Item 3. Key Information
Our Holding Company Structure
and Contractual Arrangements with the Former Variable Interest Entities
UCLOUDLINK GROUP INC is not
a Chinese operating company but a Cayman Islands holding company with operations primarily conducted by its subsidiaries, including but
not limited to the former VIEs based in mainland China. The laws and regulations of mainland China restrict and impose conditions on foreign
investment in telecommunication businesses. Accordingly, we used to operate these businesses in mainland China through Beijing uCloudlink
New Technology Co., Ltd. and Shenzhen uCloudlink Network Technology Co., Ltd., which we refer to as the former VIEs in this annual report.
There were contractual arrangements among our mainland China subsidiaries, the former VIEs and their nominee shareholders, which were
terminated on March 17, 2022 as we continued to adjust our business model in mainland China and proceed the Restructuring. Revenues contributed
by the former VIEs accounted for 8%, 5% and 2% of our total revenues for the years of 2020, 2021 and 2022, respectively. As
used in this annual report, “uCloudlink” refers to UCLOUDLINK GROUP INC., and “we,” “us,” “our
company,” or “our” refers to UCLOUDLINK GROUP INC. and its subsidiaries, and, when describing our operations and consolidated
financial information, also includes the former VIEs and their subsidiaries in mainland China. Investors in our ADSs are not purchasing
equity interest in the former VIEs in mainland China but instead are purchasing equity interest in a holding company incorporated in the
Cayman Islands.
We, through Beijing uCloudlink
Technology Co., Ltd., were subject to a series of contractual arrangements with the former VIEs and the nominee shareholders of the former
VIEs from January 2015 to March 2022. During the effective period of these contractual arrangements, these contractual arrangements enabled
us to: (i) receive the economic benefits that could potentially be significant to the former VIEs in consideration for the services provided
by our subsidiaries; (ii) exercise effective control over the former VIEs; and (iii) hold an exclusive option to purchase all or part
of the equity interests in and assets of the former VIEs when and to the extent permitted by the laws of mainland China.
These contractual agreements
included exclusive technology consulting and services agreements, business operation agreements, powers of attorney, equity interest pledge
agreements, option agreements and/or spousal consent letters, as the case may be. We refer to Beijing uCloudlink Technology Co., Ltd.
as Beijing uCloudlink, to Shenzhen uCloudlink Network Technology Co., Ltd as Shenzhen uCloudlink, and to Beijing uCloudlink New Technology
Co., Ltd. as Beijing Technology. Pursuant to the option agreement, Beijing Technology and its shareholders had irrevocably granted Beijing
uCloudlink or any person designated by it an exclusive option to purchase all or part of its equity interests in Shenzhen uCloudlink.
Pursuant to the business operation agreement, Shenzhen uCloudlink and Beijing Technology and its shareholders agree that to the extent
permitted by law, they accept and unconditionally execute instructions from Beijing uCloudlink on business operations. Beijing Technology
and its shareholders also executed a power of attorney to irrevocably authorize Beijing uCloudlink, or any person designated by Beijing
uCloudlink, to act as its attorney-in-fact to exercise all of its rights as a shareholder of Shenzhen uCloudlink. Pursuant to the exclusive
technology consulting and services agreement, Beijing uCloudlink had the exclusive right to provide Shenzhen uCloudlink with operational
supports as well as consulting and technical services required by Shenzhen uCloudlink’s business. Pursuant to the equity interest
pledge agreements, Beijing Technology’ shareholders had pledged 100% equity interests in Beijing Technology to Beijing uCloudlink,
and Beijing Technology had pledged 100% equity interests in Shenzhen uCloudlink to Beijing uCloudlink, to guarantee performance by Shenzhen
uCloudlink and Beijing Technology of their obligations under the option agreement, the exclusive technology consulting and services agreement,
the business operation agreement and power of attorney they entered into. The spouses of the shareholders of Beijing Technology, if applicable,
had each signed a spousal consent letter agreeing that the equity interests in Beijing Technology held by and registered under the name
of the respective shareholders would be disposed pursuant to the contractual agreements with Beijing uCloudlink. We have evaluated the
guidance in FASB ASC 810 and concluded that we are the primary beneficiary of the former VIEs for accounting purposes because of these
contractual arrangements for the effective period of these contractual arrangements. Accordingly, under U.S. GAAP, the financial
statements of the former VIEs are consolidated as part of our financial statements for the years ended December 31, 2020, 2021
and 2022 in this annual report.
