Microalgo Inc. quarterly report, Q1 FY2023

MicroAlgo Inc. 2023 Q1 Form 10-Q Summary

Business Context and Reporting Period

MicroAlgo Inc. is a Cayman Islands holding company operating primarily through subsidiaries in China, Hong Kong, Singapore, and related jurisdictions. The company develops and applies bespoke central processing algorithms and provides advertising algorithm services, mobile-game-related services, and intelligent-chip products and services. The December 9, 2022 business combination with VIYI Algorithm Inc. was completed before the period presented; VIYI became a wholly owned subsidiary.

The filing reports unaudited U.S. GAAP results for the three months ended March 31, 2023, compared with the three months ended March 31, 2022. The company had 43,856,706 ordinary shares outstanding at March 31, 2023.

Financial Performance and Position

Metric	Q1 2023	Q1 2022	Change
Revenue	$17.8 million	$23.4 million	Down 23.6%
Gross profit	$5.0 million	$5.4 million	Down $0.4 million
Gross margin	27.8%	23.1%	Up 4.7 percentage points
Operating income (loss)	$(1.4) million	$1.2 million	Turned to loss
Net income (loss)	$(1.3) million	$0.9 million	Turned to loss
Net loss attributable to MicroAlgo	$(1.3) million	$0.9 million	Turned to loss
Basic and diluted EPS	$(0.03)	$0.00	Declined
Cash flow from operations	$(2.8) million	$0.5 million	Declined

Service revenue, consisting primarily of central processing advertising algorithm services, increased to $16.4 million from $14.7 million, while intelligent-chip revenue fell to $1.4 million from $8.7 million. Mobile-game revenue was zero in Q1 2023 versus $0.3 million in Q1 2022.
Central processing algorithm services generated $4.95 million of gross profit at a 30.2% margin, compared with $5.04 million and 34.3% in the prior-year quarter.
Intelligent chips and services generated $5,986 of gross profit at a 0.4% margin, compared with $358,168 and 4.1% in Q1 2022.
Research and development expense increased to $5.2 million from $3.2 million. General and administrative expense increased to $1.0 million from $0.8 million, primarily due to post-business-combination public-company compliance and administrative costs.
A $29,232 impairment loss on long-lived assets was recorded in Q1 2023.
Other income was $153,540, including a $124,104 gain from short-term investments. Income tax expense was $5,239.
Cash and cash equivalents were $21.0 million at March 31, 2023, compared with $42.7 million at December 31, 2022. Management reported working capital of approximately $50.3 million and stated that it expected current working capital to support operations and obligations for at least one year.
Total assets were $75.6 million and total liabilities were $8.7 million at March 31, 2023. Total equity was $66.9 million.
Operating cash outflow was driven substantially by a $6.5 million increase in prepaid service fees. Investing cash outflow was $0.3 million. Financing cash outflow was $19.6 million, principally reflecting a $20.3 million advance to the Parent, partly offset by $0.7 million of banking-facility proceeds.
The filing does not provide a clear total balance for conventional interest-bearing debt. Reported liabilities primarily consist of accounts payable, deferred revenue, accrued liabilities, taxes, deferred taxes, and operating lease liabilities.

Material Changes Versus the Prior Comparable Period

Revenue declined 23.6% as the company shifted toward services and intelligent-chip sales were adversely affected by chip controls, supply-chain conditions, and a sluggish chip market.
Overall gross margin improved because the revenue mix shifted toward higher-margin services, but the central-processing-services margin declined because of higher advertising-channel costs.
The company moved from operating income of $1.2 million to an operating loss of $1.4 million, principally because of higher research and development, general and administrative, and impairment expenses.
The company moved from net income of $0.9 million to net loss of $1.3 million.
Cash used in operations increased from $0.5 million of operating cash inflow to $2.8 million of operating cash outflow.
Amounts due from the Parent increased from $5.7 million to $25.8 million. The company stated that it provided approximately $20 million to the Parent during the quarter; the balance is unsecured, non-interest-bearing, and payable on demand.
Accumulated other comprehensive loss improved from $1.6 million to $0.5 million, primarily because of a $1.2 million favorable foreign-currency translation adjustment.

Guidance, Outlook, Risks, Contingencies, and Unusual Items

No quantitative revenue, earnings, or margin guidance was provided. Management stated that it intends to continue developing proprietary algorithm services and one-stop intelligent data-management solutions.
Management identified early-stage-company risks, including the need to develop products, secure contracts, build a customer base, execute business and marketing strategies, and hire personnel. Failure to generate sufficient revenue, achieve planned margins, control costs, or obtain funding could require delayed or reduced expansion and development.
Material risks include dependence on China-based operations, foreign-exchange controls and currency exposure, restrictions on transferring funds from PRC subsidiaries, concentration of cash in banks with limited deposit insurance, customer and receivables risk, and exposure to changes in advertising-channel costs and the intelligent-chip market.
As of March 31, 2023, accounts receivable included a $1.2 million allowance for doubtful accounts. The company also reported approximately $1.3 million of tax-loss carryforwards, with some beginning to expire in 2023, and a full valuation allowance against related deferred tax assets.
PRC subsidiaries had approximately $28.9 million of restricted paid-in capital and statutory reserves that could limit upstream transfers and dividend payments.
The company had eight non-cancellable operating leases for ten offices expiring through December 2023. Reported operating lease liabilities were $219,632 in aggregate at March 31, 2023, based on the filing’s current and noncurrent amounts.
The company reported 4.6 million public warrants and 225,000 private warrants outstanding. Public warrants have an exercise price of $11.50 per full share; private warrants are classified as liabilities.
After quarter-end, the company and Joyous JD Limited filed litigation in New York against the sponsor of Venus Acquisition Corporation, alleging breaches related to investments and misuse of a Form S-4. The company is seeking damages, but the outcome cannot be guaranteed.
Routine legal proceedings were not considered material. Management reported no material changes to the risk factors in the 2022 Form 10-K, no off-balance-sheet arrangements, and no material changes to internal control over financial reporting. Disclosure controls were judged effective.

Important Facts for Investors to Verify

Reconcile the significant increase in the Parent receivable to $25.8 million, including the terms, collectability, and intended use of the approximately $20 million quarterly advance.
Assess whether the shift from chip sales to algorithm services is sustainable and whether advertising-channel costs will continue to pressure service margins.
Evaluate the company’s ability to return to positive operating cash flow after the $2.8 million quarterly operating cash outflow and $21.0 million ending cash balance.
Review PRC restrictions on cash transfers, the location and insurance coverage of cash deposits, and the company’s ability to fund obligations at the public-company level.
Monitor the New York litigation, potential costs or recoveries, and any subsequent developments.
Verify the dilution and potential cash proceeds associated with the outstanding public and private warrants.
Review the filing’s segment, related-party, goodwill, impairment, receivables, and deferred-tax disclosures, including the full allowance for tax-loss-related deferred tax assets.