an income tax rate of 15%, subject to a requirement that they re-apply for HNTE status every three years. In addition, 75% of R&D expenses of the PRC entities are subject to additional deduction from pre-tax income.

 

Korgas 233, Korgas Weidong and Kashi Guoyu were formed and registered in Korgas and Kashi in Xinjiang Provence, China in 2017, 2020 and 2021. These companies are not subject to income tax for 5 years and can obtain another two years of tax exempt status and three years at reduced income tax rate of 12.5% after the 5 years due to the local tax policies to attract companies in various industries.

 

Shenzhen Qianhai was formed and registered in Qianhai District in Guangdong Provence, China in 2015. The company is subject to income tax at a reduced rate of 15% due to the local tax policies to attract companies in various industries. The reduced rate benefit will expire in December 2025.

 

Significant components of the provision for income taxes are as follows:

 

		For The Three Months Ended March 31,
		2022				2023
Current income tax expenses		$	(72,488	)		$	(5,239	)
Deferred income tax benefits			61,012				-
Income tax expenses		$	(11,476	)		$	(5,239	)

 

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Deferred tax assets and liabilities

 

Significant components of deferred tax assets and liabilities were as follows:

 

		December 31,				March 31,
		2022				2023
Deferred tax assets:
Net operating loss carryforwards		$	1,832,369			$	-
Allowance for doubtful accounts			207,174				-
Less: valuation allowance			(2,039,543	)			-
Deferred tax assets, net		$	-			$	-
Deferred tax liabilities:
Recognition of intangible assets arising from business combinations		$	241,085			$	251,666
Total deferred tax liabilities, net		$	241,085			$	251,666

 

The Company evaluated the recoverable amounts of deferred tax assets, and provided a valuation allowance to the extent that future taxable profits will be available against which the net operating loss and temporary difference can be utilized. The Company considers both positive and negative factors when assessing the future realization of the deferred tax assets and applied weigh to the relative impact of the evidences to the extent it could be objectively verified.

 

The Company’s cumulative net operating loss (“NOL”) of approximately $1.3 million as of March 31, 2023 was mainly from NOL of Fe-da, Shenzhen Qianhai Wangxin, Shenzhen Yitian and Korgas 233. The NOL starts to expire in 2023. Management considers projected future losses outweighs other factors and made a full allowance of related deferred tax assets.

 

The Company recognized deferred tax liabilities related to the excess of the intangible assets reporting basis over its income tax basis as a result of fair value adjustment from acquisitions in 2015. The deferred tax liabilities will reverse as the intangible assets are amortized for financial statement reporting purposes.

 

Uncertain tax positions

 

The Company evaluates each uncertain tax position (including the potential application of interest and penalties) based on the technical merits, and measure the unrecognized benefits associated with the tax positions. As of December 31, 2022 and March 31, 2023, the Company did not have any significant unrecognized uncertain tax positions. The Company did not incur any interest and penalties related to potential underpaid income tax expenses for the years ended December 31, 2022 and for the three months ended March 31, 2023 and also does not anticipate any significant increases or decreases in unrecognized tax benefits in the future.

 

Value added taxes (“VAT”) and goods and services taxes (“GST”)

 

Revenue represents the invoiced value of service, net of VAT or GST. The VAT and GST are based on gross sales price and VAT rates range up to 13% in China, depending on the type of service provided or product sold, and GST rate is generally 7% in Singapore.

 

Taxes payable consisted of the following:

 

		December 31,				March 31,
		2022				2023
VAT taxes payable		$	5,913			$	(32,242	)
Income taxes payable			45,992				51,141
Other taxes payable			3,460				2,163
Totals		$	55,365			$	21,062

 

23

 

 

Note 10 — Concentration of risk

 

Credit risk

 

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash. In China, the insurance coverage of each bank is RMB 500,000 (approximately USD 72,000). As of March 31, 2023, cash balance of $20,027,603 was deposited with financial institutions located in China,The Hong Kong Deposit Protection Board pays compensation up to a limit of HKD 500,000 (approximately USD 64,000) if the bank with which an individual/a company hold its eligible deposit fails. As of March 31, 2023, cash balance of $448,851 was maintained at financial institutions in Hong Kong, of which nil was subject to credit risk. The Singapore Deposit Insurance Corporation Limited (SDIC) insures deposits in a Deposit Insurance (DI) Scheme member bank or finance company up to SGD 75,000 (approximately USD 56,000) per account. As of March 31, 2023, cash balance of $532,152 was maintained at DI Scheme banks in Singapore, of which $330,758 was subject to credit risk. While management believes that these financial institutions are of high credit quality, it also continually monitors their credit worthiness.

 

A majority of the Company’s expense transactions are denominated in RMB and a significant portion of the Company and its subsidiaries’ assets and liabilities are denominated in RMB. RMB is not freely convertible into foreign currencies. In the PRC, certain foreign exchange transactions are required by law to be transacted only by authorized financial institutions at exchange rates set by the PBOC. Remittances in currencies other than RMB by the Company in China must be processed through the PBOC or other China foreign exchange regulatory bodies which require certain supporting documentation in order to affect the remittance.

 

To the extent that the Company needs to convert U.S. dollars into RMB for capital expenditures and working capital and other business purposes, appreciation of RMB against U.S. dollar would have an adverse effect on the RMB amount the Company would receive from the conversion. Conversely, if the Company decides to convert RMB into U.S. dollar for the purpose of making payments for dividends, strategic acquisition or investments or other business purposes, appreciation of U.S. dollar against RMB would have a negative effect on the U.S. dollar amount available to the Company.

 

Note 11 — Leases

 

Lease commitments

 

The Company determines if a contract contains a lease at inception. US GAAP requires that the Company’s leases be evaluated and classified as operating or finance leases for financial reporting purposes. The classification evaluation begins at the commencement date and the lease term used in the evaluation includes the non-cancellable period for which the Company has the right to use the underlying asset, together with renewal option periods when the exercise of the renewal option is reasonably certain and failure to exercise such option which result in an economic penalty. All of the Company’s real estate leases are classified as operating leases.