As we continued to evaluate
our business plan, we have decided to adjust our business model in mainland China, which we believe will no longer require specific certificate
for offering internet access services that could fall within the scope of prohibited or restricted categories for foreign investment in
mainland China. As a result, the contractual arrangements with the former variable interest entities, or the former VIEs and their shareholders
are no longer necessary. Therefore, we initiated the Restructuring to adjust our local business in mainland China and unwind the aforementioned
contractual arrangements so that the former VIEs become wholly-owned subsidiaries of Shenzhen Ucloudlink Technology Limited.
On March 17, 2022, Beijing
uCloudlink, the former VIEs, the nominee shareholders of the former VIEs and the spouses of the shareholders of Beijing Technology entered
into termination agreements respectively, to terminate these contractual arrangements. Beijing uCloudlink issued a confirmation letter
to designate Shenzhen Ucloudlink Technology Limited, or Shenzhen Technology, to exercise the exclusive option right to purchase all equity
interests of Beijing Technology from its shareholders according to the abovementioned option agreement. Accordingly, Shenzhen Technology
entered into an equity interest transfer agreement with the shareholders of Beijing Technology, and was registered as the sole shareholder
of Beijing Technology since March 17, 2022. All contractual arrangements were terminated since then. We believe that the Restructuring
did not affect our uCloudlink 1.0 international data connectivity services in mainland China. After the Restructuring, we now carry out
the PaaS and SaaS platform services in mainland China, which were the primary business operated by the former VIEs, in cooperation with
local business partners, such as Beijing Huaxianglianxin Technology Company, which have the required licenses to provide local data connectivity
services in mainland China. See “Item 4. Information on the Company—C. Organizational Structure—Contractual Arrangements
with the Former VIEs and Their Respective Shareholders.”
However, our historical contractual
arrangements might not be as effective as direct ownership in providing us with control over the former VIEs and the termination of these
agreements may incur additional costs. There were and may also be substantial uncertainties regarding the interpretation and application
of current and future laws, regulations and rules of mainland China regarding the status of the rights of our Cayman Islands holding company
with respect to our historical contractual arrangements with the former VIEs and its shareholders. It is uncertain whether
any new laws or regulations of mainland China relating to former VIEs structures will be adopted or if adopted, what they would
provide. If we or any of the former VIEs is found to be in violation of any existing or future laws or regulations of mainland
China, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad
discretion to take action in dealing with such violations or failures. See “Item 3. Key Information—D. Risk Factors—Risks
Related to Our Corporate Structure—If the PRC government determines that the contractual arrangements with the former VIEs structure
did not comply with the regulations of mainland China, or if these regulations change or are interpreted differently in the future, our
shares and/or ADSs may decline in value or become worthless if we are deemed to be unable to assert our contractual control rights over
the assets of the former VIEs.”
Our historical corporate structure
is subject to risks associated with our contractual arrangements with the former VIEs. If the PRC government deems that our historical
contractual arrangements with the former VIEs do not comply with regulatory restrictions on foreign investment in the relevant industries
in mainland China, or if these regulations or the interpretation of existing regulations change or are interpreted differently in the
future, we could be subject to severe penalties or be forced to relinquish our interests in those operations. Our holding company, our
mainland China subsidiaries and former VIEs, and investors of our company face uncertainty about potential future actions by the PRC government
that could affect the enforceability of the historical contractual arrangements with the former VIEs and, consequently, significantly
affect the historical financial performance of the former VIEs and our company as a whole. For a detailed description of the risks associated
with our corporate structure, please refer to risks disclosed under “Item 3. Key Information—D. Risk Factors—Risks Related
to Our Corporate Structure.”
