F-1 1 a2239047zf-1.htm F-1

Use these links to rapidly review the document
TABLE OF CONTENTS
WIMI HOLOGRAM CLOUD INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS TABLE OF CONTENTS

Table of Contents

As filed with the Securities and Exchange Commission on June 27, 2019.

Registration No. 333-            


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933



WiMi Hologram Cloud Inc.
(Exact name of Registrant as specified in its charter)



Not Applicable
(Translation of Registrant's name into English)



Cayman Islands
(State or other jurisdiction of
incorporation or organization)
  7310
(Primary Standard Industrial
Classification Code Number)
  Not Applicable
(I.R.S. Employer
Identification Number)

No. 6, Xiaozhuang, #101A, Chaoyang District, Beijing
the People's Republic of China 100020
+86-10-5338-4913

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices)



Puglisi & Associates
850 Library Avenue, Suite 204
Newark, DE 19711
302-738-6680

(Name, address, including zip code, and telephone number, including area code, of agent for service)



Copies to:


Stuart Neuhauser, Esq.
Bill Huo, Esq.
Ari Edelman, Esq.
Ellenoff Grossman &Schole LLP
1345 Avenue of the Americas, 11th Floor
New York, NY 10105
Tel: (212) 370-1300
Fax: (212) 370-7889

 

Yang Ge, Esq.
DLA Piper UK LLP
20th Floor, South Tower, Kerry Center
No. 1 Guanghua Road, Chao Yang District
Beijing, China 100020
Tel: 86-10-8520-0616



Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this registration statement.

           If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    o

           If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

           If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

           If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

           Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.

Emerging growth company    ý

           If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 7(a)(2)(B) of the Securities Act. o



CALCULATION OF REGISTRATION FEE

       
 
Title of each class of securities
to be registered

  Proposed maximum aggregate
offering price(1)

  Amount of
registration fee

 

Class B ordinary shares, par value US$0.0001 per share(2)(3)

  US$50,000,000   US$6,060.00

 

(1)
Estimated solely for the purpose of determining the amount of registration fee in accordance with Rule 457(o) under the Securities Act of 1933.

(2)
Includes Class B ordinary shares initially offered and sold outside the United States that may be resold from time to time in the United States either as part of their distribution or within 40 days after the later of the effective date of this registration statement and the date the shares are first bona fide offered to the public, and also includes Class B ordinary shares that may be purchased by the underwriters pursuant to an over-allotment option. These Class B ordinary shares are not being registered for the purpose of sales outside the United States.

(3)
American depositary shares issuable upon deposit of the Class B ordinary shares registered hereby will be registered under a separate registration statement on Form F-6 (Registration No.333-                ). Each American depositary share represents                        Class B ordinary shares.



           The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to such Section 8(a), may determine.

   


The term "new or revised financial accounting standard" refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.


Table of Contents

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

Subject to completion
Preliminary Prospectus dated                        

American Depositary Shares

LOGO

WiMi Hologram Cloud Inc.

Representing                Class B ordinary shares



         This is an initial public offering of American depositary shares, or ADSs, representing Class B ordinary shares of WiMi Hologram Cloud Inc.

         We are offering                ADSs. Each ADS represents                of our Class B ordinary shares, par value US$0.0001 per share.

         Prior to this offering, there has been no public market for the ADSs. It is currently estimated that the initial public offering price per share will be between US$            and US$            .

         Following the completion of this offering, our issued and outstanding share capital will consist of Class A ordinary shares and Class B ordinary shares.                 will beneficially own all of our issued Class A ordinary shares and will be able to exercise        % of the total voting power of our issued and outstanding share capital immediately following the completing of this offering. Holders of Class A ordinary shares and Class B ordinary shares have the same rights except for voting and conversion rights. Each Class A ordinary share is entitled to ten (10) votes and is convertible into one Class B ordinary share, and each Class B ordinary share is entitled to one (1) vote. Class B ordinary shares are not convertible into Class A ordinary shares under any circumstances.

         Upon the completion of this offering, our outstanding share capital will consist of Class A ordinary shares and Class B ordinary shares, and we will be a "controlled company" as defined under the Nasdaq Listing Rules because Jie Zhao, our Chairman, will beneficially own          % of our issued and outstanding Class A ordinary shares and           % of our issued and outstanding Class B ordinary shares. Accordingly, Mr. Zhao will be able to exercise          % of our total voting power, assuming the underwriters do not exercise their over-allotment option, or          % of our total voting power if the underwriters exercise their over-allotment option in full. Holders of Class A ordinary shares and Class B ordinary shares have the same rights except for voting and conversion rights. Each Class A ordinary share is entitled to ten votes and is convertible into one Class B ordinary share at any time by the holder thereof, and each Class B ordinary share is entitled to one vote and is not convertible into Class A ordinary shares under any circumstances. See "Principal Shareholders."

         We intend to apply to list the ADSs on the Nasdaq Global Market under the symbol "WIMI."



         See "Risk Factors" beginning on page 18 for factors you should consider before buying the ADSs.

         Neither the United States Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

       
 
 
  Per ADS
  Total
 

Public offering price

  US$                   US$                
 

Underwriting discounts and commissions(1)

  US$                   US$                
 

Proceeds, before expenses, to us

  US$                   US$                

 

(1)
For a description of the compensation payable to the underwriters, see "Underwriting."

         The underwriters have a 30-day option to purchase up to an additional                ADSs from us at the initial public offering price less the underwriting discounts and commissions.

         The underwriters expect to deliver the ADSs against payment in U.S. dollars in New York, NY on                        , 2019.

Benchmark Company  
Maxim Group LLC
 
China Merchants Securities (HK)
 
AMTD Global Markets


BOCI

 


Everbright
Sun Hung Kai

 


GF Securities (Hong Kong)
Brokerage Limited

 


Axiom Capital Management, Inc.

   



The date of this prospectus is                        , 2019.


Table of Contents


TABLE OF CONTENTS

 
  Page

Prospectus Summary

  1

Our Corporate Information

  12

Conventions Which Apply to this Prospectus

  13

The Offering

  14

Summary Consolidated Financial Data and Operating Data

  17

Risk Factors

  18

Special Note Regarding Forward-Looking Statements

  57

Use of Proceeds

  58

Dividend Policy

  59

Capitalization

  60

Dilution

  61

Enforceability of Civil Liabilities

  63

Corporate History and Structure

  65

Selected Consolidated Financial Data

  70

Management's Discussion and Analysis of Financial Condition and Results of Operations

  71

Industry Overview

  93

Business

  107

PRC Regulation

  121

Management

  135

Principal Shareholders

  141

Related Party Transactions

  143

Description of Share Capital

  147

Description of American Depositary Shares

  158

Shares Eligible for Future Sale

  172

Taxation

  174

Underwriting

  180

Expenses Relating to this Offering

  189

Legal Matters

  190

Experts

  191

Where You Can Find Additional Information

  192

Index to Consolidated Financial Statements

  F-1

        We have not authorized anyone to provide you with different information, and we take no responsibility for any other information others may give you. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than its date.

        You should rely only on the information contained in this prospectus or in any related free-writing prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, the ADSs only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is current only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the ADSs.

        We have not taken any action to permit a public offering of the ADSs outside the United States or to permit the possession or distribution of this prospectus outside the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about and

i


Table of Contents

observe any restrictions relating to the offering of the ADSs and the distribution of the prospectus outside the United States.

        Until                        , 2019 (the 25th day after the date of this prospectus), all dealers that buy, sell or trade the ADSs, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

ii


Table of Contents



PROSPECTUS SUMMARY

        The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements and the related notes appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in the ADSs discussed under "Risk Factors" and information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" before deciding whether to buy the ADSs. Investors should note that WiMi Hologram Cloud Inc. ("WiMi Cayman"), our ultimate Cayman Islands holding company, does not directly own any substantive business operations in the PRC and the businesses described in this prospectus are operated through our variable interest entity. This prospectus contains information from an industry report, dated June 18, 2019, commissioned by us and prepared by Frost & Sullivan, an independent research firm, to provide information regarding our industry and our market position in China and globally. We refer to this report as the "Frost & Sullivan Report."

Our Business

        We offer augmented reality ("AR")-based holographic services and products to cater to our customers' needs, all centered upon providing an innovative, immersive and interactive holographic augmented reality experience for our customers and end users. "Customers" are those who have entered into contracts with us and used our services pursuant to such contracts during the relevant period. Currently, our offerings consist primarily of (i) holographic AR advertising services and (ii) holographic AR entertainment products. During the three months ended March 31, 2019, approximately 80.3% and 19.7% of our revenues were generated from our holographic AR advertising services and holographic AR entertainment products, respectively. In the year ended December 31, 2018, approximately 80.5% and 19.5% of our revenues were generated from our holographic AR advertising services and holographic AR entertainment products, respectively. In the year ended December 31, 2017, approximately 69.3% and 30.7% of our revenues were generated from our holographic AR advertising services and holographic AR entertainment products, respectively.

    Holographic AR Advertising Services

        Our holographic AR advertising software enables users to insert into video footages real or animated three-dimensional ("3D") objects that integrate seamlessly within the scene of such footages. Our online holographic AR advertising solution embeds holographic AR ads into films and shows that are hosted by leading online streaming platforms in China. During the three months ended March 31, 2019, holographic AR ads produced using our software generated a total of approximately 2.3 billion views, as compared to approximately 1.2 billion views during the three months ended March 31, 2018, representing an increase of 91.7%. In the year ended December 31, 2018, holographic AR ads produced using our software generated a total of approximately 6.6 billion views, as compared to approximately 4.9 billion views during the year ended December 31, 2017, representing an increase of 34.7%. "View" is also known as "impression". Each time an advertisement is fetched, it is counted as one impression or one view. CPM, or cost per thousand impressions, is a term used in traditional, online advertising and marketing related to web traffic, which refers to the cost or expense incurred for every thousand potential customers who view the advertisement. During the three months ended March 31, 2019, we had 65 customers, as compared to 49 customers during the three months ended March 31, 2018. Average revenue per customer was approximately RMB 1.0 million during the three months ended March 31, 2019, as compared to approximately RMB 0.7 million during the three months ended March 31, 2018. During the year ended December 31, 2018, we had 121 customers, as compared to 97 customers during the year ended December 31, 2017. Average revenue per customer was approximately RMB 1.5 million during the year ended December 31, 2018, as compared to approximately RMB 1.4 million during the year ended December 31, 2017. Average revenue per customer is calculated by dividing the total AR advertising revenue by the number of customers.

1


Table of Contents

Average revenue increase was due to the improvement in technologies where we could embed more contents in the advertisements. The duration of a typical AR advertising service contract is one year.

        In 2018, we had 36 customers that each accounted for more than RMB 1.5 million of our revenues in our AR advertising services business. We had 20 such customers in 2017. Among all our customers, the rate of customers who contributed more than RMB 1.5 million revenues in our AR advertising service was 20.6% in 2017 and increased to 29.8% in 2018. In addition, our customer retention rate, which is defined as the percentage of customers who have purchased more than once during a specific period in our AR advertising business was 19.6% and 30.6% in 2017 and 2018, respectively. We believe this material increase reflects our customers' satisfaction with our holographic AR advertising services.

        Through our proprietary image and video recognition technologies, our software enables users to analyze the underlying video footages at a pixel level to identify ad spaces that can be augmented by 3D objects. Advertisers and their agencies purchase these ad spaces through application programming interface, or APIs, integrated with our systems, specifying their target audience and budgets and typically providing the 3D models to be embedded in the videos. When the ad space is detected and 3D objects are generated, the 3D objects are embedded into the underlying streaming videos automatically on a batch-processing basis as determined by our software.

    Holographic AR Entertainment Products

        Our holographic AR entertainment products consist primarily of payment middleware software, game distribution platform and holographic mixed reality ("MR") software.

        Payment middleware is a software solution that connects mobile apps to payment channels, giving mobile app users convenient access to a wide range of online payment options. We have cooperated with more than 55 app developers and our payment middleware has been embedded to over 1,100 marketed mobile apps of over 300 customers in 2018, most of which were featured by AR functions.

        Our advanced payment middleware streamlines the often time-consuming mobile payment process. Our mobile payment middleware facilitates app developers to build an in-app payment infrastructure that allows micropayments to be made or received through an efficient, secure system, without any interface redirection. Such mobile payment middleware enables app developers to store users' payment credentials in a trusted and safe environment and eases user's burden of repeatedly entering and authenticating payment information for each transaction.

        Our payment middleware can be fully integrated with various types of mobile apps, especially those employing AR technologies, such as live streaming, gaming, selfie, photo editing, and video-sharing apps. Currently, our payment middleware supports substantially all of the major online payment channels in China, and is compatible with the mainstream mobile operating systems.

Our Technology

        We have developed powerful, cutting-edge holographic AR technologies.

    Software Engineering

        Since our inception, we have devoted the majority of our research and development resources to software development. Our software engineering team is responsible for building the company-wide software platform, supporting the integration of our products and applications within our cloud

2


Table of Contents

infrastructure, as well as producing the holographic AR-related and MR-related software and solutions we license to our entertainment industry customers.

GRAPHIC

    Content Production

        Our leading holographic AR content production capabilities are built around image acquisition, object recognition, automated image process, and computer vision technologies. Our software engineering team and visualization design team work closely to consistently advance such visualization-related technologies, and harness them to design and produce innovative holographic AR contents. Through real-time computer vision algorithms which provide an accurate pose estimation, we are able to perform scene recognition and tracking within seconds. Such cutting-edge algorithms also allow us to perform visualization of photorealistic high-resolution renderings of products on a pixel basis. While most peer companies may identify and capture 40 to 50 blocks of image data within a specific space unit, the number of data blocks we can collect reaches 500 to 550, according to Frost & Sullivan. According to Frost & Sullivan, our speed of image processing is 80% faster than the industry average, leading to improved operation efficiency. In the course of scene reconstruction, our automated image processing tools can perform noise cleaning and feature enhancement on the image we initially captured, enabling us to create best-in-class holographic AR designs with an industry-leading simulation degree.

        We have built a comprehensive holographic AR content library as compared to our peers in China. The formats of our holographic AR contents range from 3D models to holographic short videos. As of December 31, 2018, we owned 4,654 ready-to-use AR holographic contents that were available to be adapted to our holographic AR products and solutions covering a wide category, including animals, cartoon characters, vehicles and foods. Among them, 2,961 proprietary and licensed intellectual properties ("IP") were for education scenarios, 851 for tourism, 739 for arts and entertainment and 103 for popular science. In addition, our content library is also enriched by copyrighted contents we have licensed from third parties. We cooperate with various content owners, including brands, film producers and talent agencies, to adapt high-quality, popular IPs into holographic AR formats.

    Cloud

        We believe that the next-generation cloud delivery technology provides the flexibility and scalability necessary for holographic AR experience. Cloud technology is of high importance to build our

3


Table of Contents

comprehensive holographic AR ecosystem. We have developed our cloud architecture to work effectively in a flexible cloud environment that has a high degree of elasticity. Meanwhile, benefiting from our cloud storage and connecting capabilities, users of our integrated holographic AR software are able to access our large-size holographic AR content library on their native devices.

    Big Data

        We have developed advanced data analytics capabilities to derive actionable insights from the large amounts of data we collected from our products and third party sources. Currently, we have infiltrated a solid end-user base of approximately 350 million from which we are able to collect raw data. Our processing capabilities enable us to manage extremely large volumes of data and deliver real-time analysis at scale, making it possible for us to continue to improve and innovate our products and services. Our data mining and user behavioral data analytics technologies allow us to build and segment context-rich user profiles and apply such analysis in numerous applications. For instance, we have created over 2,000 user tags by analyzing user data we collected through our holographic AR advertising services. We are also in the process of developing ads performance tracking and evaluation tools.

Our Strengths

        We have developed an innovative business model with fundamental strengths that positions us for continued leadership.

    Leading Holographic Augmented Reality Application Platform in China

        We were the largest holographic AR application platform in China, in terms of the total revenue in 2018, according to Frost & Sullivan. In addition, we have built the most comprehensive and diversified holographic AR content library among all holographic AR solution providers in China, according to Frost & Sullivan.

    Market Potential Across the Holographic AR Value Chain

        As holography and AR continue to proliferate, China's holographic AR market is fast-growing and evolving. According to Frost & Sullivan, the total market size of China's holographic AR industry in terms of total revenues is expected to grow from RMB 3.6 billion in 2017 to RMB 454.8 billion in 2025.

    Cutting-edge Technology Capabilities and High-Quality User Experience

        We have developed the professional media player in China specifically designed for holographic AR contents. It has built in a comprehensive set of setting parameters and editing tools used for holographic AR content playback and allows end-users to playback complex high-fidelity simulations quickly and cost-effectively. End-users are able to adjust the contrast, saturation and vibrancy of the displayed holographic AR content and create their own custom visual effect.

    Experienced Management Team

        We benefit significantly from the experience of our founder and senior management team, who have been successfully riding the growth wave in China's booming holographic AR industry. Our chairman, Mr. Jie Zhao, has been with our company since our inception and possesses deep entrepreneurship and extensive expertise in the internet industry. Prior to establishing our company, Mr. Zhao founded Weixun Yitong, a mobile internet platform in China. Mr. Fanhua Meng, our Chief Executive Officer, has over ten years of senior management experience in internet companies. Mr. Shuo Shi, our Chief Operations Officer, is experienced in sales marketing, internet management

4


Table of Contents

and culture media. Mr. Yanghua Yang, the Chief Financial Officer of our company, has over ten years of experience in audit and finance. Mr. Chengwei Yi, our Chief Technology Officer, has over 15 years of experience focusing on video processing technology, artificial intelligence and signal processing technology. We believe that our management team's collective experience and insights have paved and will continue to pave the way for our success. Our management team is supported by a research and development team with strong academic background and industry expertise in audio/video processing, 3D modeling and cloud computing.

Our Industry

        China has a large number of Internet users and mobile Internet users. With the introduction of the underlying tool platform by system vendors such as Apple and Google, it is much more convenient for developers to create and apply diverse AR contents, enabling AR technology to quickly reach a large number of users. In addition, stores offering AR experiences are penetrating rapidly into shopping malls in China, which have enabled consumers to enjoy the AR experience at a low cost and promoted consumers' acceptance of AR.

        Currently, advertisement is the biggest vertical of AR. Accroding to Frost & Sullivan, the market size was estimated at RMB1.5 billion in 2016, and is expected to be at RMB7.8 billion by 2020, with a compound annual growth rate ("CAGR") of 71.6%, much higher than the growth of total online advertising market, which has a CAGR of 32.4% from 2014 to 2018. As AR technology keeps evolving to satisfy the advertisers' growing need, AR is expected to be largely used in advertisement. According to Frost & Sullivan, in 2025, the market will be valued at RMB143.9 billion with a CAGR of 79.1%, indicating a larger market share in total online advertising market in the next five years. Entertainment, including gaming and video, takes a huge share of AR sector as well, and it is expected to have a higher growth rate. In 2016 the market size was estimated at RMB0.6 billion and is expected to be at RMB6.8 billion by 2020, with a CAGR of 83.5%. Driven by the availability of AR SDK, improvement in smart phone performance, prospect of gaming industry, AR entertainment is expected to have a promising future, with a market size of RMB180 billion by 2025, indicating a CAGR of 92.6%, and surpassing advertisement to be the biggest application scenario of AR.

        There are four key drivers in the China holographic AR industry:

    Ultimate goal for visual display medium;

    Advancement in technology;

    Diversifying customer base and expanding application field; and

    Government and policy support.

Our Strategies

        We seek to build our AR ecosystem through collaboration with partners and customers. We intend to pursue the following strategies:

    Bring holographic AR experience to broader mass market;

    Continue to invest in technology and innovations;

    Strengthen our AR content development capabilities and enrich our content library; and

    Explore acquisition or investment opportunities.

5


Table of Contents

Our Challenges

        We face risks and uncertainties in realizing our business objectives and executing our strategies, including those relating to:

    operating in a relatively new and rapidly evolving market;

    our ability to compete effectively;

    our ability to sustain our rapid growth, effectively manage our growth or implement our business strategies;

    our ability to keep up with industry trends or technological developments;

    our ability to continue to develop, acquire, market and offer new products and services or enhancements to existing products and services that meet customer requirements;

    our ability to achieve expected returns of our significant investments;

    our ability to optimize our monetization strategies;

    our ability to obtain sufficient pricing to enable us to meet our profitability expectations;

    our ability to obtain sufficient capital to fund our research and development investments; and

    our ability to maintain continued and collaborative efforts of our senior management and key employees.

        Moreover, we face risks and uncertainties related to our corporate structure and regulatory environment in China, including:

    risks associated with our control over our VIE in China, which is based on contractual arrangements rather than equity ownership; and

    changes in the political and economic policies of the PRC government.


Corporate History and Structure

        We commenced our commercial operations in May 2015 through Beijing WiMi Hologram Cloud Software Co., Ltd. (previously under the name "WiMi Lightspeed Capital Investment Management (Beijing) Co., Ltd."), or Beijing WiMi. In February 2016, Beijing WiMi formed a wholly-owned subsidiary, Micro Beauty Lightspeed Investment Management HK Limited in Hong Kong. In addition, Beijing WiMi acquired 100% equity interest in Shenzhen Yidian Internet Technology Co., Ltd, or Shenzhen Yidian, on October 21, 2015, Shenzhen Yitian Hulian Internet Technology Co., Ltd., or Shenzhen Yitian, on August 20, 2015 and Shenzhen Kuxuanyou Technology Co., Ltd., or Shenzhen Kuxuanyou on August 26, 2015.

        We incorporated WiMi Cayman under the laws of the Cayman Islands as our offshore holding company in August 2018 to facilitate offshore financing. In September 2018, we established WiMi Hologram Cloud Limited, or WiMi HK, our wholly-owned Hong Kong subsidiary, and WiMi HK established a wholly-owned PRC subsidiary, Beijing Hologram WiMi Cloud Internet Technology Co., Ltd., or Hologram WiMi, which is also referred to as WiMi WFOE in this prospectus.

        Due to restrictions imposed by PRC laws and regulations on foreign ownership of companies that engage in internet and other related business, Hologram WiMi later entered into a series of contractual arrangements with Beijing WiMi, which we also refer to as our VIE in this prospectus, and its shareholders. We depend on these contractual arrangements with our VIE, in which we have no ownership interests, and its shareholders to conduct most aspects of our operations. We have relied and expect to continue to rely on these contractual arrangements to conduct our business in China. For

6


Table of Contents

more details, see "—Contractual Arrangements with Our VIE and Its Shareholders." The shareholders of our VIE may have potential conflicts of interest with us. See "Risk Factors—Risks Related to Our Corporate Structure—Our shareholders or the shareholders of our VIE may have potential conflicts of interest with us, which may materially and adversely affect our business."

        Under PRC laws and regulations, our PRC subsidiary may pay cash dividends to us out of its respective accumulated profits. However, the ability of our PRC subsidiary to make such distribution to us is subject to various PRC laws and regulations, including the requirement to fund certain statutory funds, as well as potential restriction on currency exchange and capital controls imposed by the PRC government. For more details, see "Risk Factors—Risks Related to Doing Business in China—Our PRC subsidiary and VIE are subject to restrictions on paying dividends or making other payments to us, which may restrict our ability to satisfy our liquidity requirements, conduct our business and to pay dividends to holders of the ADSs and our ordinary shares" and "PRC Regulation—Regulation on Dividend Distributions."

        As a result of our direct ownership in WiMi WFOE and the variable interest entity contractual arrangements, we are regarded as the primary beneficiary of our VIE. We treat it and its subsidiaries as our consolidated affiliated entities under generally accepted accounting principles in the United States of America ("U.S. GAAP"), and have consolidated the financial results of these entities in our consolidated financial statements in accordance with U.S. GAAP.

Implication of Being a Foreign Private Issuer and a Controlled Company

        We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers. Moreover, the information we are required to file with or furnish to the U.S. Securities and Exchange Commission ("SEC") will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. In addition, as a company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the Nasdaq listing standards. These practices may afford less protection to shareholders than they would enjoy if we complied fully with the Nasdaq listing standards.

        Upon the completion of this offering, our outstanding share capital will consist of Class A ordinary shares and Class B ordinary shares, and we will be a "controlled company" as defined under the Nasdaq Stock Market Rules because Jie Zhao, our Chairman, will beneficially own      % of our issued and outstanding Class A ordinary shares and            % of our issued and outstanding Class B ordinary shares. Accordingly, Mr. Zhao will be able to exercise    % of our total voting power, assuming the underwriters do not exercise their over-allotment option, or    % of our total voting power if the underwriters exercise their over-allotment option in full. Holders of Class A ordinary shares and Class B ordinary shares have the same rights except for voting and conversion rights. Under the Nasdaq Stock Market Rules, a "controlled company" may elect not to comply with certain corporate governance requirements. Currently, we do not plan to utilize the "controlled company" exemptions with respect to our corporate governance practice after we complete this offering.

Contractual Arrangements and Corporate Structure

        Currently, substantially all of our users and business operations are located in the PRC and we do not have plans for any significant overseas expansion, as our primary focus is the PRC hologram market, which we believe possesses tremendous growth potential and attractive monetization opportunities.

        Current PRC laws and regulations impose certain restrictions or prohibitions on foreign ownership of companies that engage in value-added telecommunication services, internet audio-video program

7


Table of Contents

services and certain other businesses. The Special Administrative Measures for Entrance of Foreign Investment (Negative List) (2018 Version) provides that foreign investors are generally not allowed to own more than 50% of the equity interests in a value-added telecommunication service provider other than an e-commerce service provider, and the Provisions on the Administration of Foreign-Invested Telecommunications Enterprises (2016 Revision) require that the major foreign investor in a value-added telecommunication service provider in China must have experience in providing value-added telecommunications services overseas and maintain a good track record. In addition, foreign investors are prohibited from investing in companies engaged in certain online and culture related businesses. See "PRC Regulation—Regulation on Foreign Investment Restrictions." We are an exempted company incorporated in the Cayman Islands. Hologram WiMi, our PRC subsidiary, is considered foreign-invested enterprise. To comply with the foregoing PRC laws and regulations, we primarily conduct our business in China through Beijing WiMi, our VIE and its subsidiaries in the PRC, based on a series of contractual arrangements. As a result of these contractual arrangements, we exert effective control over our VIE and its subsidiaries and consolidate their operating results in our consolidated financial statements under GAAP. These contractual arrangements may not be as effective as direct ownership in providing us with control over our VIE and its subsidiaries. If our VIE or its respective shareholders fail to perform their respective obligations under the contractual arrangements, we could be limited in our ability to enforce the contractual arrangements that give us effective control over our business operations in the PRC and may have to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure will be effective under PRC law. For details of these and other risks associated with our VIE structure, see "Risk Factors—Risks Related to Our Corporate Structure."

        On November 6, 2018, WiMi Cayman completed a reorganization of entities under common control of its shareholders, who collectively owned all of the equity interests of WiMi Cayman prior to the reorganization. WiMi Cayman and WiMi HK were established as the holding companies of Hologram WiMi. Hologram WiMi is the primary beneficiary of Beijing WiMi and its subsidiaries. All of the direct and indirect subsidiaries of WiMi Cayman are under common control. Consequently, the consolidation of Beijing WiMi and its subsidiaries has been accounted for as a reorganization of entities under common control at carrying value. The consolidated financial statements are prepared on the basis as if the reorganization became effective as of the beginning of the first period presented in the accompanying consolidated financial statements of WiMi Cayman.

8


Table of Contents

        The following diagram illustrates our corporate structure, including our significant subsidiaries and our VIE, immediately upon the completion of this offering, assuming no exercise of the over-allotment option granted to the underwriters, based on the initial public offering price of US$            per ADS.

