MicroAlgo Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Overview We are dedicated to the development and application of bespoke central processing algorithms. We provide comprehensive solutions to customers by integrating central processing algorithms with software or hardware, or both, to streamline their digital services for end-users or technological development purposes, thereby helping them increase the 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. Our ability to efficiently deliver software and hardware optimization to our customers through bespoke central processing algorithms serves as a driving force for our long-term development. Currently, our technology and solutions are mainly in the field of internet multimedia video advertising, internet gaming entertainment, where we have historically been successful in providing advertising distribution solutions, online game agent solutions, software services, and comprehensive solutions for enterprise customers and intelligent chips solutions as we believe that the demand for algorithms in the semiconductor sector is growing rapidly, representing huge market potentials. In the mid-to-long term, we will continue to adhere to its 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. We derive our revenue primarily from (i) central processing algorithms services for the internet advertisement and internet gaming industries (“CPA”) and (ii) intelligent chips and services, including software development. Our revenue for the year ended December 31, 2022 was $87.1 million, which represents an increase of $5.1 million, or 6.2%, from Our total revenues of $82.0 million for the year ended December 31, 2021. Our gross profit for the year ended December 31, 2022 was $19.0 million, representing a decrease of $14.1 million, or 42.8%, from $33.1 million for the year ended December 31, 2021. Our operating expenses for the year ended December 31, 2022 was $26.8 million, representing a increase of $1.7 million, or 7.1%, from $25.1 million for the year ended December 31, 2021. Our net loss for the year ended December 31, 2022 was $6.9 million, representing an decrease of $16.1 million, or 187.3%, from $8.5 million net income for the year ended December 31, 2021. Key Factors Affecting Results of Operations We believe that its future performance and success depend to a substantial extent on the following factors, each of which is in turn subject to significant risks and challenges, including those discussed below and in the section of this report entitled “Risk Factors.” The ability to increase and retain customers A significant amount of our historical VIE’s revenues are derived from the provision of central processing algorithm services, as such our historical VIE’s profitability is highly dependent on their ability to retain and increase customers who engage us in providing central processing algorithm services. For the years ended December 31, 2021 and 2022, our subsidiaries and our historical VIE had 196 and 142 customers, respectively. Since September 2020, we also began developing its intelligent chips and services business and has accumulated 52 and 31 customers for the years ended December 31, 2021 and 2022 respectively. 54 The average revenues per customer in the CPA segment were approximately $217,000 and $468,861, respectively for the years ended December 31, 2021 and 2022. Average revenue per customer in our CPA segment, calculated as the total revenues for the given period divided by the number of customers during the period who have obtained our services. Customer retention rates for CPA segment for the same periods were 82.8% and 66.5%, respectively, whereas retention rate for intelligent chips and services was 100% and 63.3% for the years ended December 31, 2021 and 2022. Retention rate is calculated by first counting the number of existing customers at the beginning of the period (denominator) and the number of those customers who are still active at the end of the following period (numerator), then dividing the numerator by the denominator. The quantitative information in the number of customers, the number of new customers, and average revenue per customer provides investors with information to evaluate our revenue growth and concentration of revenue on a periodic basis to evaluate the trend which could be relevant to investors while customer retention rate will provide investors with information about our ability to retain customers which is an indicator of the stability of our revenue base. This information also provides investors insights on how we measure and monitors its performance. Our management team monitors the number of customers and the number of new customers as indicators of the growth of our overall business. The increase in new customers indicates the effectiveness of our business expansion and reflects our strong business development capabilities. The retention rate shows that we have high service quality, which can meet customer needs and provide its customers with value. At the same time, the retention rate of customers also guarantees the stable growth our business. If the number of new customers and retention rate fall, we may need to re-evaluate its business strategy or evaluate its service efficiency. Our ability to increase customers, average revenue per customer and retention rate will depend on the development of the internet advertising, online gaming and intelligent chips market and its ability to continue to enhance the quality and capabilities of its algorithms which enabled us to provide better services for customers. The demand for our services has grown in recent years, and we believes that the number of customers will continue to grow due to the increase in a general demand for more efficient data processing in various industries driven by the growing internet population and expect that retention rates will