 

The Company has entered into eight non-cancellable operating lease agreements for ten office spaces expiring through December 2023. As of March 31, 2023, upon adoption of FASB ASU 2016-02, the Company recognized $207,767 right of use (“ROU”) assets and $219,632 lease liabilities based on the present value of the future minimum rental payments of leases, using a weighted average discount rate of 7%, which is determined using an incremental borrowing rate with similar term in the PRC. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. The leases generally do not contain options to extend at the time of expiration and the weighted average remaining lease terms are 1 year.

 

24

 

 

Note 12 — Shareholders’ equity

 

Ordinary shares

 

The Company was established under the laws of Cayman Islands on May 14, 2018 with authorized share of 50,000,000 ordinary shares of par value USD 0.001 each.

 

On February 11, 2021, the Company consummated the IPO of 4,000,000 units (the “Units”). In addition, the underwriters exercised in full the over-allotment option for an additional 600,000 Units on such date, resulting in the issuance and sale of an aggregate of 4,600,000 Units. Each Unit consists of one ordinary share, par value $0.001 per share (“Share”), one warrant (“Warrant”) entitling its holder to purchase one-half of one Share at a price of $11.50 per Share, and one right to receive one-tenth (1/10) of one Share upon the consummation of the Company’s initial business combination.

 

Simultaneously with the closing of the Initial Public Offering on February 11, 2021, the Sponsor purchased an aggregate of or 225,000 Private Units at a price of $10.00 per Private Unit, ($2,250,000 in the aggregate), from the Company in a private placement.

 

On December 9, 2022, in accordance with the Merger Agreement, the Closing occurred, pursuant to which Venus issued 39,603,961 ordinary shares to VIYI shareholders.

 

As of March 31, 2023, the Company had 43,856,706 ordinary shares issued and outstanding with a par value of USD 0.001 each.

 

As of March 31, 2023, the Company had 4,600,000 Public Warrants and 225,000 Private Warrants outstanding.

 

Statutory reserve

 

The Company’s PRC entities are required to set aside at least 10% of their after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50% of its registered capital. In addition, the Company’s PRC entities may allocate a portion of its after-tax profits based on PRC accounting standards to enterprise expansion fund and staff bonus and welfare fund at its discretion. The Company’s PRC entities may allocate a portion of its after-tax profits based on PRC accounting standards to a discretionary surplus fund at its discretion. The statutory reserve funds and the discretionary funds are not distributable as cash dividends. Remittance of dividends by a wholly foreign-owned company out of China is subject to examination by the banks designated by State Administration of Foreign Exchange.

 

Restricted assets

 

The Company’s ability to pay dividends is primarily dependent on the Company receiving distributions of funds from its subsidiary. Relevant PRC statutory laws and regulations permit payments of dividends by the Company’s PRC entities only out of its retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. The results of operations reflected in the accompanying condensed consolidated financial statements prepared in accordance with U.S. GAAP differ from those reflected in the statutory financial statements of the Company’s PRC entities.

 

As a result of the foregoing restrictions, the Company’s PRC entities are restricted in their ability to transfer their assets to the Company. Foreign exchange and other regulation in the PRC may further restrict the Company’s PRC entities from transferring funds to the Company in the form of dividends, loans and advances. As of March 31, 2023, amounts restricted are the paid-in-capital and statutory reserve of the Company’s PRC entities, which amounted to $28,900,650.

 

25

 

 

Note 13 — Warrants

 

Public Warrants

 

Each public warrant entitles the holder thereof to purchase one-half (1/2) of one ordinary share at a price of $11.50 per full share, subject to adjustment as described in this prospectus. Pursuant to the warrant agreement, a warrant holder may exercise its warrants only for a whole number of shares. This means that only an even number of warrants may be exercised at any given time by a warrant holder.

 

No public warrants will be exercisable for cash unless the Company has an effective and current registration statement covering the ordinary shares issuable upon exercise of the warrants and a current prospectus relating to such ordinary shares. It is the Company’s current intention to have an effective and current registration statement covering the ordinary shares issuable upon exercise of the warrants and a current prospectus relating to such ordinary shares in effect promptly following consummation of an initial business combination.

 

Notwithstanding the foregoing, if a registration statement covering the ordinary shares issuable upon exercise of the public warrants is not effective within 90 days following the consummation of our initial business combination, public warrant holders may, until such time as there is an effective registration statement and during any period when we shall have failed to maintain an effective registration statement, exercise warrants on a cashless basis pursuant to an available exemption from registration under the Securities Act. In such event, each holder would pay the exercise price by surrendering the warrants for that number of ordinary shares equal to the quotient obtained by dividing (x) the product of the number of ordinary shares underlying the warrants, multiplied by the difference between the exercise price of the warrants and the “Fair Market Value” (defined below) by (y) the Fair Market Value. The “Fair Market Value” shall mean the average reported last sale price of the ordinary shares for the 10 trading days ending on the day prior to the date of exercise. For example, if a holder held 300 warrants to purchase 150 shares and the Fair Market Value on the date prior to exercise was $15.00, that holder would receive 35 shares without the payment of any additional cash consideration. If an exemption from registration is not available, holders will not be able to exercise their warrants on a cashless basis.

 

The Warrants will become exercisable on the later of (a) the consummation of a Business Combination or (b) 12 months from the effective date of the registration statement relating to the IPO. The warrants will expire at 5:00 p.m., New York City time, on the fifth anniversary of our completion of an initial business combination, or earlier upon redemption.

 

The Company may redeem the outstanding warrants (including any outstanding warrants issued upon exercise of the unit purchase option issued to Ladenburg Thalmann & Co., Inc.,), in whole and not in part, at a price of $0.01 per warrant:

 

●

at any time while the Public Warrants are exercisable,

 

●

upon not less than 30 days’ prior written notice of redemption to each Public Warrant holder,

 

●

if, and only if, the reported last sale price of the ordinary shares equals or exceeds $18.00 per share, for any 20 trading days within a 20 trading day period ending on the third trading day prior to the notice of redemption to Public Warrant holders, and

 

●

if, and only if, there is a current registration statement in effect with respect to the issuance of the ordinary shares underlying such warrants at the time of redemption and for the entire 30-day trading period referred to above and continuing each day thereafter until the date of redemption.