GRAPHIC

        The principal shareholders of Beijing Wimi are Jie Zhao and Minwen Wu. Jie Zhao, our Chairman, beneficially owns 100% of our outstanding Class A ordinary shares, 77.5% of our outstanding Class B ordinary shares and 82.05% of the outstanding capital stock of Beijing Wimi. Minwen Wu, the controlling person of Sensefuture Holdings Limited and Sensebright Holdings Limited, beneficially owns approximately 14.0% of our issued and outstanding Class B ordinary shares, and 11.32% of the outstanding capital stock of Beijing Wimi.

Contractual Arrangements with Our VIE and Its Shareholders

        The following is a summary of the currently effective contractual arrangements by and among our wholly-owned subsidiary, Hologram WiMi, our VIE and its shareholders. These contractual arrangements enable us to (i) exercise effective control over our VIE; (ii) receive substantially all of the economic benefits of our VIE; (iii) have an exclusive option to purchase the equity interests in our VIE, and (iv) have an exclusive option to purchase all or part of the assets of our VIE when and to the extent permitted by PRC law.

Agreements that provide us effective control over our VIE

        Power of Attorney.    Pursuant to the power of attorney dated November 6, 2018, by Hologram WiMi and each shareholder of Beijing WiMi, respectively, each shareholder of Beijing WiMi irrevocably authorized Hologram WiMi or any person(s) designated by Hologram WiMi to exercise such shareholder's voting rights in Beijing WiMi, including, without limitation, the power to participate in and vote at shareholder's meetings, the power to nominate directors and appoint senior management, the power to sell or transfer such shareholder's equity interest in Beijing WiMi, and other shareholders' voting rights permitted by PRC law and the Articles of Association of Beijing WiMi. The power of attorney remains irrevocable and continuously valid from the date of execution so long as each shareholder remains as a shareholder of Beijing WiMi.

        Equity Interest Pledge Agreement.    Pursuant to the equity interest pledge agreement dated November 6, 2018, by and among Hologram WiMi, Beijing WiMi and the shareholders of Beijing WiMi, the shareholders of Beijing WiMi pledged all of their equity interests in Beijing WiMi to

9


Table of Contents

Hologram WiMi to guarantee their and Beijing WiMi's obligations under the contractual arrangements including the exclusive consulting and services agreement, the exclusive option agreement, the exclusive asset purchase agreement and the power of attorney and this equity interest pledge agreement, as well as any loss incurred due to events of default defined therein and all expenses incurred by Hologram WiMi in enforcing such obligations of Beijing WiMi or its shareholders. The shareholders of Beijing WiMi agree that, without Hologram WiMi's prior written approval, during the term of the equity interest pledge agreement, they will not dispose of the pledged equity interests or create or allow any other encumbrance on the pledged equity interests. We have completed the registration of the equity pledges with the relevant office of the State Administration for Industry and Commerce ("SAIC") in accordance with the PRC Property Rights Law.

        Spousal Consent Letters.    Pursuant to these letters, the spouses of the applicable shareholders of Beijing WiMi unconditionally and irrevocably agreed that the equity interest in Beijing WiMi held by them and registered in their names will be disposed of pursuant to the equity interest pledge agreement, the exclusive option agreement, the exclusive asset purchase agreement and the power of attorney. Each of their spouses agreed not to assert any rights over the equity interest in Beijing WiMi held by their respective spouses. In addition, in the event that any spouse obtains any equity interest in Beijing WiMi held by his or her spouse for any reason, he or she agreed to be bound by the contractual arrangements.

Agreements that allow us to receive economic benefits from our VIE

        Exclusive Business Cooperation Agreement.    Under the exclusive business cooperation agreement between Hologram WiMi and Beijing WiMi, dated November 6, 2018, Hologram WiMi has the exclusive right to provide to Beijing WiMi consulting and services related to, among other things, use of software, operation maintenance, product development, and management and marketing consulting. Hologram WiMi has the exclusive ownership of intellectual property rights created as a result of the performance of this agreement. Beijing WiMi agrees to pay Hologram WiMi service fee at an amount equal to the consolidated net profit after offsetting previous year's loss (if any). This agreement will remain effective until the date when it is terminated by WiMi WFOE.

Agreements that provide us with the option to purchase the equity interests in our VIE

        Exclusive Share Purchase Option Agreement.    Pursuant to the exclusive share purchase option agreement dated November 6, 2018, by and among Hologram WiMi, Beijing WiMi and each of the shareholders of Beijing WiMi, each of the shareholders of Beijing WiMi irrevocably granted Hologram WiMi an exclusive call option to purchase, or have its designated person(s) to purchase, at its discretion, all or part of their equity interests in Beijing WiMi, and the purchase price shall be the lowest price permitted by applicable PRC law. Each of the shareholders of Beijing WiMi undertakes that, without the prior written consent of Hologram WiMi or us, they may not increase or decrease the registered capital, amend its articles of association or change registered capital structure. This agreement will remain effective for ten years and can be renewed at Hologram WiMi's sole discretion. Any transfer of shares pursuant to this agreement would be subject to PRC regulations and to any changes required thereunder.

Agreements that provide us with the option to purchase the assets in our VIE

        Exclusive Asset Purchase Agreement.    Pursuant to the exclusive asset purchase agreement dated November 6, 2018 by Hologram WiMi and Beijing WiMi, Beijing WiMi irrevocably granted Hologram WiMi an exclusive call option to purchase, or have its designated person(s) to purchase, at its discretion, all or part of Beijing WiMi's current or future assets (including intellectual property rights), and the purchase price shall be the lowest price permitted by applicable PRC law. Beijing WiMi undertakes that, without the prior written consent of Hologram WiMi, it may not sell, transfer, pledge,

10


Table of Contents

dispose of its assets, incur any debts or guarantee liabilities. It will notify Hologram WiMi any potential litigation, arbitration or administrative procedures regarding the assets, and defend the assets if necessary. This agreement will remain effective for ten years and can be renewed at Hologram WiMi's sole discretion. Any transfer of assets pursuant to this agreement would be subject to PRC regulations and to any changes required thereunder.

        In the opinion of Jingtian & Gongcheng Law Firm, our PRC legal counsel:

    the ownership structures of Hologram WiMi and Beijing WiMi, both currently and immediately after giving effect to this offering, are not in any violation of PRC laws or regulations currently in effect; and

    the contractual arrangements among Hologram WiMi and Beijing WiMi and its shareholders governed by PRC law both currently and immediately after giving effect to this offering are legal, valid, binding and enforceable in accordance with its terms and applicable PRC laws, and do not and will not result in any violation of PRC laws or regulations currently in effect.

        However, we have been further advised by our PRC legal counsel that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules. If the PRC government finds that the agreements that establish the structure for operating our hologram business do not comply with PRC government restrictions on foreign investment in our businesses, we could be subject to severe penalties including being prohibited from continuing operations. See "Risk Factors—Risks Related to Our Corporate Structure—If the PRC government finds that the agreements that establish the structure for operating our businesses in China do not comply with PRC regulations relating to the relevant industries, or if these regulations or their interpretation change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations."

Emerging Growth Company Status

        We are an "emerging growth company," as defined in the Jumpstart Our Business Startups Act (the "JOBS Act"), and we are eligible to take advantage of certain exemptions from various reporting and financial disclosure requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, (1) presenting only two years of audited financial statements and only two years of related management's discussion and analysis of financial condition and results of operations in this prospectus, (2) not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") and (3) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We intend to take advantage of these exemptions. As a result, investors may find investing in our ordinary shares less attractive.

        In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the "Securities Act"), for complying with new or revised accounting standards. As a result, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.

        We could remain an emerging growth company for up to five years, or until the earliest of (1) the last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion, (2) the date that we become a "large accelerated filer" as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our ordinary shares that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter and we have been publicly reporting for at least 12 months, or (3) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period.

11


Table of Contents

Foreign Private Issuer Status

        We are a foreign private issuer within the meaning of the rules under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As such, we are exempt from certain provisions applicable to United States domestic public companies. For example:

    We are not required to provide as many Exchange Act reports, or as frequently, as a domestic public company;

    Subject to Nasdaq rules, for interim reporting, we are permitted to comply solely with our home country requirements, which are less rigorous than the rules that apply to domestic public companies;

    We are not required to provide the same level of disclosure on certain issues, such as executive compensation;

    We are exempt from provisions of Regulation Fair Disclosure ("Regulation FD") aimed at preventing issuers from making selective disclosures of material non-public information;

    We are not required to comply with the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; and

    Our insiders are not required to comply with Section 16 of the Exchange Act requiring such insiders to file public reports of their share ownership and trading activities and establishing insider liability for profits realized from any "short-swing" trading transaction.


OUR CORPORATE INFORMATION

        The principal executive offices of our main operations are located at No. 6, Xiaozhuang, #101A, Chaoyang District, Beijing, the People's Republic of China. Our telephone number at this address is +86-10-5338-4913. Our registered office in the Cayman Islands is located at the office of Sertus Incorporations (Cayman) Limited, Sertus Incorporations (Cayman) Limited, Sertus Chambers, Governors Square, Suite#5-204, 23 Lime Tree Bay Avenue, P.O. Box 2547, Grand Cayman, KY1-1104, Cayman Islands. Our agent for service of process in the United States is Puglisi & Associates, located at 850 Library Avenue, Suite 204, Newark, DE 19711.

12


Table of Contents


CONVENTIONS WHICH APPLY TO THIS PROSPECTUS

        Unless we indicate otherwise, all information in this prospectus reflects the following:

    no exercise by the underwriters of their over-allotment option to purchase up to                additional ADSs representing                 Class B ordinary shares from us; and

        Except where the context otherwise requires:

    "ADSs" refers to the American depositary shares, each representing                Class B ordinary shares;

    "China" or "PRC" refers to the People's Republic of China, excluding, for the purpose of this prospectus only, Taiwan, Hong Kong and Macau;

    "HK$", "HKD" or "Hong Kong dollars" refers to the legal currency of the Hong Kong SAR;

    "GAAP" refers to the generally accepted accounting principles in the United States;

    "ordinary shares" refers to our Class A ordinary shares of par value US$0.0001 per share and Class B ordinary shares of par value US$0.0001 per share;

    "RMB" or "Renminbi" refers to the legal currency of the People's Republic of China;

    "US$," "dollars", "USD"or "U.S. dollars" refers to the legal currency of the United States; and

    "WIMI," "we," "us," "our company," "the company," "our," or similar terms used in this prospectus refer to WiMi Hologram Cloud Inc., a Cayman Islands exempted company, including its wholly owned subsidiaries and, in the context of describing our operations and consolidated financial information, its VIE and its subsidiaries.

        Unless otherwise noted, all translations from Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this prospectus are made at RMB 6.6832 to US$1.00, the mid-point rate set forth by Federal Reserve Bank of New York on December 31, 2018. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, the rates stated below, or at all. On June 25, 2019, the mid-point rate for Renminbi was RMB 6.8798 to US$1.00.

        This prospectus contains information derived from various public sources and certain information from an industry report commissioned by us and prepared by Frost & Sullivan, a third-party industry research firm, to provide information regarding our industry and market position in China. Such information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to these estimates. We have not independently verified the accuracy or completeness of the data contained in these industry publications and reports. The industry in which we operate is subject to a high degree of uncertainty and risk due to variety of factors, including those described in the "Risk Factors" section. These and other factors could cause results to differ materially from those expressed in these publications and reports.

13


Table of Contents

 


THE OFFERING

Offering price

  US$                per ADS.

ADSs offered by us in this offering

 

                ADSs (or                ADSs if the underwriters exercise their over-allotment option in full).

Ordinary shares outstanding immediately after this offering

 


                ordinary shares, comprised of                Class A ordinary shares of par value US$0.0001 per share and                Class B ordinary shares of par value US$0.0001 per share (or                ordinary shares if the underwriters exercise their option to purchase additional ADSs in full, comprised of                Class A ordinary shares of par value US$0.0001 per share and                Class B ordinary shares of par value US$0.0001 per share), including 8,611,133 shares of Class B ordinary shares issuable upon the automatic conversion of the Series A preferred shares.

ADSs outstanding immediately after this offering

 

                ADSs or                ADSs if the underwriters exercise their option to purchase additional ADSs in full.

Over-allotment option

 

We have granted to the underwriters an option, which is exercisable within 30 days from the date of this prospectus, to purchase up to an aggregate of                additional ADSs.

The ADSs

 

Each ADS represents                Class B ordinary shares, par value US$0.0001 per share. The depositary will hold the Class B ordinary shares underlying the ADSs. You will have rights as provided in the deposit agreement.

 

We do not expect to pay dividends in the foreseeable future. If, however, we declare dividends on our Class B ordinary shares, the depositary will pay you the cash dividends and other distributions it receives on our Class B ordinary shares, after deducting its fees and expenses in accordance with the terms set forth in the deposit agreement.

 

You may turn in the ADSs to the depositary in exchange for Class B ordinary shares. The depositary will charge you fees for any exchange.

 

We may amend or terminate the deposit agreement without your consent. If you continue to hold the ADSs after an amendment to the deposit agreement, you agree to be bound by the deposit agreement as amended.

 

To better understand the terms of the ADSs, you should carefully read the "Description of American Depositary Shares" section of this prospectus. You should also read the deposit agreement, which is filed as an exhibit to the registration statement that includes this prospectus.

14


Table of Contents

Ordinary shares

 

We will issue                Class B ordinary shares represented by the ADSs in this offering (assuming the underwriters do not exercise their option to purchase additional ADSs).

 

Our ordinary shares will be divided into Class A ordinary shares and Class B ordinary shares immediately prior to the completion of this offering. Holders of Class A ordinary shares and Class B ordinary shares will have the same rights except for voting and conversion rights. In respect of matters requiring a shareholder vote, each Class B ordinary share will be entitled to one vote, and each Class A ordinary share will be entitled to 10 votes. Each Class A ordinary share is convertible into one Class B ordinary share at any time by the holder thereof. Class B ordinary shares are not convertible into Class A ordinary shares under any circumstances. Upon any sale, transfer, assignment or disposition of any Class A ordinary shares by a holder thereof to any non-affiliate to such holder, each of such Class A ordinary shares will be automatically and immediately converted into one Class B ordinary share.

 

All share-based compensation awards, regardless of grant dates, will entitle holders to the equivalent number of Class B ordinary shares once the vesting and exercising conditions on such share-based compensation awards are met.

 

See "Description of Share Capital."

Use of proceeds

 

Based on the initial public offering price of US$            per ADS, we expect to receive (i) net proceeds of approximately US$            million in the aggregate (or net proceeds of approximately US$            million in the aggregate if the underwriters exercise their over-allotment option in full in connection with this offering) from this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

We plan to use (i) approximately 40% of the net proceeds for research and development purposes, including the development of holographic facial recognition system, holographic artificial intelligence facial change, holographic digital life system, holographic education intellectual properties, holographic navigation system for cars, holographic shopping system and holographic tourism navigation system, (ii) approximately 40% of the net proceeds for strategic acquisitions and investments in complementary business, and (iii) approximately 20% of the net proceeds for other general corporate purposes, including working capital, operating expenses, and capital expenditures.

 

See "Use of Proceeds."

15


Table of Contents

Lock-up

 

We, our directors, executive officers, and existing shareholders have agreed with the underwriters, subject to certain exceptions, not to sell, transfer or dispose of, directly or indirectly, any of the ADSs or ordinary shares or securities convertible into or exercisable or exchangeable for the ADSs or ordinary shares for a period of 180 days after the date of this prospectus. See "Shares Eligible for Future Sale" and "Underwriting" for more information.

Listing

 

We have been approved to list our ADSs on the Nasdaq Global Market. Our ordinary shares will not be listed on any other stock exchange or quoted for trading on any over-the-counter trading system.

Proposed Nasdaq trading symbol

 

WIMI

Payment and settlement

 

The underwriters expect to deliver the ADSs against payment therefor through the facilities of The Depository Trust Company on                        , 2019.

Depositary

 

JPMorgan Chase Bank, N.A.

Taxation

 

For the Cayman Islands, PRC and U.S. federal income tax considerations with respect to the ownership and disposition of the ADSs, see "Taxation."

Risk Factors

 

See "Risk Factors" and other information included in this prospectus for discussions of the risks relating to investing in the ADSs. You should carefully consider these risks before deciding to invest in the ADSs.

16


Table of Contents



SUMMARY CONSOLIDATED FINANCIAL DATA

        The following tables summarize our consolidated financial data for the periods and as of the dates indicated. The summary consolidated statement of income and comprehensive income for the years ended December 31, 2017 and 2018 and for the three months ended March 31, 2018 and 2019 and the summary consolidated balance sheet as of December 31, 2017 and 2018 and March 31, 2019 have been derived from our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP, and included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future. The following summary consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements included elsewhere in this prospectus.

 
  For the Years Ended December 31,   For the Three Months Ended March 31,  
Consolidated Statements of Income and Comprehensive Income:
 
  2017   2018   2018   2018   2019   2019  
 
  RMB
  RMB
  USD
  RMB
  RMB
  USD
 
 
   
   
   
  (Unaudited)
 

Operating revenues

    192,029,524     225,271,564     32,823,109     49,226,626     78,492,282     11,656,981  

Cost of revenues

    (79,180,187 )   (85,414,061 )   (12,445,224 )   (16,041,094 )   (22,601,650 )   (3,356,598 )

Gross profit

    112,849,337     139,857,503     20,377,885     33,185,532     55,890,632     8,300,383  

Operating expenses

    (35,550,993 )   (39,054,908 )   (5,690,481 )   (7,946,202 )   (13,859,491 )   (2,058,289 )

Income from operations

    77,298,344     100,802,595     14,687,404     25,239,330     42,031,141     6,242,094  

Other expenses, net

    (3,432,362 )   (3,509,207 )   (511,308 )   (1,600,249 )   (654,282 )   (97,169 )

Provision for income taxes

    (528,011 )   (8,075,596 )   (1,176,652 )   (1,412,147 )   (3,883,067 )   (576,679 )

Net income

    73,337,971     89,217,792     12,999,444     22,226,934     37,493,792     5,568,246  

Other comprehensive income (loss)

    (250,623 )   1,759,288     256,336     (775,975 )   (2,668,422 )   (396,290 )

Comprehensive income

    73,087,348     90,977,080     13,255,780     21,450,959     34,825,370     5,171,956  

WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES

                                     

Basic

    100,000,000     100,000,000     100,000,000     100,000,000     100,000,000     100,000,000  

Diluted

    100,000,000     100,922,621     100,922,621     100,000,000     108,611,133     108,611,133  

EARNINGS PER SHARE

                                     

Basic

    0.73     0.89     0.13     0.22     0.37     0.06  

Diluted

    0.73     0.88     0.13     0.22     0.35     0.05  

 

 
  As of December 31,   As of March 31,  
Summary Consolidated Balance Sheet Data:
  2017   2018   2018   2019   2019  
 
  RMB
  RMB
  USD
  RMB
  USD
 
 
   
   
   
  (Unaudited)
 

Current assets

    52,030,035     213,295,430     31,078,131     214,063,234     31,790,782  

Other assets

    405,451,567     394,187,996     57,435,016     392,372,270     58,271,667  

Total assets

    457,481,602     607,483,426     88,513,147     606,435,504     90,062,449  

Total liabilities

    367,275,213     288,561,957     42,044,811     252,688,665     37,527,089  

Total shareholders' equity

    90,206,389     318,921,469     46,468,336     353,746,839     52,535,360  

17


Table of Contents

RISK FACTORS

        You should consider carefully all of the information in this prospectus, including the risks and uncertainties described below and the information in our consolidated financial statements and related notes, before making an investment in the ADSs. Any of the following risks and uncertainties could have a material adverse effect on our business, financial condition, results of operations and prospects. The market price of the ADSs could decline significantly as a result of any of these risks and uncertainties, and you may lose all or part of your investment.

Risks Relating to Our Business and Industry

We operate in a relatively new and rapidly evolving market.

        Our business and prospects primarily depend on the continuing development and growth of the holographic AR industry in China. Growth of the holographic AR industry in China is affected by numerous factors, including but not limited to technological innovations, user experience, development of internet and internet-based services, regulatory environment, and macroeconomic environment. The markets for our products and services are relatively new and rapidly developing and are subject to significant challenges. In addition, our continued growth depends, in part, on our ability to respond to changes in the holographic AR industry, including rapid technological evolution, continued shifts in customer demands, introductions of new products and services and emergence of new industry standards and practices. Developing and integrating new content, products, services or infrastructure could be expensive and time-consuming, and these efforts may not yield the benefits we expect to achieve.

        In addition, as the holographic AR industry in China is relatively young, there are few proven methods of projecting customer demand or available industry standards on which we can rely. Some of our current monetization methods are also in a relatively preliminary stage. We cannot assure you that our attempts to monetize our current offerings will continue to be successful, profitable or accepted, and therefore the profit potential of our business is difficult to gauge. Our growth prospects should be considered in light of the risks and uncertainties that fast-growing early-stage companies with limited operating history in an evolving industry may encounter, including, among others, risks and uncertainties regarding our ability to:

    continue to develop new software and related solutions that are appealing to end users;

    enrich our holographic AR content portfolio;

    maintain stable relationships with other key participants in the holographic AR value chain;

    expand our products and services into more use cases; and

    expand into new geographic markets with high growth potential.

        Addressing these risks and uncertainties will require significant capital expenditures and allocation of valuable management and employee resources. We cannot assure you that we will succeed in any of these aspects or that the holographic AR industry in China will continue to grow at a rapid pace. If we fail to successfully address any of the above risks and uncertainties, the size of our user base, our revenue and profits may decline.

Our competitive position and results of operations could be harmed if we do not compete effectively.

        The markets for our products and services are characterized by intense competition, new industry standards, limited barriers to entry, disruptive technology developments, short product life cycles, customer price sensitivity and frequent product introductions (including alternatives with limited functionality available at lower costs or free of charge). Any of these factors could create downward pressure on pricing and profitability and could adversely affect our ability to attract new customers. Our future success will depend on our continued ability to enhance our existing products and services,

18


Table of Contents

introduce new products and services in a timely and cost-effective manner, meet changing customer expectations and needs, extend our core technology into new applications, and anticipate emerging standards, business models, software delivery methods and other technological developments. Furthermore, we are a small-size company as compared to some of the well-established enterprises that could potentially enter the holographic AR market. Some of our current and potential competitors enjoy competitive advantages such as greater financial, technical, sales, marketing and other resources, broader brand awareness, and access to larger customer bases. As a result of these advantages, potential and current customers might select the products and services of our competitors, causing a loss of our market share.

We are a relatively young company, and we may not be able to sustain our rapid growth, effectively manage our growth or implement our business strategies.

        Our business was launched in 2015 and we have a limited operating history. Although we have experienced significant growth since our business was launched, our historical growth rate may not be indicative of our future performance. We may not be able to achieve similar results or grow at the same rate as we had in the past. As our business and the holographic AR market in China continue to develop, we may need to adjust our product and service offerings or modify our business model. These adjustments may not achieve expected results and may have a material and adverse impact on our financial conditions and results of operations.

        In addition, our rapid growth and expansion have placed, and continue to place, a significant strain on our management and resources. This level of significant growth may not be sustainable or achievable at all in the future. We believe that our continued growth will depend on many factors, including our ability to develop new sources of revenues, diversify monetization methods, attract and retain customers, continue developing innovative hologram-related technologies, increase brand awareness, expand into new market segments, and adjust to the rapidly changing regulatory environment in China. We cannot assure you that we will achieve any of the above, and our failure to do so may materially and adversely affect our business and results of operations.

If we fail to keep up with industry trends or technological developments, our business, results of operations and financial condition may be materially and adversely affected.

        The holographic AR industry is rapidly evolving and subject to continuous technological changes. Our success depends on our ability to continue to develop and implement services and solutions that anticipate and respond to rapid and continuing changes in technology and industry developments and offerings to serve the evolving needs of our customers. Our growth strategy is focused on responding to these types of developments by driving innovation that will enable us to expand our business into new growth areas. If we do not sufficiently invest in new technology and industry developments, or evolve and expand our business at sufficient speed and scale, or if we do not make the right strategic investments to respond to these developments and successfully drive innovation, our services and solutions, our results of operations, and our ability to develop and maintain a competitive advantage and continue to grow could be negatively affected. In addition, we operate in a quickly evolving environment, in which there currently are, and we expect will continue to be, new technology entrants. New services or technologies offered by competitors or new entrants may make our offerings less differentiated or less competitive, when compared to other alternatives, which may adversely affect our results of operations. Technological innovations may also require substantial capital expenditures in product development as well as in modification of products, services or infrastructure. We cannot assure you that we can obtain financing to cover such expenditure. Failure to adapt our products and services to such changes in an effective and timely manner could materially and adversely affect our business, financial condition and results of operations.

19


Table of Contents

If we cannot continue to develop, acquire, market and offer new products and services or enhancements to existing products and services that meet customer requirements, our operating results could suffer.

        The process of developing and acquiring new technology products and services and enhancing existing offerings is complex, costly and uncertain. If we fail to anticipate customers' rapidly changing needs and expectations, our market share and results of operations could suffer. We must make long-term investments, develop, acquire or obtain appropriate intellectual property and commit significant resources before knowing whether our predictions will accurately reflect customer demand for our products and services. If we misjudge customer needs in the future, our new products and services may not succeed and our revenues and earnings may be harmed. Additionally, any delay in the development, acquisition, marketing or launch of a new offering or enhancement to an existing offering could result in customer attrition or impede our ability to attract new customers, causing a decline in our revenue or earnings.

We make significant investments in new products and services that may not achieve expected returns.

        We will continue to make significant investments in research, development, and marketing for existing products, services, and technologies, including holographic AR advertising solutions, mobile payment middleware, integrated holographic AR software and other AR-based holographic offerings, as well as new technology or new applications of existing technology. Investments in new technology are speculative. Commercial success depends on many factors, including but not limited to innovativeness, developer support, and effective distribution and marketing. If customers do not perceive our latest offerings as providing significant new functionality or other value, they may reduce their purchases of our services or products, unfavorably affecting our revenue and profits. We may not achieve significant revenue from new product, service or distribution channel investments, or new applications of existing new product, service or distribution channel investments, for several years, if at all. New products and services may not be profitable, and even if they are profitable, operating margins for some new products and businesses may not be as high as the margins we have experienced historically. Furthermore, developing new technologies is complex and can require long development and testing periods. Significant delays in new releases or significant problems in creating new products or offering new services could adversely affect our revenue and profits.

We cannot guarantee our monetization strategies will be successfully implemented or generate sustainable revenues and profit.

        Our monetization model is evolving. We currently generate a substantial majority of our revenues from holographic AR advertising services and payment middleware licensing. We plan to increase revenue contribution from our other hologram-related monetization methods including, for example, holographic AR IP licensing. If our strategic initiatives do not enhance our monetization ability or enable us to develop new approaches to monetization, we may not be able to maintain or increase our revenues or profits or recover any associated costs. In addition, we may in the future introduce new services to further diversify our revenue streams, including services with which we have little or no prior development or operating experience. If these new or enhanced services fail to engage customers, we may fail to attract or retain users or to generate sufficient revenues or profits to justify our investments, and our business and operating results may suffer as a result.

Our results of operations could materially suffer if we are not able to obtain sufficient pricing to enable us to meet our profitability expectations.

        If we are not able to obtain sufficient pricing for our services and solutions, our revenues and profitability could materially suffer. The rates we are able to charge for our services and solutions are affected by a number of factors, including:

    general economic and political conditions;

20


Table of Contents

    the competitive environment in our industry;

    our customers' desire to reduce their costs; and

    our ability to accurately estimate, attain and sustain contract revenues, margins and cash flows over the full contract period.

        In addition, our profitability with respect to our services and solutions for new technologies may be different when compared to the profitability of our current business, due to factors such as the use of alternative pricing, the mix of work and the number of service providers, among others.

