MicroCloud Hologram Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the notes related thereto which are included in “Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. Certain information contained in the discussion and analysis set forth below includes forward-looking statements. Special Note Regarding Forward-Looking Statements All statements other than statements of historical fact included in this Form 10-K including, without limitation, statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding the Company’s financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. When used in this Form 10-K, words such as “anticipate,” “believe,” “estimate,” “expect,” “intend” and similar expressions, as they relate to us or the Company’s management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, the Company’s management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors detailed in our filings with the SEC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and the notes thereto contained elsewhere in this Report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties. Overview We are a blank check company incorporated in the Cayman Islands on May 9, 2018. We are formed for the purpose of effecting a merger, share exchange, asset acquisition, stock purchase, reorganization, or similar business combination with one or more businesses in a Business Combination. Although we are not limited to a particular industry or geographic region for purposes of consummating a Business Combination, we intend to focus on businesses that have a connection to the Asian market. We are an early stage and emerging growth company and, as such, we are subject to all of the risks associated with early stage and emerging growth companies. We intend to effectuate our initial business combination using cash from the proceeds of the IPO and the private placement of the private placement units, the proceeds of the sale of our securities in connection with our initial business combination (pursuant to backstop agreements we may enter into following the consummation of the IPO or otherwise), our shares, debt or a combination of cash, stock and debt. The issuance of additional shares in a Business Combination: ● may significantly dilute the equity interest of investors in the IPO; ● may subordinate the rights of holders of ordinary shares if preference shares are issued with rights senior to those afforded our ordinary shares; ● could cause a change of control if a substantial number of our ordinary shares are issued, which may affect, among other things, our ability to use our net operating loss carry forwards, if any, and could result in the resignation or removal of our present officers and directors; ● may have the effect of delaying or preventing a change of control of us by diluting the share ownership or voting rights of a person seeking to obtain control of us; and ● may adversely affect prevailing market prices for our ordinary shares and/or warrants. 58 Similarly, if we issue debt securities, it could result in: ● default and foreclosure on our assets if our operating revenues after an initial business combination are insufficient to repay our debt obligations; ● acceleration of our obligations to repay the indebtedness even if we make all principal and interest payments when due if we breach certain covenants that require the maintenance of certain financial ratios or reserves without a waiver or renegotiation of that covenant; ● our immediate payment of all principal and accrued interest, if any, if the debt security is payable on demand; ● our inability to obtain necessary additional financing if the debt security contains covenants restricting our ability to obtain such financing while the debt security is outstanding; ● our inability to pay dividends on our ordinary shares; ● using a substantial portion of our cash flow to pay principal and interest on our debt, which will reduce the funds available for dividends on our ordinary shares if declared, expenses, capital expenditures, acquisitions and other general corporate purposes; ● limitations on our flexibility in planning for and reacting to changes in our business and in the industry in which we operate; ● increased vulnerability to adverse changes in general economic, industry and competitive conditions and adverse changes in government regulation; and ● limitations on our ability to borrow additional amounts for expenses, capital expenditures, acquisitions, debt service requirements, execution of our strategy and other purposes and other disadvantages compared to our competitors who have less debt.] Recent Developments On September 10, 2021, we, MC and the Merger Sub, entered into the Merger Agreement. Pursuant to the Merger Agreement, upon the terms and subject to the conditions of the Merger Agreement and in accordance with the Cayman Islands Companies Act (As Revised), the parties intend to effect a business combination transaction whereby the Merger Sub will merge with and into MC, with MC being the surviving entity and becoming a wholly owned Subsidiary of the Company on the terms and subject to the conditions set forth in the Merger Agreement and simultaneously with the closing, the Company will change its name to “MicroCloud Hologram Inc.” The Board of Directors of both the Company and MC and the stockholders of MC have approved the Merger Agreement and the transactions contemplated by it. Pursuant to the Merger Agreement, the Merger is structured as a stock for stock transaction and is intended to be qualified as a tax-free reorganization. The terms of the Merger provide for a valuation of MC and its subsidiaries and businesses of $450,000,000. Based upon a per share value of $10.10 per share, the stockholders of MC will receive approximately 44,554,455 ordinary shares of the Company which will represent approximately 84.07% of the combined outstanding shares following the closing, assuming no redemptions by our stockholders and assuming conversion of our outstanding rights into 602,050 