 

If the foregoing conditions are satisfied and the Company would issue a notice of redemption, each warrant holder can exercise his, her or its warrant prior to the scheduled redemption date. However, the price of the ordinary shares may fall below the $18.00 trigger price as well as the $11.50 warrant exercise price per full share after the redemption notice is issued and not limit our ability to complete the redemption.

 

26

 

 

The redemption criteria for the warrants have been established at a price which is intended to provide warrant holders a reasonable premium to the initial exercise price and provide a sufficient differential between the then-prevailing share price and the warrant exercise price so that if the share price declines as a result of our redemption call, the redemption will not cause the share price to drop below the exercise price of the warrants.

 

If the Company call the warrants for redemption as described above, our management will have the option to require all holders that wish to exercise warrants to do so on a “cashless basis.” In such event, each holder would pay the exercise price by surrendering the whole warrants for that number of ordinary shares equal to the quotient obtained by dividing (x) the product of the number of ordinary shares underlying the warrants, multiplied by the difference between the exercise price of the warrants and the “fair market value” (defined below) by (y) the fair market value. The “fair market value” shall mean the average reported last sale price of the ordinary shares for the 10 trading days ending on the third trading day prior to the date on which the notice of redemption is sent to the holders of warrants. Whether the Company will exercise our option to require all holders to exercise their warrants on a “cashless basis” will depend on a variety of factors including the price of our ordinary shares at the time the warrants are called for redemption, the Company’s cash needs at such time and concerns regarding dilutive share issuances.

 

Private Warrants

 

Simultaneously with the closing of the Initial Public Offering, the Company consummated a private placement of 270,500 Private Units at $10.0 per unit, purchased by the sponsor. The Private Units are identical to the units sold in the Initial Public Offering except that the warrants included in the Private Units (the “Private Warrants”) and the ordinary shares issuable upon the exercise of the Private Warrants will not be transferable, assignable or saleable until after the completion of a Business Combination, subject to certain limited exceptions. Additionally, the Private Warrants will be exercisable on a cashless basis and will be non-redeemable so long as they are held by the initial purchasers or their permitted transferees. If the Private Warrants are held by someone other than the initial purchasers or their permitted transferees, the Private Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants.

 

The private warrants are accounted for as liabilities in accordance with ASC 815-40 and are presented within warrant liabilities on the balance sheets. The warrants were classified as Level 3 at the initial measurement date due to the use of unobservable inputs.

 

The Company established the initial fair value for the private warrants at $380,000 on February 11, 2021, the date of the Company’s Initial Public Offering, using a Black-Scholes model. The Company allocated the proceeds received from the sale of Private Units, first to the private warrants based on their fair values as determined at initial measurement, with the remaining proceeds recorded as ordinary shares subject to possible redemption, and ordinary shares based on their relative fair values recorded at the initial measurement date. The warrants were classified as Level 3 at the initial measurement date due to the use of unobservable inputs.

 

Note 14 — Commitments and contingencies

 

Contingencies

 

From time to time, the Company is party to certain legal proceedings, as well as certain asserted and unasserted claims. Amounts accrued, as well as the total amount of reasonably possible losses with respect to such matters, individually and in aggregate, are not deemed to be material to the condensed consolidated financial statements.

 

27

 

 

Note 15 — Segments

 

ASC 280, “Segment Reporting”, establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organizational structure as well as information about geographical areas, business segments and major customers in financial statements for detailing the Company’s business segments.

 

The Company’s chief operating decision maker is the Chief Executive Officer, who reviews the financial information of the separate operating segments when making decisions about allocating resources and assessing the performance of the group. The Company has determined that it has two operating segments: (i) central processing algorithm services and (ii) intelligent chips and services.

 

The following tables present summary information by segment for the three months ended March 31, 2022 and 2023:

 

		Central processing algorithm services				Intelligent chips and services				Total For The Three Months Ended March 31, 2022
Revenues		$	14,675,711			$	8,680,504			$	23,356,215
Cost of revenues		$	9,637,496			$	8,322,336			$	17,959,832
Gross profit		$	5,038,214			$	358,168			$	5,396,383
Depreciation and amortization		$	65,727			$	277,636			$	343,364
Total capital expenditures		$	185,733			$	-			$	185,733

 

		Central Processing algorithm services				Intelligent chips and services				Total For The Three Months Ended March 31, 2023
Revenues		$	16,397,686			$	1,434,690			$	17,832,376
Cost of revenues		$	11,447,640			$	1,428,704			$	12,876,344
Gross profit		$	4,950,046			$	5,986			$	4,956,032
Depreciation and amortization		$	56,461			$	50,731			$	107,192
Total capital expenditures		$	54,464			$	-			$	54,464

 

Total assets as of:

 

		December 31,				March 31,
		2022				2023
Central processing algorithm services		$	47,787,032			$	71,937,158
Intelligent chips and services			24,299,702				3,698,849
Total assets		$	72,086,734			$	75,636,007

 

28

 

 

The Company’s operations are primarily based in the mainland PRC and internationally, where the Company derives a substantial portion of their revenues. Management also review condensed consolidated financial results by business locations. Disaggregated information of revenues by geographic locations are as follows:

 

		For The Three Months Ended March 31,
		2022				2023
Mainland PRC revenues		$	14,675,711			$	16,397,686
International revenues			8,680,504				1,434,690
Total revenues		$	23,356,215			$	17,832,376

 

Note 16 — Subsequent events

 

Subsequent to the perioded ended March 31, 2023, Joyous JD Limited and the Company filed suit in the New York Supreme Court New York County against Yolanda Asset Management Corporation, the sponsor of Venus Acquisition Corporation. Joyous JD Limited was a backstop investor of the Company prior to the closing of the Business Combination. In the lawsuit, Joyous JD Limited and the Company has alleged the following claims:

 

1. Breach of certain agreements concerning Joyous JD Limited’s investment in Yolanda and Venus Acquisition Corporation, and:

 

2. Misuse of Form S-4 by Venus Acquisition Corporation under the direction of the Sponsor, resulting in the withdrawal of the Form S-4. The Company has initiated lawsuit seeking damages.