        The competitive environment in our industry affects our ability to obtain favorable pricing in a number of ways, any of which could have a material negative impact on our results of operations. The less we are able to differentiate our services and solutions and/or clearly convey the value of our services and solutions, the more risk we have that they will be seen as commodities, with price being the driving factor in selecting a service provider. In addition, the introduction of new services or products by competitors could reduce our ability to obtain favorable pricing for the services or products we offer. Competitors may be willing, at times, to price contracts lower than us in an effort to enter new markets or increase market share. Further, if competitors develop and implement methodologies that yield greater efficiency and productivity, they may be better positioned to offer services similar to ours at lower prices.

We require a significant amount of capital to fund our research and development investments. If we cannot obtain sufficient capital on favorable terms or at all, our business, financial condition and prospects may be materially and adversely affected.

        Operating our holographic AR business requires significant, continuous investment in acquiring, maintaining and upgrading content and technology. Historically, we have financed our operations primarily with net cash generated from operating activities, financial support from our shareholders and equity financings and loans from third parties. As part of our growth strategy, we plan to continue to invest substantial capital in our research and development activities in the future, which may require us to obtain additional equity or debt financing. Our ability to obtain additional financing in the future is subject to a number of uncertainties, including but not limited to those relating to:

    our future business development, financial condition and results of operations;

    general market conditions for financing activities; and

    macro-economic and other conditions in China and elsewhere.

        Although we expect to rely increasingly on net cash provided by operating activities and financing through capital markets for our liquidity needs as our business continues to grow and after we become a public company, we cannot assure you that we will be successful in our efforts to diversify our sources of liquidity. If we raise additional funds through future issuances of equity or convertible debt securities, our existing shareholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our ordinary shares. Any debt financing that we secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, including the ability to pay dividends. This may make it more difficult for us to obtain additional capital to fund our research and pursue business opportunities, including potential acquisitions. If we cannot obtain sufficient capital to meet our capital needs, we may not be able to implement our growth strategies, and our business, financial condition and prospects may be materially and adversely affected.

21


Table of Contents

If we fail to attract, retain and engage appropriately skilled personnel, including senior management and technology professionals, our business may be harmed.

        Our future success depends on our retention of highly skilled executives and employees. Competition for well-qualified and skilled employees is intense, and our future success also depends on our continuing ability to attract, develop, motivate and retain highly qualified and skilled employees, including, in particular, software engineers, artificial intelligence scientists and AR technology professionals. Our continued ability to compete effectively depends on our ability to attract new employees and to retain and motivate existing employees. All of our senior management and key personnel are employees at will and, as a result, any of these employees could leave with little or no prior notice. If any member of our senior management team or other key employees leave our company, our ability to successfully operate our business and execute our business strategy could be adversely affected. In particular, such individuals are free to compete with us in the event that they leave. Furthermore, under PRC law, certain of our employees may have ownership rights to our intellectual property, which rights would continue in the event they left our company. We may also have to incur significant costs in identifying, hiring, training and retaining replacements of departing employees.

If existing or new customers are less willing to cooperate with us, our revenues and profits may be adversely affected.

        We offer holographic AR advertising solutions primarily through contracts entered into with advertisers or third-party advertising agencies and middleware services primarily through contracts entered into with app developers and content providers. We promote our products and services directly through our experienced and creative sales and marketing team by making direct office visits, attending conferences and industry exhibitions, and through word-of-mouth referral. Our ability to retain existing customers or attract new customers depends on many factors, some of which are out of our control, including:

        Our ability to innovate and rapidly respond to customer needs;

    The competiveness of our pricing and payment terms for our clients, which may, in turn, be constrained by our capital and financial resources;

    Sufficient capital support;

    Our ability to acquire complementary technologies, products and businesses to enhance the features and functionality of our applications; and

    Brand awareness and reputation.

        We cannot assure you that we will be able to continue retain these customers or attract new customers. If we fail to retain and enhance our business relationships with new and existing customers, our business and results of operations may be materially and adversely affected.

If we fail to successfully compete with other advertising platforms, media companies, AR or traditional advertisement producers, our revenues and profits may be adversely affected.

        Revenue generated from our advertising business is affected by the online advertising industry in China and advertisers' allocation of budgets to Internet advertising and promotion in general, and specifically with respect to online holographic AR advertising. Companies that decide to advertise or promote online may utilize more established methods or channels for online advertising and promotion, such as key words advertising on established Chinese search engines, over in-video holographic AR advertising. In addition, we compete with media companies, AR or traditional advertisement producers. If the holographic AR advertising market size does not increase from current levels, if we are unable to capture and retain a sufficient share of that market, or if we are unable to compete effectively with our

22


Table of Contents

competitors, our ability to maintain or increase our current level of advertisement revenue and our profitability and prospects could be adversely affected.

Our products and software are highly technical and may contain undetected software bugs or vulnerabilities, which could manifest in ways that could seriously harm our reputation and our business.

        Our products and software are highly technical and complex. Our software or any of our products may contain undetected software bugs, hardware errors, and other vulnerabilities. These bugs and errors can manifest in any number of ways in our products, including through diminished performance, security vulnerabilities, malfunctions, or even permanently disabled products. We have a practice of regularly updating our products and some errors in our products may be discovered only after a product has been used by users, and may in some cases be detected only under certain circumstances or after extended use. Any errors, bugs or other vulnerabilities discovered in our code or backend after release could damage our reputation, drive away users, allow third parties to manipulate or exploit our software, lower revenue and expose us to claims for damages, any of which could seriously harm our business.

Our failure to protect our intellectual property rights may undermine our competitive position.

        We believe that our patents, copyrights, trademarks and other intellectual property are essential to our success. Please see "Business—Intellectual Property" for more details. We depend to a large extent on our ability to develop and maintain the intellectual property rights relating to AR technology and our hologram content. We have devoted considerable time and energy to the development and improvement of our software, middleware, websites, and our hologram IPs.

        We rely primarily on patents, copyrights, trademarks, trade secrets, laws and contractual restrictions for the protection of the intellectual property used in our business. Nevertheless, these provide only limited protection and the actions we take to protect our intellectual property rights may not be adequate. Our trade secrets may become known or be independently discovered by our competitors. We may have no or limited rights to stop others' use of our information. Moreover, to the extent that our employees or third parties with whom we do business use intellectual property owned by others in their work for us, disputes may arise as to the rights to such intellectual property. Furthermore, it is often difficult to maintain and enforce intellectual property rights in China. Statutory laws and regulations are subject to judicial interpretation and enforcement, and may not be applied consistently due to the lack of clear guidance on statutory interpretation. Contractual restrictions may be breached by counterparties, and there may not be adequate remedies available to us for any such breach. Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce our contractual rights in China. Preventing any unauthorized use of our intellectual property is difficult and costly and the steps we take may be inadequate to prevent the misappropriation of our intellectual property. In the event that we resort to litigation to enforce our intellectual property rights, such litigation could result in substantial costs and a diversion of our managerial and financial resources. We can provide no assurance that we will prevail in such litigation. Any failure in protecting or enforcing our intellectual property rights could have a material adverse effect on our business, financial condition and results of operations.

We may not be able to protect our source code from copying if there is an unauthorized disclosure.

        Source code, the detailed program commands for our middleware and software programs, is critical to our business. Although we license portions of our application and operating system source code to several licensees, we take significant measures to protect the secrecy of large portions of our source code. If our source code leaks, we might lose future trade secret protection for that code. It may then become easier for third parties to compete with our products by copying functionality, which could adversely affect our revenue and operating margins.

23


Table of Contents

As our patents may expire and may not be extended, our patent applications may not be granted and our patent rights may be contested, circumvented, invalidated or limited in scope, our patent rights may not protect us effectively. In particular, we may not be able to prevent others from developing or exploiting competing technologies, which could have a material and adverse effect on our business operations, financial condition and results of operations.

        In China, the validity period of utility model patent rights or design patent rights is ten years and not extendable. Currently, we have 180 registered patents, 59 patent applications pending in China and no additional patent applications under the patent cooperation treaty. For our pending application, we cannot assure you that we will be granted patents pursuant to our pending applications. Even if our patent applications succeed, it is still uncertain whether these patents will be contested, circumvented or invalidated in the future. In addition, the rights granted under any issued patents may not provide us with sufficient protection or competitive advantages. The claims under any pending patents that issue from our patent applications may not be broad enough to prevent others from developing technologies that are similar to or that achieve results similar to ours. It is also possible that the intellectual property rights of others will bar us from licensing and from exploiting any patents that issue from our pending applications. Numerous U.S. and foreign issued patents and pending patent applications owned by others exist in the fields in which we have developed and are developing our technology. These patents and patent applications might have priority over our patent applications and could subject our patent applications to invalidation. Finally, in addition to those who may claim priority, any of our existing or pending patents may also be challenged by others on the basis that they are otherwise invalid or unenforceable.

Our services or solutions could infringe upon the intellectual property rights of others or we might lose our ability to utilize the intellectual property of others.

        We cannot be sure that our services and solutions do not infringe on the intellectual property rights of third parties, and these third parties could claim that we or our clients are infringing upon their intellectual property rights. These claims could harm our reputation, cause us to incur substantial costs or prevent us from offering some services or solutions in the future. Any related proceedings could require us to expend significant resources over an extended period of time. Any claims or litigation in this area could be time-consuming and costly, damage our reputation and/or require us to incur additional costs to obtain the right to continue to offer a service or solution to our clients. If we cannot secure this right at all or on reasonable terms, or we cannot substitute alternative technology, our results of operations could be materially adversely affected. The risk of infringement claims against us may increase as we expand our industry software solutions.

        In the operation of our AR holographic ads business, we do not enter into any agreements directly with the copyright owners of the videos in which ads are placed using our software. Consequently, there is no assurance that we will not be affected by disputes between platform operators, on the one hand, and copyright owners of such videos, on the other hand.

        Additionally, in recent years, individuals and firms have purchased intellectual property assets in order to assert claims of infringement against technology providers and customers that use such technology. Any such action naming us or our clients could be costly to defend or lead to an expensive settlement or judgment against us. Moreover, such an action could result in an injunction being ordered against our client or our own services or operations, causing further damages.

        In addition, we rely on third-party software in providing some of our services and solutions. If we lose our ability to continue using such software for any reason, including because it is found to infringe the rights of others, we will need to obtain substitute software or seek alternative means of obtaining the technology necessary to continue to provide such services and solutions. Our inability to replace such software, or to replace such software in a timely or cost-effective manner, could materially adversely affect our results of operations.

24


Table of Contents

Third parties may register trademarks or domain names or purchase internet search engine keywords that are similar to our trademarks, brands or websites, or misappropriate our data and copy our platform, all of which could cause confusion to our users, divert online customers away from our products and services or harm our reputation.

        Competitors and other third parties may purchase (i) trademarks that are similar to our trademarks and (ii) keywords that are confusingly similar to our brands or websites in internet search engine advertising programs and in the header and text of the resulting sponsored links or advertisements in order to divert potential customers from us to their websites. Preventing such unauthorized use is inherently difficult. If we are unable to prevent such unauthorized use, competitors and other third parties may continue to drive potential online customers away from our platform to competing, irrelevant or potentially offensive platform, which could harm our reputation and cause us to lose revenue.

Our business is highly dependent on the proper functioning and improvement of our information technology systems and infrastructure. Our business and operating results may be harmed by service disruptions, or by our failure to timely and effectively scale up and adjust our existing technology and infrastructure.

        Our business depends on the continuous and reliable operation of our information technology ("IT") systems. Our IT systems are vulnerable to damage or interruption as a result of fires, floods, earthquakes, power losses, telecommunications failures, undetected errors in software, computer viruses, hacking and other attempts to harm our IT systems. Disruptions, failures, unscheduled service interruptions or a decrease in connection speeds could damage our reputation and cause our customers and end-users to migrate to our competitors' platforms. If we experience frequent or constant service disruptions, whether caused by failures of our own IT systems or those of third-party service providers, our user experience may be negatively affected, which in turn may have a material and adverse effect on our reputation and business. We may not be successful in minimizing the frequency or duration of service interruptions. As the number of our end-users increases and more user data are generated on our platform, we may be required to expand and adjust our technology and infrastructure to continue to reliably store and process content.

Our operations depend on the performance of the Internet infrastructure and fixed telecommunications networks in China, which may experience unexpected system failure, interruption, inadequacy or security breaches.

        Almost all access to the Internet in China is maintained through state-owned telecommunication operators under the administrative control and regulatory supervision of the Ministry of Industry and Information Technology, or the MIIT. Moreover, we primarily rely on a limited number of telecommunication service providers to provide us with data communications capacity through local telecommunications lines and Internet data centers to host our servers. We have limited access to alternative networks or services in the event of disruptions, failures or other problems with China's Internet infrastructure or the fixed telecommunications networks provided by telecommunication service providers. Web traffic in China has experienced significant growth during the past few years. Effective bandwidth and server storage at Internet data centers in large cities such as Beijing are scarce. With the expansion of our business, we may be required to upgrade our technology and infrastructure to keep up with the increasing traffic on our platform. We cannot assure you that the Internet infrastructure and the fixed telecommunications networks in China will be able to support the demands associated with the continued growth in Internet usage. If we cannot increase our capacity to deliver our online services, we may not be able to expand customer base, and the adoption of our services may be hindered, which could adversely impact our business and profitability.

        In addition, we have no control over the costs of the services provided by telecommunication service providers. If the prices we pay for telecommunications and Internet services rise significantly,

25


Table of Contents

our results of operations may be materially and adversely affected. Furthermore, if Internet access fees or other charges to Internet users increase, some users may be prevented from accessing the mobile Internet and thus cause the growth of mobile Internet users to decelerate. Such deceleration may adversely affect our ability to continue to expand our user base.

We use third-party services and technologies in connection with our business, and any disruption to the provision of these services and technologies to us could result in adverse publicity and a slowdown in the growth of our users, which could materially and adversely affect our business, financial condition and results of operations.

        Our business partially depends on services provided by, and relationships with, various third parties. Some third-party software we use in our operations is currently publicly available free of charge. If the owner of any such software decides to charge users or no longer makes the software publicly available, we may need to incur significant costs to obtain licensing, find replacement software or develop it on our own. If we are unable to obtain licensing, find or develop replacement software at a reasonable cost, or at all, our business and operations may be adversely affected.

        We exercise no control over the third parties with whom we have business arrangements. If such third parties increase their prices, fail to provide their services effectively, terminate their service or agreements or discontinue their relationships with us, we could suffer service interruptions, reduced revenues or increased costs, any of which may have a material adverse effect on our business, financial condition and results of operations.

If we are unable to collect our receivables or unbilled services, our results of operations, financial condition and cash flows could be adversely affected.

        Our business depends on our ability to successfully and timely obtain payment from our customers of the amounts they owe us for work performed. We evaluate the financial condition of our clients and usually bill and collect on 30 to 60 day cycles. We have established allowances for losses of receivables and unbilled services. Actual losses on client balances could differ from those that we currently anticipate, and, as a result, we might need to adjust our allowances. We might not accurately assess the creditworthiness of our clients. Macroeconomic conditions could also result in financial difficulties for our customers, including bankruptcy and insolvency. This could cause customers to delay payments to us, request modifications to their payment arrangements that could increase our receivables balance, or default on their payment obligations to us. Recovery of customer financing and timely collection of client balances also depend on our ability to complete our contractual commitments and bill and collect our contracted revenues. If we are unable to meet our contractual requirements, we might experience delays in collection of and/or be unable to collect our customer balances, and if this occurs, our results of operations and cash flows could be adversely affected. In addition, if we experience an increase in the time to bill and collect for our services, our cash flows could be adversely affected.

If we fail to obtain or maintain the required licenses and approvals or if we fail to comply with laws and regulations applicable to our industry, our business, financial condition and results of operations may be materially and adversely affected.

        The Internet industry in China is highly regulated, which requires certain licenses, permits, filings and approvals to conduct and develop business. Currently, we have obtained Business Performance Permit, Telecom Value-added Service License and Network Culture Operation License Business Performance Permit.

        Due to the uncertainties of interpretation and implementation of existing and future laws and regulations, the licenses we held may not be sufficient to meet regulatory requirements, which may restrain our ability to expand our business scope and may subject us to fines or other regulatory actions by relevant regulators if our practice is deemed as violating relevant laws and regulations. As we

26


Table of Contents

further develop and expand our business scope, we may need to obtain additional qualifications, permits, approvals or licenses. Moreover, we may be required to obtain additional licenses or approvals if the PRC government adopts more stringent policies or regulations for our industry.

        As the Internet industry in China is still at a relatively early stage of development, new laws and regulations may be adopted from time to time to address new issues that come to the authorities' attention. Considerable uncertainties still exist with respect to the interpretation and implementation of existing and future laws and regulations governing our business activities. We cannot assure you that we will not be found in violation of any future laws and regulations or any of the laws or regulations currently in effect due to changes in the relevant authorities' interpretation of these laws and regulations.

        In accordance with to the Notice on Adjusting the Scope and Standardizing the Examination and Approval Process of Network Culture Operation License ("Notice") of the Ministry of Culture and Tourism, dated May 14, 2019, any network culture operation licenses whose business scope contains online-games related activities remains valid, although such licenses may not be renewed upon expiration thereof. There is currently no clear regulation as to whether new licenses could be issued by an alternative governmental authority. As a result, there is risk that the Company may not have a valid license to conduct online-gaming activities after the expiration of such license.

        As of the date of this prospectus, we have not received any material penalties from the relevant government authorities for our past business operations. We cannot assure you, however, that the government authorities will not do so in the future. In addition, we may be required to obtain additional license or permits, and we cannot assure you that we will be able to timely obtain or maintain all the required licenses or permits or make all the necessary filings in the future. If we fail to obtain, hold or maintain any of the required licenses or permits or make the necessary filings on time or at all, we may be subject to various penalties, such as confiscation of the net revenues that were generated through the unlicensed activities, the imposition of fines and the discontinuation or restriction of our operations. Any such penalties may disrupt our business operations and materially and adversely affect our business, financial condition and results of operations.

We may be materially and adversely affected by the complexity, uncertainties and changes in PRC regulation of the Internet industry and companies.

        The PRC government extensively regulates the Internet industry, including foreign ownership of, and the licensing and permit requirements pertaining to, companies in the Internet industry. These Internet-related laws and regulations are relatively new and evolving, and their interpretation and enforcement involve significant uncertainty. As a result, in certain circumstances it may be difficult to determine what actions or omissions may be deemed to be in violations of applicable laws and regulations. Issues, risks and uncertainties relating to PRC regulation of the Internet business include, but are not limited to, the following:

    There are uncertainties relating to the regulation of the Internet business in China, including evolving licensing practices and the requirement for real-name registrations. Permits, licenses or operations at some of our subsidiaries and PRC variable interest entity levels may be subject to challenge, we may not be able to timely obtain or maintain all the required licenses or approvals, permits, or to complete filing, registration or other formalities necessary for our present or future operations, and we may not be able to renew certain permits or licenses or renew certain filing or registration or other formalities. See "—If we fail to obtain or maintain the required licenses and approvals or if we fail to comply with laws and regulations applicable to our industry, our business, financial condition and results of operations may be materially and adversely affected" and "Regulation."

    The evolving PRC regulatory system for the Internet industry may lead to the establishment of new regulatory agencies. For example, in May 2011, the State Council announced the

27


Table of Contents

      establishment of a new department, the State Internet Information Office. The primary role of this new agency is to facilitate the policy-making and legislative development in this field to direct and coordinate with the relevant departments in connection with online content administration and to deal with cross-ministry regulatory matters in relation to the Internet industry. We are unable to determine what policies this new agency or any new agencies to be established in the future may have or how they may interpret existing laws, regulations and policies and how they may affect us. Further, new laws, regulations or policies may be promulgated or announced that will regulate Internet activities, including online video and online advertising businesses. If these new laws, regulations or policies are promulgated, additional licenses may be required for our operations. If our operations do not comply with these new regulations after they become effective, or if we fail to obtain any licenses required under these new laws and regulations, we could be subject to penalties.

        The interpretation and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies relating to the Internet industry have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, Internet businesses in China, including our business. There are also risks that we may be found to violate the existing or future laws and regulations given the uncertainty and complexity of China's regulation of Internet business.

Our business generates and processes a large amount of data, and we are required to comply with PRC laws and regulations relating to cyber security. These laws and regulations could create unexpected costs, subject us to enforcement actions for compliance failures, or restrict portions of our business or cause us to change our data practices or business model.

        Our business generates and processes a large quantity of data. We face risks inherent in handling and protecting large volume of data. In particular, we face a number of challenges relating to data we collect through our game distribution platform and integrated holographic AR software offering, including:

    protecting the data in and hosted on our system, including against attacks on our system by outside parties or fraudulent behavior or improper use by our employees;

    addressing concerns related to privacy and sharing, safety, security and other factors; and

    complying with applicable laws, rules and regulations relating to the collection, use, storage, transfer, disclosure and security of personal information, including any requests from regulatory and government authorities relating to this data.

        Governments around the world, including the PRC government, have enacted or are considering legislation related to online businesses. There may be an increase in legislation and regulation related to the collection and use of anonymous internet user data and unique device identifiers, such as IP address or mobile unique device identifiers, and other data protection and privacy regulation. The PRC regulatory and enforcement regime with regard to data security and data protection is evolving. We may be required by Chinese governmental authorities to share personal information and data that we collect to comply with PRC laws relating to cybersecurity. All these laws and regulations may result in additional expenses to us and any non-compliance may subject us to negative publicity which could harm our reputation and negatively affect the trading price of our ADSs. There are also uncertainties with respect to how these laws will be implemented in practice. PRC regulators have been increasingly focused on regulation in the areas of data security and data protection. We expect that these areas will receive greater attention and focus from regulators, as well as attract continued or greater public scrutiny and attention going forward, which could increase our compliance costs and subject us to heightened risks and challenges associated with data security and protection. If we are unable to manage these risks, we could become subject to penalties, fines, suspension of business and revocation of required licenses, and our reputation and results of operations could be materially and adversely

28


Table of Contents

affected. In addition, regulatory authorities around the world have recently adopted or are considering a number of legislative and regulatory proposals concerning data protection. These legislative and regulatory proposals, if adopted, and the uncertain interpretations and application thereof could, in addition to the possibility of fines, result in an order requiring that we change our data practices, which could have an adverse effect on our business and results of operations.

Our business depends on the market recognition of our brand, and if we are unable to maintain and enhance brand recognition, or promote or maintain our brand in a cost-effective manner, our business, financial conditions and results of operations may be materially and adversely affected.

        We believe that maintaining and enhancing our brand is of significant importance to the success of our business. A well-recognized brand is important to attract customers, especially in this novel and evolving market. We promote our brand though marketing team and word-of-mouth referral. Successful promotion of our brand will depend on the effectiveness of our marketing efforts and amount of word-of-mouth referral we received from satisfied customers. We may incur extra expenses in promoting our brand. However, our brand promotion activities and marketing efforts may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incurred in promoting our brand. Since we operate in a highly competitive industry, our brand recognition directly affects our ability to maintain our market position. If we fail to successfully promote and maintain our brand, or if we incur extra expenses in an unsuccessful attempt to promote and maintain our brand, we may fail to attract enough new customers or retain our existing customers and our business and results of operations may be materially and adversely affected.

Our success depends on the interoperability of our products and services with next-generation AR hardware.

        The success of our products depends upon the cooperation of AR hardware manufactures to ensure interoperability with our products and offer compatible products and services to end users. To the extent that hardware manufactures perceive that their products and services compete with ours, they may have an incentive to withhold their cooperation, decline to share access or sell to us their proprietary application programming interfaces ("APIs"), protocols or formats, or engage in practices to actively limit the functionality, compatibility and certification of our products. If any of the foregoing occurs, our product development efforts may be delayed or foreclosed and it may be difficult and more costly for us to achieve functionality and service levels that would make our services attractive to end users, any of which could negatively impact our business and operating results.

Future litigation could have a material and adverse impact on our business, financial condition and results of operations.

        From time to time, we have been, and may in the future be, subject to lawsuits brought by our competitors, individuals, or other entities against us, in matters relating to intellectual property rights, contractual disputes and competition claims. The outcomes of actions we institute may not be successful or favorable to us. Lawsuits against us may also generate negative publicity that significantly harms our reputation, which may adversely affect our user base. In addition to the related cost, managing and defending litigation and related indemnity obligations can significantly divert our management's attention from operating our business. We may also need to pay damages or settle lawsuits with a substantial amount of cash. While we do not believe that any currently pending proceedings are likely to have a material adverse effect on us, if there were adverse determinations in legal proceedings against us, we could be required to pay substantial monetary damages or adjust our business practices, which could have an adverse effect on our business, financial condition and results of operations.

29


Table of Contents

Negative media coverage could adversely affect our business.

        Negative publicity about us and our business, shareholders, affiliates, directors, officers, and other employees, as well as the industry in which we operate, can harm our operations. Negative publicity concerning these parties could be related to a wide variety of matters, including:

    alleged misconduct or other improper activities committed by our shareholders, affiliates, directors, officers and other employees;

    false or malicious allegations or rumors about us or our shareholders, affiliates, directors, officers, and other employees;

    user complaints about the quality of our products and services;

    copyright or patent infringements involving us and content offered on our platforms; and

    governmental and regulatory investigations or penalties resulting from our failure to comply with applicable laws and regulations.

        In addition to traditional media, there has been an increasing use of social media platforms and similar devices in China, including instant messaging applications, social media websites and other forms of internet-based communications that provide individuals with access to a broad audience of users and other interested persons. The availability of information on instant messaging applications and social media platforms is virtually immediate as is its impact without affording us an opportunity for redress or correction. The opportunity for dissemination of information, including inaccurate information, is seemingly limitless and readily available. Information concerning our company, shareholders, directors, officers and employees may be posted on such platforms at any time. The risks associated with any such negative publicity or incorrect information cannot be completely eliminated or mitigated and may materially harm our reputation, business, financial condition and results of operations.

If we fail to implement and maintain an effective system of internal controls, we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud, and investor confidence and the market price of our shares may be materially and adversely affected.

        Prior to this offering, we were a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. Our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. In the course of auditing our consolidated financial statements for the year ended December 31, 2017 and 2018 and as of December 31, 2017 and 2018, we and our independent registered public accounting firm identified two material weaknesses in our internal control over financial reporting as well as other control deficiencies as of December 31, 2018. The same material weaknesses and significant deficiency were identified in connection with the audit of our combined and consolidated financial statements for the 2017 fiscal year. As defined in standards established by the Public Company Accounting Oversight Board ("PCAOB"), a "material weakness" is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses identified related to (1) our lack of sufficient skilled staff with U.S. GAAP knowledge and the SEC reporting knowledge for the purpose of financial reporting as well as the lack in formal accounting policies and procedures manual to ensure proper financial reporting in accordance with U.S. GAAP and SEC reporting requirements; and (2) our lack of audit committee and internal audit function to establish formal risk assessment process and internal control framework. Upon completion of this offering, we will become a public company in the United States and are subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002 will require that we include a report of management on our internal control over financial reporting in our annual report

30


Table of Contents

on Form 20-F beginning with our annual report for the fiscal year ending December 31, 2020. In addition, once we cease to be an "emerging growth company" as such term is defined under the JOBS Act, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, after we become a public company, our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation.

        If we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting. If we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results of operations and lead to a decline in the trading price of our shares. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may also be required to restate our financial statements from prior periods.

Future strategic alliances or acquisitions may have a material and adverse effect on our business, financial condition and results of operations.

        We may enter into strategic alliances, including joint ventures or minority equity investments, with various third parties to further our business purpose from time to time. These alliances could subject us to a number of risks, including risks associated with sharing proprietary information, non-performance by the third party and increased expenses in establishing new strategic alliances, any of which may materially and adversely affect our business. We may have limited ability to monitor or control the actions of these third parties and, to the extent any of these strategic third parties suffers negative publicity or harm to their reputation from events relating to their business, we may also suffer negative publicity or harm to our reputation by virtue of our association with any such third party.