remain at high levels in the long term as we continue to build stable cooperation relationship with its customers. Investment in technology and talent We expend considerable capital and efforts in the research and development of algorithmic use cases and product solutions to maintain our competitiveness in the computer and internet industries. In light of the rapid growth of data volume, data processing capabilities are the key to enterprise development, which requires the advancement of technology related to central processing algorithms, new services, products, and capabilities to newer stages of development. To retain existing customers and attract potential customers, we must continue to innovate to keep pace with the growth of the industry and our business to bring forward new cutting-edge technologies. Our current research and development efforts primarily focus on enhancing its artificial intelligence technology, image processing technology, intelligent chips, and application solutions to create novel service and product offerings. we spent approximately $16.6 million and $13.9 million on research and development for the years ended December 31, 2021 and 2022, respectively. China’s increased demand for central processing algorithm services in internet advertisement and the online game industry Effective central processing algorithm solutions can empower downstream industries experiencing high demand for data analysis and computing power optimization, which applies to internet advertising, internet game applications, finance, retail, logistics, and other industries. Because of huge downstream demands, the overall market of central processing algorithm services is enormous. Our ability to pursue strategic opportunities for growth We intend to continually pursue strategic acquisitions and investments in selective technologies and businesses in the central processing algorithm and semiconductor industries to enhance our technology capabilities. We believe that a solid acquisition and investment strategy may be critical for us to accelerate our growth and strengthen its competitive position in the future. our ability to identify and execute strategic acquisitions and investments will likely affect our operating results over time. 55 Our ability to expand its application fields and to diversify its customer base Currently, the primary source of our revenue is derived from providing central processing algorithm solutions to businesses in the entertainment and internet advertisement industries. With increasing awareness and acceptance of this technology, we expect that more applications will be identified to magnify the value of this technology, such as the industry of the Internet, finance, local government, and manufacturing industries that have strong demand for data empowerment. Expand the scenario application of central processing algorithm services. Our ability to expand its application fields and diversify its customer base may affect our operating results in the future. Impact of COVID-19 The ongoing outbreak of the novel coronavirus (COVID-19) has spread rapidly to many parts of the world. In March 2020, the World Health Organization declared the COVID-19 as a pandemic. The pandemic has resulted in quarantines, travel restrictions, and the temporary closure of stores and business facilities in China for the first few months in 2020. As a result of the resurgence of COVID-19 variants in first quarter of 2022 in China, our office in the PRC was again closed for one week in first quarter of 2022. We resumed normal operation since April 2022. Due to the nature of our business, the impact of the closure on our operational capabilities were not significant, as most of our workforce continued working offsite during such closure. Our customers have been impacted as a result of business disruption due to closures in various cities, which affected their customers’ advertising spending. As a result, we experienced lower revenue growth on advertising which affected our gross margin. In early December 2022, Chinese government eased the strict control measure for COVID-19, which has led to surge in increased infections and disruption in our business operations. Any future impact of COVID-19 on the Company’s China operation results will depend on, to a large extent, future developments and new information that may emerge regarding the duration and resurgence of COVID-19 variants and the actions taken by government authorities to contain COVID-19 or treat its impact, almost all of which are beyond our control. Key Components of 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 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. Selling expenses Our selling expenses consist primarily of (i) compensation for selling personnel and (ii) travel expenses for its sales representatives. 56 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: The following table summarizes our consolidated results of operations for the years ended December 31, 2021 and 2022. This information should be read together with our consolidated financial statements, and related notes included elsewhere in this report. For the Years Ended December 31, 2021 2022 US $ US $ Operating revenues 82,035,289 87,132,230 Cost of revenues (48,918,412 ) (68,180,339 ) Gross profit 33,116,877 18,951,891 Operating expenses (25,067,464 ) (26,812,591 ) Income from operations 8,049,414 (7,860,700 ) Other income, net 519,911 375,914 (Provision) Benefit for income taxes (84,819 ) 564,793 Net income (loss) 8,484,506 (6,919,993 ) Less: Net (loss) income attributable to non-controlling interests (83,401 ) 43,553 Net income (loss) attributable to MicroAlgo Inc. 8,567,907 (6,963,546 ) Other comprehensive income (loss) 1,147,887 (4,555,839 ) Less: Comprehensive (loss) income attributable to noncontrolling interests (77,298 ) 5,271 Comprehensive income (loss) attributable to Algorithm Inc. 9,709,691 (11,481,103 ) Year Ended December 31, 2021, Compared to the Year Ended December 31, 2022 Revenues Our total revenues increased by approximately 5.1 million, or 6.2%, from approximately $82.0 million for the year ended December 31, 2021, to approximately $87.1 million for year ended December 31, 2022, due to an increase of approximately $18.5 million in central processing algorithm service revenue, and a decrease of approximately $13.4 million in intelligent chips and services revenue. 