 

The Court has accepted the complaint filed by Joyous JD Limited and the Company. The Company cannot guarantee the outcome of the lawsuit, the final ruling of the court shall prevail.

 

Notwithstanding the above, the Company has evaluated all events and transactions that occurred after the period ended March 31, 2023 up through the date the Company issued these unaudited condensed consolidated financial statements, and has determined that it does not have any additional material subsequent events to disclose in these financial statements.

 

29

 

 

Item 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 condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report. This discussion and other parts of this report contain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Part II, Item 1A “Risk Factors” of this Quarterly Report and our Quarterly Report on Form 10-Q and our annual report on Form 10-K for the fiscal year ended December 31, 2022 under Forward-Looking Statements and Item 1A–Risk Factors, filed with the SEC on March 29, 2023.

 

Overview

 

On December 9, 2022, the Company completed its De-SPAC Business Combination with VIYI. VIYI became our wholly-owned subsidiary. The Company changed its name to “MicroAlgo Inc.” in connection with the consummation of the Business Combination.

 

MicroAlgo is dedicated to the development and application of bespoke central processing algorithms. We provide comprehensive solutions to our business customers by integrating central processing algorithms with software or hardware, or both, thereby helping them increase their number of customers, improve end-user satisfaction, achieve direct cost savings, reduce power consumption, and achieve technical goals. The range of our services include algorithm optimization, accelerating computing power without the need for hardware upgrades, lightweight data processing, and data intelligence services.

 

Central processing algorithms refer to a range of computing algorithms, including analytical algorithms, recommendation algorithms, and acceleration algorithms. The businesses engaged in internet advertisement, game development, intelligent chip design, finance, retail, and logistics depend on the ability to efficiently process and analyze data with optimized computing software and hardware capable of handling the data workload. Bespoke central processing algorithms suitable to each customer’s distinct needs help them achieve this purpose.

 

In the mid-to-long term, we will continue to adhere to our strategic mindset. By improving upon each iteration of our one-stop intelligent data management solutions made possible by our proprietary central processing algorithm services, we can help customers to enhance their service efficiency and make model innovations in business, and actively enhance the industry value of the central processing algorithm services in the general field of data intelligent processing industry.

 

Results of Operations

 

Understanding Our Results of Operations

 

We currently operate in two segments and generates revenue by providing (i) central processing algorithm services and (ii) intelligent chips and services. Please see our condensed consolidated financial statements included elsewhere in this annual report.

 

Revenues

 

Our revenues consist of (i) providing central processing algorithm solutions, including internet advertising solutions, internet games services, and (ii) intelligent chips and services revenues.

 

Cost of Revenues

 

Cost of revenue for our central processing algorithm solutions for the internet advertisement algorithm services, internet games services comprised of (i) costs paid to channel providers and shared costs with content providers based on the profit-sharing arrangements, (ii) third party consulting services expenses and (iii) compensation expenses for the Our professionals.

 

Cost of revenue for our intelligent chip and services consists primarily of the costs of products sold and third-party software development costs.

 

30

 

 

Selling Expenses

 

Our selling expenses consist primarily of (i) compensation for selling personnel and (ii) travel expenses for its sales representatives.

 

General and Administrative Expenses

 

Our general and administrative expenses consist primarily of (i) compensation for its management and administrative personnel, (ii) expenses in connection with its operation supporting functions such as legal, accounting, consulting and other professional service fees, and (iii) office rental, depreciation, and other administrative related expenses.

 

Research and Development Expenses

 

Our research and development expenses include salaries and other compensation-related expenses to our research and product development personnel, outsourced subcontractors, as well as office rental, depreciation, and related expenses for our research and product development team.

 

Results of Operations for the Three Months Ended March 31, 2023 Compared to the Three Months Ended March 31, 2022

 

Revenue

 

For the three months ended March 31, 2022 and 2023, the Company’s revenue was $23,356,215 and $17,832,376, respectively. The decrease in revenue between periods resulted in our shift in focus to providing services, and due to the overall industry impact of chip control and logistics chain, revenue from smart chip products has decreased, which resulted in a decrease of revenue generated from products. The Company primarily generates its revenue through the provision of services.

 

		For The Three Months Ended March 31,
		2022				2023
Central processing advertising algorithm services		$	14,675,711			$	16,397,686
Sales of intelligent chips			8,680,504				1,434,690
Total revenues		$	23,356,215			$	17,832,376

 

Cost of Revenue

 

For the three months ended March 31, 2022 and 2023, the Company’s cost of revenue was $17,959,832 and $12,876,344, respectively. Cost of revenue decreased in correlation with our decrease in revenue.

 

		For The Three Months Ended March 31,
		2022				2023
Central processing advertising algorithm services		$	9,637,496			$	11,447,640
Sales of intelligent chips		$	8,322,336			$	1,428,704
Total cost of revenues		$	17,959,832			$	12,876,344

 

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Gross Profit

 

The Company’s gross profit decreased by approximately $440,351, from approximately $5,396,383 for the three months ended March 31, 2022, to approximately $4,956,032 during the three months ended March 31, 2023. For the three months ended March 31, 2022, and 2023, the Company’s overall gross margin was 23.1% and 27.8%, respectively.