We face various risks and
uncertainties related to doing business in China. A significant portion of our business operations are conducted in mainland China, and
we are subject to complex and evolving laws and regulations of mainland China. For example, we face risks associated with regulatory approvals
on offshore offerings, anti-monopoly regulatory actions, and oversight on cybersecurity and data privacy. This may impact our ability
to conduct certain businesses, accept foreign investments, or list on a United States or other foreign exchange. These risks could result
in a material adverse change in our operations and the value of our ADSs, significantly limit or completely hinder our ability to continue
to offer securities to investors, or cause the value of such securities to significantly decline. For a detailed description of risks
related to doing business in China, please refer to risks disclosed under “Item 3. Key Information—D. Risk Factors—Risks
Related to Doing Business in China.”
PRC government’s significant
authority in regulating our operations and its oversight and control over offerings conducted overseas by, and foreign investment in,
China-based issuers could significantly limit or completely hinder our ability to offer or continue to offer securities to investors.
Implementation of industry-wide regulations, including data security or anti-monopoly related regulations, in this nature may cause the
value of such securities to significantly decline or be of little or no value. For more details, see “Item 3. Key Information—D.
Risk Factors—Risks Related to Doing Business in China—The PRC government’s significant oversight over our business operation
could result in a material adverse change in our operations and the value of our ADSs.”
Risks and uncertainties arising
from the legal system in mainland China, including risks and uncertainties regarding the enforcement of laws and quickly evolving rules
and regulations in mainland China, could result in a material adverse change in our operations and the value of our ADSs. For more details,
see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Uncertainties with respect
to the PRC legal system could adversely affect us.”
The Holding Foreign
Companies Accountable Act
Pursuant to the Holding Foreign
Companies Accountable Act, or the HFCAA, if the Securities and Exchange Commission, or the SEC, determines that we have filed audit reports
issued by a registered public accounting firm that has not been subject to inspections by the Public Company Accounting Oversight Board,
or the PCAOB, for two consecutive years, the SEC will prohibit our shares or the ADSs from being traded on a national securities exchange
or in the over-the-counter trading market in the United States. On December 16, 2021, the PCAOB issued a report to notify the SEC of its
determination that the PCAOB was unable to inspect or investigate completely registered public accounting firms headquartered in mainland
China and Hong Kong, including our previous auditor. In May 2022, the SEC conclusively listed us as a Commission-Identified Issuer under
the HFCAA following the filing of our annual report on Form 20-F for the fiscal year ended December 31, 2021. On December 15, 2022, the
PCAOB issued a report that vacated its December 16, 2021 determination and removed mainland China and Hong Kong from the list of jurisdictions
where it is unable to inspect or investigate completely registered public accounting firms. In addition, our current auditor is a Singapore-based
accounting firm that is registered with the PCAOB and can be inspected by the PCAOB. For this reason, we do not expect to be identified
as a Commission-Identified Issuer under the HFCAA after we file this annual report on Form 20-F. Each year, the PCAOB will determine whether
it can inspect and investigate completely audit firms in mainland China and Hong Kong, among other jurisdictions. If the PCAOB determines
in the future that it no longer has full access to inspect and investigate completely our current auditor, we would be identified as a
Commission-Identified Issuer following the filing of the annual report on Form 20-F for the relevant fiscal year. There can be no assurance
that we would not be identified as a Commission-Identified Issuer for any future fiscal year, and if we were so identified for two consecutive
years, we would become subject to the prohibition on trading under the HFCAA. For more details, see “Item 3. Key Information—D.
