WiMi Hologram(WIMI) - 2020 Q4 - Annual Report

FORWARD-LOOKING STATEMENTS This section outlines that the report contains forward-looking statements subject to various risks and uncertainties, advising investors to consider disclosed risk factors Forward-Looking Statements Overview The report contains forward-looking statements based on current expectations, subject to risks and uncertainties, requiring investors to consider disclosed risk factors - All statements in the report, other than historical facts, are forward-looking and involve known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially[7] - Key areas covered by forward-looking statements include growth strategies, future business development, financial condition, results of operations, ability to retain and grow user base, product expansion, expected changes in revenues and operating margins, talent retention, competitive landscape in China's holographic AR industry, general economic and political conditions in China and globally, and the regulatory environment[8] - Investors are advised to read forward-looking statements in conjunction with the risk factors disclosed in 'Item 3. Key Information—3.D. Risk Factors' and acknowledge that new risks and uncertainties may emerge, and the company does not undertake to update or revise these statements except as required by law[9] INTRODUCTORY NOTE This section defines key terms and specifies the company's reporting currency and exchange rate for U.S. dollar translations Key Definitions and Currency Translation This section defines key terms and specifies the company's reporting currency and exchange rate for U.S. dollar translations - Key terms defined include ADSs (American depositary shares), AR (augmented reality), China/PRC (People's Republic of China excluding Taiwan, Hong Kong, Macau), CPM (cost per thousand impressions), GAAP (U.S. generally accepted accounting principles), HKD, RMB, USD, View (advertisement impression), and WIMI (WiMi Hologram Cloud Inc. and its consolidated entities)[12] - The company's reporting currency is Renminbi (RMB). Translations from Renminbi to U.S. dollars in this report were made at RMB6.5249 to US$1.00, based on the mid-point reference rate set by the People's Bank of China on December 31, 2020[13] - The PRC government imposes controls over its foreign currency reserves, including direct regulation of Renminbi conversion and restrictions on foreign trade[13] PART I This section covers the company's key financial data, risk factors, business operations, corporate governance, and market disclosures ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Information regarding the identity of directors, senior management, and advisers is not applicable in this item - This item is marked as 'Not applicable'[16] ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE Information regarding offer statistics and expected timetable is not applicable for this report - This item is marked as 'Not applicable'[16] ITEM 3. KEY INFORMATION This section provides essential information about the company, including financial data, capitalization, indebtedness, and comprehensive risk factors A. Selected financial data. This subsection presents selected consolidated financial data for 2018-2020, including statements of operations, balance sheets, cash flow, and non-GAAP net income Selected Consolidated Statements of Operations and Comprehensive Income (Loss) | Metric | 2018 (RMB) | 2019 (RMB) | 2020 (RMB) | 2020 (USD) | |:---|:---|:---|:---|:---| | Operating revenues | 225.3 million | 319.2 million | 766.0 million | 117.4 million | | Cost of revenues | (85.4 million) | (146.2 million) | (596.6 million) | (91.4 million) | | Gross profit | 139.9 million | 173.0 million | 169.4 million | 26.0 million | | Operating expenses | (39.1 million) | (60.2 million) | (322.9 million) | (49.5 million) | | Income (loss) from operations | 100.8 million | 112.9 million | (153.4 million) | (23.5 million) | | Net income (loss) attributable to WiMi Hologram Cloud, Inc. | 89.2 million | 102.2 million | (151.2 million) | (23.2 million) | | Basic EPS | 0.89 | 1.02 | (1.17) | (0.18) | | Diluted EPS | 0.88 | 0.94 | (1.17) | (0.18) | Selected Consolidated Balance Sheet Data (as of December 31) | Metric | 2018 (RMB) | 2019 (RMB) | 2020 (RMB) | 2020 (USD) | |:---|:---|:---|:---|:---| | Current assets | 213.3 million | 177.5 million | 616.4 million | 94.5 million | | Total assets | 607.5 million | 563.5 million | 1.17 billion | 179.7 million | | Total liabilities | 288.6 million | 140.8 million | 163.4 million | 25.0 million | | Total shareholders' equity | 318.9 million | 422.7 million | 1.01 billion | 154.6 million | Selected Consolidated Cash Flow Data (for the years ended December 31) | Metric | 2018 (RMB) | 2019 (RMB) | 2020 (RMB) | 2020 (USD) | |:---|:---|:---|:---|:---|\ | Net cash provided by (used in) operating activities | 99.5 million | 144.0 million | (67.0 million) | (10.3 million) | | Net cash used in investing activities | (98.6 million) | (126.5 million) | (228.1 million) | (35.0 million) | | Net cash provided by (used in) financing activities | 137.5 million | (41.0 million) | 562.6 million | 86.2 million | | Cash, cash equivalents and restricted cash, end of year | 151.9 million | 129.0 million | 368.1 million | 56.4 million | Non-GAAP Net Income Attributable to WiMi