WiMi Hologram Cloud Inc. — FY2019 Form 20-F
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing; quarterly results are not provided. Financial statements are prepared under U.S. GAAP and reported in RMB. USD figures below are the filing’s convenience translations.
Business context
WiMi provides holographic AR advertising and entertainment products, including payment middleware, game distribution and MR software. AR advertising generated 83.8% of FY2019 revenue, up from 80.5% in 2018. The company operates primarily in China through subsidiaries and a variable interest entity (VIE), which contributed substantially all revenue in 2017–2019.
Key financial metrics
| Metric | FY2018 | FY2019 | Change |
|---|---|---|---|
| Revenue | RMB 225.3m | RMB 319.2m (USD 45.8m) | +41.7% |
| Gross profit / margin | RMB 139.9m / 62.1% | RMB 173.0m / 54.2% | Profit +23.7%; margin down 7.9 percentage points |
| Operating income | RMB 100.8m | RMB 112.9m | +12.0% |
| Net income | RMB 89.2m | RMB 102.2m (USD 14.7m) | +14.6% |
| Basic / diluted EPS | RMB 0.89 / 0.88 | RMB 1.02 / 0.94 | — |
| Cash from operations | RMB 99.5m | RMB 144.0m (USD 20.6m) | Increased |
Revenue mix and margins: AR advertising revenue grew 47.6% to RMB 267.5m; AR entertainment grew 17.3% to RMB 51.7m. Advertising gross margin fell from 55.1% to 47.4%, while entertainment gross margin was 89.4%, versus 91.0% in 2018. Management attributed the overall margin decline primarily to higher channel costs in short-form mobile video advertising.
Expenses and unusual items: Operating expenses rose 54.0% to RMB 60.2m, including R&D expense of RMB 18.4m, up 128.9%. Net other expense increased to RMB 7.5m, including RMB 11.5m of amortized debt discount related to acquisition payables. Income tax expense declined to RMB 3.1m; the effective tax rate was 3.0%, reflecting preferential tax treatment.
Balance sheet and liquidity at December 31, 2019: Cash and equivalents were RMB 129.0m (USD 18.5m); working capital was RMB 55.4m (USD 7.9m), compared with current assets of RMB 177.5m and current liabilities of RMB 122.1m. Total assets were RMB 563.5m, total liabilities RMB 140.8m and shareholders’ equity RMB 422.7m. Current and non-current related-party loans totaled RMB 87.0m (USD 12.5m), of which RMB 71.0m was due within one year; a related-party loan carried a 7% annual rate. Management said available working capital was sufficient for operations and debt obligations for the next 12 months.
Cash flows and obligations: Investing activities used RMB 126.5m, mainly RMB 122.4m of acquisition-payable repayments. Financing activities used RMB 41.0m, largely reflecting repayment of shareholder loans. Cash declined RMB 22.9m during the year. Contractual obligations included RMB 87.0m of related-party loans and RMB 4.1m of operating leases. Capital expenditure was RMB 0.2m.
Material changes versus FY2018
- Revenue growth accelerated from 17.3% to 41.7%, led by advertising. Advertising customers increased from 121 to 153, and paid impressions rose from 6.6bn to 9.7bn.
- Short-form mobile video advertising launched in 2019 and contributed approximately 15.5% of advertising revenue, but its channel costs were higher and reduced advertising and consolidated margins.
- Operating expenses increased substantially, particularly R&D and general and administrative costs; the latter included IPO-related professional fees and a higher allowance for doubtful accounts.
- Operating cash flow improved, while cash balances fell because of acquisition-payable repayments and related-party loan repayments. Related-party acquisition payables were fully paid by year-end.
- Accounts receivable included an allowance for doubtful accounts of RMB 1.6m, versus RMB 2,591 at the end of 2018. Two customers represented 25.4% of year-end receivables; one vendor represented 26.6% of annual purchases.
Outlook, risks and governance
- Management expected slower revenue growth in Q1 2020 and warned that COVID-19 could reduce advertisers’ budgets, delay customer payments and adversely affect 2020 revenue, gross profit and net income. The impact was not reasonably estimable in the filing.
- In April 2020, after the reporting period, WiMi completed its IPO, selling 4.75m ADSs at USD 5.50 each and receiving approximately USD 23.1m in net proceeds. The ADSs began Nasdaq trading on April 1, 2020.
- One material weakness in internal control over financial reporting was identified: insufficient U.S. GAAP and SEC-reporting expertise and no formal accounting-procedures manual. Management described remediation steps; disclosure controls were assessed as ineffective at year-end. The auditor gave an unqualified opinion on the financial statements but did not opine on internal controls.
- Key risks include dependence on a developing and competitive AR market, advertising revenue concentration, China regulatory and licensing uncertainty, VIE contractual-control and enforceability risks, foreign-exchange and cash-transfer restrictions, and limited business insurance. The filing also identifies uncertainty around the Foreign Investment Law’s implications for VIE structures.
- No material pending legal proceeding was reported, and no off-balance-sheet arrangements were disclosed. The company did not expect to pay dividends in the foreseeable future.
Most important facts for investors to verify
- Whether mobile-video advertising can sustain growth while improving channel economics and gross margins.
- Customer collections, the increased bad-debt allowance, and the concentration of receivables and vendor purchases.
- Repayment timing and terms for RMB 87.0m of related-party loans, including the 7% loan and the extent of reliance on the controlling shareholder and affiliates.
- Progress in remediating the material weakness and establishing effective financial-reporting controls.
- Regulatory status and enforceability of the VIE arrangements, and the ability to transfer cash from PRC operations to the offshore holding company.
- COVID-19’s actual impact on advertising demand, collections and 2020 results, and the deployment of IPO proceeds.