Business context and reporting period
This is Wunong Net Technology Company Limited’s annual report on Form 20-F for the fiscal year ended December 31, 2020, not a standalone fourth-quarter report. The filing identifies the company as Wunong Net Technology Company Limited (Nasdaq: WNW). It operates a China-focused online food retailer and a small restaurant business, sourcing products from third-party suppliers rather than manufacturing them. The company consolidates its principal operating business through contractual arrangements with a PRC variable interest entity (VIE).
Financial performance and liquidity
| Metric | FY 2020 | FY 2019 |
|---|---|---|
| Revenue | $22.13 million | $7.68 million |
| Gross profit / margin | $4.16 million / 18.8% | $1.90 million / 24.8% |
| Operating loss | $2.24 million | $1.76 million |
| Net loss | $2.22 million | $1.76 million |
| Comprehensive loss | $2.42 million | $1.73 million |
| Net cash from operating activities | $4.85 million | Cash used: $0.41 million |
| Net cash used in investing activities | $26.46 million | $0.15 million |
| Net cash from financing activities | $27.67 million | $1.00 million |
- Revenue increased 188%, driven mainly by online product sales and expansion of sales channels. FY 2020 revenue included $16.43 million from online food sales, $5.67 million from offline sales, and $28,590 from restaurant services.
- Cost of revenue grew 211%, faster than revenue, and gross margin declined by 6 percentage points. Management attributed category-level pressure partly to lower-margin wholesale sales and higher meat costs following swine flu-related market conditions.
- Sales and marketing expense rose 112% to $3.99 million; general and administrative expense rose 30% to $1.87 million; and research and development expense rose 55% to $0.53 million. The company remained loss-making for a third consecutive year.
- Cash and cash equivalents were $7.03 million at year-end, versus $0.55 million a year earlier. Current assets were $36.37 million, including a $26.50 million loan receivable; current liabilities were $12.99 million. The filing reports negative working capital of $3.1 million excluding that loan receivable.
- Total liabilities were $20.56 million, including $7.03 million due to related parties and $0.82 million in operating lease liabilities. Related-party borrowings, excluding the IPO-related amount, were generally interest-free and due on demand. The filing reports no outstanding bank borrowings.
- Operating cash flow was positive despite the net loss, with the filing citing increases in accounts payable, customer advances and accrued liabilities as significant contributors. Investing cash outflow primarily reflects the $26.50 million loan receivable. Financing cash inflow included $21.50 million of IPO proceeds, $5.00 million of IPO proceeds due to a related party, related-party loans and capital contributions.
Material changes versus the prior period
- Revenue scaled sharply from $7.68 million to $22.13 million, while net loss widened from $1.76 million to $2.22 million. Gross margin fell from 24.8% to 18.8%.
- Meat, poultry and egg sales expanded to $7.23 million, or 32.7% of revenue, from $0.88 million, or 11.4%, in 2019. Grains, oil and spices remained the largest category at $8.64 million, but its share fell from 49.6% to 39.1%.
- The company completed its IPO in December 2020, issuing 5 million shares to the public at $5 per share. Year-end shares outstanding were 25 million, compared with 20 million a year earlier.
- The balance sheet shifted substantially, including the $26.50 million loan receivable and higher related-party amounts payable. Shareholders’ equity moved from a $1.65 million deficit to positive equity of $16.90 million.
Outlook, commentary, risks and unusual items
- Management described a plan to open approximately 120 franchise restaurants in each of 2021 and 2022, while refining the concept toward “community experience stores.” At year-end 2020, the company reported one launched restaurant and 49 cooperative restaurants; 40 franchise contracts were signed, nine were pending, and fees had been collected from 24. Management expected the remaining restaurants to resume normal operations before June 30, 2021. These are plans and expectations, not reported results or formal financial guidance.
- COVID-19 increased online food purchasing in early 2020 but disrupted restaurant expansion and deferred franchise fees. The company said the pandemic’s future financial impact could not be reasonably estimated.
- The $26.50 million one-year note receivable was made to Fortune Access Development Corporation at 3% annual interest. In June 2021, the company agreed to transfer the receivable to Cang Jin Suo Financial Service (Shenzhen) Co., Ltd. for the same principal amount, interest-free, with scheduled collections from July through November 2021. Collection and counterparty performance are key uncertainties.
- Material structural risks include reliance on VIE contracts rather than direct ownership of the core PRC operation, uncertainty in PRC regulation and enforcement, foreign-exchange and cash-remittance restrictions, and the defective legal status of subleases covering its offices and restaurant.
- The filing gives conflicting assessments of internal controls: a risk-factor disclosure says controls were ineffective because the company lacked in-house personnel with sufficient U.S. GAAP and SEC reporting experience, while the controls section says management concluded internal control over financial reporting was effective. Management’s stated remediation included using outside financial personnel.
- Management reported underpayment of required PRC employee-benefit contributions and accrued an estimate for potential catch-up payments, fees and fines. A contract dispute had resulted in a judgment ordering a counterparty to repay RMB 1.2 million; the case was in the execution stage.
- The 2020 financial statements received an unmodified audit opinion. The company disclosed that it dismissed Friedman LLP and engaged Audit Alliance LLP in May 2021, reporting no disagreements or reportable events related to the change.
Most important facts for investors to verify
- Whether the $26.50 million loan receivable was collected on the disclosed schedule, and the terms, creditworthiness and relationships of the parties involved.
- How much of the $4.85 million positive operating cash flow came from sustainable operations versus increases in payables, customer advances and accrued liabilities.
- The company’s liquidity excluding the loan receivable, its ability to meet related-party amounts due on demand, and its plans for additional financing.
- The basis for the conflicting internal-control conclusions and the status of remediation of the stated accounting and SEC-reporting staffing weakness.
- Whether franchise agreements, fee collections and restaurant openings support the 2021–2022 expansion targets, and the economics of the revised restaurant model.
- The enforceability and continued regulatory compliance of the VIE arrangements, and the status of the potentially defective property subleases and PRC employee-benefit contributions.