Hologram Cloud, Inc. | Metric | 2018 (RMB) | 2019 (RMB) | 2020 (RMB) | 2020 (USD) | |:---|:---|:---|:---|:---|\ | Net income (loss) attributable to WiMi Hologram Cloud, Inc. | 89.2 million | 102.2 million | (151.2 million) | (23.2 million) | | Stock compensation expenses | - | - | 191.4 million | 29.3 million | | Non-GAAP net income attributable to WiMi Hologram Cloud, Inc. | 89.2 million | 102.2 million | 40.3 million | 6.2 million | | Non-GAAP Basic EPS | 0.89 | 1.02 | 0.31 | 0.05 | | Non-GAAP Diluted EPS | 0.88 | 0.94 | 0.31 | 0.05 | - Non-GAAP net income (loss) is defined as net income (loss) before stock compensation expenses, which are excluded as they are non-cash and partially discretionary, providing a better understanding of core operations and facilitating comparisons[25][26] B. Capitalization and Indebtedness Information regarding capitalization and indebtedness is not applicable for this report - This item is marked as 'Not applicable'[30] C. Reasons for the Offer and Use of Proceeds Information regarding the reasons for the offer and use of proceeds is not applicable for this report - This item is marked as 'Not applicable'[30] D. Risk Factors This section outlines significant risks across various categories, including business, industry, corporate structure, China operations, and ADSs - The company operates in a relatively new and rapidly evolving holographic AR and semiconductor market, facing challenges such as technological innovations, changing customer demands, and the need for significant capital expenditures[31][32][35] - Intense competition, short product life cycles, and customer price sensitivity characterize the markets, requiring continuous enhancement of products and services and timely introduction of new offerings[37] - The company incurred a net loss of RMB 145.0 million (US$21.8 million) and negative cash flows from operating activities of RMB 67.0 million in 2020, and may not maintain profitability due to investment in R&D, business acquisitions, and stock compensation expenses[42] - The business is highly dependent on the proper functioning of IT systems and infrastructure, which are vulnerable to disruptions, failures, and security breaches, potentially harming reputation and growth[78][79] - The company relies on contractual arrangements with Variable Interest Entities (VIEs) for operations in China due to foreign ownership restrictions, which may not be as effective as direct ownership and are subject to PRC government scrutiny and legal uncertainties[123][125][129] - Doing business in China involves risks from adverse changes in economic, political, or social conditions, extensive government regulation of the Internet industry, and uncertainties in the interpretation and enforcement of PRC laws[143][144][157] - Risks related to ADSs include market price volatility, limited voting rights for ADS holders, potential dilution from rights offerings, and the possibility of being classified as a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes[200][221][223][241] ITEM 4. INFORMATION ON THE COMPANY This section provides a comprehensive overview of the company's history, business, organizational structure, and property, plant, and equipment A. History and Development of our Company The company commenced commercial operations in May 2015, underwent offshore holding company formation, completed IPOs, and established a semiconductor business - Commercial operations began in May 2015 via Beijing WiMi Hologram Cloud Software Co., Ltd[242] - WiMi Cayman was incorporated in August 2018 as an offshore holding company to facilitate offshore financing[243] Public Offerings and Proceeds | Offering Type | Date | ADSs Sold | Price per ADS | Gross Proceeds (US$) | Net Proceeds (US$) | |:---|:---|:---|:---|:---|:---|\ | Initial Public Offering | April 2020 | 4,750,000 | US$5.50 | US$26.125 million | US$24.2 million | | Follow-on Public Offering | July 27, 2020 | 7,560,000 | US$8.18 | - | US$57.3 million | | Second Follow-on Public Offering | March 25, 2021 | 11,173,335 units | US$7.50 per unit | US$83.8 million | US$77.8 million | - In September 2020, the company acquired 100% equity interests of FE-DA Electronics Company Private Limited for a total consideration of US$35 million to further develop its semiconductor business[246] - Due to PRC foreign ownership restrictions, the company relies on contractual arrangements with Variable Interest Entities (VIEs), Beijing WiMi and Shenzhen Yitian, to conduct most of its operations in China, with recent restructuring in December 2020[249] B. Business Overview The company provides AR-based holographic services and products, expanded into central processing algorithm services and computer chip products, and operates under a complex regulatory framework - The company offers AR-based holographic services and products, focusing on innovative, immersive, and interactive holographic AR experiences, alongside central processing algorithm services and computer chip products for enterprise customers[254] Revenue Contribution by Business Segment | Business Segment | 2018 Revenue Contribution (%) | 2019 Revenue Contribution (%) | 2020 Revenue Contribution (%) | |:---|:---|:---|:---|\ | Holographic AR advertising services | 80.5% | 83.8% | 40.1% | | Holographic AR entertainment products | 19.5% | 16.2% | 3.9% | | Semiconductor