 

The Company’s gross profit and gross profit margin from its major business segments are summarized as follows:

 

		For The Three Months Ended March 31,
		2022				2023				Variance Amount/%
Central processing algorithm services
Gross profit		$	5,038,214			$	4,950,046			$	(88,168	)
Gross margin			34.3	%			30.2	%			(1.7	)%
Intelligent chips and services
Gross profit		$	358,168			$	5,986			$	(352,182	)
Gross margin			4.1	%			0.4	%			(98.3	)%
Total
Gross profit		$	5,396,383			$	4,956,032			$	(440,351	)
Gross margin			23.1	%			27.8	%			(8.2	)%

 

The Company’s gross margins for central processing algorithm services were 34.3% and 30.2% for the three months ended March 31, 2022 and 2023, respectively. The decrease in margin was due to the increase in cost of revenue with advertising channels, the gross margin was lower for short form video advertising as a few channels dominated the market.

 

The Company’s gross margin for intelligent chips and services was 4.1% and 0.4% for the three months ended March 31, 2022 and 2023, respectively. The decrease in margin was due to decrease in intelligent chips revenue and the overall environment of the intelligent chips market is sluggish, with significant increase in chip costs.

 

Operating Income (loss)

 

For the three months ended March 31, 2022, the Company had an operating income of $1,176,852. For the three months ended March 31, 2023, the Company had an operating loss of $1,413,284.

 

Research and Development Expenses

 

For the three months ended March 31, 2022 and 2023, the Company’s expended $3,203,060 and $5,227,067 in research and development, respectively. The increase in research and development is in line with the Company’s focus in developing better and more efficient bespoke algorithms.

 

General and administrative Expenses

 

For the three months ended March 31, 2022 and 2023, the Company had general and administrative expenses of $809,248 and $1,017,386, respectively. The increase in general and administrative expenses is attributed to the Company’s recent De-SPAC transaction, which resulted in increased administrative and compliance expenditures as a result of the Company and its subsidiaries becoming a NASDAQ listed entity.

 

Net Income (loss)

 

For the three months ended March 31, 2022, the Company had a net income of $888,357. For the three months ended March 31, 2023, the Company had a net loss of $1,264,983.

 

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Liquidity and Capital Resources

 

In assessing our liquidity, we monitor and analyze our cash on-hand and our operating and capital expenditure commitments. Our liquidity needs are to meet our working capital requirements, operating expenses and capital expenditure obligations. At the end of the period ended March 31, 2023, the Company had cash and cash equivalents of $21,008,606. Our working capital was approximately $50.3 million as of March 31, 2023. We believe our revenues and operations will continue to grow and the current working capital is sufficient to support our operations and debt obligations as they become due one year through report date.

 

On December 16, 2022, following the consummation of our Business Combination, we received net cash proceeds of $20.66 million, net of certain transaction costs.

 

We are subject to risks and uncertainties frequently encountered by early-stage companies including, but not limited to, the uncertainty of successfully developing products, securing certain contracts, building a customer base, successfully executing business and marketing strategies, and hiring appropriate personnel.

 

To date, we have been funded primarily by cash flow generated from operations, interest-free advances from our Parent prior to the closing of the Business Combination, and the net proceeds we received through the Business Combination. Failure to generate sufficient revenues, achieve planned gross margins and operating profitability, control operating costs, or secure additional funding may require us to modify, delay, or abandon some of our planned future expansion or development, or to otherwise enact operating cost reductions available to management, which could have a material adverse effect on our business, operating results, financial condition, and ability to achieve our intended business objectives.

 

Cash Flows used by Operating Activities:

 

For the three months ended March 31, 2022, net cash provided by operating activities of $456,596. For the three months ended March 31, 2023, net cash used in operating activities was $2,761,637. The increase of cash used in operating activities is due to the increase of prepayments.

 

Cash Flows used by Investing Activities:

 

For the three months ended March 31, 2022, and 2023, our net cash used in investing activities was $15,995,926 and $256,943 respectively. Net cash used in investing activities decreased because the Company reduced the purchase of short term investments in the current period.

 

Cash Flow used by Financing Activities:

 

For the three months ended March 31, 2022, and 2023, our net cash used in financing activities was $5,513,374 and $19,612,100, respectively. Net cash used in financing activities increased as a result of an advance to Parent.

 

Critical Accounting Policies and Estimates

 

Basis of presentation

 

The accompanying condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”), regarding financial reporting, and include all normal and recurring adjustments that management of the Company considers necessary for a fair presentation of its financial position and operation results.

 

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Principles of consolidation

 

The condensed consolidated financial statements include the financial statements of the Company and its subsidiaries, which include the wholly-foreign owned enterprise (“WFOE”) and variable interest entity (“VIE”) and VIE’s subsidiaries over which the Company exercises control and, when applicable, entities for which the Company has a controlling financial interest or is the primary beneficiary. All transactions and balances among the Company and its subsidiaries have been eliminated upon consolidation.

 

Use of estimates and assumptions

 

The preparation of 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Significant accounting estimates reflected in the Company’s condensed consolidated financial statements include the useful lives of property and equipment and intangible assets, impairment of long-lived assets and goodwill, allowance for doubtful accounts, provision for contingent liabilities, revenue recognition, right-of-use assets and lease liabilities, deferred taxes and uncertain tax position, the fair value of contingent consideration related to business acquisitions and allocation of expenses from the Parent and Beijing WiMi. Actual results could differ from these estimates.

 

Foreign currency translation and other comprehensive income (loss)

 

The Company uses U.S. dollar (“USD”) as its reporting currency. The functional currency of VIYI Ltd. is Hong Kong Dollar, its subsidiary in Singapore is U.S. dollar, and its other subsidiaries which are incorporated in PRC are RMB, respectively, which are their respective local currencies based on the criteria of ASC 830, “Foreign Currency Matters”.

 

In the condensed consolidated financial statements, the financial information of the Company and other entities located outside of the PRC has been translated into USD. Assets and liabilities are translated at the exchange rates on the balance sheet date, equity amounts are translated at historical exchange rates, and revenues, expenses, gains and losses are translated using the average rate for the period.