ordinary shares. Consummation of the transactions contemplated by the Merger Agreement are subject to customary conditions of the respective parties, including the approval of the Merger Agreement by our shareholders. Other than as specifically discussed, this report does not assume the closing of the business combination with MC. 59 Results of Operations Our entire activity from inception up to June 24, 2021 was in preparation for the initial public offering. Since the initial public offering, our activity has been limited to the evaluation of business combination candidates and activities in connection with the proposed acquisition of MC, and we will not be generating any operating revenues until the closing and completion of our initial business combination. We expect to incur increased expenses as a result of being a public company (for legal, financial reporting, accounting and auditing compliance), as well as for due diligence expenses. We expect our expenses to increase substantially after this period. For the year ended December 31, 2021, we had a net loss of $740,299, which was comprised of change in fair value of warrant liabilities, dividend income and general and administrative expenses. For the year ended December 31, 2020, we had a net loss of $32,267, which consists of formation and operating costs. Liquidity and Capital Resources On June 24, 2021, we consummated the Initial Public Offering of 5,750,000 ordinary units (the “Public Units”), which includes the full exercise by our underwriter of its over-allotment option in the amount of 750,000 Public Units, at $10.00 per Public Unit, generating gross proceeds of $57,500,000. Simultaneously with the closing of the Initial Public Offering, we consummated the sale of 270,500 units (the “Private Units”) at a price of $10.00 per Private Unit in a private placement to Greenland Asset Management Corporation (the “Sponsor”), generating gross proceeds of $2,705,000. Transaction costs amounted to $2,887,500, consisting of $1,150,000 of underwriting fees, $1,437,500 of deferred underwriting fees and $300,000 of other offering costs. As of December 31, 2021, cash of $48,955 was held outside of the Trust Account and is available for the payment of offering costs and for working capital purposes. We intend to use the funds held outside the Trust Account primarily to identify and evaluate prospective acquisition candidates, perform business due diligence on prospective target businesses, travel to and from the offices, plants or similar locations of prospective target businesses, review corporate documents and material agreements of prospective target businesses, select the target business to acquire and structure, negotiate and consummate a Business Combination. The Sponsor had previously advanced expenses or loaned the Company the sum of $453,364, evidenced in part by a note dated as of December 19, 2020 which loan was payable upon the earlier of completion of the IPO or December 31, 2021. In connection with the completion of the IPO, the note was repaid in full via an offset of certain amounts due under the Private Placement subscription. In addition, in order to finance transaction costs in connection with an intended initial business combination, our sponsor or an affiliate of our sponsor or certain of our officers and directors may, but are not obligated to, loan us funds as may be required. If we complete our initial business combination, we would repay such loaned amounts out of the proceeds of the trust account released to us. Otherwise, such loans would be repaid only out of funds held outside the trust account. In the event that our initial business combination does not close, we may use a portion of the working capital held outside the trust account to repay such loaned amounts but no proceeds from our trust account would be used to repay such loaned amounts. Up to $1,500,000 of such loans may be convertible into units at a price of $10.00 per unit at the option of the lender. As of December 31, 2021 and 2020, we had temporary advances of $164,740 and $36,784 from a related party for the payment of costs related to our business combination transaction and the Initial Public Offering respectively. The balance is unsecured, interest-free and has no fixed terms of repayment. Other than potential loans from our sponsor we do not believe we will need to raise additional funds following the IPO in order to meet the expenditures required for operating our business. However, if our estimates of the costs of identifying a target business, undertaking in-depth due diligence and negotiating an initial business combination are less than the actual amount necessary to do so, we may have insufficient funds available to operate our business prior to our initial business combination. Moreover, we may need to obtain additional financing either to complete our initial business combination or because we become obligated to redeem a significant number of our public shares upon completion of our initial business combination, in which case we may issue additional securities or incur debt in connection with such business combination. If the Company is unable to raise additional capital, it may be required to take additional measures to conserve liquidity, which could include, but not necessarily be limited to, curtailing operations, suspending the pursuit of a potential transaction, and reducing overhead expenses. The Company cannot provide any assurance that new financing will be available to it on commercially acceptable terms, if at all. These conditions raise substantial doubt about the Company’s ability to continue as a going concern through one year from the date of these financial statements if a Business Combination is not consummated. These consolidated financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern. 60 Off-balance sheet financing arrangements We have no obligations, assets or liabilities, which would be considered off-balance sheet arrangements as of December 31, 2021. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements. We have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or purchased any non-financial assets. Contractual obligations At December 31, 2021, we have long-term liabilities, other than an agreement to pay an affiliate of our sponsor a monthly fee of $10,000 for office space, administrative and support services provided to the Company. We began incurring these fees on June 24, 2021 and will continue to incur these fees monthly until the earlier of the completion of the business combination and the Company’s liquidation. We did not have any long-term debt, capital lease obligations or operating lease obligations. However, we are committed to the below: Registration Rights Pursuant to a registration rights agreement entered into on June 24, 2021 the holders of the Founder Shares, Private Units (and their underlying securities) and any Units that may be issued upon conversion of the Working Capital Loans (and underlying securities) are entitled to registration rights. The holders of these securities are entitled to make up to three demands, excluding short form demands, that we register such securities. In addition, the holders have certain “piggy-back” registration rights with respect to registration statements filed subsequent to the consummation of a Business Combination and rights to require us to register for resale such securities pursuant to Rule 415 under the Securities Act. We will bear the expenses incurred in connection with the filing of any such registration statements. Underwriting Agreement We have an agreement to pay the underwriters a deferred fee of two and one-half percent (2.5%) of the gross proceeds of the initial public offering, or $1,437,500. Critical Accounting Policies The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and income and expenses during the years reported. Actual results could materially differ from those estimates. We have identified the following critical accounting policies: Warrant liabilities We account 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 our own ordinary shares and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of our control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding. For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of equity at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded as liabilities at their initial fair value on the date of issuance, and each balance sheet date thereafter. Changes in the estimated fair value of the warrants are recognized as a non-cash gain or loss on the statements of operations. We have elected to account for its Public Warrants as equity and the Private Warrants as liabilities. Ordinary shares subject to possible redemption We account for its ordinary shares subject to possible redemption in accordance with the guidance in ASC Topic 480, Distinguishing Liabilities from Equity . Ordinary share subject to mandatory redemption (if any) is classified as a liability instrument and is measured at fair value. Conditionally redeemable ordinary shares (including ordinary shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within our control) are classified as temporary equity. At all other times, ordinary shares are classified as shareholders’ equity. As of December 31, 2021, our ordinary shares feature certain redemption rights that are considered to be outside of our control. 5,750,000 ordinary shares subject to possible redemption are presented as temporary equity, outside of the shareholders’ equity section of our balance sheet. 61 Net loss per share We calculate net loss per share in accordance with ASC Topic 260, Earnings per Share . In order to determine the net income (loss) attributable to both the redeemable shares and non-redeemable shares, we first considered the undistributed income (loss) allocable to both the redeemable ordinary shares and non-redeemable ordinary shares and the undistributed income (loss) is calculated using the total net loss less any dividends paid. We then allocated the undistributed income (loss) ratably based on the weighted average number of shares outstanding between the redeemable and non-redeemable ordinary shares. Any remeasurement of the accretion to redemption value of the ordinary shares subject to possible redemption was considered to be dividends paid to the public stockholders. As of December 31, 2021, we have not considered the effect of the warrants sold in the Initial Public Offering to purchase an aggregate of 1,454,000 shares in the calculation of diluted net loss per share, since the exercise of the warrants is contingent upon the occurrence of future events and the inclusion of such warrants would be anti-dilutive and we did not have any other dilutive securities and other contracts that could, potentially, be exercised or converted into ordinary share and then share in our earnings. As a result, diluted loss per share is the same as basic loss per share for the years presented. The net loss per share presented in the consolidated statement of operations is based on the following: For the Years Ended December 31, 2021 2020 Net loss $ (740,299 ) $ (32,267 ) Accretion of carrying value to redemption value (4,083,064 ) - Net profit $ (4,823,363 ) $ (32,267 ) For the Year Ended December 31, 2021 For the Year Ended December 31, 2020 Redeemable Ordinary shares Non-Redeemable Ordinary shares Redeemable Ordinary shares Non-Redeemable Ordinary shares Basic and diluted net loss per share: Numerators: Allocation of net loss including carrying value to redemption value $ (3,158,084 ) $ (1,665,279 ) $ - $ (32,267 ) Accretion of carrying value to redemption value 4,083,064 - - - Allocation of net income (loss) $ 924,980 $ (1,665,279 ) $ - $ (32,267 ) Denominators: Weighted-average shares outstanding 2,993,151 1,578,308 - 10 Basic and diluted net income (loss) per share $ 0.31 $ (1.06 ) $ - $ (3,227 ) Recent accounting pronouncements Management does not believe that any other recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on our financial statements.