Risk Factors—Risks Related to Doing Business in China—The PCAOB had historically been unable to inspect our auditor in relation
to their audit work performed for our financial statements and the inability of the PCAOB to conduct inspections of our auditor in the
past has deprived our investors with the benefits of such inspections.” and “Item 3. Key Information—D. Risk Factors—Risks
Related to Doing Business in China—Our ADSs may be prohibited from trading in the United States under the HFCAA in the future if
the PCAOB is unable to inspect or investigate completely our current auditor. The delisting of the ADSs, or the threat of their being
delisted, may materially and adversely affect the value of your investment.”
Permissions Required
from the PRC Authorities for Our Operations
We have conducted our business
in mainland China primarily through our subsidiaries and former VIEs in mainland China. Our operations in mainland China are governed
by the laws and regulations of mainland China. As of the date of this annual report, apart from the approval of the China Securities Regulatory
Commission (“CSRC”), Cyberspace Administration of China (“CAC”) or other PRC government authorities that may be
required in connection with the former VIE structure and our offshore offerings under the laws of mainland China, we have not received
any requirement from PRC governmental authorities to obtain other permissions for our material operations in mainland China and issuance
of securities to foreign investors. Given the uncertainties of interpretation and implementation of relevant laws and regulations and
the enforcement practice by relevant government authorities, we may be required to obtain additional licenses, permits, filings or approvals
for the functions and services of our platform in the future.
Furthermore, in connection
with our issuance of securities to foreign investors, under current laws, regulations and regulatory rules of mainland China promulgated,
as of the date of this annual report, we, our mainland China subsidiaries and the former VIEs, (i) are not required to obtain permissions
from the China Securities Regulatory Commission, or the CSRC, (ii) are not required to go through cybersecurity review by the Cyberspace
Administration of China, or the CAC, and (iii) have not received or were denied such requisite permissions by any PRC authority. However,
the PRC government has recently indicated an intent to exert more oversight and control over offerings that are conducted overseas and/or
foreign investment in mainland China-based issuers. For more detailed information, see “Item 3. Key Information—D. Risk Factors—Risks
Related to Doing Business in China—The approval and/or other requirements of the CSRC, the CAC, or other PRC governmental authorities
may be required in connection with an offering under the rules, regulations or policies of mainland China, and, if required, we cannot
predict whether or how soon we will be able to obtain such approval, and, even if we obtain such approval, the approval could be rescinded.
Any failure to obtain or delay in obtaining such approval for this offering, or a rescission of obtained approval, would subject us to
sanctions imposed by the CSRC or other PRC government authorities.”
Additionally, on December
28, 2021, the CAC, together with another twelve regulatory authorities jointly issued the Measures for Cybersecurity Review,
or the Review Measures, which came into effect on February 15, 2022. The Review Measures required that, in addition to network products
and services acquired by critical information infrastructure operators, online platform operators are also subject to cybersecurity review
if they carry out data processing activities that affect or may affect national security, and online platform operators listing in a foreign
country with more than one million users’ personal information data must apply for a cybersecurity review with the Cybersecurity
Review Office. The Review Measures further elaborated the factors to be considered when assessing the national security risks of the relevant
activities. On July 7, 2022, the CAC promulgated the Measures on Security Assessment of Cross-border Data Transfer, or the Data Export
Measures, which became effective on September 1, 2022. The Data Export Measures requires that any data processor who processes or exports
personal information exceeding a certain volume threshold pursuant to the measures shall apply for a security assessment by the CAC before
transferring any personal information abroad. The security assessment requirement also applies to any transfer of important data outside
of mainland China. As the Review Measures and the Data Export Measures were issued recently, there are uncertainties regarding how they
would be interpreted and enforced, and to what extent they may affect us. On November 14, 2021, the CAC released the Regulations on the
Network Data Security (Draft for Comments), or the Draft Regulations, and have accepted public comments until December 13, 2021.