57 Our breakdown of revenues for the years ended December 31, 2021 and 2022, respectively, is summarized below: For the Years Ended December 31, 2021 2022 Revenues Central processing algorithm services $ 42,321,966 $ 66,578,301 Intelligent chips and services 39,713,323 20,553,929 Total revenues $ 82,035,289 $ 87,132,230 We generate revenues from advertising display services when we complete its performance obligation to deliver related advertising services based on the specific terms of the contract, which are commonly based on a specific action, e.g., cost per impression (“CPM”) for online display. Over 90% of our advertising display services contracts with these customers are based on the CPM charging model. Revenue from performance based advertising services is generated when traffic users completed a transaction as specified in contracts. Revenues generated from mobile games include royalty payments from licensee operators of our mobile games and fees collected from game developers for using our game portal. Our central processing algorithm services revenue increased by approximately $24.3 million, or 57.3%, from approximately $42.3 million for the year ended December 31, 2021, to approximately $66.6 million for the year ended December 31, 2022. This increase was primarily attributable to the overall market demand for internet advertising. Approximately 30.3% or $7.3 million of the increase in CPA segment was from performance based advertising services in 2022. Approximately 69.7% increase was due to increase advertising revenue from short form videos as we started providing advertising services in videos streaming market in 2022. Intelligent chips and services revenues include revenues generated from the resale of intelligent chips. We generate revenues when the control of products is transferred to customers, as evidenced by customers’ signed acceptances. We also generate revenues from software development. Our revenue from the resale of intelligent chips and accessories is mainly from our subsidiary Fe-da which amounted to approximately $20.6 million for the year ended December 31, 2022, which is a decrease of $19.2 million from $39.7 million for the year ended December 31, 2021, representing a 48.2% decrease. The decrease was mainly due to $13.8 million decrease from resale of intelligent chips because market change that affected the demand of our products. Our customers are mainly in consumer electronics and communication which has faced slowdown in consumer demand for electronic devices. Our software development revenue decreased by $5.4 million also as a result of reduce in customer demand. Cost of Revenues For our central processing algorithm services, the cost of revenues consists of the costs paid to (i) 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 our professionals. For intelligent chips and services, the cost of revenue consists primarily of the costs of products sold and third-party software development costs. Our total cost of revenues increased by approximately $19.3 million, or 39.4%, from approximately $48.9 million the year ended December 31, 2021, to approximately $68.2 million for the year ended December 31, 2022. 58 Our breakdown of cost of revenues for the years ended December 31, 2021 and 2022, respectively, is summarized below: For the Years Ended December 31, 2021 2022 Cost of revenues Central processing algorithm services $ 15,016,980 $ 48,206,832 Intelligent chips and services 33,901,432 19,973,507 Total cost of revenues $ 48,918,412 $ 68,180,339 Our cost of revenues for central processing algorithm services increased by approximately $33.2 million, or 221.0%, from approximately $15.0 million for the year ended December 31, 2021, to approximately $48.2 million for the year ended December 31, 2022. The increase in the cost of revenues was mainly due to channel costs, which the Company has incurred channel costs with major internet advertising outlets such as internal portal, platform or applications to secure advertising space. Our cost of revenues for intelligent chips and accessories was approximately $33.9 million for the year ended December 31, 2021 compared to approximately $20.0 million for the year ended December 31, 2022 which are mainly product costs. Gross Profit Our gross profit decreased by approximately $14.2 million, from approximately $33.1 million for the year ended December 31, 2021, to approximately $19.0 million (USD 14.7 million) during the year ended December 31, 2022. For the years ended December 31, 2021, and 2022, our overall gross margin was 40.4% and 21.8%, respectively. For the Years Ended December 31, 2021 2022 Variance Amount/% US $ US $ US $ Central processing algorithm services Gross profit 27,304,986 18,371,469 (8,933,517 ) Gross margin 64.5 % 27.6 % (32.7 )% Intelligent chips and services Gross profit 5,811,892 580,422 (5,231,469 ) Gross margin 14.6 % 2.8 % (90.0 )% Total Gross profit 33,116,877 18,951,891 (14,164,986 ) Gross margin 40.4 % 21.8 % (42.8 )% Our gross profit and gross profit margin from its major business segments are summarized as follows: Our gross margins for central processing algorithm services were 64.5% and 27.6% for the years ended December 31, 2021, and 2022, respectively. The decrease in margin was due to the increase in cost of revenue with advertising channels whereas revenue growth was at a slower pace due to impact of COVID 19 in 2022. In addition, the gross margin was lower for short form video advertising as a few channels dominated the market. Our gross margin for intelligent chips and services was 14.6% for the year ended December 31, 2021 compared to 2.8% for year ended December 31, 2022 mainly due to decrease in software development revenue which has higher margin. Our margin also decreased from sale of intelligent chips due to decrease in volume. 