MicroAlgo Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 on May 14, 2018 in the Cayman Islands with limited liability (meaning our shareholders have no liability, as members of the Company, for the liabilities of the Company over and above the amount already paid for their shares) formed for the purpose of acquiring, engaging in a share exchange, share reconstruction and amalgamation with, purchasing all or substantially all of the assets of, or engaging in any other similar business combination with one or more businesses or entities. We intend to effectuate our business combination using cash from the proceeds of our initial public offering and the sale of the Private Units that occurred simultaneously with the completion of our initial public offering, our shares, debt or a combination of cash, shares and debt. The issuance of additional shares in a business combination: ● may significantly dilute the equity interest of investors who would not have pre-emption rights in respect of any such issue; ● may subordinate the rights of holders of ordinary shares if the rights, preferences, designations and limitations attaching to the preferred shares are created by amendment of our memorandum and articles of association by resolution of the board of directors and preferred shares are issued with rights senior to those afforded our ordinary shares ; ● could cause a change in control if a substantial number of 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. Similarly, if we issue debt securities or otherwise incur significant indebtedness, it could result in: ● default and foreclosure on our assets if our operating revenues after our 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; 61 ● 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 any document governing such debt 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. We expect to continue to incur significant costs in the pursuit of our acquisition plans. We cannot assure you that our plans to complete a Business Combination will be successful. Recent Developments Business Combination with VIYI and WiMi On June 10, 2021, we, VIYI, Merger Sub, and WiMi, entered into the Merger Agreement. WiMi holds approximately 73% of the share capital of VIYI. 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 VIYI, with VIYI being the surviving entity and becoming a wholly owned subsidiary of us on the terms and subject to the conditions set forth in the Merger Agreement and simultaneously with the closing we will change our name to “MicroAlgo Inc.” The Board of Directors of both us and VIYI and the stockholders of VIYI 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 VIYI and its subsidiaries and businesses of $400,000,000. Based upon a per share value of $10.10 per share, the VIYI stockholders will receive approximately 39,600,000 ordinary shares of us which will represent approximately 85% of the combined outstanding shares following the closing, assuming no redemptions by our stockholders and assuming conversion of our outstanding rights into 485,000 ordinary shares. Currently, there are 6,050,000 ordinary shares of us issued and outstanding (including 4,600,000 ordinary shares subject to possible redemption) (assuming all the units were separated into their component parts on such date). At the effective time of the Merger Agreement, all outstanding options and other convertible securities of VIYI will be cancelled or converted into ordinary shares of VIYI and exchanged for our ordinary shares as part of the consideration described above. As contemplated by and as a condition of the Merger Agreement, we entered into a backstop agreement with Ever Abundant Investments Limited, dated as of June 10, 2021. On January 24, 2022, we agreed with Ever Abundant Investments Limited to terminate the backstop agreement. 62 In addition, on January 24, 2022, we entered into an amendment to the Merger Agreement with VIYI and WiMi. The purposes of the amendment were to: 1. extend the outside termination date of the proposed merger to June 30, 2022; 2. provide for the termination of the original backstop agreement and the execution of the new backstop agreement with the majority shareholder of VIYI; and 3. acknowledge the existence of new potential governmental approvals required under recent changes in China law. Pursuant to the amendment to the Merger Agreement, on January 24, 2022, we entered into a backstop agreement with WiMi. Under the new agreement, WiMi agreed to purchase (i) ordinary shares in open market transactions in connection with any tendered or proposed redemptions, and (ii) from us ordinary shares in a private placement transaction exempt from registration under the Securities Act of 1933, as amended. Any purchases, either from our shareholders seeking to redeem ordinary shares, or from us are limited to up to $15 million in gross amount. WiMi has agreed that any ordinary shares acquired by it will not be subject to redemption under our corporate organizational documents and also waived any claims against our Trust Account. 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, and minimum net tangible assets immediately after the closing. Other than as specifically discussed, this report does not assume the closing of the business combination with VIYI. Extensions On February 11, 2022, we elected to extend the date by which we are required to complete a business combination to March 11, 2022 and deposited $153,333 into our trust account. On February 11, 2022, we issued an unsecured promissory note, each in an amount of $153,333 to the Sponsor, pursuant to which such amount had been deposited into the Trust Account in order to extend the amount of available time to complete a business combination until March 11, 2022. The note is non-interest bearing and payable upon the closing of a business combination. In addition, the note may be converted, at the lender's discretion, into additional Private Units at a price of $10.00 per unit. On March 11, 2022, we elected to further extend the date by which we are required to complete a business combination to April 11, 2022 and deposited $153,333 into our trust account. Results of Operations We have neither engaged in any operations nor generated any revenues to date. Our only activities from inception through December 31, 2021 were organizational activities, those necessary to prepare for the initial public offering, described below, and identifying a target business for a business combination and activities in connection with the proposed acquisition of VIYI. We do not expect to generate any operating revenues until after the completion