        In addition, when appropriate opportunities arise, we may acquire additional assets, products, technologies or businesses that are complementary to our existing business. In addition to possible shareholders' approval, we may also have to obtain approvals and licenses from relevant government authorities for the acquisitions and to comply with any applicable PRC laws and regulations, which could result in increased delay and costs, and may derail our business strategy if we fail to do so. Furthermore, past and future acquisitions and the subsequent integration of new assets and businesses require significant attention from our management and could result in a diversion of resources from our existing business, which in turn could have an adverse effect on our business operations. Acquired assets or businesses may not generate the financial results we expect. Acquisitions could result in the use of substantial amounts of cash, potentially dilutive issuances of equity securities, the occurrence of significant goodwill impairment charges, amortization expenses for other intangible assets and exposure to potential unknown liabilities of the acquired business. Moreover, the costs of identifying and consummating acquisitions may be significant. Furthermore, our equity investees may generate significant losses, a portion of which will be shared by us in accordance with U.S. GAAP. Any such

31


Table of Contents

negative developments could have a material adverse effect on our business, reputation, results of operations and financial condition.

We have limited business insurance coverage.

        Insurance companies in China offer limited business insurance products. We do not have any business liability or disruption insurance coverage for our operations in China. Any business disruption may result in our incurring substantial costs and the diversion of our resources, which could have an adverse effect on our results of operations and financial condition.

Risks Related to Our Corporate Structure

We are subject to changing law and regulations regarding regulatory matters, corporate governance and public disclosure that have increased both our costs and the risk of non-compliance.

        We are subject to rules and regulations by various governing bodies, including, for example, the SEC, which are charged with the protection of investors and the oversight of companies whose securities are publicly traded, and to new and evolving regulatory measures under applicable law. Our efforts to comply with new and changing laws and regulations have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.

        Moreover, because these laws, regulations and standards are subject to varying interpretations, their application in practice may evolve over time as new guidance becomes available. This evolution may result in continuing uncertainty regarding compliance matters and additional costs necessitated by ongoing revisions to our disclosure and governance practices. If we fail to address and comply with these regulations and any subsequent changes, we may be subject to penalty and our business may be harmed.

If the PRC government finds that the agreements that establish the structure for operating our businesses in China do not comply with PRC regulations relating to the relevant industries, or if these regulations or their interpretation change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.

        Foreign ownership of the telecommunication business and certain other businesses in China is extensively regulated and subject to numerous restrictions. Pursuant to the Special Administrative Measures for Access of Foreign Investment (Negative List) (2018 Edition), or the Negative List, and Administrative Provisions on Foreign-Invested Telecommunications Enterprises (Revised in 2016) , foreign investors are generally not allowed to own more than 50% of the equity interests in a commercial internet content provider or other value-added telecommunication service provider other than operating e-commerce, and the major foreign investor in a value-added telecommunication service provider in China must have experience in providing value-added telecommunications services overseas and maintain a good track record in accordance with the Negative List, Administrative Provisions on Foreign-Invested Telecommunications Enterprises (Revised in 2016) and other applicable laws and regulations. In addition, foreign investors are prohibited from investing in companies engaged in online publishing business, internet audio-visual programs business, internet culture business and radio and television program production business.

        We are a Cayman Islands company and our PRC subsidiary is currently considered foreign-invested enterprises. Accordingly, none of our PRC subsidiary are eligible to operate internet content service, online culture activities or other businesses which foreign-owned companies are prohibited or restricted from conducting in China. To ensure strict compliance with the PRC laws and regulations, we conduct such business activities through our VIE and its subsidiaries. Our wholly owned subsidiary in China, Hologram WiMi, has entered into a series of contractual arrangements with our VIE and its

32


Table of Contents

shareholders, which enables us to (i) exercise effective control over our VIE; (ii) receive substantially all of the economic benefits of our VIE; and (iii) have an exclusive option to purchase all or part of the equity interests and assets in our VIE when and to the extent permitted by PRC law. As a result of these contractual arrangements, we have control over and are the primary beneficiary of our VIE and hence consolidate their financial results as our VIE under U.S. GAAP. See "Corporate History and Structure" for details.

        If the PRC government finds that our contractual arrangements do not comply with its restrictions on foreign investment in the telecommunication business and certain other businesses, or if the PRC government otherwise finds that we, our VIE, or any of its subsidiaries is in violation of PRC laws or regulations or lacks the necessary permits or licenses to operate our business, the relevant PRC regulatory authorities, including the MIIT and the Ministry of Commerce of the People's Republic of China ("MOFCOM"), would have broad discretion in dealing with such violations or failures, including:

    revoking the business licenses and/or operating licenses of such entities;

    discontinuing or placing restrictions or onerous conditions on our operation through any transactions between our PRC subsidiary and our VIE;

    imposing fines, confiscating the income from our PRC subsidiary or our VIE, or imposing other requirements with which we or our VIE may not be able to comply;

    requiring us to restructure our ownership structure or operations, including terminating the contractual arrangements with our VIE and deregistering the equity pledges of our VIE, which in turn would affect our ability to consolidate, derive economic interests from, or exert effective control over our VIE; or

    restricting or prohibiting our use of the proceeds of this offering to finance our business and operations in China.

        Any of these events could cause significant disruption to our business operations and severely damage our reputation, which would in turn materially and adversely affect our business, financial condition and results of operations. If occurrences of any of these events results in our inability to direct the activities of our VIE that most significantly impacts its economic performance and/or our failure to receive the economic benefits from our VIE, we may not be able to consolidate the entities in our consolidated financial statements in accordance with U.S. GAAP.

Substantial uncertainties exist with respect to the enactment timetable, interpretation and implementation of PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations.

        In March 2019, the Standing Committee of the National People's Congress of the PRC passed the Foreign Investment Law of the People's Republic of China ("Foreign Investment Law"). Among other things, the Foreign Investment Law defines the "foreign investment" as the investment activities in China conducted by foreign individuals, enterprises and other organizations (collectively, the "Foreign Investors") in a direct or indirectly manner, including any of the following circumstances: (1) the foreign investor establishes a foreign-invested enterprise within the territory of China, independently or jointly with any other investor; (2) the foreign investor acquires shares, equities, property shares or any other similar rights and interests of an enterprise within the territory of China; (3) the foreign investor makes investment to initiate a new project within the territory of China, independently or jointly with any other investor; and (4) the foreign investor makes investment in any other way stipulated by laws, administrative regulations or provisions of the State Council. The Foreign Investment Law leaves uncertainty with respect to whether Foreign Investors control PRC onshore variable interest entities via

33


Table of Contents

contractual arrangements will be recognized as "foreign investment". PRC governmental authorities will administrate foreign investment by applying the principal of pre-entry national treatment together with a "negative list" (the "Negative List", which shall be promulgated by or promulgated with approval by the State Counsel), to be specific, Foreign Investors are prohibited from making any investments in the fields which are catalogued into prohibited industries for foreign investment based on the Negative List, while Foreign Investors are allowed to make investments in the restricted industries provided that all the requirements and conditions as set forth in the Negative List have been satisfied; when Foreign Investors make investments in the fields other than those included in the Negative List, the national treatment principle shall apply. Besides, certain approval and/or filing requirements shall be fulfilled in accordance with applicable foreign investment laws and regulations.

        The internet content service and online culture activities that we conduct through our VIE are subject to Special Management Measures for the Market Entry of Foreign Investment (Negative List) (2018 Version) (the "2018 Negative List") issued by MOFCOM and the National Development and Reform Commission. It is unclear whether any new "negative list" to be issued under the Foreign Investment Law will be different from the 2018 Negative List. If our control over our VIE through contractual arrangements are deemed as foreign investment in the future, and any business of our VIE is restricted or prohibited from foreign investment under the "negative list" effective at the time, we may be deemed to be in violation of the Foreign Investment Law, the contractual arrangements that allow us to have control over our VIE may be deemed as invalid and illegal, and we may be required to unwind such contractual arrangements and/or restructure our business operations, any of which may have a material adverse effect on our business operation.

We rely on contractual arrangements with our VIE and its shareholders for our operations in China, which may not be as effective in providing operational control as direct ownership.

        We have relied and expect to continue to rely on contractual arrangements with Beijing WiMi, or our VIE, and its shareholders, and certain of its subsidiaries to operate our business in China. These contractual arrangements may not be as effective as direct ownership in providing us with control over our VIE. For example, our VIE and its shareholders could breach their contractual arrangements with us by, among other things, failing to conduct their operations in an acceptable manner or taking other actions that are detrimental to our interests. The revenues contributed by our VIE and its subsidiaries constituted substantially all of our revenues in 2017 and 2018.

        If we had direct ownership of our VIE, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of our VIE, which in turn could implement changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under the current contractual arrangements, we rely on the performance by our VIE and its shareholders of their respective obligations under the contracts to exercise control over our VIE. The shareholders of our VIE may not act in the best interests of our company or may not perform their obligations under these contracts. Such risks exist throughout the period in which we intend to operate certain portion of our business through the contractual arrangements with our VIE. If any dispute relating to these contracts remains unresolved, we will have to enforce our rights under these contracts through arbitration, litigation or other legal proceedings and therefore will be subject to uncertainties in the PRC legal system. Therefore, our contractual arrangements with our VIE may not be as effective in controlling our business operations as direct ownership.

Any failure by our VIE or its shareholders to perform their obligations under our contractual arrangements with them would have a material and adverse effect on our business.

        If our VIE or its shareholders fail to perform their respective obligations under the contractual arrangements, we may have to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC law, including seeking specific

34


Table of Contents

performance or injunctive relief, and claiming damages, which we cannot assure will be effective under PRC law. For example, if the shareholders of our VIE refuse to transfer its equity interest in our VIE to our PRC subsidiary or its designee after we exercise the purchase option pursuant to these contractual arrangements, or if they otherwise act in bad faith or otherwise fail to fulfill their contractual obligations, we may have to take legal actions to compel them to perform their contractual obligations. In addition, if any third parties claim any interest in such shareholders' equity interests in our VIE, our ability to exercise shareholders' rights or foreclose the share pledge according to the contractual arrangements may be impaired. If these or other disputes between the shareholders of our VIE and third parties were to impair our control over our VIE, our ability to consolidate the financial results of our VIE would be affected, which would in turn result in a material adverse effect on our business, operations and financial condition.

Our shareholders or the shareholders of our VIE may have potential conflicts of interest with us, which may materially and adversely affect our business.

        The shareholders of our VIE may have actual or potential conflicts of interest with us. These shareholders may breach, or cause our VIE to breach, or refuse to renew, the existing contractual arrangements we have with them and our VIE, which would have a material and adverse effect on our ability to effectively control our VIE and receive economic benefits from them. For example, the shareholders may be able to cause our agreements with our VIE to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely basis. We cannot assure you that when conflicts of interest arise any or all of these shareholders will act in the best interests of our company or such conflicts will be resolved in our favor. Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our company. If we cannot resolve any conflict of interest or dispute between us and these shareholders, we would have to rely on legal proceedings, which could result in disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.

All the agreements under our contractual arrangements with our VIE and its equity owners are governed by PRC law and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts would be interpreted in accordance with PRC law, and any disputes would be resolved in accordance with PRC legal procedures.

        All the agreements under our contractual arrangements with our VIE and its equity owners are governed by PRC law and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. Meanwhile, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a VIE should be interpreted or enforced under PRC law. There remain significant uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary. In addition, under PRC law, rulings by arbitrators are final, parties cannot appeal the arbitration results in courts, and if the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would require additional expenses and delay. In the event we are unable to enforce these contractual arrangements, or if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over our VIE, and our ability to conduct our business may be negatively affected.

35


Table of Contents

We may lose the ability to use and enjoy assets held by our VIE and its subsidiaries that are important to our business if our VIE and its subsidiaries declare bankruptcy or become subject to a dissolution or liquidation proceeding.

        As part of our contractual arrangements with our VIE, the entity holds certain assets that are material to the operation of certain portion of our business. If our VIE goes bankrupt and all or part of its assets become subject to liens or rights of third-party creditors, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations. Under the contractual arrangements, our VIE may not, in any manner, sell, transfer, mortgage or dispose of its assets or legal or beneficial interests in the business without our prior consent. If our VIE undergoes a voluntary or involuntary liquidation proceeding, the independent third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business, financial condition and results of operations

Contractual arrangements we have entered into with our VIE may be subject to scrutiny by the PRC tax authorities. A finding that we owe additional taxes could negatively affect our financial condition and the value of your investment.

        Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities within ten years after the taxable year when the transactions are conducted. We could face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements between us and our VIE were not entered into on an arm's-length basis in such a way as to result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and adjust the income of our VIE in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by our VIE for PRC tax purposes, which could in turn increase its tax liabilities without reducing our PRC subsidiary's tax expenses. In addition, the PRC tax authorities may impose late payment fees and other penalties on our VIE for the adjusted but unpaid taxes according to the applicable regulations. Our financial position could be materially and adversely affected if our VIE's tax liabilities increase or if it is required to pay late payment fees and other penalties.

If the chops of our PRC subsidiary, our VIE and its subsidiaries, are not kept safely, are stolen or are used by unauthorized persons or for unauthorized purposes, the corporate governance of these entities could be severely and adversely compromised.

        In China, a company chop or seal serves as the legal representation of the company towards third parties even when unaccompanied by a signature. Each legally registered company in China is required to maintain a company chop, which must be registered with the local Public Security Bureau. In addition to this mandatory company chop, companies may have several other chops which can be used for specific purposes. The chops of our PRC subsidiary and VIE are generally held securely by personnel designated or approved by us in accordance with our internal control procedures. To the extent those chops are not kept safely, are stolen or are used by unauthorized persons or for unauthorized purposes, the corporate governance of these entities could be severely and adversely compromised and those corporate entities may be bound to abide by the terms of any documents so chopped, even if they were chopped by an individual who lacked the requisite power and authority to do so. In addition, if the chops are misused by unauthorized persons, we could experience disruption to our normal business operations. We may have to take corporate or legal action, which could involve significant time and resources to resolve while distracting management from our operations.

36


Table of Contents

Risks Related to Doing Business in China

Adverse changes in China's economic, political or social conditions or government policies could have a material adverse effect on our business, financial condition and results of operations.

        The majority of our revenues are sourced from China. Accordingly, our results of operations, financial condition and prospects are influenced by economic, political and legal developments in China. Economic reforms begun in the late 1970s have resulted in significant economic growth. However, any economic reform policies or measures in China may from time to time be modified or revised. China's economy differs from the economies of most developed countries in many respects, including with respect to the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises significant control over China's economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or companies.

        While the PRC economy has experienced significant growth in the past 30 years, growth has been uneven across different regions and among different economic sectors. The Chinese government has implemented measures to encourage economic growth and guide the allocation of the resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on us. For example, our financial condition and reults of operations may be adversely affected by government control over capital investments or changes in tax regulations.

        Although the PRC economy has grown significantly in the past decade, that growth may not continue, as evidenced by the slowing of the growth of the PRC economy since 2012. Any adverse changes in economic conditions in China, in the policies of the PRC government or in the laws and regulations in China could have a material adverse effect on the overall economic growth of China. Such developments could adversely affect our business and operating results, lead to reduction in demand for our services and adversely affect our competitive position.

A severe or prolonged downturn in the PRC or global economy could materially and adversely affect our business and our financial condition.

        The global macroeconomic environment is facing challenges. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies adopted by the central banks and financial authorities of some of the world's leading economies, including the United States and China. There have been concerns over unrest and terrorist threats in the Middle East, Europe and Africa and over the conflicts involving Ukraine, Syria and North Korea. There have also been concerns on the relationship among China and other Asian countries, which may result in or intensify potential conflicts in relation to territorial disputes, and the trade disputes between the United States and China. It is unclear whether these challenges and uncertainties will be contained or resolved, and what effects they may have on the global political and economic conditions in the long term. The uncertainty caused by the exit of the United Kingdom from the European Union could negatively impact all of the economies and market conditions of European Union and/or worldwide and could continue to contribute to instability in the global financial market.

        Economic conditions in China are sensitive to global economic conditions, changes in domestic economic and political policies and the expected or perceived overall economic growth rate in China. While the economy in China has grown significantly over the past decades, growth has been uneven,

37


Table of Contents

both geographically and among various sectors of the economy, and the rate of growth has been slowing in recent years. Although growth of China's economy remained relatively stable, there is a possibility that China's economic growth may materially decline in the near future. Any severe or prolonged slowdown in the global or PRC economy may materially and adversely affect our business, results of operations and financial condition.

Uncertainties in the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to you and us.

        The PRC legal system is based on written statutes and prior court decisions have limited value as precedents. Since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involves uncertainties. From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. However, since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. Furthermore, the PRC legal system is based in part on government policies and internal rules (some of which are not published in a timely manner or at all) that may have retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. Such uncertainties, including uncertainty over the scope and effect of our contractual, property (including intellectual property) and procedural rights, could materially and adversely affect our business and impede our ability to continue our operations.

Under the PRC enterprise income tax law, we may be classified as a PRC 'resident enterprise,' which could result in unfavorable tax consequences to us and our shareholders and have a material adverse effect on our results of operations and the value of your investment.

        Under the PRC enterprise income tax law that became effective on January 1, 2008, an enterprise established outside the PRC with "de facto management bodies" within the PRC is considered a "resident enterprise" for PRC enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income. On April 22, 2009, the State Administration of Taxation, or the SAT, issued the Notice Regarding the Determination of Chinese-Controlled Overseas Incorporated Enterprises as PRC Tax Resident Enterprise on the Basis of De Facto Management Bodies, or SAT Circular 82, which provides certain specific criteria for determining whether the "de facto management body" of a PRC-controlled enterprise that is incorporated offshore is located in China. Further to SAT Circular 82, on August 3, 2011, the SAT issued the Administrative Measures of Enterprise Income Tax of Chinese-Controlled Offshore Incorporated Resident Enterprises (Trial), or SAT Bulletin 45, which became effective on September 1, 2011, to provide more guidance on the implementation of SAT Circular 82.

        According to SAT Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be considered a PRC tax resident enterprise by virtue of having its "de facto management body" in China and will be subject to PRC enterprise income tax on its worldwide income only if all of the following conditions are met: (a) the senior management and core management departments in charge of its daily operations function have their presence mainly in the PRC; (b) its financial and human resources decisions are subject to determination or approval by persons or bodies in the PRC; (c) its major assets, accounting books, company seals, and minutes and files of its board and shareholders' meetings are located or kept in the PRC; and (d) not less than half of the enterprise's directors or senior management with voting rights habitually reside in the PRC. SAT Bulletin 45 further clarifies the resident status determination, post-determination administration as well as competent tax authorities.

38


Table of Contents

        Although SAT Circular 82 and SAT Bulletin 45 only apply to offshore incorporated enterprises controlled by PRC enterprises or PRC enterprise group instead of those controlled by PRC individuals or foreigners, Jingtian & Gongcheng Law Firm, our legal adviser as to PRC law, has advised us that the determination criteria set forth therein may reflect SAT's general position on how the term "de facto management body" could be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises, individuals or foreigners.

        We do not meet all of the conditions above; therefore, we believe that we should not be treated as a "resident enterprise" for PRC tax purposes even if the standards for "de facto management body" prescribed in the SAT Circular 82 are applicable to us.

        However, it is possible that the PRC tax authorities may take a different view. Jingtian & Gongcheng Law Firm, our legal adviser as to PRC law, has advised us that if the PRC tax authorities determine that our Cayman Islands holding company is a PRC resident enterprise for PRC enterprise income tax purposes, our world-wide income could be subject to PRC tax at a rate of 25%, which could reduce our net income. In addition, we will also be subject to PRC enterprise income tax reporting obligations.

        Although dividends paid by one PRC tax resident to another PRC tax resident should qualify as "tax-exempt income" under the enterprise income tax law, we cannot assure you that dividends by our PRC subsidiary to our Cayman Islands holding company will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax on dividends, and the PRC tax authorities have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes.

        Non-PRC resident ADS holders may also be subject to PRC withholding tax on dividends paid by us and PRC tax on gains realized on the sale or other disposition of ADSs or Class B ordinary shares, if such income is sourced from within the PRC. The tax would be imposed at the rate of 10% in the case of non-PRC resident enterprise holders and 20% in the case of non-PRC resident individual holders. In the case of dividends, we would be required to withhold the tax at source. Any PRC tax liability may be reduced under applicable tax treaties or similar arrangements. Although our holding company is incorporated in the Cayman Islands, it remains unclear whether dividends received and gains realized by our non-PRC resident ADS holders will be regarded as income from sources within the PRC if we are classified as a PRC resident enterprise. Any such tax will reduce the returns on your investment in our ADSs.

        We cannot assure you that the PRC tax authorities will not, at their discretion, adjust any capital gains and impose tax return filing and withholding or tax payment obligations with respect to any internal restructuring, and our PRC subsidiary may be requested to assist in the filing. Any PRC tax imposed on a transfer of our shares not through a public stock exchange, or any adjustment of such gains would cause us to incur additional costs and may have a negative impact on the value of your investment in our company.

We may not be able to obtain certain benefits under relevant tax treaty on dividends paid by our PRC subsidiary to us through our Hong Kong subsidiary.

        We are an exempted limited liability company, used as holding company, incorporated under the laws of the Cayman Islands and as such rely on dividends and other distributions on equity from our PRC subsidiary, as paid to us through our Hong Kong subsidiary, to satisfy part of our liquidity requirements. Pursuant to the PRC Enterprise Income Tax Law, a withholding tax rate of 10% currently applies to dividends paid by a PRC 'resident enterprise' to a foreign enterprise investor, unless any such foreign investor's jurisdiction of incorporation has a tax treaty with China that provides for preferential tax treatment. Pursuant to the Arrangement between the Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on

39


Table of Contents

Income, or the Double Tax Avoidance Arrangement, and Circular 81 issued by the State Administration of Taxation, such withholding tax rate may be lowered to 5% if the PRC enterprise is at least 25% held by a Hong Kong enterprise throughout the 12 months prior to distribution of the dividends and is determined by the relevant PRC tax authority to have satisfied other requirements. Furthermore, under the Administrative Measures for Non-Resident Enterprises to Enjoy Treatments under Tax Treaties, which became effective in August 2015, the non-resident enterprises shall determine whether they are qualified for preferential tax treatment under the tax treaties and file relevant reports and materials with the tax authorities. There are also other conditions for benefiting from the reduced withholding tax rate according to other relevant tax rules and regulations. We cannot assure you that our determination regarding our Hong Kong subsidiary' qualification to benefit from the preferential tax treatment will not be challenged by the relevant PRC tax authority or that we will be able to complete the necessary filings with the relevant PRC tax authority and benefit from the preferential withholding tax rate of 5% under the Double Taxation Avoidance Arrangement with respect to dividends to be paid by our PRC subsidiary to our Hong Kong subsidiary.

We face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.

        We face uncertainties regarding the reporting on and consequences of previous private equity financing transactions involving the transfer and exchange of shares in our company by non-resident investors.

        In February 2015, the SAT issued the Bulletin on Issues of Enterprise Income Tax on Indirect Transfers of Assets by Non-PRC Resident Enterprises, or SAT Bulletin 7, as amended in 2017. Pursuant to this bulletin, an "indirect transfer" of assets, including equity interests in a PRC resident enterprise, by non-PRC resident enterprises may be re-characterized and treated as a direct transfer of PRC taxable assets, if such arrangement does not have a reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax. According to SAT Bulletin 7, "PRC taxable assets" include assets attributed to an establishment in China, immovable properties located in China, and equity investments in PRC resident enterprises, in respect of which gains from their transfer by a direct holder, being a non-PRC resident enterprise, would be subject to PRC enterprise income taxes. When determining whether there is a "reasonable commercial purpose" of the transaction arrangement, features to be taken into consideration include: whether the main value of the equity interest of the relevant offshore enterprise derives from PRC taxable assets; whether the assets of the relevant offshore enterprise mainly consist of direct or indirect investment in China or if its income mainly derives from China; whether the offshore enterprise and its subsidiaries directly or indirectly holding PRC taxable assets have real commercial nature which is evidenced by their actual function and risk exposure; the duration of existence of the business model and organizational structure; the replicability of the transaction by direct transfer of PRC taxable assets; and the tax situation of such indirect transfer and applicable tax treaties or similar arrangements. In respect of an indirect offshore transfer of assets of a PRC establishment, the resulting gain is to be included with the enterprise income tax filing of the PRC establishment or place of business being transferred, and would consequently be subject to PRC enterprise income tax at a rate of 25%. Where the underlying transfer relates to the immovable properties located in China or to equity investments in a PRC resident enterprise, which is not related to a PRC establishment or place of business of a non-resident enterprise, a PRC enterprise income tax of 10% would apply, subject to available preferential tax treatment under applicable tax treaties or similar arrangements, and the party who is obligated to make the transfer payments has the withholding obligation. SAT Bulletin 7 does not apply to transactions of sale of shares by investors through a public stock exchange where such shares were acquired from a transaction through a public stock exchange.

40


Table of Contents

        There is uncertainty as to the application of SAT Bulletin 7. We face uncertainties as to the reporting and other implications of certain past and future transactions where PRC taxable assets are involved, such as offshore restructuring, sale of the shares in our offshore subsidiaries or investments. Our company may be subject to filing obligations or taxed if our company is transferor in such transactions, and may be subject to withholding obligations if our company is transferee in such transactions under SAT Bulletin 7. For transfer of shares in our company by investors that are non-PRC resident enterprises, our PRC subsidiary may be requested to assist in the filing under SAT Bulletin 7. As a result, we may be required to expend valuable resources to comply with SAT Bulletin 7 or to request the relevant transferors from whom we purchase taxable assets to comply with these circulars, or to establish that our company should not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.

Certain judgments obtained against us by our shareholders may not be enforceable.

        We are a Cayman Islands company and substantially all of our current operations are conducted in China. In addition, most of our current directors and officers are nationals and residents of countries other than the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers.

        Maples and Calder (Hong Kong) LLP, our counsel as to Cayman Islands law, has advised us that there is uncertainty as to whether the courts of the Cayman Islands would:

    recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States; or

    entertain original actions brought in the Cayman Islands against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.

        Maples and Calder (Hong Kong) LLP has informed us that the Cayman Islands courts are unlikely to enforce a judgment obtained from the U.S. federal securities law as if such judgment is determined by the courts of the Cayman Islands to give rise to obligations to make payments that are penal or punitive in nature. As such a determination has not yet been made by a court of the Cayman Islands, it is uncertain whether such civil liability judgments from U.S. courts would be enforceable in the Cayman Islands. For more information regarding the relevant laws of the Cayman Islands and China, see "Enforceability of Civil Liabilities."

Implementation of labor laws and regulations in China may adversely affect our business and results of operations.

        Pursuant to the labor contract law that took effect in January 2008, its implementation rules that took effect in September 2008 and its amendment that took effect in July 2013, employers are subject to stricter requirements in terms of signing labor contracts, minimum wages, paying remuneration, determining the term of employees' probation and unilaterally terminating labor contracts. Due to lack of detailed interpretative rules and uniform implementation practices and broad discretion of the local competent authorities, it is uncertain as to how the labor contract law and its implementation rules will affect our current employment policies and practices. Our employment policies and practices may violate the labor contract law or its implementation rules, and we may thus be subject to related penalties, fines or legal fees. Compliance with the labor contract law and its implementation rules may increase our operating expenses, in particular our personnel expenses. In the event that we decide to terminate some of our employees or otherwise change our employment or labor practices, the labor

41


Table of Contents

contract law and its implementation rules may also limit our ability to effect those changes in a desirable or cost-effective manner, which could adversely affect our business and results of operations. According to the Social Insurance Law and the Regulations on the Management of Housing Fund, employees must participate in pension insurance, work-related injury insurance, medical insurance, unemployment insurance and maternity insurance and housing funds, and the employers must, together with their employees or separately, pay the social insurance premiums and housing funds for such employees.