59 Operating Expenses For year ended December 31, 2022, we incurred approximately $25.7 million in operating expenses, representing an increase of approximately $0.6 million, or 2.4%, from approximately $25.1 million for year ended December 31, 2021, primarily due to increases in impairment loss for goodwill and intangible assets as a result of impact of COVID-19. Selling expenses decreased by approximately $0.2 million, or 33.3%, from approximately $0.8 million for the year ended December 31, 2021, to approximately $0.6 million for the year ended December 31, 2022. The decrease was mainly due to the decreased marketing activities during 2022 due to the impact of COVID-19 which caused closures of public areas in several cities in China. General and administrative expenses decreased by approximately $0.1 million, or 2.8%, from $5.3 million for the year ended December 31, 2021, to approximately $5.1 million for the year ended December 31, 2022. The decrease was mainly due to (i1) travel and meeting related expenses of approximately $0.1 million due to travel restriction in various cities due to the pandemic, and (ii) depreciation and amortization expenses of approximately $0.1 million as a result of fully amortization of Yitian’s intangible assets and (iii) professional fee of approximately $1.1 million. The decrease was offset by the increase in salary and benefit expenses of approximately $0.3 million and increased in bad debt expenses of approximately $0.9 million from our intelligent chips segment. Research and development expenses decreased by approximately 2.7 million, or 16.0%, from approximately $16.6 million for the year ended December 31, 2021, to approximately $14.0 million for the year ended December 31, 2022. The decrease was mainly due to the slowdown in the progress of outsourced technical development services as a result of impact from COVID-19. We incurred approximately $16.1 million in outsourced technical development services for the year ended December 31, 2021, to approximately $13.1 million for the year ended December 31, 2022. Impairment losses for goodwill that were associated with our intelligent chips segment was approximately $5.3 million and $2.9 million for the years ended December 31, 2022 and 2021. Impairment losses for long lived assets that were also associated with our intelligent chips segment was approximately $2.0 million and nil for the years ended December 31, 2022 and 2021. These impairment charges were driven by a decline in forecasted profit in the segment as a result of reduced customer demand for electronics and communication devices. Change in fair value of business acquisition payable amounted to $0.5 million and nil for the year ended December 31, 2021 and 2022. The Company is contractually obligated to pay contingent consideration to the sellers of Fe-da in the event that certain net income targets are achieved during the three years following acquisition. The net income target was not met for the year ended December 31, 2021. Our management, with the assistance of third party appraiser determined the fair value of contingent consideration was nil for the year ended December 31, 2021 based on a probability weighted discounted cash flow analysis with significant fair value input being the financial performance of Fe-da. Change in fair value of warrant liability amounted to approximately $0.1 million for the year ended December 31, 2022 due to change in share price of the Company between December 9, 2022 where the Company completed its merger and December 31, 2022. The change in fair value of warrant liability between January 1, 2021 to December 9, 2022 was approximately $0.3 million which was included in Venus’s historical retained earnings (accumulated deficit). Other Income, net Total other income, net, for year ended December 31, 2021, was approximately $0.5 million and $0.4 million for the years ended December 31, 2021 and 2022 respectively. We have less investment and interest income because we incurred investment loss offset by the decrease in amortization of investment payable discount because it was ended during the year ended December 31, 2021. Provision for income taxes Our income tax expenses decreased by approximately $0.7 million, or 765.9%, from approximately $0.1 million of expense for year ended December 31, 2021, to approximately $0.6 million of benefits for the year ended December 31, 2022 as a result of increase in deferred tax benefit as a result of intangible assets amortization and impairment. 60 Net income As a result of the combination of factors discussed above, our net income decreased from approximately $8.5 million for the year ended December 31, 2021, to approximately $6.9 million of net loss for the year ended December 31, 2022. After the deduction of non-controlling interest, net income attributable to us was approximately $8.6 million for the year ended December 31, 2021, compared to approximately $7.0 million net loss attributable to us for the same period in 2022. Comprehensive income attributable to us was approximately $9.7 million for the year ended December 31, 2021, compared to approximately $11.5 million comprehensive loss attributable to us for the same period in 2022. Critical Accounting Estimates Use of Estimates and Assumptions The preparation of 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 consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Significant