business | - | - | 56.0% | - Holographic AR advertising services embed 3D objects into online videos using proprietary image and video recognition technologies, generating 11.3 billion views in 2020, a 16.5% increase from 2019[256] - Holographic AR entertainment products include payment middleware software, a game distribution platform (233 Game Platform with over 3,532 apps and 3.8 million active members in 2020), and holographic MR software[260][263][264] - The semiconductor business, launched in July 2020, provides central processing algorithm services and computer chip products, generating 56.0% of 2020 revenues from sales of semiconductor products and related accessories[255][267] - Key technologies include holographic image processing and recognition intelligence (e.g., 3D facial recognition, facial change technology), software engineering, content production (4,600+ ready-to-use AR holographic contents), cloud architecture, big data analytics (2,560+ user tags), and artificial intelligence, with future adaptation to 5G technology[268][269][271][272][273][277][278][279][280][282][283] - The company's intellectual property portfolio as of December 31, 2020, includes 195 registered patents (193 utility models), 56 pending patent applications, 325 registered software copyrights, 26 registered trademarks, and 25 registered domain names in China[290] - The company operates in a highly regulated Internet industry in China, subject to various laws and regulations concerning foreign investment restrictions, AR industry promotion, value-added telecommunication services, internet content providers, intellectual property rights, online advertising, internet security, privacy protection, online games, employment, social welfare, and taxation[296][297][301][302][305][310][319][321][325][331][341][342][345][346] C. Organizational Structure The company's corporate structure involves an offshore holding company, PRC subsidiaries, and VIEs, relying on contractual arrangements due to foreign ownership restrictions - The company's corporate structure includes WiMi Cayman (offshore holding), PRC subsidiaries (Hologram WiMi, Shenzhen Weiyixin), and VIEs (Beijing WiMi, Shenzhen Yitian) and their subsidiaries[369][371] - Jie Zhao, Chairman, beneficially owns 100% of Class A ordinary shares, 27.1% of Class B ordinary shares, and 82.05% of Beijing WiMi's capital stock, indicating significant control[369] - Contractual arrangements with VIEs are necessary to comply with PRC foreign ownership restrictions in value-added telecommunication services, internet audio-video programs, and other restricted businesses[371] - These contractual arrangements grant the company effective control over its VIEs, allow it to receive substantially all economic benefits, and provide exclusive options to purchase equity interests and assets, enabling consolidation under GAAP[373] - Key agreements include Power of Attorney (granting voting rights), Equity Interest Pledge Agreement (securing obligations), Exclusive Business Cooperation Agreement (service fees equal to net income), Exclusive Share Purchase Option Agreement (option to acquire equity), and Exclusive Asset Purchase Agreement (option to acquire assets)[375][376][379][380][381][382][384][386][387] D. Property, Plant and equipment The company's headquarters are in Beijing, China, with additional offices, and capital expenditures primarily for office property and equipment - The company's headquarters are in Beijing, China, with additional offices in Shenzhen, China (2,620 sq meters), Hong Kong (655 sq feet), and Singapore (1,500 sq feet)[389] Capital Expenditure | Year | Capital Expenditure (RMB) | Capital Expenditure (USD) | |:---|:---|:---|\ | 2018 | 0.05 million | - | | 2019 | 0.2 million | - | | 2020 | 0.5 million | 74,296 | - Capital expenditures in 2020 were mainly for the purchase of office property and equipment, and leasehold improvements[253] ITEM 4A. UNRESOLVED STAFF COMMENTS There are no unresolved staff comments applicable to this report - This item is marked as 'Not applicable', indicating no unresolved staff comments to report[391] ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS This section provides a detailed discussion and analysis of the company's financial condition and results of operations, including operating results, liquidity, R&D, and contractual obligations A. Operating Results The company experienced significant revenue growth in 2020, driven by the new semiconductor business, despite a net loss and negative operating cash flow, with COVID-19 impacts Revenue Growth (YoY) | Year | Total Revenues (RMB) | YoY Growth (%) | |:---|:---|:---|\ | 2018 | 225.3 million | - | | 2019 | 319.2 million | 41.7% | | 2020 | 766.0 million | 140.0% | Net Income (Loss) and Non-GAAP Net Income | Year | Net Income (Loss) (RMB) | Non-GAAP Net Income (RMB) | |:---|:---|:---|\ | 2018 | 89.2 million | 89.2 million | | 2019 | 102.2 million | 102.2 million | | 2020 | (145.0 million) | 40.3 million | - The semiconductor business, launched in July 2020, generated approximately RMB 429.0 million (US$ 65.7 million) in revenues, accounting for 56.0% of total revenues in 2020[394][421] - AR advertising revenue increased by 14.9% to RMB 307.3 million in 2020, driven by an increase in customers (from 153 to 294), but average revenue per customer decreased