        As the interpretation and implementation of these laws and regulations are still evolving, we cannot assure you that our employment practice will at all times be deemed in full compliance with labor-related laws and regulations in China, which may subject us to labor disputes or government investigations. If we are deemed to have violated relevant labor laws and regulations, we could be required to provide additional compensation to our employees and our business, financial condition and results of operations could be materially and adversely affected.

        Further, labor disputes, work stoppages or slowdowns at our company or any of our third-party service providers could significantly disrupt our daily operation or our expansion plans and have a material adverse effect on our business.

China's M&A Rules and certain other PRC regulations establish complex procedures for certain acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.

        The Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in 2006 and amended in 2009, and some other regulations and rules concerning mergers and acquisitions established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time consuming and complex, including requirements in some instances that the anti-monopoly law enforcement agency be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. Moreover, the Anti-Monopoly Law requires that the anti-monopoly law enforcement agency shall be notified in advance of any concentration of undertaking if certain thresholds are triggered. In addition, the security review rules issued by the MOFCOM, that became effective in September 2011 specify that mergers and acquisitions by foreign investors that raise "national defense and security" concerns and mergers and acquisitions through which foreign investors may acquire de facto control over domestic enterprises that raise "national security" concerns are subject to strict review by the MOFCOM, and the rules prohibit any activities attempting to bypass a security review, including by structuring the transaction through a proxy or contractual control arrangement. In the future, we may grow our business by acquiring complementary businesses. Complying with the requirements of the above-mentioned regulations and other relevant rules to complete such transactions could be time consuming, and any required approval processes, including obtaining approval from the MOFCOM or its local counterpart or anti-monopoly law enforcement agency may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

PRC regulations relating to offshore investment activities by PRC residents may limit our PRC subsidiary's ability to increase their registered capital or distribute profits to us or otherwise expose us to liability and penalties under PRC law.

        The State Administration of Foreign Exchange ("SAFE") promulgated the Circular on Relevant Issues Relating to PRC Resident's Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, in July 2014 that requires PRC residents or entities to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing. In addition, such PRC residents or

42


Table of Contents

entities must update their SAFE registrations when the offshore special purpose vehicle undergoes material events relating to any change of basic information (including change of such PRC residents or entities, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions.

        SAFE Circular 37 is issued to replace the Circular on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging in Financing and Roundtrip Investments through Overseas Special Purpose Vehicles.

        If our shareholders who are PRC residents or entities do not complete their registration with the local SAFE branches, our PRC subsidiary may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to us, and we may be restricted in our ability to contribute additional capital to our PRC subsidiary. Moreover, failure to comply with SAFE registration described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.

        However, we may not be informed of the identities of all the PRC residents or entities holding direct or indirect interest in our company, nor can we compel our shareholders to comply with the requirements of SAFE Circular 37. As a result, we cannot assure you that all of our shareholders who are PRC residents or entities have complied with, and will in the future make or obtain any applicable registrations or approvals required by, SAFE Circular 37. Failure by such shareholders to comply with SAFE Circular 37, or failure by us to amend the foreign exchange registrations of our PRC subsidiary, could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiary's ability to make distributions or pay dividends to us or affect our ownership structure, which could adversely affect our business and prospects.

PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of this offering to make loans to or make additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

        Any transfer of funds by us to our PRC subsidiary, either as a shareholder loan or as an increase in registered capital, are subject to approval by or registration or filing with relevant governmental authorities in China. According to the relevant PRC regulations on foreign-invested enterprises in China, capital contributions to our PRC subsidiary are subject to the approval of or filing with the Ministry of Commerce in its local branches and registration with a local bank authorized by SAFE. In addition, (i) any foreign loan procured by our PRC subsidiary is required to be registered with SAFE or its local branches or filed with SAFE in its information system; and (ii) our PRC subsidiary may not procure loans which exceed the difference between its total investment amount and registered capital or, as an alternative, only procure loans subject to the calculation approach and limitation as provided in the People's Bank of China Notice No. 9 ("PBOC Notice No. 9"). Any medium- or long-term loan to be provided by us to our VIE must be registered with the National Development and Reform Commission and SAFE or its local branches. We may not be able to obtain these government approvals or complete such registrations on a timely basis, if at all, with respect to future capital contributions or foreign loans by us to our PRC subsidiary. If we fail to receive such approvals or complete such registration or filing, our ability to use the proceeds of this offering and to capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business. There is, in effect, no statutory limit on the amount of capital contribution that we can make to our PRC subsidiary. This is because there is no statutory limit on the amount of registered capital for our PRC subsidiary, and we are allowed to make capital contributions to our PRC subsidiary by subscribing for their initial registered capital and increased registered capital, provided that the PRC subsidiary completes the relevant filing and registration procedures. With respect to loans to the PRC subsidiary by us, (i) if the PRC subsidiary adopt the traditional foreign exchange

43


Table of Contents

administration mechanism, or the Current Foreign Debt Mechanism, the outstanding amount of the loans shall not exceed the difference between the total investment and the registered capital of the PRC subsidiary; and (ii) if the PRC subsidiary adopt the foreign exchange administration mechanism as provided in Notice of the People's Bank of China on Matters concerning the Macro-Prudential Management of Full-Covered Cross-Border Financing, or the PBOC Notice No. 9, the risk-weighted outstanding amount of the loans, which shall be calculated based on the formula provided in PBOC Notice No. 9, shall not exceed 200% of the net asset of the PRC subsidiary. For example, the maximum amount of the loans that Beijing WiMi, one of our PRC subsidiaries, may acquire from outside China is (i) approximately RMB 651 million (US$100 million), under the total investment minus registered capital approach as of March 31, 2019; and (ii) approximately RMB 450 million (US$66.7 million), under the net asset approach as of March 31, 2019. According to the PBOC Notice No. 9, after a transition period of one year since the promulgation of PBOC Notice No. 9, the PBOC and SAFE will determine the cross-border financing administration mechanism for the foreign-invested enterprises after evaluating the overall implementation of PBOC Notice No. 9. As of the date hereof, neither the PBOC nor SAFE has promulgated and made public any further rules, regulations, notices or circulars in this regard. It is uncertain which mechanism will be adopted by the PBOC and SAFE in the future and what statutory limits will be imposed on us when providing loans to our PRC subsidiaries. Currently, our PRC subsidiary has the flexibility to choose between the Current Foreign Debt Mechanism and the Notice No. 9 Foreign Debt Mechanism. However, if a more stringent foreign debt mechanism becomes mandatory, our ability to provide loans to our PRC subsidiary or our consolidated affiliated entities may be significantly limited, which may adversely affect our business, financial condition and results of operations.

        The Circular on Reforming the Administration of Foreign Exchange Settlement of Capital of Foreign-Invested Enterprises, or SAFE Circular 19, effective as of June 1, 2015, as amended by Circular of the State Administration of Foreign Exchange on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement under the Capital Account, or SAFE Circular 16, effective on June 9, 2016, allows FIEs to settle their foreign exchange capital at their discretion, but continues to prohibit FIEs from using the Renminbi fund converted from their foreign exchange capitals for expenditure beyond their business scopes, and also prohibit FIEs from using such Renminbi fund to provide loans to persons other than affiliates unless otherwise permitted under its business scope. As a result, we are required to apply Renminbi funds converted from the net proceeds we received from this offering within the business scopes of our PRC subsidiaries. SAFE Circular 19 and SAFE Circular 16 may significantly limit our ability to use Renminbi converted from the net proceeds of this offering to fund the establishment of new entities in China by our VIE or its subsidiaries, to invest in or acquire any other PRC companies through our PRC subsidiary, or to establish new consolidated VIEs in China, which may adversely affect our business, financial condition and results of operations.

Our PRC subsidiary and VIE are subject to restrictions on paying dividends or making other payments to us, which may restrict our ability to satisfy our liquidity requirements, conduct our business and to pay dividends to holders of the ADSs and our ordinary shares.

        We are a holding company incorporated in the Cayman Islands. We rely on dividends from our PRC subsidiary which in turn relies on consulting and other fees paid by our VIE for our cash and financing requirements, such as the funds necessary to pay dividends and other cash distributions to our shareholders, including holders of our ADSs, and service any debt we may incur. Current PRC regulations permit our PRC subsidiary to pay dividends to us only out of their accumulated after-tax profits upon satisfaction of relevant statutory condition and procedures, if any, determined in accordance with Chinese accounting standards and regulations. In addition, our PRC subsidiary is required to set aside at least 10% of its accumulated profits each year, if any, to fund certain reserve funds until the total amount set aside reaches 50% of its registered capital. Furthermore, if our PRC subsidiary, our VIE and its subsidiaries incur debt on their own behalf in the future, the instruments

44


Table of Contents

governing the debt may restrict their ability to pay dividends or make other payments to us, which may restrict our ability to satisfy our liquidity requirements.

        In addition, the Enterprise Income Tax Law of the PRC, or the PRC EIT Law, and its implementation rules provide that withholding tax rate of 10% will be applicable to dividends payable by Chinese companies to non-PRC-resident enterprises unless otherwise exempted or reduced according to treaties or arrangements between the PRC central government and governments of other countries or regions where the non-PRC-resident enterprises are incorporated.

Fluctuations in exchange rates could have a material adverse effect on our results of operations and the value of your investment.

        The value of the Renminbi against the U.S. dollar and other currencies is affected by changes in China's political and economic conditions and China's foreign exchange policies, among other things. In 2005, the PRC government changed its decades-old policy of pegging the value of the Renminbi to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. With the development of the foreign exchange market and progress towards interest rate liberalization and Renminbi internationalization, the PRC government may in the future announce further changes to the exchange rate system and we cannot assure you that Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between Renminbi and the U.S. dollar in the future.

Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment.

        The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in Renminbi. Under our current corporate structure, our Cayman Islands holding company may rely on dividend payments from our PRC subsidiary to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval of SAFE by complying with certain procedural requirements. Specifically, under the existing exchange restrictions, without prior approval of SAFE, cash generated from the operations of our PRC subsidiary in China may be used to pay dividends to our company. However, approval from or registration with appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. As a result, we need to obtain SAFE approval to use cash generated from the operations of our PRC subsidiary and consolidated affiliated entities to pay off their respective debt in a currency other than Renminbi owed to entities outside China, or to make other capital expenditure payments outside China in a currency other than Renminbi.

        In light of the flood of capital outflows of China in 2016 due to the weakening Renminbi, the PRC government has imposed more restrictive foreign exchange policies and stepped up scrutiny of major outbound capital movement including overseas direct investment. More restrictions and substantial vetting process are put in place by SAFE to regulate cross-border transactions falling under the capital account. If any of our shareholders regulated by such policies fails to satisfy the applicable overseas direct investment filing or approval requirement timely or at all, it may be subject to penalties from the relevant PRC authorities. The PRC government may at its discretion further restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system

45


Table of Contents

prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.

Failure to comply with PRC regulations regarding the registration requirements for employee stock ownership plans or share option plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.

        Pursuant to SAFE Circular 37, PRC residents who participate in share incentive plans in overseas non-publicly-listed companies may submit applications to SAFE or its local branches for the foreign exchange registration with respect to offshore special purpose companies. In the meantime, our directors, executive officers and other employees who are PRC citizens or who are non-PRC residents residing in the PRC for a continuous period of not less than one year, subject to limited exceptions, and who have been granted incentive share awards by us, may follow the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly-Listed Company, or 2012 SAFE notices, promulgated by the SAFE in 2012. Pursuant to the 2012 SAFE notices, PRC citizens and non-PRC citizens who reside in China for a continuous period of not less than one year who participate in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with SAFE through a domestic qualified agent, which could be the PRC subsidiaries of such overseas listed company, and complete certain other procedures. In addition, an overseas entrusted institution must be retained to handle matters in connection with the exercise or sale of stock options and the purchase or sale of shares and interests. We and our executive officers and other employees who are PRC citizens or who reside in the PRC for a continuous period of not less than one year and who have been granted options will be subject to these regulations when our company becomes an overseas listed company upon the completion of this offering. Failure to complete the SAFE registrations may subject them to fines, and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiary and limit our PRC subsidiary's ability to distribute dividends to us. We also face regulatory uncertainties that could restrict our ability to adopt additional incentive plans for our directors, executive officers and employees under PRC law.

        The SAT has issued certain circulars concerning employee share options and restricted shares. Under these circulars, our employees working in China who exercise share options or are granted restricted shares will be subject to PRC individual income tax. Our PRC subsidiary has obligations to file documents related to employee share options or restricted shares with relevant tax authorities and to withhold individual income taxes of those employees who exercise their share options. If our employees fail to pay or we fail to withhold their income taxes according to relevant laws and regulations, we may face sanctions imposed by the tax authorities or other PRC governmental authorities.

Our leased property interests may be defective and our right to lease the properties affected by such defects may be challenged, which could adversely affect our business.

        According to the PRC Land Administration Law, land in urban districts is owned by the state. The owner of a property built on state-owned land must possess the proper land and property title certificate to demonstrate that it is the owner of the premises and that it has the right to enter into lease contracts with the tenants or to authorize a third party to sublease the premises. Some of the landlords of our learning center locations have failed to provide the title certificates to us. Our right to lease the premises may be interrupted or adversely affected if our landlords are not the property owners and the actual property owners should appear.

46


Table of Contents

        In addition, the title certificate usually records the approved use of the state-owned land by the government and the property owner is obligated to follow the approved use requirement when making use of the property. In the case of failure to utilize the property in accordance with the approved use, the land administration authorities may order the tenant to cease utilizing the premises or even invalidate the contract between the landlord and the tenant. If our use of the leased premises is not in full compliance with the approved use of the land, we may be unable to continue to use the property, which may cause disruption to our business.

Risks Relating to the ADSs and This Offering

There has been no public market for our shares or ADSs prior to this offering, and you may not be able to resell our ADSs at or above the price you paid, or at all.

        We intend to apply to list our ADSs on Nasdaq. We have no current intention to seek a listing for our ordinary shares on any other stock exchange. Prior to the completion of this offering, there has been no public market for our ADSs or our ordinary shares, and we cannot assure you that a liquid public market for our ADSs will develop. If an active public market for our ADSs does not develop following the completion of this offering, the market price and liquidity of our ADSs may be materially and adversely affected. The initial public offering price for our ADSs was determined by negotiation between us and the underwriters based upon several factors, and we can provide no assurance that the trading price of our ADSs after this offering will not decline below the initial public offering price. As a result, investors in our securities may experience a significant decrease in the value of their ADSs.

The market price for our ADSs may be volatile.

        The trading price of our ADSs is likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, including the performance and fluctuation of the market prices of other companies with business operations located mainly in China that have listed their securities in the United States. In addition to market and industry factors, the price and trading volume for our ADSs may be highly volatile for factors specific to our own operations, including the following:

    variations in our revenues, earnings, cash flow and data related to our user base or user engagement;

    announcements of new investments, acquisitions, strategic partnerships or joint ventures by us or our competitors;

    announcements of new product and service offerings, solutions and expansions by us or our competitors;

    changes in financial estimates by securities analysts;

    detrimental adverse publicity about us, our products and services or our industry;

    additions or departures of key personnel;

    release of lock-up or other transfer restrictions on our outstanding equity securities or sales of additional equity securities; and

    potential litigation or regulatory investigations.

        Any of these factors may result in large and sudden changes in the volume and price at which our ADSs will trade.

        In the past, shareholders of public companies have often brought securities class action suits against those companies following periods of instability in the market price of their securities. If we

47


Table of Contents

were involved in a class action suit, it could divert a significant amount of our management's attention and other resources from our business and operations and require us to incur significant expenses to defend the suit, which could harm our results of operations. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.

Because our initial public offering price is substantially higher than our net tangible book value per share, you will experience immediate and substantial dilution.

        If you purchase ADSs in this offering, you will pay more for your ADSs than the amount paid by our existing shareholders for their ordinary shares on a per ADS basis. As a result, you will experience immediate and substantial dilution of US$ per ADS, representing the difference between the assumed initial public offering price of US$ per ADS, the midpoint of the estimated range of the initial public offering price, and our net tangible book value per ADS as of December 31, 2018, after giving effect to the net proceeds to us from this offering. See "Dilution" for a more complete description of how the value of your investment in our ADSs will be diluted upon completion of this offering.

If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding the ADSs, the market price for the ADSs and trading volume could decline.

        The trading market for our ADSs will be influenced by research or reports that industry or securities analysts publish about our business. If one or more analysts who cover us downgrade our ADSs, the market price for our ADSs would likely decline. If one or more of these analysts cease to cover us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the market price or trading volume for our ADSs to decline.

The sale or availability for sale of substantial amounts of the ADSs could adversely affect their market price.

        Sales of substantial amounts of the ADSs in the public market after the completion of this offering, or the perception that these sales could occur, could adversely affect the market price of the ADSs and could materially impair our ability to raise capital through equity offerings in the future. The ADSs sold in this offering will be freely tradable without restriction or further registration under the Securities Act, and shares held by our existing shareholders may also be sold in the public market in the future subject to the restrictions in Rule 144 and Rule 701 under the Securities Act and the applicable lock-up agreements. There will be                ADSs (representing                ordinary shares) outstanding immediately after this offering, or                ADSs (representing                ordinary shares) if the underwriters exercise their overallotment option in full. In connection with this offering, we and our directors, executive officers, and certain existing shareholders have agreed, subject to certain exceptions, not to sell any ordinary shares or ADSs for 180 days after the date of this prospectus without the prior written consent of the representatives of the underwriters. However, the underwriters may release these securities from these restrictions at any time, subject to applicable regulations of the Financial Industry Regulatory Authority, Inc. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of the ADSs. See "Underwriting" and "Shares Eligible for Future Sale" for a more detailed description of the restrictions on selling our securities after this offering.

48


Table of Contents

You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law.

        We are an exempted company limited by shares incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our memorandum and articles of association, the Companies Law of the Cayman Islands, as amended from time to time, and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary duties of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England and Wales, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.

        Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records (other than the memorandum and articles of association) or to obtain copies of lists of shareholders of these companies. Our directors will have discretion under the post-offering memorandum and articles of association we expect to adopt, to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder resolution or to solicit proxies from other shareholders in connection with a proxy contest.

        As a result of all of the above, our public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the United States. For a discussion of significant differences between the provisions of the Companies Law (2018 Revision) of the Cayman Islands and the laws applicable to companies incorporated in the United States and their shareholders, see "Description of Share Capital—Differences in Corporate Law."

Techniques employed by short sellers may drive down the market price of the ADSs.

        Short selling is the practice of selling securities that the seller does not own but rather has borrowed from a third party with the intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. As it is in the short seller's interest for the price of the security to decline, many short sellers publish, or arrange for the publication of, negative opinions and allegations regarding the relevant issuer and its business prospects in order to create negative market momentum and generate profits for themselves after selling a security short. These short attacks have, in the past, led to selling of shares in the market. If we were to become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we could have to expend a significant amount of resources to investigate such allegations and/or defend ourselves. While we would strongly defend against any such short seller attacks, we may be constrained in the manner in which we can proceed against the relevant short seller by principles of freedom of speech, applicable state law or issues of commercial confidentiality.

49


Table of Contents

Because we do not expect to pay dividends in the foreseeable future after this offering, you must rely on a price appreciation of the ADSs for a return on your investment.

        We currently intend to retain most, if not all, of our available funds and any future earnings after this offering to fund the development and growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in our ADSs as a source for any future dividend income.

        Our board of directors has complete discretion as to whether to distribute dividends, subject to certain requirements of Cayman Islands law. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our board of directors. Under Cayman Islands law, a Cayman Islands company may pay a dividend out of either profit or share premium account, provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course of business. Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other things, our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in our ADSs will likely depend entirely upon any future price appreciation of our ADSs. There is no guarantee that our ADSs will appreciate in value after this offering or even maintain the price at which you purchased the ADSs. You may not realize a return on your investment in our ADSs and you may even lose your entire investment in our ADSs.

You may not receive dividends or other distributions on our ordinary shares and you may not receive any value for them, if it is illegal or impractical to make them available to you.

        The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on ordinary shares or other deposited securities underlying our ADSs, after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act but that are not properly registered or distributed under an applicable exemption from registration. The depositary may also determine that it is not feasible to distribute certain property through the mail. Additionally, the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may determine not to distribute such property. We have no obligation to register under U.S. securities laws any ADSs, ordinary shares, rights or other securities received through such distributions. We also have no obligation to take any other action to permit the distribution of ADSs, ordinary shares, rights or anything else to holders of ADSs. This means that you may not receive distributions we make on our ordinary shares or any value for them if it is illegal or impractical for us to make them available to you. These restrictions may cause a material decline in the value of our ADSs.

ADSs holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in less favorable outcomes to the plaintiff(s) in any such action.

        The deposit agreement governing the ADSs representing our Class B ordinary shares provides that, to the fullest extent permitted by law, ADS holders waive the right to a jury trial for any claim they may have against us or the depositary arising out of or relating to our shares, the ADSs or the deposit agreement, including any claim under the U.S. federal securities laws.

50


Table of Contents

        If we or the depositary were to oppose a jury trial based on this waiver, the court would have to determine whether the waiver was enforceable based on the facts and circumstances of the case in accordance with applicable state and federal law. To our knowledge, the enforceability of a contractual pre-dispute jury trial waiver in connection with claims arising under the federal securities laws has not been finally adjudicated by the United States Supreme Court. However, we believe that a contractual pre-dispute jury trial waiver provision is generally enforceable, including under the laws of the State of New York, which govern the deposit agreement, or by a federal or state court in the City of New York, which has non-exclusive jurisdiction over matters arising under the deposit agreement. In determining whether to enforce a contractual pre-dispute jury trial waiver, courts will generally consider whether a party knowingly, intelligently and voluntarily waived the right to a jury trial. We believe that this would be the case with respect to the deposit agreement and the ADSs. It is advisable that you consult legal counsel regarding the jury waiver provision before investing in the ADSs.

        If you or any other holders or beneficial owners of ADSs bring a claim against us or the depositary in connection with matters arising under the deposit agreement or the ADSs, including claims under federal securities laws, you or such other holder or beneficial owner may not be entitled to a jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us or the depositary. If a lawsuit is brought against us or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court, which would be conducted according to different civil procedures and may result in different outcomes than a trial by jury would have, including outcomes that could be less favorable to the plaintiff(s) in any such action.

        Nevertheless, if this jury trial waiver is not permitted by applicable law, an action could proceed under the terms of the deposit agreement with a jury trial. No condition, stipulation or provision of the deposit agreement or the ADSs serves as a waiver by any holder or beneficial owner of ADSs or by us or the depositary of compliance with any substantive provision of the U.S. federal securities laws and the rules and regulations promulgated thereunder.

The voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise your right to direct the voting of your ordinary shares underlying the ADSs.

        Holders of ADSs do not have the same rights as our registered shareholders. As a holder of the ADSs, you will not have any direct right to attend general meetings of our shareholders or to cast any votes at such meetings. You will only be able to exercise the voting rights which attach to the underlying Class B ordinary shares represented by your ADSs indirectly by giving voting instructions to the depositary in accordance with the provisions of the deposit agreement. Under the deposit agreement, you may vote only by giving voting instructions to the depositary, as holder of the underlying Class B ordinary shares represented by your ADSs. Upon receipt of your voting instructions, the depositary will try, as far as is practicable, to vote the ordinary shares represented by your ADSs in accordance with your instructions. If we ask for your instructions, then upon receipt of your voting instructions, the depositary will try to vote the underlying Class B ordinary shares represented by your ADSs in accordance with these instructions. If we do not instruct the depositary to ask for your instructions, the depositary may still vote in accordance with instructions you give, but it is not required to do so. You will not be able to directly exercise any right to vote with respect to the underlying Class B ordinary shares unless you withdraw such shares and become the registered holder of such shares prior to the record date for the general meeting. When a general meeting is convened, you may not receive sufficient advance notice of the meeting to enable you to withdraw the underlying Class B ordinary shares represented by your ADSs and become the registered holder of such shares prior to the record date for the general meeting to allow you to attend the general meeting and to vote directly with respect to any specific matter or resolution to be considered and voted upon at the general meeting. In addition, under our post-offering articles of association that will become effective immediately prior to completion of this offering, for the purposes of determining those shareholders

51


Table of Contents

who are entitled receive notice of, to attend or vote at any general meeting, our directors may close our register of members for a stated period not exceeding thirty calendar days and/or fix in advance a record date for determining those shareholder that are entitled to receive notice of, attend or vote at such meeting, and such closure of our register of members or the setting of such a record date may prevent you from withdrawing the underlying Class B ordinary shares represented by your ADSs and becoming the registered holder of such shares prior to the record date, so that you would not be able to attend the general meeting or to vote directly. Where any matter is to be put to a vote at a general meeting, the depositary will use its best endeavors to notify you of the upcoming vote and to deliver our voting materials to you. We cannot assure you that you will receive the voting material in time to ensure you can direct the depositary to vote your shares. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for their manner of carrying out your voting instructions. This means that you may not be able to exercise your right to direct how the underlying Class B ordinary shares represented by your ADSs are voted and you may have no legal remedy if the underlying Class B ordinary shares represented by your ADSs are not voted as you requested.

You may experience dilution of your holdings due to the inability to participate in rights offerings.

        We may, from time to time, distribute rights to our shareholders, including rights to acquire securities. Under the deposit agreement, the depositary will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt from registration under the Securities Act with respect to all holders of ADSs, or are registered under the provisions of the Securities Act. The depositary may, but is not required to, attempt to sell these undistributed rights to third parties, and may allow the rights to lapse. We may be unable to establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, holders of ADSs may be unable to participate in our rights offerings and may experience dilution of their holdings as a result.

You may be subject to limitations on the transfer of the ADSs.

        Your ADSs are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may close its books from time to time for a number of reasons, including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of our ADSs generally when our share register or the books of the depositary are closed, or at any time if we or the depositary thinks that it is advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason in accordance with the terms of the deposit agreement. As a result, you may be unable to transfer your ADSs when you wish to.

Our post-offering memorandum and articles of association contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our ordinary shares and ADSs.

        We will adopt amended and restated memorandum and articles of association that will become effective immediately prior to the completion of this offering. Our post-offering memorandum and articles of association will contain certain provisions to limit the ability of others to acquire control of our company or cause us to engage in change-of-control transactions, including a provision that grants authority to our board of directors to establish and issue from time to time one or more series of preferred shares without action by our shareholders and to determine, with respect to any series of

52


Table of Contents

preferred shares without action by our shareholders and to determine, with respect to any series of preferred shares, the terms and rights of that series. These provisions could have the effect of depriving our shareholders and ADSs holders of the opportunity to sell their shares or ADSs at a premium over the prevailing market price by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transactions.

The approval of the China Securities Regulatory Commission may be required in connection with this offering under PRC law.

        The M&A Rules requires an overseas special purpose vehicle formed for listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals to obtain the approval of the China Securities Regulatory Commission, or the CSRC, prior to the listing and trading of such special purpose vehicle's securities on an overseas stock exchange. The interpretation and application of the regulations remain unclear, and this offering may ultimately require approval from the CSRC. In addition, it is reported that the CSRC intended to propose a pre-approval regime that requires all offshore listings by China-based companies with variable interest entity structures, such as ours, that operate in industry sectors subject to foreign investment restrictions to obtain CSRC's approval. If CSRC approval is required, it is uncertain whether it would be possible for us to obtain the approval and any failure to obtain or delay in obtaining CSRC approval for this offering would subject us to sanctions imposed by the CSRC and other PRC regulatory agencies.