accounting estimates reflected in our 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, deferred taxes, and uncertain tax position, purchase price allocations for business combinations, the fair value of contingent consideration related to business acquisitions, allocation of share-based compensation and allocation of expenses from WiMi and Beijing WiMi. Actual results could differ from these estimates. Goodwill Impairment Testing We perform annual goodwill impairment analysis as of December 31 with the assistance of an independent valuation expert following the subsequent measurement provisions of FASB ASU 2017-04, Intangible — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment , which eliminated the calculation of implied goodwill fair value and allows us to use a simpler one-step impairment test. Under ASU 2017-04, we must record goodwill impairment charges if a reporting unit’s carrying value exceeds its fair value. The reporting units’ fair values are determined by the income approach where projected future cash flows are discounted at rates commensurate with the risks involved (“Discounted Cash Flow” or “DCF” of the income approach). Assumptions used in a DCF analysis require the exercise of significant judgment, including judgment about appropriate discount rates and terminal values, growth rates, and the amount and timing of expected future cash flows. The forecasted cash flows are based on current plans, and for years beyond that plan, the estimates are based on assumed growth rates. We believe that its assumptions are consistent with the plans and estimates used to manage the underlying businesses. The discount rates, which are intended to reflect the risks inherent in future cash flow projections, used in a DCF analysis are based on estimates of the weighted-average cost of capital “WACC”) of a market participant. Such estimates are derived from Our analysis of peer companies and consider the industry weighted average return on debt and equity from a market participant perspective and adjusted for Our specific risks. The discount rate applied were 18% and 20% for Our reporting units. We have two reporting units that have goodwill. The following table categorizes Our goodwill by reporting unit as of December 31, 2022, according to the level of excess between the reporting’ unit’s fair value and carrying value. 61 Segment Reporting Unit Fair Value Exceeds Carrying Value Net Goodwill as of December 31, 2022 (thousands) Central processing algorithm services Central processing algorithm services unit 844 % $ 15,259 Intelligent chips and services Intelligent chips and services unit (100 )% - $ 15,259 We have performed qualitative assessment for goodwill impairment as of December 31, 2022 for its segments and determined that goodwill from intelligent chips and services was impaired. We gave consider to the general macroeconomic condition, industry and market consideration, access to capital, cost factors and overall financial performances. Revenues from the central processing algorithm segment for the year ended December 31, 2022 have increased by approximately $2.4 million, or 57.3%, while sale of intelligent chips revenue decreased by approximately $19.2 million from $39.7 million for the year ended December 31,2021 representing a 48.2% decrease. We believe that the current results of operations have been within its forecast for the valuation of the enterprise value. Revenue recognition We adopted Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (ASC Topic 606) for the year ended December 31, 2019, using the modified retrospective method for contracts that were not completed as of December 31, 2018. The ASU requires the use of a new five-step model to recognize revenue from customer contracts. The five-step model requires that we (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) we satisfy our performance obligation. The application of the five-step model to the revenue streams compared to the prior guidance did not result in significant changes in the way we record revenue. Upon adoption, we evaluated our revenue recognition policy for all revenue streams within the scope of the ASU under previous standards, using the five-step model under the new guidance, and confirmed that there were no differences in the pattern of revenue recognition as all revenue were recognized at a point in time prior to adoption of the ASU. (i) Central processing algorithm advertising services — Advertising display services For our central processing algorithm advertising display services, our performance obligation is to identify advertising spaces and embed images or videos into films, shows, and short-form videos that are hosted by 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 a specific action (i.e., cost per impression (“CPM”) for online display. We enter 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 us, the advertisers, and channel providers, and collectability is probable. Revenue is recognized on a CPM basis as impressions. 