Sound Group Inc. — FY2023 Form 20-F
Reporting period: Fiscal year ended December 31, 2023. This is an annual report, not a standalone 2023 fourth-quarter earnings filing; the supplied text does not provide quarterly revenue or profit figures. Financial statements are prepared under U.S. GAAP. The company filed the report on October 31, 2024.
Business context
Sound Group operates audio entertainment and social networking platforms, principally in China. Its largest revenue source is virtual gifts purchased for audio entertainment. The company conducts most of its China business through variable interest entities (VIEs), which it consolidates through contractual arrangements rather than equity ownership. VIEs generated 99.9% of 2023 revenue. The company changed its name from LIZHI INC. and its Nasdaq ticker from LIZI to SOGP in January 2024; each ADS represents 200 Class A ordinary shares.
Key financial metrics
| Metric | FY2023 | FY2022 |
|---|---|---|
| Revenue | RMB2,071.8 million (US$291.8 million) | RMB2,185.3 million |
| Gross profit / margin | RMB585.4 million / 28.3% | RMB716.3 million / 32.8% |
| Operating income (loss) | (RMB147.7 million) / (7.1%) | RMB66.7 million / 3.0% |
| Net income (loss) | (RMB134.5 million); attributable to ordinary shareholders: (RMB126.7 million) | RMB86.5 million |
| Operating cash flow | (RMB117.0 million) | RMB136.3 million |
| Cash, cash equivalents and restricted cash | RMB497.6 million | RMB578.5 million |
| Working capital | RMB260.5 million positive | Not stated here |
| Short-term loans | Nil at year-end | RMB73.8 million |
| Lease liabilities | RMB14.3 million | RMB26.6 million |
Revenue was down 5.2% year over year. Virtual gifts contributed RMB2,063.3 million, or 99.6% of revenue; podcast, advertising and other revenue was RMB8.4 million, or 0.4%. Revenue sharing fees were RMB1,368.5 million, approximately 92% of cost of revenue. The 2023 net loss included an RMB90.7 million (US$12.8 million) expected credit loss provision related to a deposit at a third-party financial institution. Capital expenditures were RMB7.2 million.
Material changes versus FY2022
- Revenue declined as average paying users fell; gross profit decreased 18.3% and gross margin contracted by about 4.5 percentage points.
- Operating results swung from RMB66.7 million income to a RMB147.7 million loss; net results swung from RMB86.5 million income to a RMB134.5 million loss.
- Operating expenses rose 12.8% to RMB733.0 million. General and administrative expenses increased to RMB193.9 million, principally due to higher credit-loss provisions and professional fees. Research and development expenses rose to RMB301.5 million, while selling and marketing expenses declined to RMB237.6 million.
- Operating cash flow turned negative, primarily reflecting the loss, the deposit-related credit-loss provision and a RMB94.6 million increase in prepayments and other current assets.
- Average mobile monthly active users declined to 43.3 million from 50.4 million; average monthly paying users fell to 418,300 from 483,900. Management attributed declines to changes in user-acquisition strategy and overall economic conditions.
Outlook, risks and unusual items
- Liquidity and outlook: Management expects cash and cash equivalents, together with other available resources, to cover anticipated working capital and capital expenditure needs for at least the next 12 months. Plans include developing products and AI technology, broadening the creator base, improving monetization and controlling costs. The filing provides no numeric revenue or earnings guidance.
- Deposit recovery and controls: The audit committee’s independent investigation, completed in October 2024, found no substantive issue relating to the incident but identified control gaps in documentation, approval records and retention of a departed employee’s emails. The company fully reserved the RMB90.7 million receivable; recovery remains uncertain. Management described remediation steps, but did not establish that the weaknesses have been remediated.
- Financial reporting: Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2023, citing two material weaknesses: insufficient U.S. GAAP/SEC reporting expertise and inadequate ongoing monitoring of financial assets and third-party collection risk. The auditor issued an unmodified opinion on the financial statements but did not attest to internal-control effectiveness.
- Filing history and auditor: The company disclosed past SEC filing delinquency and cautioned that this filing may not restore its “current” reporting status or eligibility for certain SEC forms and rules. Enrome LLP replaced PwC in July 2024 and audited FY2021–FY2023 statements; PwC had raised concerns about the deposit and had not completed its FY2023 audit procedures when dismissed.
- Structural and regulatory exposure: The VIE arrangements are untested in court and underpin substantially all China revenue. PRC authorities could challenge their enforceability or impose new licensing, data, cybersecurity, content or overseas-listing requirements. Cash movement from China and upstream distributions are subject to restrictions.
- Other investor risks: The company reports that it was likely a passive foreign investment company (PFIC) for 2023, with significant risk of PFIC status in 2024. It also cites Nasdaq minimum-bid-price risk, dual-class voting control, and user, host-retention and regulatory risks. No dividends are planned in the near term.
Most important facts for investors to verify
- Whether the US$12.8 million deposit is recovered, and whether any further impairment, inquiry or liability arises.
- Progress and independent validation of remediation for both material weaknesses, particularly financial-asset monitoring and reporting expertise.
- Subsequent revenue, paying-user trends and operating cash flow, given FY2023 declines and the lack of numeric guidance in this filing.
- Liquidity availability and location: RMB360.5 million of year-end cash and cash equivalents was held by PRC subsidiaries and VIEs, where cross-border transfers are restricted.
- Continued compliance with VIE arrangements, required licenses, PRC filing and data rules, and Nasdaq listing requirements.
- Potential dilution from outstanding share awards and the status of the authorized US$3 million repurchase program.