Ucloudlink Group Inc. — FY2021 Form 20-F Summary
Business context and reporting period
Ucloudlink Group Inc. is a Cayman Islands holding company whose operations are primarily conducted through subsidiaries in China, Hong Kong and other jurisdictions. The company provides cloud-SIM-enabled mobile data connectivity services, PaaS/SaaS platform services and related hardware, including portable Wi-Fi terminals and GlocalMe Inside-enabled devices. This filing is an annual report for the fiscal year ended December 31, 2021; it is not a quarterly filing.
The company operated under historical variable-interest-entity arrangements in China during 2021. Those arrangements were terminated on March 17, 2022, when the former VIEs were transferred to Shenzhen Ucloudlink Technology Limited. The restructuring was expected to be completed in the third quarter of 2022.
Key financial metrics
| US$ millions, except percentages | 2020 | 2021 | Change |
|---|---|---|---|
| Revenue | 89.6 | 73.8 | Down 17.6% |
| Gross profit | 28.3 | 21.8 | Down 22.9% |
| Gross margin | 31.6% | 29.6% | Down 2.0 percentage points |
| Loss from operations | (63.0) | (45.9) | Improved |
| Net loss | (63.4) | (46.0) | Improved |
| Net cash used in operating activities | (2.0) | (21.7) | Worsened |
| Cash and cash equivalents | 22.0 | 7.9 | Down 64.2% |
| Short-term borrowings | 3.7 | 3.2 | Down 14.2% |
- Service revenue decreased 18.1% to US$37.8 million. Data-connectivity revenue decreased 33.9% to US$26.4 million, including international connectivity revenue of US$21.7 million and local connectivity revenue of US$4.8 million.
- PaaS/SaaS revenue increased 88.4% to US$10.8 million, reflecting expansion in business partners using the platform.
- Product revenue decreased 17.0% to US$36.0 million. Terminal sales declined 15.9% to US$27.4 million, and data-related product sales declined 42.7% to US$5.8 million.
- Operating expenses decreased to US$67.7 million from US$91.3 million, primarily because share-based compensation declined to US$8.8 million from US$50.6 million in 2020. Unrecognized share-based compensation was US$5.1 million at year-end.
- Other expense was US$11.9 million in 2021, primarily reflecting US$12.4 million of fair-value losses on other investments.
- Total assets declined to US$67.1 million from US$97.3 million, while shareholders’ equity declined to US$20.1 million from US$56.4 million.
- Accounts receivable increased to US$14.9 million from US$6.7 million, while accounts payable increased to US$13.0 million from US$8.7 million.
- Capital expenditures were approximately US$0.9 million. Net cash used in investing activities was US$0.9 million, and net cash generated from financing activities was US$0.7 million.
Material changes versus the prior comparable period
- COVID-19-related travel restrictions continued to depress international connectivity demand, contributing to the 17.6% revenue decline and lower gross margin.
- Average daily active terminals decreased 2.3% to 241,046, and average daily data usage per active terminal decreased to 1,941 megabytes from 2,254 megabytes.
- Management reduced research and development expense by 48.0%, sales and marketing expense by 53.5% and general and administrative expense by 33.9%, largely due to lower share-based compensation and cost controls.
- Operating losses narrowed because of lower operating expenses, but cash generation deteriorated materially as operating cash use increased to US$21.7 million.
- The company recorded US$12.6 million of current other investments and US$12.1 million of non-current other investments at year-end, compared with total other investments of US$37.0 million at December 31, 2020.
- Former VIEs contributed 5% of consolidated revenue in 2021, compared with 8% in 2020. Their 2021 revenue was US$31.0 million before intercompany eliminations, and their net loss was US$16.2 million.
Outlook, liquidity, risks and unusual items
Management expects international connectivity services to recover gradually as global travel resumes and intends to maintain the current operating scale while controlling operating expenses and capital spending. No quantitative revenue or earnings guidance was provided.
The filing states that the COVID-19 impact and operating losses initially created substantial doubt about going-concern status. Management concluded that the doubt was alleviated based on cash, short-term investments, short-term borrowings, cost reductions and subsequent financing. At December 31, 2021, cash and cash equivalents plus short-term deposits were US$8.1 million, and short-term investments were US$12.6 million.
- In January 2022, the company issued US$5.0 million principal amount of convertible debentures to Yorkville at a 5% annual interest rate and a 95% purchase price, with a one-year maturity. The conversion price is the lower of US$3.50 per ADS or 85% of a reference price; 1,000,000 Class A ordinary shares were also issued as a commitment fee.
- The company has no present plan to pay dividends. Cash transfers from PRC subsidiaries and former VIEs are subject to accumulated-profit, statutory-reserve, foreign-exchange and other PRC restrictions. Restricted net assets were US$49.2 million at December 31, 2021.
- Management reported two material weaknesses in internal control over financial reporting: insufficient U.S. GAAP/SEC reporting resources and a lack of comprehensive U.S. GAAP accounting policies and reporting procedures. Disclosure controls and procedures were also deemed ineffective. The auditor was not required to attest to internal control effectiveness because the company remained an emerging growth company.
- The PCAOB had determined that it could not fully inspect the company’s China-based auditor. The filing warned of potential HFCAA trading restrictions or delisting if inspection requirements were not satisfied.
- Key regulatory risks include evolving PRC rules on data security, cybersecurity reviews, personal-information protection, telecommunications licensing, offshore listings and foreign investment. The company had not received a final clearance from Guangdong regulators relating to prior investigations and rectification measures involving mobile resale, real-name authentication and M2M data SIM cards.
- The company settled significant patent and trade-secret litigation with SIMO and affiliates in 2021. The Federal Circuit reversed the prior infringement ruling, the US$8.2 million escrow was released in March 2021, and the injunction was dissolved in April 2021. The filing states that three patent invalidation matters remained pending and no significant loss was accrued.
- Business concentration remains significant: Japan represented approximately 49% of 2021 revenue and North America approximately 33%. International data connectivity services represented 29.4% of total revenue.
Most important facts for investors to verify
- Whether revenue and operating cash flow recover as international travel resumes, and whether the company can return to profitability without relying on further financing.
- The company’s actual liquidity after considering cash held in restricted jurisdictions, short-term investments, debt maturities, convertible-debt conversion risk and operating cash burn.
- Completion and legal effectiveness of the March 2022 VIE restructuring, including licensing, ownership, tax and consolidation consequences.
- Progress in remediating the two material weaknesses and ineffective disclosure controls.
- Current PCAOB inspection and HFCAA status and the resulting risk to Nasdaq trading of the ADSs.
- Regulatory clearance and compliance status for PRC telecommunications, M2M SIM, real-name authentication, data privacy and cybersecurity requirements.
- Customer and geographic concentration, particularly dependence on Japan, North America and a limited number of strategic partners.
- Fair value, liquidity and potential losses associated with the company’s investment funds and other investments.