        Our PRC counsel, Jingtian & Gongcheng Law Firm, has advised us based on their understanding of the current PRC law, rules and regulations that the CSRC's approval is not required for the listing and trading of our ADSs on Nasdaq in the context of this offering, given that:

    the CSRC currently has not issued any definitive rule or interpretation concerning whether offerings like ours under this prospectus are subject to this regulation; and

    no provision in this regulation clearly classifies contractual arrangements as a type of transaction subject to its regulation.

        However, our PRC legal counsel has further advised us that there remains some uncertainty as to how the M&A Rules will be interpreted or implemented in the context of an overseas offering and its opinions summarized above are subject to any new laws, rules and regulations or detailed implementations and interpretations in any form relating to the M&A Rules. We cannot assure you that relevant PRC governmental agencies, including the CSRC, would reach the same conclusion as we do. If it is determined that CSRC approval is required for this offering, we may face sanctions by the CSRC or other PRC regulatory agencies for failure to seek CSRC approval for this offering. These sanctions may include fines and penalties on our operations in the PRC, limitations on our operating privileges in the PRC, delays in or restrictions on the repatriation of the proceeds from this offering into the PRC, restrictions on or prohibition of the payments or remittance of dividends by our China subsidiary, or other actions that could have a material and adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our ADSs. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to halt this offering before the settlement and delivery of the ADSs that we are offering. Consequently, if you engage in market trading or other activities in anticipation of and prior to the settlement and delivery of the ADSs we are offering, you would be doing so at the risk that the settlement and delivery may not occur.

You must rely on the judgment of our management as to the use of the net proceeds from this offering, and such use may not produce income or increase our ADS price.

        Our management will have considerable discretion in the application of the net proceeds received by us. You will not have the opportunity, as part of your investment decision, to assess whether

53


Table of Contents

proceeds are being used appropriately. The net proceeds may be used for corporate purposes that do not improve our efforts to achieve or maintain profitability or increase our ADS price. The net proceeds from this offering may be placed in investments that do not produce income or that lose value.

We are an emerging growth company and may take advantage of certain reduced reporting requirements.

        We are an "emerging growth company," as defined in the JOBS Act, and we may take advantage of certain exemptions from various requirements applicable to other public companies that are not emerging growth companies including, most significantly, not being required to comply with the auditor attestation requirements of Section 404 of Sarbanes-Oxley Act of 2002 for so long as we are an emerging growth company. As a result, if we elect not to comply with such auditor attestation requirements, our investors may not have access to certain information they may deem important.

        The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. We plan to take advantage of such exemptions afforded to an emerging growth company. As a result, our operating results and financial statements may not be comparable to the operating results and financial statements of other companies who have adopted the new or revised accounting standards.

As a company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from Nasdaq corporate governance listing standards. These practices may afford less protection to shareholders than they would enjoy if we complied fully with Nasdaq corporate governance listing standards.

        As an exempted company incorporated in the Cayman Islands that is expected to be listed on Nasdaq, we are subject to Nasdaq corporate governance listing standards. However, Nasdaq rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from Nasdaq corporate governance listing standards. Currently, we do not plan to rely on home country practice with respect to our corporate governance after we complete this offering. However, if we choose to follow home country practice in the future, our shareholders may be afforded less protection than they otherwise would enjoy under Nasdaq corporate governance listing standards applicable to U.S. domestic issuers.

We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to U.S. domestic public companies.

        Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including:

    the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K;

    the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under the Exchange Act;

    the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and

    the selective disclosure rules by issuers of material nonpublic information under Regulation FD.

54


Table of Contents

        We will be required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish our results on a quarterly basis as press releases, distributed pursuant to the rules and regulations of Nasdaq. Press releases relating to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information that would be made available to you were you investing in a U.S. domestic issuer.

We will be a "controlled company" within the meaning of the rules of the Nasdaq Stock Market and, as a result, can rely on exemptions from certain corporate governance requirements that provide protection to shareholders of other companies.

        Following the completion of this offering, we will be a "controlled company" within the meaning of the Nasdaq Stock Market corporate governance rules because Jie Zhao, our Chairman, will beneficially own more than 50% of the total voting power of our then outstanding ordinary shares. For so long as we remain a controlled company under that definition, we are permitted to elect to rely, and may rely, on certain exemptions from corporate governance rules, including an exemption from the rule that a majority of our board of directors must be independent directors or that we have to establish a nominating committee and a compensation committee composed entirely of independent directors. As a result, you will not have the same protection afforded to shareholders of companies that are subject to these corporate governance requirements.

Our Chairman controls, and will control, following the completion of this offering, more than 50% of the total voting power of our outstanding ordinary shares and thus his interest may differ from other shareholders and holders of our ADSs, as he will be able to exert significant control over certain actions requiring a shareholder vote.

        Jie Zhao, our Chairman, controls, and will control, following the completion of this offering, more than 50% of the total voting power of our outstanding ordinary shares. Consequently, he will be able to exert significant control over certain actions requiring a shareholder vote. As our majority shareholder, Mr. Zhao is able to elect our board of directors, and determine the outcome of all matters requiring the approval of the holders of a majority of our outstanding shares, including the sale of our assets or an acquisition of assets. This concentration of ownership in our shares by Mr. Zhao limits your ability to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us. Consequently, his interest in such matters may differ from the interest of other shareholders and holders of our ADSs.

We will incur increased costs as a result of being a public company, particularly after we cease to qualify as an 'emerging growth company.

        Upon completion of this offering, we will become a public company and expect to incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and Nasdaq, impose various requirements on the corporate governance practices of public companies. We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly. We expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the other rules and regulations of the SEC. For example, as a result of becoming a public company, we will need to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director

55


Table of Contents

and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, we will incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.

        In the past, shareholders of a public company often brought securities class action suits against the company following periods of instability in the market price of that company's securities. If we were involved in a class action suit, it could divert a significant amount of our management's attention and other resources from our business and operations, which could harm our results of operations and require us to incur significant expenses to defend the suit. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.

There can be no assurance that we will not be a passive foreign investment company, or PFIC, for any taxable year, which could result in adverse U.S. federal income tax consequences to U.S. investors in the ADSs or ordinary shares.

        In general, a non-U.S. corporation is a PFIC for any taxable year in which (i) 75% or more of its gross income consists of passive income; or (ii) 50% or more of the average quarterly value of its assets consists of assets that produce, or are held for the production of, passive income. For purposes of the above calculations, a non-U.S. corporation that owns, directly or indirectly, at least 25% by value of the shares of another corporation is treated as if it held its proportionate share of the assets of the other corporation and received directly its proportionate share of the income of the other corporation. Passive income generally includes dividends, interest, rents, royalties and certain gains. Cash is a passive asset for these purposes. Goodwill is generally characterized as active or passive asset based on the nature of the income produced in the activity to which the goodwill is attributable. Based on the expected composition of our income and assets and the value of our assets, including goodwill, which is based on the expected price of the ADSs in this offering, we do not expect to be a PFIC for our current taxable year. However, it is not entirely clear how the contractual arrangements between our wholly-owned subsidiaries, our VIE and the shareholders of our VIE will be treated for purposes of the PFIC rules. In addition, the extent to which our goodwill should be characterized as an active asset is not entirely clear. Furthermore, we will hold a substantial amount of cash following this offering and our PFIC status for any taxable year will depend on the composition of our income and assets and the value of our assets from time to time (which may be determined, in part, by reference to the market price of the ADSs, which could be volatile). Accordingly, there can be no assurance that we will not be a PFIC for our current or any future taxable year. If we were a PFIC for any taxable year during which a U.S. taxpayer holds ADSs or ordinary shares, the U.S. taxpayer generally will be subject to adverse U.S. federal income tax consequences, including increased tax liability on disposition gains and "excess distributions" and additional reporting requirements. See "Taxation—U.S. Federal Income Taxation—Passive Foreign Investment Company Rules."

56


Table of Contents


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

        This prospectus contains forward-looking statements that involve risks and uncertainties. All statements other than statements of historical facts are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.

        You can identify these forward-looking statements by words or phrases such as "may," "will," "expect," "anticipate," "aim," "estimate," "intend," "plan," "believe," "likely to" or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, but are not limited to, statements about:

    general economic, political, demographic and business conditions globally and in China;

    fluctuations in inflation and exchange rates in China;

    our ability to implement our growth strategy;

    our ability to retain, grow and engage our user base and expand our product offering;

    changes in consumer tastes and preferences;

    the availability of qualified personnel and the ability to retain such personnel;

    changes in content-related costs and other operating costs;

    changes in government regulation and tax matters;

    other factors that may affect our business, financial condition and results of operations; and

    other risk factors discussed under "Risk Factors."

        You should read thoroughly this prospectus and the documents that we refer to in this prospectus with the understanding that our actual future results may be materially different from and worse than what we expect. Other sections of this prospectus include additional factors which could adversely impact our business and financial performance. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.

        You should not rely upon forward-looking statements as predictions of future events. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

        This prospectus also contains statistical data and estimates that we obtained from industry publications and reports generated by third-party providers of market intelligence. These industry publications and reports generally indicate that the information contained therein was obtained from sources believed to be reliable, but do not guarantee the accuracy and completeness of such information. Although we believe that the publications and reports are reliable, we have not independently verified the data.

57


Table of Contents


USE OF PROCEEDS

        Based on the initial public offering price of US$            per ADS, we expect to receive (i) net proceeds of approximately US$             million in the aggregate (or net proceeds of approximately US$             million in the aggregate if the underwriters exercise their over-allotment option in full in connection with this offering) from this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

        We plan to use (i) approximately 40% of the net proceeds for research and development purposes, including the development of holographic facial recognition system, holographic artificial intelligence facial change, holographic digital life system, holographic education intellectual properties, holographic navigation system for cars, holographic shopping system and holographic tourism navigation system, (ii) approximately 40% of the net proceeds for strategic acquisitions and investments in complementary business, and (iii) approximately 20% of the net proceeds for other general corporate purposes, including working capital, operating expenses, and capital expenditures.

        If an unforeseen event occurs or business conditions change, we may use the proceeds of this offering differently than as described in this prospectus. In utilizing the proceeds from this offering, we are permitted under PRC laws and regulations to provide funding to our PRC subsidiary only through loans or capital contributions, and to our VIE only through loans, and only if we satisfy the applicable government registration and approval requirements. The relevant filing and registration processes for capital contributions typically take approximately eight weeks to complete. The filing and registration processes for loans typically take approximately four weeks or longer to complete. While we currently see no material obstacles to completing the filing and registration procedures with respect to future capital contributions and loans to our PRC subsidiary or our VIE, we cannot assure you that we will be able to complete these filings and registrations on a timely basis, or at all. We cannot assure you that we will be able to meet these requirements on a timely basis, if at all. See "Risk Factors—Risks Related to Doing Business in China—PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of this offering to make loans or make additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business." Additionally, while there is no statutory limit on the amount of capital contribution that we can make to our PRC subsidiaries, loans provided to our PRC subsidiary and our VIE in the PRC are subject to certain statutory limits. For example, the maximum amount of the loans that Wimi Beijing, one of our PRC subsidiaries, may acquire from outside China is (i) ) approximately RMB 651 million (US$100 million) under the total investment minus registered capital approach as of March 31, 2019; and (ii) approximately RMB 450 million (US$66.7 million), under the net asset approach as of March 31, 2019. See "PRC Regulation—Loans by Foreign Companies to their PRC Subsidiaries."

        Pending use of the net proceeds, we intend to hold our net proceeds in short-term, interest-bearing, financial instruments or demand deposits.

58


Table of Contents


DIVIDEND POLICY

        We have not declared and currently have no plan to declare or pay any dividends in the near future on our shares or ADSs, as we currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.

        We are a holding company incorporated in the Cayman Islands. We rely principally on dividends from our PRC subsidiary for our cash requirements, including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiary to pay dividends to us. See "Risk Factors—Risks Related to Doing Business in China—Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment."

        Our board of directors has discretion as to whether to distribute dividends, subject to certain requirements of Cayman Islands law. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our board of directors. Under Cayman Islands law, a Cayman Islands company may pay a dividend out of either profit or share premium account, provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course of business. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant. If we pay any dividends on our ordinary shares, we will pay those dividends which are payable in respect of the Class B ordinary shares underlying the ADSs to the depositary, as the registered holder of such Class B ordinary shares, and the depositary then will pay such amounts to the ADS holders in proportion to the Class B ordinary shares underlying the ADSs held by such ADS holders, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See "Description of American Depositary Shares."

59


Table of Contents


CAPITALIZATION

        The following table sets forth our capitalization as of March 31, 2019:

    on an actual basis;

    on a pro forma basis to reflect the automatic conversion of            of our issued and outstanding Series A preferred shares into             Class B ordinary shares on a one-for-one basis immediately upon the completion of this offering; and on a pro forma as adjusted basis to reflect the (i) the automatic conversion of            of our issued and outstanding Series A preferred shares into            Class B ordinary shares and (ii) issuance and sale of             Class B ordinary shares in the form of ADSs by us in this offering at the initial public offering price of

    US$            per ADS, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us (assuming the underwriters do not exercise their option to purchase additional ADSs).

        You should read this table together with our consolidated financial statements and the related notes included elsewhere in this prospectus and the information under "Management's Discussion and Analysis of Financial Condition and Results of Operations."

 
  As of March 31, 2019  
 
  Actual   Pro Forma   Pro Forma as
Adjusted(1)
 
 
  RMB   US$   RMB   US$   RMB   US$  
 
  (Unauidted, in thousands)
 

Equity:

                                     

Series A convertible preferred shares, USD 0.0001 par value, 12,916,700 shares authorized, 0 and 8,611,133 shares issued and outstanding

    6     1                          

Class A ordinary shares, USD 0.0001 par value, 20,115,570 shares authorized, 20,115,570 shares issued and outstanding

    13     2                          

Class B ordinary shares, USD 0.0001 par value, 466,967,730 shares authorized, 79,884,430 shares issued and outstanding

    52     8                          

Additional paid-in capital

    168,167     24,974                          

Retained earnings

    166,557     24,736                          

Stautory reserves

    20,111     2,987                          

Accumulated other comprehensive income (loss)

    (1,159 )   (173 )                        

Total shareholders' equity

    353,747     52,535                          

Notes:

(1)
The pro forma as adjusted information discussed above is illustrative only.

60


Table of Contents


DILUTION

        If you invest in the ADSs, your interest will be diluted to the extent of the difference between the initial public offering price per ADS and our net tangible book value per ADS after this offering. Dilution results from the fact that the initial public offering price per ordinary share is substantially in excess of the net tangible book value per ordinary share attributable to the existing shareholders for our presently outstanding ordinary shares.

        Our net tangible book value as of March 31, 2019 was approximately US$        per ordinary share and US$        per ADS. Net tangible book value per ordinary share represents the amount of total tangible assets, minus the amount of total liabilities, divided by the total number of ordinary shares outstanding. Pro forma net tangible book value per ordinary share is calculated after giving effect to the automatic conversion of all of our issued and outstanding convertible Series A preferred shares. Dilution is determined by subtracting net tangible book value per ordinary share from the initial public offering price per ordinary share.

        Without taking into account any other changes in such net tangible book value after March 31, 2019, other than to give effect to (our issuance and sale of                ADSs offered in this offering at an initial public offering price of US$        per ADS, after deduction of the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of March 31, 2019 would have been approximately US$         million, or US$        per ordinary share and US$        per ADS, to existing shareholders and an immediate dilution in net tangible book value of US$        per ordinary share, or US$        per ADS, to purchasers of ADSs in this offering.

        The following table illustrates the dilution at the initial public offering price per ordinary share is US$        and all ADSs are exchanged for ordinary shares.

Initial public offering price per ordinary share

  US$         

Net tangible book value per ordinary share

  US$         

Pro forma net tangible book value per ordinary share after giving effect to the conversion of our preferred shares

  US$         

Pro forma net tangible book value per ordinary share as adjusted to give effect to this offering

  US$         

Amount of dilution in net tangible book value per ordinary share to new investors in this offering

  US$         

Amount of dilution in net tangible book value per ADS to new investors in this offering

  US$         

        The pro forma information discussed above is illustrative only.

        The following table summarizes, on a pro forma basis as of March 31, 2019, the differences between the existing shareholders and the new investors with respect to the number of ordinary shares purchased from us in this offering, the total consideration paid and the average price per ordinary share paid at the initial public offering price of US$        per ADS before deducting estimated underwriting discounts and commissions and estimated offering expenses. The total number of ordinary

61


Table of Contents

shares does not include Class B ordinary shares underlying the ADSs issuable upon the exercise of the over-allotment option granted to the underwriters.

 
  Ordinary shares
Purchased
   
   
   
   
 
 
  Total Consideration    
   
 
 
  Average Price
Per Ordinary
Share
  Average Price
Per ADS
 
 
  Number   Percent   Amount   Percent  
 
   
   
  (in thousands of US$)
   
  US$
  US$
 

Existing shareholders

                                     

New investors

                                     

Total

                                     

62


Table of Contents


ENFORCEABILITY OF CIVIL LIABILITIES

Cayman Islands

        We were incorporated in the Cayman Islands in order to enjoy the following benefits:

    political and economic stability;

    an effective judicial system;

    a favorable tax system;

    the absence of exchange control or currency restrictions; and

    the availability of professional and support services.

        However, certain disadvantages accompany incorporation in the Cayman Islands. These disadvantages include, but are not limited to, the following:

    the Cayman Islands has a less developed body of securities laws as compared to the United States and these securities laws provide significantly less protection to investors; and

    Cayman Islands companies may not have standing to sue before the federal courts of the United States.

        Our constitutional documents do not contain provisions requiring that disputes, including those arising under the securities laws of the United States, between us, our officers, directors and shareholders, be arbitrated.

        Substantially all of our operations are conducted in China, and substantially all of our assets are located in China. A majority of our directors and executive officers are nationals or residents of jurisdictions other than the United States and a substantial portion of their assets are located outside the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon these persons, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.

        We have appointed Puglisi & Associates as our agent upon whom process may be served in any action brought against us under the securities laws of the United States.

        Maples and Calder (Hong Kong) LLP, our counsel as to Cayman Islands law, has advised us that there is uncertainty as to whether the courts of the Cayman Islands would:

    recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States; or

    entertain original actions brought in the Cayman Islands against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.

        Maples and Calder (Hong Kong) LLP has informed us that the Cayman Islands courts are unlikely to enforce a judgment obtained from the U.S. federal securities law as if such judgment is determined by the courts of the Cayman Islands to give rise to obligations to make payments that are penal or punitive in nature. As such a determination has not yet been made by a court of the Cayman Islands, it is uncertain whether such civil liability judgments from U.S. courts would be enforceable in the Cayman Islands. Maples and Calder (Hong Kong) LLP has informed us that although there is no statutory enforcement in the Cayman Islands of judgments obtained in the federal or state courts of the United States (and the Cayman Islands are not a party to any treaties for the reciprocal enforcement or recognition of such judgments), a judgment obtained in such jurisdiction will be recognized and

63


Table of Contents

enforced in the courts of the Cayman Islands at common law, without any reexamination of the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided that such judgment (i) is given by a foreign court of competent jurisdiction, (ii) imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given, (iii) is final, (iv) is not in respect of taxes, a fine or a penalty, and (v) was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or the public policy of the Cayman Islands.

PRC

        Jingtian & Gongcheng Law Firm, our PRC legal counsel, has advised us that there is uncertainty as to whether the courts of China would:

    recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States; or

    entertain original actions brought in each respective jurisdiction against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.

        Jingtian & Gongcheng Law Firm has further advised us that the recognition and enforcement of foreign judgments are provided for under PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. China does not have any treaties or other form of reciprocity with the United States or the Cayman Islands that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC law or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States or in the Cayman Islands. Under the PRC Civil Procedures Law, foreign shareholders may originate actions based on PRC law against us in the PRC, if they can establish sufficient nexus to the PRC for a PRC court to have jurisdiction, and meet other procedural requirements, including, among others, the plaintiff must have a direct interest in the case, and there must be a concrete claim, a factual basis and a cause for the suit. However, it would be difficult for foreign shareholders to establish sufficient nexus to the PRC by virtue only of holding the ADSs or our ordinary shares.

64


Table of Contents


CORPORATE HISTORY AND STRUCTURE

Our Corporate History

        We commenced our commercial operations in May 2015 through Beijing WiMi (previously under the name "WiMi Lightspeed Capital Investment Management (Beijing) Co., Ltd."). In February 2016, Beijing WiMi formed a wholly-owned subsidiary, Micro Beauty Lightspeed Investment Management HK Limited in Hong Kong. In addition, Beijing WiMi acquired 100% equity interest in Shenzhen Yidian on October 21, 2015, Shenzhen Yitian on August 20, 2015 and Shenzhen Kuxuanyou on August 26, 2015.

        We incorporated WiMi Cayman under the laws of the Cayman Islands as our offshore holding company in August 2018 to facilitate offshore financing. In September 2018, we established WiMi HK, our wholly-owned Hong Kong subsidiary, and WiMi HK established a wholly-owned PRC subsidiary, Hologram WiMi.

        Due to restrictions imposed by PRC laws and regulations on foreign ownership of companies that engage in internet and other related business, Hologram WiMi later entered into a series of contractual arrangements with Beijing WiMi, or our VIE, and its shareholders. We depend on these contractual arrangements with our VIE, in which we have no ownership interests, and its shareholders to conduct most aspects of our operations. We have relied and expect to continue to rely on these contractual arrangements to conduct our business in China. For more details, see "—Contractual Arrangements with Our VIE and Its Shareholders." The shareholders of our VIE may have potential conflicts of interest with us. See "Risk Factors—Risks Related to Our Corporate Structure—Our shareholders or the shareholders of our VIE may have potential conflicts of interest with us, which may materially and adversely affect our business."

        Under PRC laws and regulations, our PRC subsidiary may pay cash dividends to us out of its respective accumulated profits. However, the ability of our PRC subsidiary to make such distribution to us is subject to various PRC laws and regulations, including the requirement to fund certain statutory funds, as well as potential restriction on currency exchange and capital controls imposed by the PRC government. For more details, see "Risk Factors—Risks Related to Doing Business in China—Our PRC subsidiary and VIE are subject to restrictions on paying dividends or making other payments to us, which may restrict our ability to satisfy our liquidity requirements, conduct our business and to pay dividends to holders of the ADSs and our ordinary shares" and "PRC Regulation—Regulation on Dividend Distributions."

        As a result of our direct ownership in WiMi WFOE and the variable interest entity contractual arrangements, we are regarded as the primary beneficiary of our VIE. We treat it and its subsidiaries as our consolidated affiliated entities under U.S. GAAP, and have consolidated the financial results of these entities in our consolidated financial statements in accordance with U.S. GAAP.

Recent Share Issuances

        In the last quarter of 2018, in connection with the reorganization of our company, we issued a total of 20,115,570 Class A ordinary shares to our Chairman for an aggregate consideration of approximately US$2,011.56 and a total of 79,885,430 Class B ordinary shares to the equity holders of Beijing WiMi for an aggregate consideration of approximately US$7,988.54, in each case under Regulation S under the Securities Act of 1933.

        In November 2018, we issued a total of 8,611,133 Series A preferred shares to two investors for an aggregate consideration of approximately RMB 137 million (US$20 million), in each case under Regulation S under the Securities Act of 1933.

65


Table of Contents

Corporate Structure

        The following diagram illustrates our corporate structure, including our significant subsidiaries and our VIE, immediately upon the completion of this offering, assuming no exercise of the over-allotment option granted to the underwriters, based on the initial public offering price of US$        per ADS.

GRAPHIC

        The Principal shareholders of Beijing Wimi are Jie Zhao and Minwen Wu. Jie Zhao, our Chairman, beneficially owns 100% of our outstanding Class A ordinary shares, 77.5% of our outstanding Class B ordinary shares and 82.05% of the outstanding capital stock of Beijing Wimi. Minwen Wu, the controlling person of Sensefuture Holdings Limited and Sensebright Holdings Limited, beneficially owns approximately 14.0% of our issued and outstanding Class B ordinary shares, and 11.32% of the outstanding capital stock of Beijing Wimi.

Contractual Arrangements with Our VIE and its Respective Shareholders

        Currently, substantially all of our users and business operations are located in the PRC and we do not have plans for any significant overseas expansion, as our primary focus is the PRC hologram market, which we believe possesses tremendous growth potential and attractive monetization opportunities.

        Current PRC laws and regulations impose certain restrictions or prohibitions on foreign ownership of companies that engage in value-added telecommunication services, internet audio-video program services and certain other businesses. The Special Administrative Measures for Entrance of Foreign Investment (Negative List) (2018 Version) provides that foreign investors are generally not allowed to own more than 50% of the equity interests in a value-added telecommunication service provider other than an e-commerce service provider, and the Provisions on the Administration of Foreign-Invested Telecommunications Enterprises (2016 Revision) require that the major foreign investor in a value-added telecommunication service provider in China must have experience in providing value-added telecommunications services overseas and maintain a good track record. In addition, foreign investors are prohibited from investing in companies engaged in certain online and culture related businesses. See "Risk Factors—Risks Related to Our Corporate Structure—We are subject to changing law and regulations regarding regulatory matters, corporate governance and public disclosure that have increased both our costs and the risk of non-compliance" and "PRC Regulation—Regulations on Foreign Direct Investment in Value Added Telecommunications Companies." We are a company incorporated in the Cayman Islands. Hologram WiMi, our PRC subsidiary, is considered foreign-invested enterprises. To comply with the foregoing PRC laws and regulations, we primarily conduct our business in China through Beijing WiMi., our VIE and its subsidiaries in the PRC, based on a series of

66


Table of Contents

contractual arrangements. As a result of these contractual arrangements, we exert effective control over our VIE and its subsidiaries, and consolidate their operating results in our consolidated financial statements under GAAP. These contractual arrangements may not be as effective as direct ownership in providing us with control over our VIE. If our VIE or its respective shareholders fail to perform their respective obligations under the contractual arrangements, we could be limited in our ability to enforce the contractual arrangements that give us effective control over our business operations in the PRC and may have to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure will be effective under PRC law. For details of these and other risks associated with our VIE structure, see "Risk Factors—Risks Related to Our Corporate Structure."

        On November 6, 2018, WiMi Cayman completed a reorganization of entities under common control of its shareholders, who collectively owned all of the equity interests of WiMi Cayman prior to the reorganization. WiMi Cayman, and WiMi HK were established as the holding companies of Hologram WiMi. Hologram WiMi is the primary beneficiary of Beijing WiMi and its subsidiaries. All of the direct and indirect subsidiaries of WiMi Cayman are under common control. Consequently, the consolidation of Beijing WiMi and its subsidiaries has been accounted for as a reorganization of entities under common control at carrying value. The consolidated financial statements are prepared on the basis as if the reorganization became effective as of the beginning of the first period presented in the accompanying consolidated financial statements of WiMi Cayman.

        The following diagram illustrates our corporate structure, including our significant subsidiaries and our VIE, immediately upon the completion of this offering, assuming no exercise of the over-allotment option granted to the underwriters, based on the initial public offering price of US$        per ADS.

GRAPHIC

Contractual Arrangements with Our VIE and Its Shareholders

        The following is a summary of the currently effective contractual arrangements by and among our wholly-owned subsidiary, Hologram WiMi, our VIE and its shareholders. These contractual arrangements enable us to (i) exercise effective control over our VIE; (ii) receive substantially all of the economic benefits of our VIE; (iii) have an exclusive option to purchase the equity interests in our VIE, and (iv) have an exclusive option to purchase all or part of the assets of our VIE when and to the extent permitted by PRC law.