due to lower pricing during the COVID-19 pandemic[419] - AR entertainment revenue decreased by 42.4% to RMB 29.7 million in 2020, primarily due to reduced demand for mobile games and SDK payment channel services impacted by COVID-19 and competition[420] Operating Expenses (YoY Change) | Expense Category | 2019 (RMB) | 2020 (RMB) | YoY Change (RMB) | YoY Change (%) | |:---|:---|:---|:---|:---|\ | Selling expenses | 1.9 million | 3.7 million | 1.8 million | 94.7% | | General and administrative expenses | 39.9 million | 42.7 million | 2.8 million | 7.1% | | Research and development expenses | 18.4 million | 85.0 million | 66.6 million | 362.8% | | Stock compensation expenses | - | 191.4 million | 191.4 million | 100.0% | | Total Operating Expenses | 60.2 million | 322.9 million | 262.7 million | 436.6% | - Gross profit decreased slightly by RMB 3.6 million to RMB 169.4 million in 2020, with overall gross margin declining from 54.2% in 2019 to 22.1% in 2020, mainly due to the lower profit margin of the semiconductor business (10.9%) and higher costs for AR advertising in short-form videos[425][426][429] - The COVID-19 pandemic negatively impacted customer budgets for online advertising and MR software development in the first half of 2020, leading to an impairment of approximately RMB 7.3 million (US$1.1 million) for MR software development[398][399] B. Liquidity and Capital Resources As of December 31, 2020, the company had RMB 368.1 million in cash and RMB 484.2 million in working capital, with liquidity financed through operations, debt, and equity offerings Cash and Working Capital (as of December 31, 2020) | Metric | Amount (RMB) | Amount (USD) | |:---|:---|:---|\ | Cash, cash equivalents and restricted cash | 368.1 million | 56.4 million | | Working capital | 484.2 million | 74.2 million | - The company received net proceeds of approximately US$24.2 million from its initial public offering in April 2020, US$57.3 million from a follow-on offering in July 2020, and US$77.8 million from a registered direct offering in March 2021[496] - PRC regulations restrict the ability of PRC entities to transfer net assets to the Cayman Islands and Hong Kong subsidiaries, but these restrictions do not currently impact the company's ability to meet its cash obligations within the PRC[497] - Funding to PRC subsidiaries through loans or capital contributions is subject to PRC government approvals or registrations, with statutory limits on foreign debts[498][500] Cash Flow Summary (for the years ended December 31) | Cash Flow Activity | 2018 (RMB) | 2019 (RMB) | 2020 (RMB) | 2020 (USD) | |:---|:---|:---|:---|:---|\ | Net cash provided by (used in) operating activities | 99.5 million | 144.0 million | (67.0 million) | (10.3 million) | | Net cash used in investing activities | (98.6 million) | (126.5 million) | (228.1 million) | (35.0 million) | | Net cash provided by (used in) financing activities | 137.5 million | (41.0 million) | 562.6 million | 86.2 million | | Net change in cash, cash equivalents and restricted cash | 139.3 million | (22.9 million) | 239.1 million | 36.6 million | - Net cash used in operating activities in 2020 was primarily due to a net loss of RMB 145.0 million, increased accounts receivable, and higher prepaid expenses, partially offset by non-cash items like stock compensation expenses[504] - Net cash used in investing activities in 2020 increased significantly due to payments for cost method investments, net acquisition payments for Fe-DA, and purchases of short-term investments[508][509] - Net cash provided by financing activities in 2020 was mainly from public offering proceeds and additional related-party loans, partially offset by loan repayments[513] C. Research and Development, Patents and Licenses, etc. The company significantly increased its research and development expenses in 2020, focusing on AI, holographic AR, image processing, intelligent hardware, and photosensitive signal transmission technologies Research and Development Expenses | Year | R&D Expenses (RMB) | R&D Expenses (USD) | |:---|:---|:---|\ | 2018 | 8.0 million | - | | 2019 | 18.4 million | - | | 2020 | 85.0 million | 13.0 million | - R&D efforts are primarily focused on enhancing artificial intelligence technology, holographic AR and image processing technology, intelligent hardware technology, and photosensitive signal transmission technology[402] - The company relies on a combination of patent, copyright, trademark, and trade secret laws, along with disclosure restrictions, to protect its intellectual property rights[520] D. Trend information No additional material adverse trends, uncertainties, demands, commitments, or events were identified for the year ended December 31, 2020, beyond those already disclosed - No additional material adverse trends, uncertainties, demands, commitments, or events were identified for the year ended December 31, 2020, beyond those already disclosed in the annual report[521] E. Off-Balance Sheet Arrangements The company has not entered into any material off-balance sheet arrangements that are reasonably likely to have a current or future effect on its financial condition - The company has not entered into any material off-balance sheet arrangements, including financial guarantees, derivative contracts, or retained/contingent interests in assets transferred