62 We consider ourselves as the provider of the services as we have control of the specified services and products at any time before they are transferred to the customers, which is evidenced by (1) we are primarily responsible to our customers for products and services offered where the products were designed in house and we have customer services team to directly serve the customers; and (2) we have latitude in establishing pricing. Therefore, we act as the principal of these arrangements and reports revenue earned and costs incurred related to these transactions on a gross basis. — Performance-based advertising services We provide central processing algorithm performance-based advertising services for its customers, which enable the customers to get the optimal business opportunities. Our 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. Related service fees are generally billed monthly, based on a per transaction basis. We consider ourselves as provider of the services as we have control of the specified services and products at any time before it is transferred to the customers which is evidenced by (1) we are primarily responsible to our customers for the services offered where the algorithms and data optimization were designed and performed in house and we have customer services team to directly serve the customers; and (2) having latitude in establish pricing. Therefore, we act as the principal of these arrangements and reports revenue earned and costs incurred related to these transactions on a gross basis. In addition, through our data algorithm optimization, it is able to identify certain end user needs and it facilitates certain value added services to the end users. We engage third party services provider to perform the services. We conclude that we do not control the services as the third party service provider is responsible for providing the service and our responsibility is merely to facilitate the provision of these value added service to the end users and charges a fee. As such we recorded revenue from the value added services on a net basis when the services is provided by third party service provider. (ii) Central processing algorithm gaming services We generate revenue from jointly operated internet games publishing services and licensed out games. In accordance with ASC 606, Revenue Recognition: Principal Agent Considerations, we evaluate agreements with the game developers, distribution channels, and payment channels in order to determine whether or not we act 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 we promised our customers to provide products or services or to facilitate a sale by a third party. The nature of the promise depends on whether we control the products or services prior to transferring them to our customers. Control is evidenced if we were primarily responsible for fulling the provision of services and had discretion in establishing the selling price. When we control the products or services, our promise is to provide and deliver the products, and revenue is presented on a gross basis. When we do not control the products, our promise is to facilitate the sale, and we present the revenue on a net basis. — Jointly operated internet games publishing services We offer publishing services for internet games developed by third-party game developers. We act as a distribution channel that publishes the games on our own app or a third-party-owned app or website, named game portals. Through these game portals, game players can download the internet games to their mobile devices and purchase coins, the virtual currency, for in-game premium features to enhance their game playing experience. We enter into 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 co-publishers are entitled to profit-sharing based on a prescribed percentage of the gross amount charged to the game players. Our obligation in the publishing services is completed at a point in time when the game players make a payment to purchase coins. 63 With respect to the publishing services arrangements between us and the game developer, we considered that we do not control the services, as (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 internet games are the responsibilities of the third-party platforms; and (iii) the developers or third party platforms have the right to change the pricing of in-game virtual items. Our responsibilities are publishing, providing payment solutions, and market promotion services, and thus we view the game developers as our customers and considers itself as the facilitator of the game developers in the arrangements with game players. Accordingly, we record the game publishing service revenue from these games, net of amounts paid to the game developers. — Licensed out internet games We also license third parties to operate our internet games developed internally through the mobile portal and receive revenue from the third-party licensee operators on a monthly basis. Our performance obligation is to provide internet games to game operators, which enable players of the internet games to make in-game purchases, and we recognize revenue at a point in time when game players complete the purchases. We record revenues on a net basis, as we do not have control of the services provided, nor so we have the primary responsibility for fulfillment or the right to change the pricing of the game services. (iii) Sale of chips and intelligent chips products Starting in September 2020, we have also been engaged in the resale of chips and intelligent chips products and accessories. We typically enter into written contracts with our customers where the parties’ rights, including payment terms, are identified, and sales prices to our customers are fixed with no separate sales rebate, discount, or other incentives, and no right of return exists on sales of inventory. Our performance obligation is to deliver products according to contract specifications. We recognize gross product revenue at a point in time when the control of products or services is transferred to customers. To distinguish a promise to provide products from a promise to facilitate the sale from a third party, we consider the guidance of control in ASC 606-10-55-37A and the indicators in 606-10-55-39. We consider this guidance in conjunction with the terms in our arrangements with both suppliers and customers. In general, we control the products as we have an obligation to (i) fulfill delivery of products and (ii) bear any inventory risk as legal owners. In addition, when establishing the selling prices for delivery of the resale products, we have control to set our selling price to ensure we would generate profit for the product delivery arrangements. We believe that all these factors