 

Translation adjustments included in accumulated other comprehensive income amounted to negative $453,807 as of March 31, 2023. The balance sheet amounts, with the exception of shareholders’ equity as on December 31, 2022, and March 31, 2023 were translated at USD 1.00 to HKD 7.7965 and to HKD 7.8493 respectively. The average translation rates applied to statement of income accounts for the three months ended March 31, 2022 and 2023 were USD 1.00 to HKD 7.8064 and to HKD 7.8370, respectively. The balance sheet amounts, with the exception of shareholders’ equity at December 31, 2022 and March 31, 2023 were translated at USD 1.00 to RMB 6.9646 and to RMB 6.8717 respectively. The average translation rates applied to statement of income accounts for the three months ended March 31, 2022 and 2023 were USD 1.00 to RMB 6.3505 and to RMB 6.8418 respectively. The shareholders’ equity accounts were stated at their historical rate. Cash flows are also translated at average translation rates for the periods, therefore, amounts reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets.

 

Cash and cash equivalents

 

Cash and cash equivalents primarily consist of bank deposits with original maturities of three months or less, which are unrestricted as to withdrawal and use. Cash and cash equivalents also consist of funds earned from the Company’s operating revenues which were held at third party platform fund accounts which are unrestricted as to immediate use or withdraw. The Company maintains most of its bank accounts in the PRC, HK and Singapore.

 

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Accounts receivable, net

 

Accounts receivable include trade accounts due from customers. Accounts are considered overdue after 90 days. Management reviews its receivables on a regular basis to determine if the bad debt allowance is adequate and provides allowance when necessary. The allowance is based on management’s best estimates of specific losses on individual customer exposures, as well as the historical trends of collections. Account balances are charged off against the allowance after all means of collection have been exhausted and the likelihood of collection is not probable. As of March 31, 2023, the company has $1,218,672 allowance.

 

Prepaid services fees

 

Prepaid services fees are mainly payments made to vendors or services providers for future services. These amounts are refundable and bear no interest. Prepaid services fees also include money advance deposited with certain channel providers to ensure the contents of the advertisement do not violate the terms of the channel providers. The advances usually have one year term and are refundable upon contract termination. Management reviews its prepaid services fees on a regular basis to determine if the allowance is adequate and adjusts the allowance when necessary. As of March 31, 2023, no allowance was deemed necessary.

 

Cost method investments

 

The Company accounts for investments with less than 20% of the voting shares and does not have the ability to exercise significant influence over operating and financial policies of the investee using the cost method. The Company records cost method investments at the historical cost in its condensed consolidated financial statements and subsequently records any dividends received from the net accumulated earrings of the investee as income. Dividends received in excess of earnings are considered a return of investment and are recorded as reduction in the cost of the investments.

 

Cost method investments are evaluated for impairment when facts or circumstances indicate that the fair value of the long-term investments is less than its carrying value. An impairment is recognized when a decline in fair value is determined to be other-than-temporary. The Company reviews several factors to determine whether a loss is other-than-temporary. These factors include, but are not limited to, the: (i) nature of the investment; (ii) cause and duration of the impairment; (iii) extent to which fair value is less than cost; (iv) financial condition and near term prospects of the investments; and (v) ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. No event had occurred and indicated that other-than-temporary impairment existed and therefore the Company did not record any impairment charges for its investments for the three months ended March 31, 2023.

 

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Intangible assets, net

 

The Company’s intangible assets with definite useful lives primarily consist of copyrights, non-compete agreements, and technology know-hows. Identifiable intangible assets resulting from the acquisitions of subsidiaries accounted for using the purchase method of accounting are estimated by management based on the fair value of assets received. The Company amortizes its intangible assets with definite useful lives over their estimated useful lives and reviews these assets for impairment. The Company typically amortizes its intangible assets with definite useful lives on a straight-line basis over the shorter of the contractual terms or the estimated useful lives. The estimated useful lives are as follows:

 

		Useful Life
Customer relationship		4 years
Technology know-hows		5 years
Non-compete agreements		6 years
Software copyright		6 years

 

Goodwill

 

Goodwill represents the excess of the consideration paid of an acquisition over the fair value of the net identifiable assets of the acquired subsidiaries at the date of acquisition. Goodwill is not amortized and is tested for impairment at least annually, more often when circumstances indicate impairment may have occurred. Goodwill is carried at cost less accumulated impairment losses. If impairment exists, goodwill is immediately written off to its fair value and the loss is recognized in the consolidated statements of operations and comprehensive loss. Impairment losses on goodwill are not reversed.

 

The Company reviews the carrying value of intangible assets not subject to amortization, including goodwill, to determine whether impairment may exist annually or more frequently if events and circumstances indicate that it is more likely than not that an impairment has occurred. The Company has the option to assess qualitative factors to determine whether it is necessary to perform further impairment testing in accordance with ASC 350-20, as amended by ASU 2017-04. If the Company believes, as a result of the qualitative assessment, that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, then the impairment test described below is required. The Company compares the fair values of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired. If the carrying amount of a reporting unit exceeds its fair value, impairment is recognized for the difference, limited to the amount of goodwill recognized for the reporting unit. Estimating fair value is performed by utilizing various valuation techniques, with the primary technique being a discounted cash flow.

 

Impairment for long-lived assets

 

Long-lived assets, including property and equipment and intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying value of an asset may not be recoverable. The Company assesses the recoverability of the assets based on the undiscounted future cash flows the assets are expected to generate and recognize an impairment loss when estimated undiscounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. If an impairment is identified, the Company would reduce the carrying amount of the asset to its estimated fair value based on a discounted cash flows approach or, when available and appropriate, to comparable market values. For the three months ended March 31, 2023, there was $29,232 impairment of long-lived assets was recognized.

 

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Business combination

 

The purchase price of an acquired company is allocated between tangible and intangible assets acquired and liabilities assumed from the acquired business based on their estimated fair values, with the residual of the purchase price recorded as goodwill. Transaction costs associated with business combinations are expensed as incurred, and are included in general and administrative expenses in the Company’s consolidated statements of operations. The results of operations of the acquired business are included in the Company’s operating results from the date of acquisition.