to unconsolidated entities[522] F. Tabular Disclosure of Contractual Obligations As of December 31, 2020, the company's contractual obligations primarily consisted of operating lease obligations, loans from related parties, and acquisition payables Contractual Obligations as of December 31, 2020 | Contractual obligations | Total (RMB) | Less than 1 year (RMB) | 1 - 2 years (RMB) | 3 - 5 years (RMB) | Thereafter (RMB) | |:---|:---|:---|:---|:---|:---|\ | Operating leases obligations | 3.5 million | 2.8 million | 640,628 | - | - | | Loans—related parties | 86.6 million | 63.9 million | 22.7 million | - | - | | Acquisition payable | 1.9 million | - | 1.9 million | - | - | | Total | 91.9 million | 66.7 million | 25.2 million | - | - | G. Safe Harbor This section refers to the 'Forward-looking Statements' section at the beginning of the annual report for information regarding safe harbor provisions - This section directs readers to the 'Forward-looking Statements' section for details on safe harbor provisions[526] ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES This section provides information on the company's directors and executive officers, their compensation, board practices, employee statistics, and share ownership A. Directors, Senior Management and Employees This subsection lists the company's directors and executive officers, including their age and position, highlighting their professional backgrounds and experience Directors and Executive Officers | Name | Age | Position/Title | |:---|:---|:---|\ | Jie Zhao | 44 | Chairman | | Shuo Shi | 38 | Chief Executive and Operations Officer and Director | | Songrui Guo | 37 | Chief Technology Officer and Director | | Guanghui Zheng | 31 | Chief Financial Officer | | Hongtao Zhao | 44 | Independent Director | | Yuanyuan Liu | 37 | Independent Director | | Shan Cui | 48 | Independent Director | | Michael W. Harlan | 60 | Independent Director | - Jie Zhao, the founder, has over 10 years of management experience and holds significant control as Chairman[528] - Shuo Shi, CEO and COO, has over 10 years of experience in sales marketing, internet management, and culture media[530] - Songrui Guo, CTO, has a PhD in computer science and technology and extensive R&D experience[531] B. Compensation In 2020, the aggregate cash compensation for directors and executive officers was approximately RMB 810,518, with no pension benefits, but statutory contributions for PRC employees Aggregate Cash Compensation for Directors and Executive Officers (2020) | Metric | Amount (RMB) | Amount (USD) | |:---|:---|:---|\ | Aggregate cash compensation | 810,518 | 124,219 | - The company does not provide pension, retirement, or similar benefits to directors and executive officers[538] - PRC subsidiaries and consolidated VIEs are required to contribute to employee social security plans (pension, medical, unemployment, childbirth, work-related injury insurance, and housing fund) based on specified percentages of salaries[538] - Employment agreements with executive officers are for an unspecified period, include confidentiality clauses, and can be terminated by either party with prior written notice or for cause[539] C. Board Practices The board of directors consists of seven members, including four independent directors, with established audit, compensation, and nominating committees, and directors owing fiduciary duties - The board of directors comprises seven directors, including four independent directors (Hongtao Zhao, Yuanyuan Liu, Shan Cui, and Michael W. Harlan), satisfying Nasdaq's independence requirements[540] - Three committees have been established: an audit committee (chaired by Shan Cui, with Shan Cui, Hongtao Zhao, and Yuanyuan Liu as independent members), a compensation committee (chaired by Hongtao Zhao, with Hongtao Zhao and Yuanyuan Liu as independent members), and a nominating and corporate governance committee (chaired by Hongtao Zhao, with Hongtao Zhao and Yuanyuan Liu as independent members)[543][545][546] - Directors owe fiduciary duties to the company under Cayman Islands law, including duties of loyalty, honesty, and acting in the company's best interests, as well as exercising reasonable skill and care[548] - Directors are appointed by the board or shareholders and serve without a fixed term, holding office until removed by an ordinary resolution of shareholders[549] - The 2020 Equity Incentive Plan was adopted to attract and retain personnel, authorizing the issuance of up to 17,500,000 Class B ordinary shares through options, restricted shares, restricted share units, and local awards[550][552] D. Employees The company's total full-time employees increased from 122 in 2018 to 202 in 2020, primarily in R&D, with all employees based in China and participating in social security plans Full-time Employees by Year | Year | Number of Full-time Employees | |:---|:---|\ | 2018 | 122 | | 2019 | 147 | | 2020 | 202 | Full-time Employees by Function (as of December 31, 2020) | Function | Number of Full-time Employees | |:---|:---|\ | Research and Development | 87 | | Business and Marketing | 67 | | Administrative, Human Resources and Finance | 48 | | Total | 202 | - All employees are based in China, and the company participates in government-mandated social security plans (pension, unemployment, childbirth, work-related injury, medical