Sound Group Inc. (filing issuer: LIZHI INC.) — FY2021 Form 20-F
Reporting period: Fiscal year ended December 31, 2021. Although the request identifies 2021 Q4, this filing reports annual results; it does not provide a standalone fourth-quarter income statement or cash-flow statement. Financial statements are prepared under U.S. GAAP. Amounts below are primarily RMB unless stated otherwise.
Business context and operating metrics
The company operates audio entertainment, podcast and social-networking products, primarily in China. Its results are consolidated with those of Chinese operating entities through contractual variable-interest-entity (VIE) arrangements; investors hold shares in the Cayman Islands parent, not equity in the VIEs.
- Average total mobile monthly active users (MAUs) were 58.4 million in 2021, versus 56.2 million in 2020. Average monthly paying users were 488,000, versus 446,100.
- In Q4 2021, average total mobile MAUs were 54.1 million, down from 58.9 million in Q3; average monthly paying users were 497,300, up from 485,500.
- Audio entertainment generated 99.1% of 2021 revenue. The company also operates podcast products, TIYA social networking and in-car audio offerings.
Financial performance and liquidity
| Metric | FY2021 | FY2020 | Change / context |
|---|---|---|---|
| Net revenue | RMB2,119.5 million (US$332.6 million) | RMB1,502.9 million | Up 41.0% |
| Gross profit / margin | RMB617.0 million / 29.1% | RMB368.2 million / 24.5% | Margin expanded 4.6 percentage points |
| Operating loss | RMB138.5 million | RMB88.7 million | Loss widened |
| Net loss | RMB127.3 million (US$20.0 million) | RMB82.2 million | Loss widened 54.8% |
| Net cash from/(used in) operations | RMB(40.4) million | RMB40.0 million | Cash generation reversed |
| Cash and cash equivalents at year-end | RMB533.3 million (US$83.7 million) | RMB315.5 million | Excludes RMB4.2 million restricted cash |
| Short-term loans | RMB69.0 million | RMB39.5 million | Up RMB29.5 million |
Year-end current assets were RMB577.5 million and current liabilities RMB366.5 million, producing reported positive working capital of RMB211.0 million and an approximate current ratio of 1.58. Total liabilities were RMB388.0 million; lease liabilities totaled RMB31.0 million. Operating cash use occurred despite the annual revenue growth and higher gross profit.
Investing activities provided RMB52.1 million, mainly from maturities of short-term investments; financing activities provided RMB212.7 million, including follow-on offering proceeds and VIE borrowings. Capital expenditures were RMB20.9 million. The company reported no dividends and no material off-balance-sheet guarantees or arrangements.
Changes versus prior year and management outlook
- Revenue growth was attributed mainly to more paying users and higher spending on audio entertainment. Gross margin improved principally because the revenue-sharing percentage paid to content creators was lower, although revenue-sharing fees increased in dollars.
- Operating expenses rose 65.4% to RMB755.5 million. Selling and marketing increased 170.6% to RMB386.2 million, primarily for promotion of new apps, international expansion and audio entertainment; R&D increased 17.5% to RMB264.7 million.
- Management said existing cash, expected operating and financing cash flows, and offering proceeds should cover anticipated working capital and capital expenditures for at least the next 12 months. This is not quantified earnings or revenue guidance. Management also plans to pursue product and monetization development, broaden its creator base and manage costs.
- No material trend likely to adversely affect results was identified in the trend disclosure, but management highlighted uncertainty from COVID-19, competition and evolving Chinese regulation. No specific FY2022 revenue, margin or profitability forecast is provided.
Risks, contingencies and unusual items
- VIE and China regulatory exposure: VIEs generated 93.0% of 2021 revenue and hold important operating licenses. The contractual structure has not been tested in court; changes in PRC rules or enforcement could impair control, consolidation or operations.
- Audit access and trading: The filing says the PCAOB could not fully inspect the China-based auditor and identifies potential HFCAA delisting under then-current law in 2024, potentially 2023 if proposed accelerated legislation became law.
- Financial reporting controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end because of a material weakness involving insufficient accounting and reporting personnel with U.S. GAAP and SEC expertise. Remediation was underway; no assurance was given that it would be timely or sufficient.
- Litigation: Two putative securities class actions alleged misstatements or omissions concerning COVID-19 in the IPO registration statement. A state-court dismissal was granted on March 3, 2022; the federal-court motion remained pending. The company could not estimate potential loss. It reported no material recorded liability for these matters.
- Other exposure: Risks include content moderation and licensing, cybersecurity and data privacy rules, host and paying-user concentration, foreign-exchange controls, and limits on transferring cash from China. The filing also notes incomplete social-insurance and housing-fund contributions, with no regulatory notice or employee claim known as of the filing date.
- Equity and unusual items: The company raised approximately US$28.5 million net in an April 2021 follow-on offering. Share-based compensation expense was RMB37.4 million in 2021; unrecognized compensation was RMB75.3 million at year-end. Prior preferred-share redemption accretions did not recur in 2021 following conversion of preferred shares at the IPO.
Important facts for investors to verify
- Reconcile the annual filing with subsequent reports for Q4-specific revenue, operating loss, cash flow and liquidity; this filing does not clearly provide standalone quarterly financial results.
- Track paying-user growth and spending, the Q4 decline in total mobile MAUs, and whether marketing costs and creator revenue sharing support sustainable margins.
- Review the source and accessibility of cash, short-term loan maturities and interest rates, and cash generated or consumed by operations.
- Follow remediation of the material weakness, auditor inspection developments, and any new PRC cybersecurity, overseas-listing or VIE requirements.
- Check the status and possible financial impact of the federal securities action and the company’s social-insurance and housing-fund contributions.