 

Fair value measurement

 

The accounting standard regarding fair value of financial instruments and related fair value measurements defines financial instruments and requires disclosure of the fair value of financial instruments held by the Company.

 

The accounting standards define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement and enhance disclosure requirements for fair value measures. The three levels are defined as follow:

 

●

Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

●

Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.

 

●

Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.

 

Warrants liabilities

 

The Company accounts for warrants (Public Warrants or Private 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”) 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 consolidated statements of operations. The Company has elected to account for its Public Warrants as equity and the Private Warrants as liabilities.

 

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Revenue recognition

 

The Company adopted Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (ASC Topic 606). The ASU requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identifies the contract with the customer, (ii) identifies the performance obligations in the contract, (iii) determines the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocates the transaction price to the respective performance obligations in the contract, and (v) recognizes revenue when (or as) the Company satisfies the performance obligation.

 

(i)

Central Processing Advertising Algorithm Services

 

— Advertising display services

 

For the advertising algorithm advertising display services, the Company’s performance obligation is to identify advertising spaces, embed images or videos into films, shows and short form videos that are hosted by leading online streaming platforms in China. Revenue is recognized at a point in time when the related services have been delivered based on the specific terms of the contract, which are commonly based on specific action (i.e., cost per impression (“CPM”) for online display).

 

The Company enters into advertising contracts with advertisers where the amounts charged per specific action are fixed and determinable, the specific terms of the contracts were agreed on by the Company, the advertisers and channel providers, and collectability is probable. Revenue is recognized on a CPM basis as impressions.

 

The Company considers itself as provider of the services as it has control of the specified services and products at any time before it is transferred to the customers which is evidenced by (1) the Company is primarily responsible to its customers for products and services offered where the products were designed in house and the Company has customer services team to directly serve the customers; and (2) having latitude in establish pricing. Therefore the Company acts as the principal of these arrangements and reports revenue earned and costs incurred related to these transactions on a gross basis.

 

— Performance-based advertising service

 

The Company provides central processing algorithm performance-based advertising services for its customers, which enable the customers to get the optimal business opportunities.

 

The Company’s performance obligation is to help customers to accurately match consumers and traffic users, and thereby increasing the conversion rate of product sale using its proprietary data optimization algorithms. The Company’s revenue is recognized at a point when an ender user completes a transaction at a rate specified in contract. Related service fees are generally billed monthly, based on a per transaction basis.

 

The Company considers itself as provider of the services as it has control of the specified services and products at any time before it is transferred to the customers which is evidenced by (1) it is primarily responsible to its customers for the services offered where the algorithms and data optimization were designed and performed in house and it has customer services team to directly serve the customers; and (2) having latitude in establish pricing. Therefore, the Company acts as the principal of these arrangements and reports revenue earned and costs incurred related to these transactions on a gross basis.

 

In addition, through the Company’s data algorithm optimization, it is able to identify certain end user needs and it facilitates certain value added services to the end users. The Company engages third party services provider to perform the services. The Company concludes that it does not control the services as the third party service provider is responsible for providing the service and its responsibility is merely to facilitate the provision of these value added service to the end users and charges a fee. As such the Company recorded revenue from the value added services on a net basis when the services is provided by third party service provider.

 

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(ii)

Mobile Games Services

 

The Company generates revenue from jointly operated mobile game publishing services and the licensed out games. In accordance with ASC 606, Revenue Recognition: Principal Agent Considerations, the Company evaluates agreements with the game developers, distribution channels and payment channels in order to determine whether or not the Company acts as the principal or as an agent in the arrangement with each party respectively. The determination of whether to record the revenues gross or net is based on whether the Company’s promise to its customers is to provide the products or services or to facilitate a sale by a third party. The nature of the promise depends on whether the Company controls the products or services prior to transferring it. Control is evidenced by if the Company is primarily responsible for fulling the provision of services and has discretion in establishing the selling price. When the Company controls the products or services, its promise is to provide and deliver the products and revenue is presented gross. When the Company does not control the products, the promise is to facilitate the sale and revenue is presented net.

 

— Jointly operated mobile game publishing services

 

The Company offers publishing services for mobile games developed by third-party game developers. The Company acted as a distribution channel that it will publish the games on their own app or a third-party owned app or website, named game portals. Through these game portals, game players can download the mobile games to their mobile devices and purchase coins, the virtual currency, for in game premium features to enhance their game playing experience. The Company contracts with third-party payment platforms for collection services offered to game players who have purchased coins. The third-party game developers, third-party payment platforms and the co-publishers are entitled to profit sharing based on a prescribed percentage of the gross amount charged to the game players. The Company’s obligation in the publishing services is completed at a point in time when the game players made a payment to purchase coins.

 

With respect to the publishing services arrangements between the Company and the game developer, the Company considered that the Company does not control the services as evidenced by (i) developers are responsible for providing the game product desired by the game players; (ii) the hosting and maintenance of game servers for running the online mobile games is the responsibility of the third-party platforms; (iii) the developers or third-party platforms have the right to change the pricing of in game virtual items. The Company’s responsibilities are publishing, providing payment solution and market promotion service, and thus the Company views the game developers to be its customers and considers itself as the facilitator of the game developers in the arrangements with game players. Accordingly, the Company records the game publishing service revenue from these games, net of amounts paid to the game developers.

 

— Licensed out mobile games

 

The Company also licenses third parties to operate its mobile games developed internally through mobile portal and receives revenue from the third-party licensee operators on a monthly basis. The Company’s performance obligation is to provide mobile games to game operators which enable players of the mobile games to make in game purchases and the Company recognized revenue at a point in time when game players completed the purchases. The Company records revenues on a net basis, as the Company does not have the control of the services provided as it does not have the primary responsibility for fulfilment nor does not have the right to change the pricing of the game services.