insurance, and housing fund) for its PRC-based employees[563] - The company maintains good working relationships with employees and has not experienced any labor disputes; none of its employees are represented by labor unions[564] E. Share Ownership This subsection details the beneficial ownership of the company's ordinary shares by directors, executive officers, and major shareholders, with Chairman Jie Zhao holding significant voting power Beneficial Ownership of Ordinary Shares (as of report date) | Directors and Executive Officers | Class A Ordinary Shares (Number) | Class A Ordinary Shares (%) | Class B Ordinary Shares (Number) | Class B Ordinary Shares (%) | Voting Power (%) | |:---|:---|:---|:---|:---|:---|\ | Jie Zhao | 20,115,570 | 100.0% | 41,591,895 | 27.1% | 68.5% | | Shuo Shi | — | — | 56,680 | *% | *% | | Songrui Guo | — | — | 5,000 | *% | *% | | Guanghui Zheng | — | — | 10,000 | *% | % | | All directors and officers as a group | 20,115,570 | 100.0% | 41,626,815 | 27.1% | 68.5% | | Principal Shareholders: | | | | | | | Vital Success Global Ltd. | — | — | 26,591,885 | 17.3% | 7.5% | | Wonderful Seed Ltd. | — | — | 15,000,010 | 9.8% | 4.2% | - Jie Zhao, the Chairman, beneficially owns 100% of Class A ordinary shares and 27.1% of Class B ordinary shares, giving him 68.5% of the total voting power[568] - As of the report date, 85,017,502 Class B ordinary shares (56.3% of total outstanding ordinary shares) are held by one record holder in the United States, which is the depositary of the ADS program[570] ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS This section details the company's major shareholders and significant transactions with related parties, including loans and contractual arrangements with VIEs A. Major Shareholders Information on major shareholders is provided in 'Item 6.E. Share Ownership' - Information on major shareholders is provided in 'Item 6.E. Share Ownership'[571] B. Related Party Transactions The company has engaged in related party transactions, primarily involving unsecured loans from its Chairman and an entity under common control, and contractual arrangements with VIEs - The company borrowed funds from Chairman Jie Zhao for operational purposes; these loans are unsecured, interest-free, and due in 2021. Repayments to Jie Zhao in 2020 amounted to RMB 4,850,000 (USD 743,306)[572] - Loans were also obtained from Shanghai Junei Internet Co. (under common control of Jie Zhao), with an annual interest rate of 7%. In 2020, the company repaid RMB 91,500,000 (USD 14,023,203) and borrowed an additional RMB 96,300,000 (USD 14,758,847)[573] Related Party Loans (as of December 31) | Name of Related Party | Relationship | Nature | 2019 (RMB) | 2020 (RMB) | 2020 (USD) | |:---|:---|:---|:---|:---|:---|\ | Jie Zhao | Chairman of Wimi Cayman | Loan | 4.9 million | - | - | | Jie Zhao | Chairman of Wimi Cayman | Loan | 6.7 million | 6.3 million | 959,657 | | Shanghai Junei Internet Co. | Under common control of Jie Zhao | Loan | 75.5 million | 80.3 million | 12.3 million | | Total | | | 87.0 million | 86.6 million | 13.3 million | | Current portion of shareholder loan | | | 71.0 million | 63.9 million | 9.8 million | | Shareholder loan—non-current | | | 16.0 million | 22.7 million | 3.5 million | - The company relies on contractual arrangements with its VIEs, as detailed in 'Item 4. Information on the Company—C. Organizational Structure,' for its operations in China[576] C. Interests of Experts and Counsel Information regarding the interests of experts and counsel is not applicable for this report - This item is marked as 'Not applicable', indicating no interests of experts and counsel to report[576] ITEM 8. FINANCIAL INFORMATION This section confirms the inclusion of the company's audited consolidated financial statements and addresses legal proceedings, dividend policy, and significant changes A. Consolidated Statements and Other Financial Information The company's audited consolidated financial statements are included in the report, with no material legal proceedings or current plans to pay dividends - The company's audited consolidated financial statements are included starting on page F-1[577] - The company is not currently a party to any legal, arbitration, or administrative proceedings that management believes could have a material adverse effect on its business, financial position, or results of operations[578] - The company currently has no plan to declare or pay any dividends in the near future, intending to retain most, if not all, available funds and future earnings to operate and expand its business[579] - Dividend distribution is at the discretion of the board of directors, subject to Cayman Islands law and the company's financial condition, with reliance on dividends from PRC subsidiaries for cash requirements[580][582] B. Significant Changes No significant changes have occurred since the date of the annual financial statements, other than those already disclosed in the report - No significant changes have occurred since the date of the annual financial statements, other than those already disclosed in the report[583] ITEM 9. THE OFFER AND LISTING This section provides details about the company's American Depositary Shares (ADSs) listing on the Nasdaq Global Market and confirms that other offer and listing-related items are not applicable