The draft Regulations provided that data processors refer to individuals or organizations that autonomously determine the purpose and
the manner of processing data. If a data processor that processes personal data of more than one million users would like to list overseas,
it shall apply for a cybersecurity review according to the draft Regulations. Besides, data processors that are listed overseas shall
carry out an annual data security assessment.
As advised by our PRC legal
counsel, the Draft Regulations is released for public comment only, and its provisions and anticipated adoption or effective date may
be subject to change and thus its interpretation and implementation remain substantially uncertain.
The Review Measures, the Draft
Regulations and the Data Export Measures remain unclear on whether the relevant requirements will be applicable to further equity or debt
offerings by companies that have completed the initial public offering in the United States. We cannot predict the impact of the Review
Measures, the Draft Regulations and the Data Export Measures, if any, at this stage, and we will closely monitor and assess the statutory
developments in this regard. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—Our
and the former VIEs’ business is subject to complex and evolving Chinese and international laws and regulations regarding
data privacy and cybersecurity. The improper use or disclosure of data could have a material and adverse effect on our business and prospects.
Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, penalties, changes
to our business practices, increased cost of operations, damages to our reputation and brand, or otherwise harm our business.”
Under the Review Measures
and other cybersecurity laws and regulations of mainland China, critical information infrastructure operators that intend to purchase
internet products and services that affect or may affect national security must be subject to the cybersecurity review. As the PRC governmental
authorities may have wide discretion in the interpretation and enforcement of these laws, including the interpretation of the scope of
“critical information infrastructure operators.” See “Item 4. Information on the Company—B. Business Overview—Regulation—Mainland
China—Regulations Related to Internet Information Security and Personal Information Protection—Regulations Related to Personal
Information Protection.” In addition, the Review Measures also stipulate that any data processor carrying out data processing activities
that affect or may affect national security should also be subject to the cybersecurity review. In anticipation of the strengthened implementation
of cybersecurity laws and regulations and the continued expansion of our business, we face potential risks if we are deemed as a critical
information infrastructure operator under the cybersecurity laws and regulations of mainland China. In such case, we must fulfill certain
obligations as required under the cybersecurity laws and regulations of mainland China, including, among others, storing personal information
and important data collected and produced within the mainland China territory during our operations in China, which we have fulfilled
in our business, and we may be subject to review when purchasing internet products and services. If a final version of the Draft Regulations
is adopted, we may be subject to review when conducting data processing activities, and may face challenges in addressing its requirements
and make necessary changes to our internal policies and practices in data processing. As of the date of this annual report, we have not
been involved in any investigations on cybersecurity review made by the Cyberspace Administration of China on such basis, and we have
not received any inquiry, notice, warning, or sanctions in such respect.
On July 6, 2021, the
relevant PRC governmental authorities made public the Opinions on Strictly Cracking Down Illegal Securities Activities in Accordance with
the Law. These opinions emphasized the need to strengthen the administration over illegal securities activities and the supervision on
overseas listings by mainland China-based companies and proposed to take effective measures, such as promoting the construction of relevant
regulatory systems to deal with the risks and incidents faced by mainland China-based overseas-listed companies. As these opinions are
recently issued, official guidance and related implementation rules have not been issued yet and the interpretation of these opinions
remains unclear at this stage. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in
China—The approval and/or other requirements of the CSRC, the CAC, or other PRC governmental authorities may be required in connection
with an offering under the rules, regulations or policies of mainland China, and, if required, we cannot predict whether or how soon we
will be able to obtain such approval, and, even if we obtain such approval, the approval could be rescinded. Any failure to obtain or
delay in obtaining such approval for this offering, or a rescission of obtained approval, would subject us to sanctions imposed by the
CSRC or other PRC government authorities.” As of the date of this annual report, we have not received any inquiry, notice, warning,
or sanctions regarding offshore offering from the CSRC or any other PRC government authorities.