indicate that we are acting as a principal in this transaction. As a result, revenue from the trading of products is presented on a gross basis. (v) Revenue from software development We also design software for central processing units based on customers’ specific needs. The contract is typically fixed priced and does not provide any post-contract customer support or upgrades. Our performance obligation is to design, develop, test, and install the related software for customers, all of which are considered one performance obligation as the customers do not obtain benefits for each separate service. The duration of the development period is short, usually less than one year. Our revenue from software development contracts is generally recognized over time during the development period, and we have no alternative use of the customized software and application without incurring significant additional costs. Revenue is recognized based on our measurement of progress towards completion based on output methods when we could appropriately measure the customization progress towards completion by reaching certain milestones specified in contracts. Assumptions, risks, and uncertainties inherent in the estimates used to measure progress could affect the amount of revenues, receivables, and deferred revenues at each reporting period. 64 Liquidity and Capital Resources As of December 31, 2022, we had cash and cash equivalents of approximately $42.7 million. Material amounts of cash disaggregated by currency denomination as of December 31, 2022 in each jurisdiction in which Our subsidiaries or historical VIE are domiciled are as follows: USD RMB USD Cayman 23,077,839 - 23,077,839 China – subsidiaries - 131,560,174 18,889,839 23,077,839 131,560,174 41,967,678 Our working capital was approximately $51.6 as of December 31, 2022. In assessing our liquidity, we monitor and analyses our cash-on-hand and operating and capital expenditure commitments. To date, we have financed our working capital requirements through cash flow generated from operations, debt and equity financings, and capital contributions from our existing shareholders. We believe our current working capital is sufficient to support our operations for the next twelve months. We may, however, need additional cash resources in the future if it experiences changes in business conditions or other developments or if we find and wish to pursue opportunities for investment, acquisition, capital expenditure, or similar actions. If we determine that our cash requirements exceed the amount of cash and cash equivalents we have on hand at the time, we may seek to issue equity or debt securities or obtain credit facilities. The issuance and sale of additional equity would result in further dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict our operations. Our obligation to bear credit risk for certain financing transactions we facilitate may also strain our operating cash flow. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all. Current foreign exchange and other regulations in the PRC may restrict our PRC entities in their ability to transfer their net assets to us and our subsidiaries in Singapore and Hong Kong and to our investors. The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. Under current corporate structure, our Cayman Islands holding company may rely on dividend payments from our PRC subsidiaries to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval of SAFE by complying with certain procedural requirements. Specifically, under the existing exchange restrictions, without prior approval of SAFE, cash generated from the operations of our PRC subsidiaries in China may be used to pay dividends to us. However, approval from or registration with appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. As a result, we need to obtain SAFE approval to use cash generated from the operations of our PRC subsidiaries to pay off their respective debt in a currency other than Renminbi owed to entities outside China, or to make other capital expenditure payments outside China in a currency other than Renminbi. In light of the flood of capital outflows of China in 2016 due to the weakening Renminbi, the PRC government has imposed more restrictive foreign exchange policies and stepped up scrutiny of major outbound capital movement including overseas direct investment. More restrictions and substantial vetting process are put in place by SAFE to regulate cross-border transactions falling under the capital account. If any of our shareholders regulated by such policies fail to satisfy the applicable overseas direct investment filing or approval requirement timely or at all, it may be subject to penalties from the relevant PRC authorities. The PRC government may at its discretion further restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to its shareholders. However, these restrictions have no material impact on the ability of these PRC subsidiaries to transfer funds to us as we have no present plans to declare dividends which it plans to retain our retained earnings to continue to grow our business. In addition, these restrictions have no material impact on the ability of us to meet its cash obligations, as a majority of our current cash obligations are due within the PRC. 65 The following table summarizes the key components of our cash flows for years ended December 31, 2021, and 2022. For the years ended December 31, 2021 2022 Net cash provided by operating activities $ 15,272,446 $ 1,955,358 Net cash (used in) provided by investing activities $ (6,483,868 ) 2,763,954 Net cash used in financing activities $ (3,887,357 ) $ (2,422,918 ) Effect of exchange rate on cash and cash equivalents $ 675,890 $ (2,269,919 ) Change in cash and cash equivalents $ 5,615,686 $ 26,475 Cash and cash equivalents, beginning of year $ 37,532,748 $ 42,719,795 Cash and cash