A. Offer and listing details The company's ADSs have been listed on the Nasdaq Global Market under the symbol 'WIMI' since April 1, 2020, with each ADS representing two Class B ordinary shares - The company's ADSs have been listed on the Nasdaq Global Market under the symbol 'WIMI' since April 1, 2020[584] - Each ADS represents two Class B ordinary shares, with a par value of US$0.0001 per share[584] - No significant trading suspensions have occurred since the ADSs began trading[584] B. Plan of Distribution Information regarding the plan of distribution is not applicable for this report - This item is marked as 'Not applicable'[584] C. Markets This section refers to 'Offer and Listing Details' for market information - This section refers to 'Offer and Listing Details' for market information[584] D. Selling Shareholders Information regarding selling shareholders is not applicable for this report - This item is marked as 'Not applicable'[584] E. Dilution Information regarding dilution is not applicable for this report - This item is marked as 'Not applicable'[584] F. Expenses of the Issue Information regarding the expenses of the issue is not applicable for this report - This item is marked as 'Not applicable'[584] ITEM 10. ADDITIONAL INFORMATION This section provides additional corporate information, including details on share capital, governing documents, material contracts, exchange controls, taxation, and dividend policy A. Share Capital Information regarding share capital is not applicable for this report - This item is marked as 'Not applicable'[584] B. Memorandum and Articles of Association The company's affairs are governed by its second amended and restated memorandum and articles of association, effective prior to its initial public offering - The company's affairs are governed by its second amended and restated memorandum and articles of association, the Companies Law of the Cayman Islands, and common law[586] - The memorandum and articles of association were adopted on July 24, 2019, and became effective immediately prior to the completion of the initial public offering[586] C. Material Contracts No material contracts outside the ordinary course of business have been entered into within the two years preceding the report date, other than those already disclosed - No material contracts outside the ordinary course of business have been entered into within the past two years, other than those already disclosed in the report[587] D. Exchange Controls This section directs readers to 'Item 4. Information on the Company—B. Business Overview—Regulations—Regulation on Foreign Exchange' and 'Regulation on Dividend Distributions' for information on exchange controls - This section directs readers to 'Item 4. Information on the Company—B. Business Overview—Regulations—Regulation on Foreign Exchange' and 'Regulation on Dividend Distributions' for information on exchange controls[588] E. Taxation This subsection outlines the tax implications for the company and its shareholders across various jurisdictions, including potential 'PRC resident enterprise' classification and PFIC status for U.S. investors - The Cayman Islands currently levy no taxes on individuals or corporations based on profits, income, gains, or appreciation, and there are no withholding taxes on dividend payments[589][590] - Under PRC EIT Law, an enterprise established outside the PRC with 'de facto management bodies' within the PRC is considered a 'resident enterprise' and subject to a 25% enterprise income tax rate on worldwide income, which could significantly reduce net income if applied to the company[591][593] - If classified as a PRC resident enterprise, dividends paid to non-PRC enterprise shareholders (including ADS holders) may be subject to a 10% withholding tax, and gains on the sale of ADSs or Class B ordinary shares may be subject to PRC tax[593] - U.S. Holders of ADSs or Class B ordinary shares may face adverse U.S. federal income tax consequences if the company is classified as a Passive Foreign Investment Company (PFIC), including increased tax liability on disposition gains and 'excess distributions'[241][616] - The company does not expect to be a PFIC for its current taxable year, but uncertainties regarding the treatment of contractual arrangements with VIEs and the volatile market price of ADSs could affect this status in the future[613] F. Dividends and Paying Agents Information regarding dividends and paying agents is not applicable for this report - This item is marked as 'Not applicable'[621] G. Statement By Experts Information regarding statements by experts is not applicable for this report - This item is marked as 'Not applicable'[621] H. Documents on Display The company is subject to SEC periodic reporting requirements as a foreign private issuer, filing annual reports on Form 20-F and furnishing press releases on Form 6-K, available on the SEC website - The company is subject to periodic reporting and informational requirements of the Exchange Act as a foreign private issuer[623] - Annual reports on Form 20-F are filed within four months after the end of each fiscal year, and press releases for financial results and material events are furnished on Form 6-K[623] - Filed documents can be inspected at the SEC's public reference facilities in Washington, D.C., and are available on