 

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(iii)

Sale of intelligent chips

 

Starting in September 2020, the Company has also been engaged in resale of intelligent chips products and accessories. The Company typically enters into written contracts with its customer where the rights of the parties, including payment terms, are identified and sales prices to the customers are fixed with no separate sales rebate, discount, or other incentive and no right of return exists on sales of inventory. The Company’s performance obligation is to deliver products according to contract specifications. The Company recognizes gross product revenue at a point in time when the control of products or services are transferred to customers.

 

To distinguish a promise to provide products from a promise to facilitate the sale from a third party, the Company considers the guidance of control in ASC 606-10-55-37A and the indicators in 606-10-55-39. The Company considers this guidance in conjunction with the terms in the Company’s arrangements with both suppliers and customers.

 

In general, the Company controls the products as it has the obligation to (i) fulfil the products delivery and (ii) bear any inventory risk as legal owners. In addition, when establishing the selling prices for delivery of the resale products, the Company has control to set its selling price to ensure it would generate profit for the products delivery arrangements. The Company believes that all these factors indicate that the Company is acting as a principal in this transaction. As a result, revenue from the sales of products is presented on a gross basis.

 

Off-Balance Sheet Arrangements

 

As of March 31, 2023, we had no off-balance sheet arrangements as defined in Instruction 8 to Item 303(b) of Regulation S-K.

 

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Recent Accounting Pronouncements

 

In May 2019, the FASB issued ASU 2019-05, which is an update to ASU Update No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced the expected credit losses methodology for the measurement of credit losses on financial assets measured at amortized cost basis, replacing the previous incurred loss methodology. The amendments in Update 2016-13 added Topic 326, Financial Instruments — Credit Losses, and made several consequential amendments to the Codification. Update 2016-13 also modified the accounting for available-for-sale debt securities, which must be individually assessed for credit losses when fair value is less than the amortized cost basis, in accordance with Subtopic 326-30, Financial Instruments — Credit Losses — Available-for-Sale Debt Securities. The amendments in this Update address those stakeholders’ concerns by providing an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. For those entities, the targeted transition relief will increase comparability of financial statement information by providing an option to align measurement methodologies for similar financial assets. Furthermore, the targeted transition relief also may reduce the costs for some entities to comply with the amendments in Update 2016-13 while still providing financial statement users with decision-useful information.

 

In November 2019, the FASB issued ASU No. 2019-10, which to update the effective date of ASU No. 2016-02 for private companies, not-for-profit organizations and certain smaller reporting companies applying for credit losses, leases, and hedging standard. The new effective date for these preparers is for fiscal years beginning after December 15, 2022. We are still evaluating the impact of the adoption of this ASU on our unaudited condensed consolidated financial statements.

 

In October 2020, the FASB issued ASU 2020-08, “Codification Improvements to Subtopic 310-20, Receivables — Nonrefundable Fees and Other Costs”. The amendments in this Update represent changes to clarify the Codification. The amendments make the Codification easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. ASU 2020-08 is effective for us for annual and interim reporting periods beginning July 1, 2021. Early application is not permitted. All entities should apply the amendments in this Update on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities. These amendments do not change the effective dates for Update 2017-08. The adoption of this new standard does not have material impact on Company’s unaudited condensed consolidated financial statements and related disclosures.

 

Except as mentioned above, we do not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on our consolidated balance sheets, statements of income and comprehensive income and statements of cash flows.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

As a smaller reporting company, as defined by Rule 229.10(f) (1) of Regulation S-K, we are not required to provide the information required by this Item.

 

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Item 4. Controls and Procedures.

 

Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures

 

The Company maintains disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The Company’s management, with the participation of its chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report. Based on this evaluation, its principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report.

 

Changes in Internal Control Over Financial Reporting

 

There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the three months ended March 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Inherent Limitations on Effectiveness of Controls

 

Our management, including our Chief Executive Officer and our Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by the collusion of two or more people or by management override of controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

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PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

We may be subject from time to time to various claims, lawsuits, and other legal and administrative proceedings arising in the ordinary course of business. Some of these claims, lawsuits, and other proceedings may involve highly complex issues that are subject to substantial uncertainties, and could result in damages, fines, and penalties, non-monetary sanctions, or relief. We intend to recognize provisions for claims or pending litigation when we determine that an unfavorable outcome is probable, and the amount of loss can be reasonably estimated. Due to the inherent uncertain nature of litigation, the ultimate outcome or actual cost of settlement may materially vary from estimates.

 

Item 1A. Risk Factors.

 

Factors that could cause our actual results to differ materially from those in this Quarterly Report are any of the risks described in our annual report on the Form 10-K for the fiscal year ended December 31, 2022 under Forward-Looking Statements and Item 1A–Risk Factors, filed with the SEC on March 29, 2023. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations. As of the date of this Quarterly Report, there have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

There were no Unregistered Sales of Equity Securities during the quarter ended March 31, 2023.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

Not applicable.

 

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Item 6. Exhibits.

 

Incorporated by Reference

Exhibit Number

Exhibit Description

Form

File No.

Exhibit

Filing Date

Filed Herewith

3.1

MicroAlgo Inc. Amended and Restated Articles of Incorporation

8-K

3.1

December 16, 2022

4.1

Specimen Ordinary Share Certificate

8-K

4.1

December 16, 2022

4.2

Description of SECURITIES

10-K

4.2

March 29, 2023

31.1

Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

X

31.2

Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

X

32.1†

Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

X

32.2†

Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

X

101.INS

XBRL Instance Document.

X

101.SCH

XBRL Taxonomy Extension Schema Document.

X

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.

X

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.

X

101.LAB

XBRL Taxonomy Extension Labels Linkbase Document.

X

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.

X

104

Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).

X

 

 

†

The certifications attached accompany this Quarterly Report on Form 10-Q are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of MicroAlgo Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: May 8, 2023

 

	MicroAlgo Inc.
	/s/ Min Shu
	Min Shu
	Chief Executive Officer (Principal Executive Officer)
	/s/ Li He
	Li He
	Chief Financial Officer (Principal Financial and Accounting Officer)

 

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