67


Table of Contents

Agreements that provide us effective control over our VIE

        Power of Attorney.    Pursuant to the power of attorney dated November 6, 2018, by Hologram WiMi and each shareholder of Beijing WiMi, respectively, each shareholder of Beijing WiMi irrevocably authorized Hologram WiMi or any person(s) designated by Hologram WiMi to exercise such shareholder's voting rights in Beijing WiMi, including, without limitation, the power to participate in and vote at shareholder's meetings, the power to nominate directors and appoint senior management, the power to sell or transfer such shareholder's equity interest in Beijing WiMi, and other shareholders' voting rights permitted by PRC law and the Articles of Association of Beijing WiMi. The power of attorney remains irrevocable and continuously valid from the date of execution so long as each shareholder remains as a shareholder of Beijing WiMi.

        Equity Interest Pledge Agreement.    Pursuant to the equity interest pledge agreement dated November 6, 2018, by and among Hologram WiMi, Beijing WiMi and the shareholders of Beijing WiMi, the shareholders of Beijing WiMi pledged all of their equity interests in Beijing WiMi to Hologram WiMi to guarantee their and Beijing WiMi's obligations under the contractual arrangements including the exclusive consulting and services agreement, the exclusive option agreement, the exclusive asset purchase agreement and the power of attorney and this equity interest pledge agreement, as well as any loss incurred due to events of default defined therein and all expenses incurred by Hologram WiMi in enforcing such obligations of Beijing WiMi or its shareholders. The shareholders of Beijing WiMi agree that, without Hologram WiMi's prior written approval, during the term of the equity interest pledge agreement, they will not dispose of the pledged equity interests or create or allow any other encumbrance on the pledged equity interests. We have completed the registration of the equity pledges with the relevant office of SAIC in accordance with the PRC Property Rights Law.

        Spousal Consent Letters.    Pursuant to these letters, the spouses of the applicable shareholders of Beijing WiMi unconditionally and irrevocably agreed that the equity interest in Beijing WiMi held by them and registered in their names will be disposed of pursuant to the equity interest pledge agreement, the exclusive option agreement, the exclusive asset purchase agreement and the power of attorney. Each of their spouses agreed not to assert any rights over the equity interest in Beijing WiMi held by their respective spouses. In addition, in the event that any spouse obtains any equity interest in Beijing WiMi held by his or her spouse for any reason, he or she agreed to be bound by the contractual arrangements.

Agreements that allow us to receive economic benefits from our VIE

        Exclusive Business Cooperation Agreement.    Under the exclusive business cooperation agreement between Hologram WiMi and Beijing WiMi, dated November 6, 2018, Hologram WiMi has the exclusive right to provide to Beijing WiMi consulting and services related to, among other things, use of software, operation maintenance, product development, and management and marketing consulting. Hologram WiMi has the exclusive ownership of intellectual property rights created as a result of the performance of this agreement. Beijing WiMi agrees to pay Hologram WiMi service fee at an amount equal to the consolidated profit minus the loss (if any). This agreement will remain effective till the date when it is terminated by WiMi WFOE.

Agreements that provide us with the option to purchase the equity interests in our VIE

        Exclusive Share Purchase Option Agreement.    Pursuant to the exclusive share purchase option agreement dated November 6, 2018, by and among Hologram WiMi, Beijing WiMi and each of the shareholders of Beijing WiMi, each of the shareholders of Beijing WiMi irrevocably granted Hologram WiMi an exclusive call option to purchase, or have its designated person(s) to purchase, at its discretion, all or part of their equity interests in Beijing WiMi, and the purchase price shall be the lowest price permitted by applicable PRC law. Each of the shareholders of Beijing WiMi undertakes

68


Table of Contents

that, without the prior written consent of Hologram WiMi or us, they may not increase or decrease the registered capital, amend its articles of association or change registered capital structure. This agreement will remain effective for ten years and can be renewed at Hologram WiMi's sole discretion. Any transfer of shares pursuant to this agreement would be subject to PRC regulations and to any changes required thereunder.

Agreements that provide us with the option to purchase the assets in our VIE

        Exclusive Asset Purchase Agreement.    Pursuant to the exclusive asset purchase agreement dated November 6, 2018 by Hologram WiMi and Beijing WiMi, Beijing WiMi irrevocably granted Hologram WiMi an exclusive call option to purchase, or have its designated person(s) to purchase, at its discretion, all or part of Beijing WiMi's current or future assets (including intellectual property rights), and the purchase price shall be the lowest price permitted by applicable PRC law. Beijing WiMi undertakes that, without the prior written consent of Hologram WiMi, it may not sell, transfer, pledge, dispose of its assets, incur any debts or guarantee liabilities. It will notify Hologram WiMi any potential litigation, arbitration or administrative procedures regarding the assets, and defend the assets if necessary. This agreement will remain effective for ten years and can be renewed at Hologram WiMi's sole discretion. Any transfer of assets pursuant to this agreement would be subject to PRC regulations and to any changes required thereunder.

        In the opinion of Jingtian & Gongcheng Law Firm, our PRC legal counsel:

    the ownership structures of Hologram WiMi and Beijing WiMi, both currently and immediately after giving effect to this offering, are not in any violation of PRC laws or regulations currently in effect; and

    the contractual arrangements among Hologram WiMi and Beijing WiMi and its shareholders governed by PRC law both currently and immediately after giving effect to this offering are legal, valid, binding and enforceable in accordance with its terms and applicable PRC laws, and do not and will not result in any violation of PRC laws or regulations currently in effect.

        However, we have been further advised by our PRC legal counsel that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules. If the PRC government finds that the agreements that establish the structure for operating our hologram business do not comply with PRC government restrictions on foreign investment in our businesses, we could be subject to severe penalties including being prohibited from continuing operations. See "Risk Factors—Risks Related to Our Corporate Structure—If the PRC government finds that the agreements that establish the structure for operating our businesses in China do not comply with PRC regulations relating to the relevant industries, or if these regulations or their interpretation change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations."

69


Table of Contents


SELECTED CONSOLIDATED FINANCIAL DATA

        The following tables summarize our consolidated financial data for the periods and as of the dates indicated. The summary consolidated statement of income and comprehensive income for the years ended December 31, 2017 and 2018 and for the three months ended March 31, 2018 and 2019 and the summary consolidated balance sheet as of December 31, 2017 and 2018 and March 31, 2019 have been derived from our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP, and included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future. The following summary consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements included elsewhere in this prospectus.

 
  For the Years Ended December 31,   For the Three Months Ended March 31,  
Consolidated Statements of Income and Comprehensive Income:
 
  2017   2018   2018   2018   2019   2019  
 
  RMB
  RMB
  USD
  RMB
  RMB
  USD
 
 
   
   
   
  (Unaudited)
 

Operating revenues

    192,029,524     225,271,564     32,823,109     49,226,626     78,492,282     11,656,981  

Cost of revenues

    (79,180,187 )   (85,414,061 )   (12,445,224 )   (16,041,094 )   (22,601,650 )   (3,356,598 )

Gross profit

    112,849,337     139,857,503     20,377,885     33,185,532     55,890,632     8,300,383  

Operating expenses

    (35,550,993 )   (39,054,908 )   (5,690,481 )   (7,946,202 )   (13,859,491 )   (2,058,289 )

Income from operations

    77,298,344     100,802,595     14,687,404     25,239,330     42,031,141     6,242,094  

Other expenses, net

    (3,432,362 )   (3,509,207 )   (511,308 )   (1,600,249 )   (654,282 )   (97,169 )

Provision for income taxes

    (528,011 )   (8,075,596 )   (1,176,652 )   (1,412,147 )   (3,883,067 )   (576,679 )

Net income

    73,337,971     89,217,792     12,999,444     22,226,934     37,493,792     5,568,246  

Other comprehensive income (loss)

    (250,623 )   1,759,288     256,336     (775,975 )   (2,668,422 )   (396,290 )

Comprehensive income

    73,087,348     90,977,080     13,255,780     21,450,959     34,825,370     5,171,956  

WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES

                                     

Basic

    100,000,000     100,000,000     100,000,000     100,000,000     100,000,000     100,000,000  

Diluted

    100,000,000     100,922,621     100,922,621     100,000,000     108,611,133     108,611,133  

EARNINGS PER SHARE

                                     

Basic

    0.73     0.89     0.13     0.22     0.37     0.06  

Diluted

    0.73     0.88     0.13     0.22     0.35     0.05  

 

 
  As of December 31,   As of March 31,  
Summary Consolidated Balance Sheet Data:
  2017   2018   2018   2019   2019  
 
  RMB
  RMB
  USD
  RMB
  USD
 
 
   
   
   
  (Unaudited)
 

Current assets

    52,030,035     213,295,430     31,078,131     214,063,234     31,790,782  

Other assets

    405,451,567     394,187,996     57,435,016     392,372,270     58,271,667  

Total assets

    457,481,602     607,483,426     88,513,147     606,435,504     90,062,449  

Total liabilities

    367,275,213     288,561,957     42,044,811     252,688,665     37,527,089  

Total shareholders' equity

    90,206,389     318,921,469     46,468,336     353,746,839     52,535,360  

70


Table of Contents

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion and analysis and other parts of this prospectus contain forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under "Risk Factors" and elsewhere in this prospectus. You should carefully read the "Risk Factors" section of this prospectus to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements.

Overview

        We were the largest holographic AR application platform in China, in terms of the total revenues in 2018, according to Frost & Sullivan. By leveraging our strong technological capabilities and infrastructure, we are able to deliver superior products and services and conduct our operations in a highly efficient manner.

        The core of our business is holographic AR technologies used in software engineering, content production, cloud and big data.

        We have grown rapidly since our inception. We generate revenues primarily from holographic AR advertising services and holographic AR entertainment products. Our total revenues increased by RMB 29,265,656, or 59.5%, from RMB 49,226,626 for the three months ended March 31, 2018 to RMB 78,492,282 for the three months ended March 31, 2019. Our net income increased by RMB 15,266,858, or 68.7%, from RMB 22,226,934 for the three months ended March 31, 2018 to RMB 37,493,792 for the three months ended March 31, 2019. Our total revenues increased by RMB 33,242,040, or 17.3%, from RMB 192,029,524 for the year ended December 31, 2017 to RMB 225,271,564 for the year ended December 31, 2018. Our net income increased by RMB 15,879,821, or 21.7%, from RMB 73,337,971 for the year ended December 31, 2017 to RMB 89,217,792 for the year ended December 31, 2018.

Key Factors that Affect Operating Results

Our ability to increase number of customers and average revenue for AR advertising services

        Approximately 80% of our revenues were generated by our AR advertising services and our middleware products in 2018 and the first quarter of 2019. The number of our customers increased from 49 for the three months ended March 31, 2018 to 65 for the three months ended March 31, 2019, representing a 32.7% increase. In addition, average revenue per customer was approximately RMB 0.7 million during the three months ended March 31, 2018, as compared to approximately RMB 1.0 million during the three months ended March 31, 2019. The number of our customers increased from 97 for the year ended December 31, 2017 to 121 for the year ended December 31, 2018, representing a 24.7% increase. In addition, average revenue per customer was approximately RMB 1.4 million during the year ended December 31, 2017, as compared to approximately RMB 1.5 million per customer during the year ended December 31, 2018. Our ability to increase our revenues and our profitability will depend on our ability to continue to increase our customer base and revenue per customer. To achieve this, we strive to increase our marketing efforts and to enhance the quality and capabilities of our technologies.

71


Table of Contents

Investment in technology and talent

        We believe that a core element of the competitiveness of the holographic AR industry is research and development related to technology development. The advancement of technology related to holographic AR will take the holographic AR experience, new services, products and capabilities, to newer stages of development. To retain and attract existing and potential customers, we must continue to innovate to keep pace with the growth of our business and bring forward cutting-edge technologies. Our current research and development efforts are primarily focused on enhancing our artificial intelligence technology, holographic AR and image processing technology, intelligent hardware technology, and photosensitive signal transmission technology to create novel service and product offerings.

China's per capita expenditure on education, culture and recreation

        China's per capita expenditure on education, culture and recreation rose at a CAGR of 9.7% from RMB1,536 in 2014 to RMB2,226 in 2018. China's residents are allocating an increasing portion of their expenditures on education, culture and recreation. And China's per capita expenditure on education, culture and recreation is predicted to reach RMB3,300 in 2023, representing a CAGR of 8.2% from 2018 to 2023. The increase in expenditure on education, culture and recreation boosts the growth of relevant markets, such as entertainment market and consuming electronic device market.

Our ability to pursue strategic opportunities for growth

        We intend to continue to pursue strategic acquisitions and investments in selective technologies and businesses in the holographic AR industry that will enhance our technology capabilities. We believe that a solid acquisition and investment strategy may be critical for us to accelerate our growth and strengthen our competitive position in the future. Our ability to identify and execute strategic acquisitions and investments will likely have an effect on our operating results over time.

Our ability to expand our application fields and diversify customer base

        Currently, the existing applications of holographic AR include primarily the entertainment and advertising industries, which are the industries we are currently focused on. With increasing awareness and acceptance of this technology, we expect that more applications will be identified to magnify the value of this technology, such as assistance in surgery and tele-diagnosis, and assistance in training and education. Our ability to expand our application fields and diversify our customer base may affect our operating results in the future.

Operating Efficiency

        Our ability to maintain and increase profitability also depends on our ability to effectively control our costs and expenses. Significant components of our cost of revenues are the cost paid to channel providers, cost paid to third-party consultants and cost of salaries (including social security and benefits). Salaries primarily include compensation to our software engineers and operating staff. Our ability to negotiate better pricing with channel providers and decrease the use of third party consultants has increased our operating margin by 3.8% from the three months ended March 31, 2018 to the three months ended March 31, 2019 and by 3.3% from the year ended December 31, 2017 to the year ended December 31, 2018.

        Our operating expenses include three key components, selling expenses, general and administrative expenses and research and development expenses. For the three months ended March 31, 2018 and 2019, our total operating expenses as a percentage of our total revenues was 16.1% and 17.7%, respectively. For the years ended December 31, 2017 and 2018, our total operating expenses as a percentage of our total revenues was 18.5% and 17.3%, respectively. We expect our expenses will also

72


Table of Contents

increase as we incur additional expenses associated with our overall growth as well as becoming a public company, but at a lower rate compared to the growth rate of our revenues.

Key Components of Our Results of Operations:

Revenues

        Our revenues consist of AR advertising services revenues and AR entertainment revenues. AR advertising services use holographic AR materials and integrate into advertisement on the online media platforms or offline displays. We generate revenues when the related services have been delivered based on the specific terms of the contract, which are commonly based on specific action (i.e. cost per impression ("CPM") or cost per action ("CPA")) for online display and service period for offline display contracts. Over 90% of our contracts with customers are based on CPM.

        AR entertainment revenues include software development kit ("SDK") payment channel services, software development, mobile games services and technology developments. We generate related revenues when a user completes the payment transaction for SDK payments, net of payments to content providers. We generate revenues from sales of software development services. Revenues generated from mobile games include royalty payments from licensee operators of our mobile games and fees collected from game developers for using our game portal.

        Our breakdown of revenues for the years ended December 31, 2017 and 2018 and for the three months ended March 31, 2018 and 2019 is summarized below:

 
  For the Years Ended December 31,   Variances   For the Three Months Ended March 31,   Variances  
 
  2017   2018   2018   %   2018   2019   2019   %  
 
  RMB
  RMB
  USD
   
  RMB
  RMB
  USD
   
 
 
   
   
   
   
  (Unaudited)
   
 

Revenues

                                                 

AR advertising

    133,078,464     181,241,346     26,407,703     36.2 %   34,110,980     62,988,775     9,354,537     84.7 %

AR entertainment

    58,951,060     44,030,218     6,415,406     (25.3 )%   15,115,646     15,503,507     2,302,444     2.6 %

Total revenues

    192,029,524     225,271,564     32,823,109     17.3 %   49,226,626     78,492,282     11,656,981     59.5 %

Cost of Revenues

        For AR advertising services, the cost of revenues consist of the costs paid to channel providers in accordance with revenue-sharing arrangements.

        For AR entertainment, the cost of revenues consist of the shared costs with content providers based on the profit sharing arrangements, third party consulting services expenses and compensation expenses for our professionals.

        Our breakdown of cost of revenues for the years ended December 31, 2017 and 2018 and for the three months ended March 31, 2018 and 2019 is summarized below:

 
  For the Years Ended December 31,   Variances   For the Three Months Ended March 31,   Variances  
 
  2017   2018   2018   %   2018   2019   2019   %  
 
  RMB
  RMB
  USD
   
  RMB
  RMB
  USD
   
 
 
   
   
   
   
  (Unaudited)
   
 

Cost of revenues

                                                 

AR advertising

    66,148,464     81,437,761     11,865,859     23.1 %   14,796,381     22,255,100     3,305,131     50.4 %

AR entertainment

    13,031,723     3,976,300     579,365     (69.5 )%   1,244,713     346,550     51,467     (72.2 )%

Total cost of revenues

    79,180,187     85,414,061     12,445,224     7.9 %   16,041,094     22,601,650     3,356,598     40.9 %

73


Table of Contents

Operating expenses

        Operating expenses include selling, general and administrative and research and development expenses.

        Selling expenses are mainly salary and benefit expenses for our sales team and related travel expenses. General and administrative expenses are mainly salary and benefit of management, professional fees, rental and other operating expenses of attributable to general and administrative activities. Research and development expenses are mainly salary and benefits for in house software engineers and payments made to outside subcontractors.

        We anticipate that our operating expenses will continue to increase as we hire additional personnel and incur additional costs in connection with the expansion of our business operations as well as becoming a publicly traded company.

Results of Operations

Our consolidated results of operations for the years ended December 31, 2017 and 2018 and for the three months ended March 31, 2018 and 2019 is summarized below:

 
  For the Years Ended December 31,   Variances   For the Three Months Ended March 31,   Variances  
 
  2017   2018   2018   %   2018   2019   2019   %  
 
  RMB
  RMB
  USD
   
  RMB
  RMB
  USD
   
 
 
   
   
   
   
  (Unaudited)
   
 

Revenues

    192,029,524     225,271,564     32,823,109     17.3 %   49,226,626     78,492,282     11,656,981     59.5 %

Cost of revenues

   
(79,180,187

)
 
(85,414,061

)
 
(12,445,224

)
 
7.9

%
 
(16,041,094

)
 
(22,601,650

)
 
(3,356,598

)
 
40.9

%

Gross profit

    112,849,337     139,857,503     20,377,885     23.9 %   33,185,532     55,890,632     8,300,383     68.4 %

Selling expenses

   
(1,235,773

)
 
(1,212,400

)
 
(176,652

)
 
(1.9

)%
 
(254,342

)
 
(323,749

)
 
(48,080

)
 
27.3

%

General and administrative expenses

   
(24,618,898

)
 
(29,822,426

)
 
(4,345,266

)
 
21.1

%
 
(6,054,030

)
 
(12,111,047

)
 
(1,798,626

)
 
100.0

%

Research and development expenses

    (9,696,322 )   (8,020,082 )   (1,168,563 )   (17.3 )%   (1,637,830 )   (1,424,695 )   (211,583 )   13.0 %

Income from operations

    77,298,344     100,802,595     14,687,404     30.4 %   25,239,330     42,031,141     6,242,094     66.5 %

Other expense, net

    (3,432,362 )   (3,509,207 )   (511,308 )   2.2 %   (1,600,251 )   (654,282 )   (97,169 )   (59.1 )%

Income before provision for income taxes

    73,865,982     97,293,388     14,176,096     31.7 %   23,639,079     41,376,859     6,144,925     81.9 %

Provision for income taxes

    (528,011 )   (8,075,596 )   (1,176,652 )   1,429.4 %   (1,412,147 )   (3,883,067 )   (576,679 )   175.0 %

Net income

    73,337,971     89,217,792     12,999,444     21.7 %   22,226,932     37,493,792     5,568,246     75.8 %

Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018

Revenues

        Total revenues increased by approximately RMB 29.3 million, or 59.5%, from approximately RMB 49.2 million for the three months ended March 31, 2018 to approximately RMB 78.5 million (USD 11.7 million) for the three months ended March 31, 2019, due to an increase of approximately RMB 28.9 million (USD 4.3 million) of AR advertising revenues and an increase of approximately RMB 0.2 million (USD 0.1 million) of AR entertainment revenues.

        Our AR advertising services revenues increased by approximately RMB 28.9 million, or 84.7%, from approximately RMB 34.1 million for the three months ended March 31, 2018 to approximately RMB 63.0 million (USD 9.4 million) for the three months ended March 31, 2019. The increase was primarily attributable to the increase in the number of advertisers who became our customers as a

74


Table of Contents

result of more referrals from customers who were satisfied with our services. During the three months ended March 31, 2019, we had 65 customers, as compared to 49 customers during the three months ended March 31, 2018. Average revenue per customer was approximately RMB 0.7 million during the three months ended March 31, 2018, as compared to approximately RMB 1.0 million during the three months ended March 31, 2019. Average revenue increase was due to the improvement in technologies which enabled us to embed more contents in the advertisements. The number of paid impressions through our AR advertising increased by 76.9%, from approximately 1.3 billion in the three months ended March 31, 2018 to approximately 2.3 billion for the three months ended March 31, 2019, due to an increase in the number of advertisers.

        Our AR entertainment revenues increased by approximately RMB 0.4 million, or 2.6%, from approximately RMB 15.1 million for the three months ended March 31, 2018 to approximately RMB 15.5 million (USD 2.3 million) for the three months ended March 31, 2019. The increase was primarily attributable to an increase in revenues from mobile games operation as a result of the launch of our 233 game platform in 2018.

Cost of Revenues

        Total cost of revenues increased by approximately RMB 6.6 million, or 40.9%, from approximately RMB 16.0 million for the three months ended March 31, 2018 to approximately RMB 22.6 million (USD 3.4 million) for the three months ended March 31, 2019.

        AR advertising services increased by approximately RMB 7.4 million, or 50.4%, from approximately RMB 14.8 million for the three months ended March 31, 2018 to approximately RMB 22.3 million (USD 3.3 million) for the three months ended March 31, 2019. The increase of cost of revenues in connection with AR advertising was in line with the increase of AR advertising services revenues. However, our increase in cost of revenues was less than increase in revenues, as we are able to maintain our cost with our channel providers due to increased sales volume.

        The cost of revenues for AR entertainment decreased by approximately RMB 0.9 million, or 72.2%, from approximately RMB 1.2 million for the three months ended March 31, 2018 to approximately RMB 0.3 million (USD 0.1 million) for the three months ended March 31, 2019. The decrease was in line with our cost structure where we reported our revenues from mobile game unit net of related costs.

Gross Profit

        Our gross profit increased by approximately RMB 22.7 million, from approximately RMB 33.2 million for the three months ended March 31, 2018 to approximately RMB 55.9 million (USD 8.3 million) for the three months ended March 31, 2019. The increase was mainly due to the significant increase in AR advertising revenues and slower increase in cost during the three months ended March 31, 2019. For the three months ended March 31, 2018 and 2019, our overall gross margin was 67.4% and 71.2%, respectively.

75


Table of Contents

        Our gross profit and gross margin from our major revenue categories is summarized below:

 
  For the Three Months Ended March 31,   Variance  
 
  2018   2019   2019   Amount/%  
 
  RMB
  RMB
  USD
   
 
 
  (Unaudited)
   
 

AR advertising

                         

Gross profit

    19,314,599     40,733,675     6,049,406     21,419,076  

Gross margin

    56.6 %   64.7 %         110.9 %

AR entertainment

                         

Gross profit

    13,870,933     15,156,957     2,250,977     1,286,024  

Gross margin

    91.8 %   97.8 %         9.3 %

Total

                         

Gross profit

    33,185,532     55,890,632     8,300,383     22,705,100  

Gross margin

    67.4 %   71.2 %         68.4 %

        Our gross margin for AR advertising services increased from 56.6% for the three months ended March 31, 2018 to 64.7% for the three months ended March 31, 2019, mainly due to our ability to increase our revenues and effectively control our costs.

        Our gross margin for AR entertainment increased from 91.8% for the three months ended March 31, 2018 to 97.8% for the three months ended March 31, 2019, mainly due to the an increase in revenues from our mobile games operations, which had higher gross margins.

    Operating Expenses

        During the three months ended March 31, 2019, we incurred a total of approximately RMB 13.9 million (USD 2.1 million) operating expenses, representing an increase of approximately RMB 5.9 million, or 74.4%, as compared to a total of approximately RMB 7.9 million during the three months ended March 31, 2019.

        Selling expenses were approximately RMB 0.3 million and RMB 0.3 million (USD 48,000) for the three months ended March 31, 2018 and 2019, respectively. Selling expenses were mainly salary and benefit expenses for our sales team and related travel expenses, and remained fairly stable during the three months ended March 31, 2018 and 2019, representing 0.5% of total revenues for the three months ended March 31, 2018 and 0.4% of total revenues for the three months ended March 31, 2019.

        General and administrative expenses increased by approximately RMB 6.1 million, or 100.0%, from RMB 6.1 million for the three months ended March 31, 2018 to approximately RMB 12.1 million (USD 1.8 million) for the three months ended March 31, 2019. The increase was mainly due an increase of professional fees, including audit fees and other professional fees of approximately RMB 4.3 million in relation to our initial public offering ("IPO"), an increase of allowance for doubtful accounts of approximately RMB 0.9 million, and an increase of other office expenses including rent and salary of approximately RMB 0.9 million.

        Research and development expenses decreased by approximately RMB 0.2 million, or 13.0%, from approximately RMB 1.6 million for the three months ended March 31, 2018 to approximately RMB 1.4 million (USD 0.2 million) for the three months ended March 31, 2019. The decrease was mainly due to our ability to effectively utilize our R&D capabilities to achieve more effective and efficient process solutions.

76


Table of Contents

Other income (expenses), net

        Total other expenses, net were approximately RMB 1.6 million for the three months ended March 31, 2018 and approximately RMB 0.7 million (USD 0.1 million) for the three months ended March 31, 2019.

        Other income includes government subsidies, which increased by approximately RMB 0.5 million, from approximately RMB 0.1 million for the three months ended March 31, 2018 to approximately RMB 0.6 million (USD 0.1 million) for the three months ended March 31, 2019, as we applied for, and received, more government grants for new technology and software.

        Finance expense, mainly consisting of amortization of debt discount, was RMB 1.7 million and RMB 1.3 million (USD 0.2 million) for the three months ended March 31, 2018 and 2019, respectively. The decrease in debt discount was consistent with the decrease in acquisition payable for the three months ended March 31, 2018 compared to three months ended March 31, 2019.

Provision for income taxes

        Our income tax expense increased by approximately RMB 2.5 million, or 175.0%, from approximately RMB 1.4 million for the three months ended March 31, 2018 to approximately RMB 3.9 million (USD 0.6 million) for the three months ended March 31, 2019.

        Current income tax increased by approximately RMB 2.6 million due to the increased taxable income of Shenzhen Qianhai and Shenzhen Yidian, whose tax exempt status has expired and are now taxed at a reduced income tax rate of 15%.

        Deferred income tax benefit increased by approximately RMB 0.1 million due to the decrease in deferred tax liability of RMB 0.4 million from intangible assets, which was offset by an increase in deferred tax assets of RMB 0.3 million as a result of allowance for doubtful accounts.

Net income

        Our net income was approximately RMB 22.2 million for the three months ended March 31, 2018, compared to net income of approximately RMB 37.5 million (USD 5.6 million) for the three months ended March 31, 2019. Such change was the result of the combination of factors discussed above.

Year Ended December 31, 2017 Compared to Year Ended December 31, 2018

Revenues

        Total revenues increased by approximately RMB 33.2 million, or 17.3%, from approximately RMB 192.0 million for the year ended December 31, 2017 to approximately RMB 225.3 million (USD 32.8 million) for the year ended December 31, 2018, due to an increase of approximately RMB 48.2 million (USD 7.02 million) of AR advertising revenues, offset by a decrease of approximately RMB 14.9 million (USD 2.17 million) of AR entertainment revenues.