the **SEC's website (http://www.sec.gov)**[623](index=623&type=chunk) I. Subsidiary Information Information regarding subsidiary information is not applicable for this report - This item is marked as 'Not applicable'[624] ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section discusses the company's exposure to market risks, including credit risk, liquidity risk, and foreign exchange risk, detailing cash deposit concentrations and RMB exchange rate impacts - The company is exposed to credit risk primarily from cash and short-term investments, with significant cash balances held in financial institutions in China, Hong Kong, Singapore, and the US, some of which exceed local insurance coverage limits[625] - Liquidity risk is managed through financial position analysis and monitoring, with reliance on financial institutions and related parties for short-term funding when necessary[627] - The company faces foreign exchange risk due to operations in HKD and USD, and RMB is not freely convertible, meaning RMB appreciation against USD could adversely affect USD conversion amounts, and vice versa[626][628] - Customer concentration risk: As of December 31, 2020, three customers accounted for 19.1%, 14.0%, and 12.2% of accounts receivable[614] - Vendor concentration risk: As of December 31, 2020, four vendors accounted for 25.9%, 18.6%, 13.9%, and 11.0% of accounts payable[630] ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES This section clarifies that there are no debt securities, warrants, or other non-equity securities to report, but details fees and charges for American Depositary Shares (ADS) holders A. Debt Securities There are no debt securities to report - This item is marked as 'None'[630] B. Warrants and Rights There are no warrants and rights to report - This item is marked as 'None'[630] C. Other Securities There are no other securities to report - This item is marked as 'None'[630] D. American Depositary Shares This subsection details various fees and charges for American Depositary Shares (ADS) holders, including issuance, transfer, cash distribution, and administrative fees, and payments from the depositary to the company - ADS holders may be charged $5.00 per 100 ADSs for issuance, delivery, reduction, cancellation, or surrender[631] - Additional charges include fees for transfers of certificated/direct registration ADRs (US$1.50 per ADR), cash distributions (up to US$0.05 per ADS), annual administrative services (up to US$0.05 per ADS per calendar year), and reimbursement of depositary/agent expenses[631][633] - For the year ended December 31, 2020, the company received US$344,297 from the depositary[635] PART II This section addresses corporate governance, internal controls, use of offering proceeds, and financial statement disclosures ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES There are no defaults, dividend arrearages, or delinquencies to report - This item is marked as 'None'[637] ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS This section confirms no material modifications to security holder rights or registered securities, and no withdrawal or substitution of assets, detailing the use of offering proceeds A. Material Modifications to the Instruments Defining the Rights of Security Holders No material modifications to the instruments defining the rights of security holders have occurred - No material modifications to the instruments defining the rights of security holders have occurred[637] B. Material Modifications to the Rights of Registered Securities by Issuing or Modifying any other Class of Securities No material modifications to the rights of registered securities by issuing or modifying any other class of securities have occurred - This item is marked as 'None'[637] C. Withdrawal or Substitution of a Material Amount of the Assets Securing any Registered Securities No withdrawal or substitution of a material amount of assets securing any registered securities has occurred - This item is marked as 'Not applicable'[637] D. Change of Trustees or Paying Agents for any Registered Securities No change of trustees or paying agents for any registered securities has occurred - This item is marked as 'Not applicable'[637] E. Use of Proceeds The company utilized net proceeds from its initial public offering and follow-on offerings for R&D, strategic acquisitions, and general corporate purposes Use of Net Proceeds from Initial Public Offering (April 2020) | Category | Amount (US$) | |:---|:---|\ | Research and development | 9.4 million | | Strategic acquisitions and investments | 10.0 million | | General corporate purposes | 4.8 million | | Total Net Proceeds | 24.2 million | Use of Net Proceeds from Follow-on Public Offering (July 2020) | Category | Amount (US$) | |:---|:---|\ | Operating expenses and R&D in semiconductor industry | 3.6 million | | Strategic acquisitions and investments | 23.1 million | | General corporate purposes | 11.4 million | | Total Net Proceeds | 57.3 million | - The registered direct offering in March 2021 generated net proceeds of approximately US$77.8 million (RMB 507.9 million), with the intended use as previously disclosed in Form F-1 registration statements[643] ITEM 15. CONTROLS AND PROCEDURES The company's management concluded that disclosure controls and procedures were ineffective as of **December 31