2015 Form 20-F Summary
Filing identity: The supplied filing identifies the registrant as Wowo Limited, not Chaince Digital Holdings Inc. Investors should verify the issuer identity and ticker before relying on this summary. The filing covers the fiscal year ended December 31, 2015; it is an annual report, not a quarterly filing. Financial statements are prepared under U.S. GAAP and reported in U.S. dollars.
Business context and reporting period
- In June 2015, Wowo acquired Join Me Group (JMU), establishing an online B2B platform serving food-service suppliers and customers in China.
- In September 2015, the company divested its group-buying and B2C businesses for nominal consideration, with the buyer assuming approximately $47.4 million of net liabilities. These activities are presented as discontinued operations.
- The continuing business generated gross merchandise value of approximately RMB5.5 billion, or $879.0 million, in 2015, but reported revenue only from direct sales because no marketplace service fees were charged.
- The company operates principally through a PRC variable interest entity structure and contractual arrangements with its VIE and its shareholders.
Key financial metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $11.5 million | $0 |
| Cost of revenues | $13.2 million | $0 |
| Gross profit/(loss) | $(1.7) million | $0 |
| Operating expenses | $104.2 million | $4.3 million |
| Loss from operations | $(105.9) million | $(4.3) million |
| Loss from continuing operations | $(104.6) million | $(4.3) million |
| Net loss | $(93.6) million | $(43.9) million |
| Net loss attributable to Wowo | $(93.6) million | $(43.9) million |
| Basic and diluted loss per ordinary share | $(0.09) | $(0.28) |
| Net cash used in operating activities | $(33.5) million | $(32.0) million |
| Cash and cash equivalents at year-end | $11.2 million | $1.6 million |
Approximate 2015 continuing-business margins were a negative gross margin of 15.2%, a negative operating margin of 923%, and a negative net margin of 912%. These ratios are heavily distorted by the $85.9 million goodwill impairment charge and the short period of ownership of the continuing B2B business.
- Goodwill: $250.7 million net at year-end after an $85.9 million impairment charge. The impairment test used a discounted cash flow model with a 17% weighted average cost of capital.
- Balance sheet: Total assets were $342.8 million, total liabilities were $38.1 million, and shareholders’ equity was $304.7 million. Current assets were $41.1 million versus current liabilities of $24.9 million.
- Debt and financing: The filing does not show material bank debt at year-end. Approximately $69.4 million of shareholder indebtedness was converted into ordinary shares in connection with the IPO.
- Cash flow: Operating cash use included $10.7 million from continuing operations and $22.8 million from discontinued operations. Investing cash use was $11.9 million, including approximately $9.8 million for the JMU acquisition. Financing cash inflow was $54.9 million.
- Liquidity: Management stated that cash, anticipated operating cash flow, and shareholder support were expected to fund needs through December 31, 2017. The company also disclosed an April 2016 interest-free shareholder loan of RMB40 million, or approximately $6.2 million.
Material changes versus the prior comparable period
- Revenue increased from zero in 2014 to $11.5 million in 2015 because the JMU B2B business was acquired during 2015.
- Operating loss increased from $4.3 million to $105.9 million, primarily because of the $85.9 million goodwill impairment and higher expenses associated with the acquisition, divestiture, marketing, and operations.
- Net loss increased from $43.9 million to $93.6 million. The discontinued businesses generated $11.1 million of net income in 2015, including a $47.4 million disposal gain, compared with a $39.5 million loss in 2014.
- Cash increased to $11.2 million from $1.6 million, primarily due to $37.3 million of IPO proceeds and a $15.0 million private placement with co-chairperson Maodong Xu.
- Total equity changed from a deficit of $233.8 million to positive equity of $304.7 million, driven largely by IPO proceeds, preferred-share conversions, debt conversion, and shares issued as JMU acquisition consideration.
- The workforce declined from 3,194 employees at December 31, 2014 to 285 at December 31, 2015 following the business restructuring.
Guidance, outlook, commentary, risks, and unusual items
- Management planned to expand the B2B platform, regional supply-chain subsidiaries, product offerings, technology infrastructure, logistics, and potential trade-financing services.
- The company sold direct-sale products at zero margin and charged no commissions or service fees to marketplace sellers in 2015. Management acknowledged that future growth and customer retention after introducing margins and fees were uncertain.
- The auditor’s report stated that recurring losses and shareholders’ equity raised substantial doubt about the company’s ability to continue as a going concern. Management relied on written shareholder funding commitments through 2017.
- Management concluded that disclosure controls and internal control over financial reporting were ineffective at December 31, 2015. Four material weaknesses were identified, involving U.S. GAAP expertise, accounting policies and procedures, risk assessment, and internal-control staffing.
- The company identified significant exposure to PRC regulatory and licensing changes, including risks affecting its VIE contractual structure, internet and food-service licenses, foreign-exchange controls, dividend transfers, and potential future foreign-investment regulation.
- Other material risks include intense competition, limited operating history, negative operating cash flow, potential additional goodwill impairment, reliance on third-party couriers and sellers, data-security incidents, product liability without product-liability insurance, related-party conflicts, and possible PFIC treatment for U.S. investors.
- The company disclosed a contingent withholding-tax obligation relating to acquisitions from individual sellers but could not reasonably estimate the potential liability, penalties, or interest.
- Operating lease commitments totaled approximately $20.9 million, including $1.5 million due within one year.
Most important facts to verify
- Verify that the filing belongs to the requested company: the document names Wowo Limited, while the request names Chaince Digital Holdings Inc.
- Verify the effect of the JMU acquisition and the group-buying/B2C divestiture on continuing versus discontinued operations and on comparability with prior periods.
- Assess whether the zero-margin direct-sales strategy and free marketplace services could generate sustainable revenue, gross profit, and operating cash flow.
- Review the assumptions supporting the $250.7 million remaining goodwill balance and the risk of further impairment.
- Confirm the availability, enforceability, and timing of shareholder funding commitments and the April 2016 RMB40 million loan.
- Review the four material weaknesses and subsequent remediation to determine whether financial reporting controls became effective.
- Evaluate the legal enforceability and regulatory standing of the PRC VIE structure, including required licenses and restrictions on transferring cash from China.
- Reconcile shares outstanding, potential dilution from options and restricted share units, lock-up provisions, and registration rights granted to former JMU shareholders.