        Our AR advertising services revenues increased by approximately RMB 48.2 million, or 36.2%, from approximately RMB 133.1 million for the year ended December 31, 2017 to approximately RMB 181.2 million (USD 26.4 million) for the year ended December 31, 2018. The increase was primarily attributable to the increase in the number of advertisers who became our customers as a result of more referrals from customers who were satisfied with our services. During the year ended December 31, 2018, we had 121 customers, as compared to the 97 customers during the year ended December 31, 2017. Average revenue per customer was approximately RMB 1.4 million during the year ended December 31, 2017, as compared to approximately RMB 1.5 million during the year ended December 31, 2018. Average revenue per customer increase was due to the improvement in

77


Table of Contents

technologies where we could embed more contents in the advertisements. The number of paid impressions through our AR advertising increased by 34.7%, from approximately 4.9 billion in 2017 to approximately 6.6 billion 2018 due to an increase in the number of advertisers.

        Our AR entertainment revenues decreased by approximately RMB 14.9 million, or 25.3%, from approximately RMB 58.9 million for the year ended December 31, 2017 to approximately RMB 44.0 million (USD 6.4 million) for the year ended December 31, 2018 . The decrease was primarily attributable to a decrease in MR software development service fee recognized in the current period. Our decrease in revenues of AR entertainment segment was primarily from our MR software unit. In 2018, we had planned a major upgrade on software system infrastructure and system coding which upgrades the platform, system and application layers. The upgrade improves holographic AR simulation and solves certain issues on delay rate where it stabilizes the software interface with other applications. We intend to continue to upgrade and customize our platform according to customers' needs and we expect to complete a substantial portion of this upgrade in the third quarter of 2019. We have approximately RMB19 million of uncompleted contracts and we expect to recognize these revenues in the third quarter of 2019, pending final customers' acceptance. However, there can be no assurance that we will be successful in completing our upgrade timely, or at all, and fulfilling these contracts and recognizing these revenues within the specific timeframe, if at all.

Cost of Revenues

        Total cost of revenues increased by approximately RMB 6.2 million, or 7.9%, from approximately RMB 79.2 million for the year ended December 31, 2017 to approximately RMB 85.4 million (USD 12.4 million) for the year ended December 31, 2018.

        AR advertising services cost of revenues increased by approximately RMB 15.3 million, or 23.1%, from approximately RMB 66.1 million for the year ended December 31, 2017 to approximately RMB 81.4 million (USD 11.9 million) for the year ended December 31, 2018. The increase of cost of revenues in connection with AR advertising was in line with the increase of AR advertising services revenues. However increase in cost of revenue was less than increase in AR advertising revenues, as we were able to negotiate better cost with our channel providers due to increased sales volume in AR advertising services.

        AR entertainment cost of revenues decreased by approximately RMB 9.0 million, or 69.5%, from approximately RMB 13.0 million for the year ended December 31, 2017 to approximately RMB 4.0 million (USD 0.6 million) for the year ended December 31, 2018. The decrease in cost of revenues in connection with AR entertainment was in line with decreased revenues in connection with AR entertainment as we used more our professionals rather than third-party consultants.

Gross Profit

        Our gross profit increased by approximately RMB 27.0 million, from approximately RMB 112.8 million for the year ended December 31, 2017 to approximately RMB 139.8 million (USD 20.4 million) during the year ended December 31, 2018. The increase was mainly due to the significant increase of AR advertising revenues during the year ended December 31, 2018. For the years ended December 31, 2017 and 2018, our overall gross margin was 58.8% and 62.1%, respectively. The increase in gross margin was due to the increased gross margin of the two segments.

78


Table of Contents

        Our gross profit from our major revenue categories is summarized below:

 
  For the Years ended December 31,   Variance  
 
  2017   2018   2018   Amount/%  
 
  RMB
  RMB
  USD
   
 

AR advertising

                         

Gross profit

    66,930,000     99,803,585     14,541,844     32,873,585  

Gross margin

    50.3 %   55.1 %         4.8 %

AR entertainment

   
 
   
 
   
 
   
 
 

Gross profit

    45,919,337     40,053,918     5,836,041     (5,865,419 )

Gross margin

    77.9 %   91.0 %         13.1 %

Total

   
 
   
 
   
 
   
 
 

Gross profit

    112,849,337     139,857,503     20,377,885     27,008,166  

Gross margin

    58.8 %   62.1 %         3.3 %

        Our gross margin for AR advertising services increased from 50.3% for the year ended December 31, 2017 to 55.1% for the year ended December 31, 2018 mainly due to our ability to increase revenue and effectively control our cost for the year ended December 31, 2018.

        Our gross margin for AR entertainment increased from 77.9% for the year ended December 31, 2017 to 91.0% for the year ended December 31, 2018, mainly due to an increase in revenues from our SDK payment channel services and mobile games operations, which had higher gross margins.

Operating Expenses

        During the year ended December 31, 2017, we incurred a total of approximately RMB 35.6 million operating expenses, an increase of approximately RMB 3.5 million, or 9.9%, as compared to a total of approximately RMB 39.1 million (USD 5.7 million) during the year ended December 31, 2018.

        Selling expenses were approximately RMB 1.2 million (USD 0.2 million) for both years ended December 31, 2017 and 2018. Selling expenses were mainly salary and benefit expenses for our sales team and related travel expenses and remained fairly during the two years ended December 31, 2017 and 2018, representing 0.64% of total revenues for the year ended December 31, 2017 and 0.54% of total revenues for the year ended December 31, 2018.

        General and administrative expenses increased by approximately RMB 5.2 million, or 21.1%, from RMB 24.6 million for the year ended December 31, 2017 to approximately RMB 29.8 million (USD 4.3 million) for the year ended December 31, 2018. The increase was mainly due an increase of professional fees including audit fees and other professional fees in relation to our initial public offering ("IPO") for approximately RMB 2.9 million, an increase of amortization and depreciation expenses of approximately RMB 0.8 million, an increase of salary and benefit expenses of approximately RMB 0.8 million which was attributable to the subsidiaries established during the last quarter of 2017. General and administrative expenses remained fairly consistent at 12.8% and 13.2% of total revenues for the years ended December 31, 2017 and 2018, respectively.

        Research and development expenses decreased by approximately RMB 1.7 million, or 17.3%, from approximately RMB 9.7 million for the year ended December 31, 2017 to approximately RMB 8.0 million (USD 1.2 million) for the year ended December 31, 2018. The decrease was mainly due to our ability to effectively utilize our R&D capabilities.

Other income (expenses), net

        Total other expenses, net were approximately RMB 3.4 million for the year ended December 31, 2017 and approximately RMB 3.5 million (USD 0.5 million) for the year ended December 31, 2018.

79


Table of Contents

        Other income consists of gain from disposal of our investments and government subsidies. For the year ended December 31, 2018, we sold one of the cost-method investments with basis of RMB50,000 in 2018 for RMB 350,000 (USD50,997), resulting in a gain from disposal of cost-method investment of RMB300,000 (USD 43,711). We also disposed of one of our subsidiaries for RMB 156,225 in November 2017 resulting in RMB134,774 of gain from disposal of subsidiary.

        Other income also includes government subsidies, which increased by approximately RMB 0.6 million in 2018, as we applied and qualified for more government grants for new technology and software.

        Finance expense, mainly consisting of amortization of debt discount, was RMB 4,191,002 and RMB 5,124,715 (USD746,696) for the years ended December 31, 2107 and 2018, respectively. The increase in finance expense was resulted from long-term business acquisition payables.

Provision for income taxes

        Our income tax expense increased by approximately RMB 7.5 million, or 1,429.4%, from approximately RMB 0.5 million for the year ended December 31, 2017 to approximately RMB 8.1 million (USD 1.2 million) for the year ended December 31, 2018.

        Current income tax increased by approximately RMB 7.6 million due to the increased taxable income of Shenzhen Yiren, Shenzhen Qianhai and Shenzhen Yidian, whose two years of tax exempt status has expired and are now taxed at a reduced income tax rate of 12.5%.

Net income

        Our net income was approximately RMB 73.3 million for the year ended December 31, 2017, compared to net income of approximately RMB 89.2 million (USD 13.0 million) for the year ended December 31, 2018. Such change was the result of the combination of factors discussed above.

Liquidity and Capital Resources

        In assessing our liquidity, we monitor and analyze our cash on-hand and our operating and capital expenditure commitments. To date, we have financed our working capital requirements from cash flow from operations, debt and equity financings and capital contributions from our existing shareholders.

        As of March 31, 2019, we had cash and cash equivalents of RMB 137.6 million (USD 20.4 million). Our working capital was approximately RMB 159.1 million (USD 23.6 million) as of March 31, 2019. For the year ended December 31, 2018, we had cash and cash equivalents of RMB 151.9 million (USD 22.1 million). Our working capital was approximately RMB 167.5 million (USD 24.4 million) as of December 31, 2018.

        We believe our current working capital is sufficient to support our operations for the next twelve months. We may, however, need additional cash resources in the future if we experience changes in business conditions or other developments, or if we find and wish to pursue opportunities for investment, acquisition, capital expenditure or similar actions. If we determine that our cash requirements exceed the amount of cash and cash equivalents we have on hand at the time, we may seek to issue equity or debt securities or obtain credit facilities. The issuance and sale of additional equity would result in further dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict our operations. Our obligation to bear credit risk for certain financing transactions we facilitate may also strain our operating cash flow. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.

80


Table of Contents

        Although we consolidate the results of our VIE and its subsidiaries, we only have access to cash balances or future earnings of our VIE and its subsidiaries through our contractual arrangements with our VIE.

        Current foreign exchange and other regulations in the PRC may restrict our PRC entities in their ability to transfer their net assets to the Company and its subsidiaries in Cayman Islands, and Hong Kong. However, these restrictions have no impact on the ability of these PRC entities to transfer funds to us as we have no present plans to declare dividend which we plan to retain our retained earnings to continue to grow our business. In addition, these restrictions have no impact on the ability for us to meet our cash obligations as all of our current cash obligations are due within the PRC.

        To utilize the proceeds we expect to receive from this offering, we may make additional capital contributions to our PRC subsidiary, establish new PRC subsidiaries and make capital contributions to these new PRC subsidiaries, or make loans to the PRC subsidiaries. However, most of these uses are subject to PRC regulations. Foreign direct investment and loans must be approved by and/or registered in accordance with the Secure and Fair Enforcement for Mortgage Licensing Act of 2008, as amended, and its local branches. The total amount of loans we can make to our PRC subsidiary cannot exceed statutory limits and must be registered with the local counterpart of SAFE. The statutory limit for the total amount of foreign debts of a foreign-invested company is the difference between the amount of total investment as approved by the Ministry of Commerce or its local counterpart and the amount of registered capital of such foreign-invested company.

        We are permitted under PRC laws and regulations to provide funding to our PRC subsidiary only through loans or capital contributions, and to our consolidated VIE only through loans, and only if we satisfy the applicable government registration and approval requirements. The relevant filing and registration processes for capital contributions typically take approximately eight weeks to complete. The filing and registration processes for loans typically take approximately four weeks or longer to complete. While we currently see no material obstacles to completing the filing and registration procedures with respect to future capital contributions and loans to our PRC subsidiary or VIE, we cannot assure you that we will be able to complete these filings and registrations on a timely basis, or at all. See "Risk Factors—Risks Related to Doing Business in China—PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of this offering to make loans or make additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business." Additionally, while there is no statutory limit on the amount of capital contribution that we can make to our PRC subsidiaries, loans provided to our PRC subsidiary and consolidated VIE in the PRC are subject to certain statutory limits. With respect to our PRC subsidiaries, the maximum amount of the loans that they can acquire in aggregate from outside China as of March 31, 2019 is (i) approximately RMB 651 million (US$100 million) under the total investment minus registered capital approach; or (ii) approximately RMB 450 million (US$66.86 million) under the net asset approach. We are able to use all of the net proceeds from this offering for investment in our PRC operations by funding our PRC subsidiary through capital contributions which is not subject to any statutory limit on the amount under PRC laws and regulations. See "PRC Regulation—Loans by Foreign Companies to their PRC Subsidiaries." We expect the net proceeds from this offering to be used in the PRC will be in the form of RMB and, therefore, our PRC subsidiary and consolidated VIE will need to convert any capital contributions or loans from U.S. dollars into Renminbi in accordance with applicable PRC laws and regulations.

81


Table of Contents

        The following summarizes the key components of our cash flows for the years ended December 31, 2017 and 2018 and for the three months ended March 31, 2018 and 2019.

 
  For the Years Ended December 31   For the Three Months Ended March 31  
 
  2017   2018   2018   2018   2019   2019  
 
  RMB
  RMB
  USD
  RMB
  RMB
  USD
 
 
   
   
   
  (Unaudited)
 

Net cash provided by operating activities

    108,057,941     99,452,205     14,490,647     20,915,741     35,828,804     5,320,977  

Net cash used in investing activities

    (118,364,263 )   (98,597,356 )   (14,366,091 )   (25,090,335 )   (6,432,638 )   (955,319 )

Net cash (used in) provided by provided by financing activities

    (3,800,000 )   137,493,993     19,964,447         (45,020,000 )   (6,685,973 )

Effect of exchange rate change on cash and cash equivalents

    (234,124 )   937,466     205,656     174,079     1,239,510     184,083  

Net change in cash and cash equivalents

    (14,340,446 )   139,286,308     20,294,659     (4,000,517 )   (14,384,324 )   (2,136,232 )

Operating activities

        Net cash provided by operating activities was approximately RMB 35.8 million (USD 5.3 million) for the three months ended March 31, 2019. Net cash provided by operating activities for the three months ended March 31, 2019 was primarily attributable to net income of approximately RMB 37.5 million (USD 5.6 million), with non-cash depreciation and amortization expense of approximately RMB 3.4 million (USD 0.5 million), provision for doubtful accounts expense of approximately RMB 0.9 million (USD 0.1 million) and amortization of debt discount of RMB 1.2 million (USD 0.2 million), which were offset by non-cash deferred tax benefits of RMB 0.5 million (USD 77,000). The cash inflow was also attributable to the increase of accounts payable of approximately RMB 3.9 million (USD 0.6 million), and the increase of taxes payable of approximately RMB 5.6 million (USD 0.8 million) due to more income tax and VAT incurred as a result of increase in revenues. Cash inflow was offset by the increase of accounts receivable of approximately RMB 14.3 million (USD 2.1 million) correspond to our increase in reveneues, the increase of prepaid expenses and other current assets of approximately RMB 0.8 million (USD 0.1 million), the increase in deferred cost of revenues of approximately RMB 1.0 million (USD 0.1 million) and the decrease of other payables and accrued liabilities of approximately RMB 0.3 million (USD 49,000).

        Net cash provided by operating activities was approximately RMB 99.5 million (USD 14.5 million) for the year ended December 31, 2018. Net cash provided by operating activities for the year ended December 31, 2018 was primarily attributable to net income of approximately RMB 89.2 million (USD 13.0 million) with non-cash depreciation and amortization expense of approximately RMB 13.5 million (USD 2.0 million) and amortization of debt discount of RMB 5.1 million (USD 0.7 million), which were offset by non-cash deferred tax benefits of RMB 1.5 million (USD 0.2 million). The cash inflow was also attributable to the increase of accounts payable of approximately RMB 7.7 million (USD 1.1 million), and the increase of taxes payable of approximately RMB 8.1 million (USD 1.2 million) due to more income tax and VAT incurred as a result of increase in revenues and expiration of tax exempt status for some of our subsidiaries. Cash inflow was offset by the increase of accounts receivable of approximately RMB 11.3 million (USD 1.6 million) as we have expanded our operations by providing more credit sales, the increase of prepaid expenses and other current assets of approximately RMB 2.3 million (USD 0.3 million), the increase in deferred cost of revenues of approximately RMB 8.4 million (USD 1.2 million).

        Net cash provided by operating activities was approximately RMB 108.1 million for the year ended December 31, 2017. Net cash provided by operating activities for the year ended December 31, 2017 was primarily attributable to net income of approximately RMB 73.3 million with non-cash depreciation and amortization expense of approximately RMB 12.8 million and amortization of debt discount of

82


Table of Contents

RMB 4.2 million, offset by recovery of doubtful accounts of approximately RMB 0.1 million and deferred tax benefits of RMB 1.5 million. Cash inflow was also attributable to the increase of prepaid expenses and other current assets of approximately RMB 5.0 million, the increase of accounts payable of approximately RMB 17.1 million, and the increase of taxes payable of approximately RMB 2.9 million. The cash inflow was offset by the increase of accounts receivable of approximately RMB 2.2 million consistent with our revenue increase, and the increase of deferred cost of revenues of RMB 3.2 million which were costs incurred for revenues that have not met recognition criteria.

Investing activities

        Net cash used in investing activities was approximately RMB 6.4 million (USD 1.0 million) for the three months ended March 31, 2019. Cash used in investing activities for the three months ended March 31, 2019 was mainly due to the purchase of approximately RMB 2.9 million (USD 0.4 million) of cost method investments, repayments of business acquisition payables to former shareholders in the amount of RMB 3.4 million (USD 0.5 million), and purchases of property, plant and equipment of approximately RMB 0.2 million (USD 34,000).

        Net cash used in investing activities of approximately RMB 98.6 million (USD 14.4 million) for the year ended December 31, 2018. Cash used in investing activities for the year ended December 31, 2018 was mainly due to the repayments of business acquisition payables to former shareholders of Skystar, Shenzhen Kuxuanyou, Shenzhen Yidian and Shenzhen Yitian in the amount of RMB 98.9 million (USD 14.4 million) and purchases of property, plant and equipment of approximately RMB 47,000 (USD7,000).

        Net cash used in investing activities was approximately RMB 118.4 million for the year ended December 31, 2017. Cash used in investing activities for the year ended December 31, 2017 was mainly due to the net payment for the Skystar acquisition of approximately RMB 18.0 million, repayments of business acquisition payables to related parties in the amount of RMB 98.7 million and purchases of property, plant and equipment of approximately RMB 2.0 million. The cash outflow was offset by the proceeds from sale of cost method investment of approximately RMB 0.1 million and cash acquired from acquisition of approximately RMB 0.2 million.

Financing activities

        Net cash used in financing activities was approximately RMB 45.0 million (USD 6.7 million) for the three months ended March 31, 2019, attributable to repayment to Jie Zhao of approximately RMB 48.2 million (USD7.2 million) and additional borrowing from Jie Zhao of approximately RMB 3.2 million (USD 0.5 million).

        Cash provided by financing activities was approximately RMB 137.5 million (USD 20.0 million) for the year ended December 31, 2018, stemming primarily from the issuance of convertible preferred shares to third party investors in an equity financing and borrowing from related parties. For the year ended December 31, 2018, cash provided by financing activities was mainly due to proceeds from issuance of Series A convertible preferred shares of approximately RMB 137.7 million (USD 20.0 million) and proceeds from related party loans of approximately RMB 14.6 million (USD 2.1 million), consisting approximately RMB 10.4 million (USD 1.5 million) from Jie Zhao and approximately RMB 4.2 million (USD 0.6 million) from Enweiliangzi Investment Co. (which is under common control of Jie Zhao) for cash flow purpose. The new loan is also interest free, no collateral and are due in 2021. The inflow of cash flow was offset by our repayment to Jie Zhao of approximately RMB 14.8 million (USD 2.2 million).

        Cash used in financing activities was approximately RMB 3.8 million for the year ended December 31, 2017, representing repayment of shareholder loans net of the capital contributed by two shareholders. For the year ended December 31, 2017, cash used in financing activities was mainly

83


Table of Contents

repayment of RMB 33.8 million to Jie Zhao, our Chairman from a loan we made in 2016. The loans are interest free, no collateral and are due in 2021. Cash provided by financing activities for the year ended December 31, 2017 was mainly due to the capital contribution from our shareholders in the amount of approximately RMB 30.0 million.

Commitments and Contingencies

        In the normal course of business, we are subject to loss contingencies, such as legal proceedings and claims arising out of its business, that cover a wide range of matters, including, among others, government investigations and tax matters. In accordance with ASC No. 450-20, "Loss Contingencies", we will record accruals for such loss contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated.

Off-Balance Sheet Arrangements

        We have no off-balance sheet arrangements including arrangements that would affect our liquidity, capital resources, market risk support and credit risk support or other benefits.

Contractual Obligations

        As of March 31, 2019, the future minimum payments under certain of our contractual obligations were as follows:

 
   
  Payments Due In  
 
  Total
RMB
  Less than 1 year   1 - 2 years   3 - 5 years   Thereafter  

Contractual obligations

                               

Operating leases obligations

    6,422,176     2,917,442     2,187,774     1,316,960      

Business acquisition payables—related parties*

    108,179,135         108,179,135          

Loans—related parties

    85,902,303         12,348,303     73,554,000      

Total

    200,503,614     2,917,442     122,715,212     74,870,960      

*
Represents future value of acquisition payments in relation to our acquisitions of Shenzhen Kuxuanyou, Shenzhen Yitian, Shenzhen Yidian and Skystar.

Holding Company Structure

        Hologram WiMi is a holding company with no material operations of its own. We conduct our operations primarily through our PRC subsidiary, our VIE and its subsidiaries in China. As a result, Hologram WiMi's ability to pay dividends depends upon dividends paid by our PRC subsidiary. If our existing PRC subsidiary or any newly formed ones incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our wholly foreign-owned subsidiary in China is permitted to pay dividends to us only out of its retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC law, each of our PRC subsidiary, our VIE and its subsidiaries in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50% of its registered capital. In addition, our wholly foreign-owned subsidiary in China may allocate a portion of its after-tax profits based on PRC accounting standards to enterprise expansion funds and staff bonus and welfare funds at its discretion, and our variable interest entity may allocate a portion of its after-tax profits based on PRC accounting standards to a discretionary surplus fund at its discretion. The statutory reserve funds and the discretionary funds are not distributable as cash dividends. Remittance of dividends by a wholly foreign-owned company out of China is subject to

84


Table of Contents

examination by the banks designated by SAFE. Our PRC subsidiary has not paid dividends and will not be able to pay dividends until it generates accumulated profits and meets the requirements for statutory reserve funds.

Inflation

        Since our inception, inflation in China has not materially affected our results of operations. According to the National Bureau of Statistics of China, the year-over-year percent changes in the consumer price index for December 2017 and December 2018 were increases of 1.8% and 1.9%, respectively. Although we have not been materially affected by inflation in the past, we may be affected if China experiences higher rates of inflation in the future.

Taxation

Cayman Islands

        Under the current laws of the Cayman Islands, we are not subject to tax on income or capital gain. Additionally, upon payments of dividends to our shareholders, no Cayman Islands withholding tax will be imposed.

Hong Kong

        WiMi HK, our wholly-owned Hong Kong subsidiary, and Micro Beauty, the wholly-owned subsidiary of our VIE, are subject to Hong Kong profits tax at a tax rate of 16.5%. We have not made any provisions for Hong Kong profit tax as there has been no assessable profit derived from or earned in Hong Kong since their respective inceptions. Under Hong Kong tax laws, Wimi HK is exempted from income tax on its foreign-derived income. Hong Kong does not impose a withholding tax on dividends.

Seychelles

        Skystar, a company incorporated in Seychelles, is not subject to tax on income generated outside of Seychelles under the current tax laws, which do not impose withholding tax upon payments of dividends.

PRC

        Under the Enterprise Income Tax Laws of the PRC (the "EIT Laws"), domestic enterprises and Foreign Investment Enterprises (the "FIE") are usually subject to a unified 25% enterprise income tax rate, while preferential tax rates, tax holidays and tax exemption may be granted on case-by-case basis. EIT grants preferential tax treatment to certain High and New Technology Enterprises ("HNTEs"). Under this preferential tax treatment, HNTEs are entitled to an income tax rate of 15%, subject to the requirement that they re-apply for HNTE status every three years. Shenzhen Kuxuanyou obtained the HNTE tax status in October 2015, which reduced its statutory income tax rate to 15% from November 2016 to November 2019. Shengzhen Yiruan, Shenzhen Yiyun, Shenzhen Yidian and Shenzhen Duodian were qualified as software companies by the local taxing authority and obtained two years of tax exemption since their respective inception. After their tax exemption period, they can be taxed at a reduced income tax rate of 12.5% for three years. After the initial 5 years, these companies can apply for the reduced rate on a yearly basis. In addition, 75% of R&D expenses of Shenzhen Kuxuanyou are subject to additional deduction from pre-tax income and 50% of R&D expenses of Shenzhen Yiruan are subject to additional deduction from pre-tax income.

        Certain subsidiaries of our VIE were formed and registered in Korgas and Kashi, China. These companies can enjoy tax exemption for 5 years after their respective inceptions, and can be exempted

85


Table of Contents

from income tax for another two years and taxed at a reduced income tax rate of 12.5% for three years, after the initial 5 years' of tax exemption periods.

Critical Accounting Policies and Estimates

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an understanding of our financial condition and results of operation. Critical accounting policies are those that are most important to the portrayal of our financial conditions and results of operations and require management's difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management's current judgments. While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements included elsewhere in this report, we believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our financial statements.

Basis of Presentation and Principals of Consolidation

Basis of presentation

        The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for information pursuant to the rules and regulations of the Securities Exchange Commission ("SEC").

Principles of consolidation

        The consolidated financial statements include the financial statements of our company and our subsidiaries, which include the wholly- foreign owned enterprise ("WFOE") and variable interest entities ("VIEs") over which we exercise control and, when applicable, entities for which we have a controlling financial interest or is the primary beneficiary. All transactions and balances among us and our subsidiaries have been eliminated upon consolidation.

Use of Estimates and Assumptions

        The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Significant accounting estimates reflected in our consolidated financial statements include the useful lives of property and equipment and intangible assets, impairment of long-lived assets and goodwill, allowance for doubtful accounts, provision for contingent liabilities, revenue recognition, and deferred taxes and uncertain tax position. Actual results could differ from these estimates.

Goodwill Impairment Testing

        We perform annual goodwill impairment analysis as of December 31 with the assistance of independent valuation expert in accordance with the subsequent measurement provisions of FASB ASC Topic 350, Intangibles—Goodwill and Other. This impairment analysis compares the fair values of our reporting units to their related carrying values. If a reporting unit carrying value exceeds its fair value,

86


Table of Contents

we then calculate the reporting unit's implied fair value of goodwill and impairment charges are recorded for any excess of the goodwill carrying value over the implied fair value of goodwill.

        The reporting units' fair values are determined by income approach where projected future cash flows discounted at rates commensurate with the risks involved, ("Discounted Cash Flow" or "DCF" of the income approach). This approach is supplemented by the market approach, (Guideline Company Method) to ensure the typical multiple such as EBITDA was within range of comparable companies.

        Assumptions used in a DCF analysis require the exercise of significant judgment, including judgment about appropriate discount rates and terminal values, growth rates, and the amount and timing of expected future cash flows. The forecasted cash flows are based on current plans and for years beyond that plan, the estimates are based on assumed growth rates. We believe that our assumptions are consistent with the plans and estimates used to manage the underlying businesses. The discount rates, which are intended to reflect the risks inherent in future cash flow projections, used in a DCF analysis are based on estimates of the weighted-average cost of capital ("WACC") of a market participant. Such estimates are derived from our analysis of peer companies and consider the industry weighted average return on debt and equity from a market participant perspective and adjusted for our specific risks.

        We have four reporting units that have goodwill. The following table categorizes our goodwill by reporting unit as of December 31, 2018 according to the level of excess between the reporting unit's fair value and carrying value and we believe that no reporting units are at risk of failing "Step 1" of a goodwill impairment analysis.

Segment
  Reporting
Unit
  Fair Value
Exceeds
Carrying Value
  Net Goodwill as of
December 31, 2018