of our business combination. We generate non-operating income in the form of interest income on marketable securities held after the initial public offering. We are incurring expenses as a result of being a public company (for legal, financial reporting, accounting and auditing compliance), as well as for due diligence expenses in connection with completing a Business Combination. For the year ended December 31, 2021, we had a net loss of $812,413, which consists of formation and operating costs of $785,096. For the year ended December 31, 2020, we had a net loss of $117,787, which consists of formation and operating costs of $117,787. Liquidity and Capital Resources On February 11, 2021, we consummated the initial public offering of 4,600,000 Units at a price of $10.00 per Unit, generating gross proceeds of $46,000,000. Simultaneously with the closing of the initial public offering, we consummated the sale of 225,000 Private Units to the sponsor and the underwriter at a price of $10.00 per unit, generating gross proceeds of $2,250,000. Following the initial public offering and the sale of the Private Units, a total of $45,120,075 was placed in the Trust Account and we had $1,339,925 of cash held outside of the Trust Account, after payment of costs related to the initial public offering, and available for working capital purposes. On February 18, 2021, we transferred $1,339,925 of such amount to the trust account. We incurred $2,462,765 in transaction costs, including $805,000 of underwriting fees, $1,150,000 of deferred underwriting fees and $507,765 of offering costs. 63 For the year ended December 31, 2021, cash used in operating activities was $748,227, consisting primarily of a net loss of $812,413. Changes in our operating assets and liabilities provided cash of $36,869. For the year ended December 31, 2020, cash used in operating activities was $77,815, consisting primarily of a net loss of $117,787. Changes in our operating assets and liabilities provided cash of $39,972. At December 31, 2021, we had cash of $32,090 held outside the Trust Account. 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. We issued an unsecured promissory note to our sponsor in the aggregate amount of $450,000. On February 11, 2021, the outstanding balance under the Promissory Note was repaid in full to the Sponsor. As of December 31, 2021 and 2020, we had temporary advances of $373,421 and $26,750 from a related party for the payment of costs related to the initial public offering. The balance is unsecured, interest-free and has no fixed terms of repayment. Other than as described above, in order to fund working capital deficiencies or finance transaction costs in connection with a 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 a Business Combination, we would repay such loaned amounts. In the event that a 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 for such repayment. Up to $1,500,000 of such loans may be convertible into Private Units, at a price of $10.00 per unit at the option of the lender. We do not believe we will need to raise additional funds in order to meet the expenditures required for operating our business. However, if our estimate of undertaking in-depth due diligence and negotiating a Business Combination is less than the actual amount necessary to do so, we may have insufficient funds available to operate our business prior to our Business Combination. Moreover, we may need to obtain additional financing either to consummate our Business Combination or because we become obligated to redeem a significant number of our public shares upon consummation of our Business Combination, in which case we may issue additional securities or incur debt in connection with such Business Combination. Subject to compliance with applicable securities laws, we would only consummate such financing simultaneously with the consummation of our Business Combination. Following our Business Combination, if cash on hand is insufficient, we may need to obtain additional financing in order to meet our obligations. 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. 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 As of 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 February 8, 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 do not have any long-term debt, capital lease obligations or operating lease obligations. In addition, 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 $1,000,000. Pursuant to the agreement we have with the underwriter, we will have the right to pay up to $400,000 of such amount to other advisors retained by us to assist us in connection with a Business Combination; provided, however, that we may, in its sole discretion, apply such 1.0% fee to other deal expenses instead. 64 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 periods reported. Actual results could materially differ from those estimates. We have identified the following critical accounting policies: Ordinary shares subject to redemption We account for our ordinary shares subject to possible conversion in accordance with the guidance in Accounting Standards Codification (“ASC”) Topic 480 “ Distinguishing Liabilities from Equity .” Ordinary shares subject to mandatory redemption are classified as a liability instrument and are 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. Our ordinary shares feature certain redemption rights that are considered to be outside of our control and subject to occurrence of uncertain future events. Accordingly, ordinary shares subject to possible redemption are presented at redemption value as temporary equity, outside of the shareholders’ equity section of our balance sheets. 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. Net loss per ordinary 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 2,412,500 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. 65 The net loss per share presented in the statement of operations is based on the following: Years Ended December 31, 2021 2020 Net loss $ (812,412 ) $ (117,787 ) Accretion of carrying value to redemption value (3,641,991 ) - Net income $ (4,454,403 ) $ (117,787 ) Years Ended December 31, 2021 Years 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 $ (3,305,127 ) $ (1,149,276 ) $ - $ (117,787 ) Accretion of carrying value to redemption value 3,641,991 - - - Allocation of net income (loss) $ 336,864 $ (1,149,276 ) $ - $ (117,787 ) Denominators: Weighted-average shares outstanding 4,070,685 1,415,479 - 1,000,000 Basic and diluted net income (loss) per share $ 0.08 $ (0.81 ) $ - $ (0.12 ) 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.