equivalents, end of year $ 42,719,795 $ 42,746,270 Operating activities Net cash provided by operating activities for the year ended December 31, 2022, was primarily attributable to net loss of approximately $6.9 million adjusted by various non-cash expenses of approximately $9.2 million so our cashflow form net income was approximately $2.3 million. Cash inflow attributable to the decrease of other receivables and prepaid expenses of approximately $0.4 million, decrease in inventory of approximately $0.7 million as the resurgences of COVID-19 variant have reduced our inventory purchase and we have to use more existing inventory, and increase in accounts payable of approximately $0.1 million due to purchase of service which is consistent with increasing cost of revenue. The inflow was offset by increase in accounts receivable of $1.0 million and decrease in deferred revenue of approximately $0.3 million as our revenue increased, and decrease in tax payable, operating lease liabilities and other payables of approximately $0.2 million in accordance with less operating expenses. Net cash provided by operating activities for the year ended December 31, 2021, was primarily attributable to net income of approximately $8.6 million increased by non-cash depreciation and amortization expenses of approximately $1.5 million, goodwill impairment loss of approximately 2.9 million, and provision for doubtful accounts of approximately $0.2 million offset with deferred tax benefit of approximately $0.3 million and change in fair value of business acquisition payable of approximately $0.5 million. Cash inflow was also attributable to the increase deferred revenue of approximately $1.1 million and decrease in accounts receivable of approximately $ 5.1 million as we made more efforts in the collection and demanded more advance payment from new customers. Investing activities Cash provided in investing activities for the year ended December 31, 2022 was mainly due to sales of short term investment of approximately $16.2 million and collection of loans receivable from a third party loan of approximately $3.2 million, offset by the purchase of short term investment of approximately $16.3 million, purchase of property and equipment of approximately $0.2 million, purchase of cost method investment of approximately $0.1 million. Cash used in investing activities for the year ended December 31, 2021 as mainly due to the payment of Guoyu’s acquisition of approximately $3.1 million, and loan to a third party of approximately $3.3 million. Financing activities Cash used by financing activities for the year ended December 31, 2022 was mainly due to repayments and borrowing to Parent of approximately $35.6 million and offset by borrowing from Parent of approximately $12.5 million. We also received approximately $20.7 million from recapitalization when we completed the merger with Venus Acquisition Corp, net of deferred offering costs. Cash used in financing activities for year ended December 31, 2021 was mainly due to the net borrowing and repayment of the banking facility to DBS Bank Ltd of approximately $2.0 million, and net borrowing and repayments from Parent of approximately $ 1.3 million to support our daily operation. We also paid deferred merger cost of approximately $0.6 million. For the year ended December 31, 2021, Shanghai Weimu borrowed total of $870,518 from Gou Lei, noncontrolling shareholder of Shanghai Weimu, for operation purpose and repaid all outstanding balance in 2021. 66 Transfer of cash within Our organization We operate in two segments, CPA and intelligent chips and software services. For intelligent chips and software services segment, it is mainly operated by us and subsidiaries in Singapore, Fe-da Electronics. Both we and Fe-da Electronics our own operating cashflow from operation of the segment. The CPA segment is mainly operated by subsidiaries in the PRC, each entity has its own operating cash flow. For the years ended December 31, 2021 and 2022, there was approximately nil and $14.3 million from the holding company to the PRC subsidiary. There was no dividends or distribution made between us, our subsidiaries and the historical VIE. We have established controls and procedures for cash flows within its organization. Each transfer of cash between Cayman Islands holding company and a subsidiary is subject to internal approval. In general cash is maintained in holding company level (MicroAlgo for companies outside PRC and our WFOE for entities inside PRC) for more efficient cash management. We have no present plans to distribute earnings. We plan to retain our retained earnings to continue to grow our business. No dividends or distribution has been declared to paid to us from subsidiaries and no dividends or distribution was made to any U.S. investors. Commitments and Contingencies In the normal course of business, we are subject to loss contingencies, such as legal proceedings and claims arising out of its business, which cover a wide range of matters, including, among others, government investigations and tax matters. In accordance with ASC No. 450-20, “Loss Contingencies”, we will record accruals for such loss contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements, including arrangements that would affect our liquidity, capital resources, market risk support, and credit risk support, or other benefits. Contractual Obligations As of December 31, 2022, the future minimum payments under certain of our contractual obligations were as follows: Payments Due In Total USD Less than 1 year 1 – 2 years 3 – 5 years Thereafter Operating leases obligations* $ 282,894 $ 256,297 $ 31,597 - - * Include operating leases with a term less than one year. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. The Company is a smaller reporting company and is not required to provide the information required under this item. 67