On April 2, 2022, the CSRC
published the Provisions on Strengthening the Confidentiality and Archives Administration Related to the Overseas Securities Offering
and Listing by Domestic Enterprises (Draft for Comments), or the Draft Provisions on Confidentiality and Archives Administration, which
was open for public comments until April 17, 2022. The Draft Provisions on Confidentiality and Archives Administration requires that,
in the process of overseas issuance and listing of securities by domestic entities, the domestic entities, and securities companies and
securities service institutions that provide relevant securities service shall strictly implement the provisions of relevant laws and
regulations and the requirements of these provisions, establish and improve rules on confidentiality and archives administration. Where
the domestic entities provide with or publicly disclose documents, materials or other items related to the state secrets and government
work secrets to the relevant securities companies, securities service institutions, overseas regulatory authorities, or other entities
or individuals, the companies shall apply for approval of competent departments with the authority of examination and approval in accordance
with law and report the matter to the secrecy administrative departments at the same level for record filing. Where there is unclear or
controversial whether or not the concerned materials are related to state secrets, the materials shall be reported to the relevant secrecy
administrative departments for determination. However, the Draft Provisions on Confidentiality and Archives Administration have not yet
been settled or become effective, and there remain uncertainties regarding the further interpretation and implementation of the Draft
Provisions on Confidentiality and Archives Administration.
On December 24, 2021, the
CSRC released the Provisions of the State Council on the Administration of Overseas Securities Offering and Listing by Domestic Companies
(Draft for Comments), or the Draft Administrative Provisions, and the Administrative Measures for the Filing of Overseas Securities Offering
and Listing by Domestic Companies (Draft for Comments), or the Draft Filing Measures, both of which were open for public comments until
January 23, 2022. On February 17, 2023, the CSRC issued the Trial Administrative Measures of Overseas Securities Offering and Listing
by Domestic Enterprises, or the Trial Measures, which will become effective on March 31, 2023. On the same date, the CSRC circulated Supporting
Guidance Rules No. 1 through No. 5, Notes on the Trial Measures, Notice on Administration Arrangements for the Filing of Overseas Listings
by Domestic Enterprises and relevant CSRC Answers to Reporter Questions, or collectively, the Guidance Rules and Notice, on CSRC’s
official website. The Trial Measures, together with the Guidance Rules and Notice, reiterate the basic principles of the Draft Administrative
Provisions and Draft Filing Measures and impose substantially the same requirements for the overseas securities offering and listing by
domestic enterprises. Under the Trial Measures and the Guidance Rules and Notice, domestic enterprises conducting overseas securities
offering and listing, either directly or indirectly, shall complete filings with the CSRC pursuant to the Trial Measures’ requirements
within three working days following the submission of an application for initial public offering or listing. Starting from March 31, 2023,
enterprises that have been listed overseas or satisfy all of the following conditions shall be deemed as “Grandfathered Issuers”
and are not required to complete the overseas listing filing immediately, but shall complete filings as required if they conduct refinancing
or are involved in other circumstances that require filing with the CSRC: (i) the application for indirect overseas offering or listing
shall have been approved by the relevant overseas regulatory authority or stock exchange prior to March 31, 2023 (as the SEC does not
approve or disapprove of an offering, this requirement is interpreted to be the SEC’s declaration of the registration statement
to be effective with respect to this offering), (ii) the enterprise is not required to reapply for the approval of the relevant overseas
regulatory authority or stock exchange, and (iii) such overseas securities offering or listing shall be completed before September 30,
2023. Any future securities offerings and listings outside of mainland China by our company, including but not limited to follow-on offerings,
refinancing, secondary listings, and going private transactions, will be subject to the filing requirements with the CSRC under the Trial
Measures, and we cannot assure you that we will be able to comply with such filing requirements in a timely manner, or at all.
If it is determined that
any approval, filing or other administrative procedure from the CSRC or other PRC governmental authorities is required for any future
offering or listing, we cannot assure that we can obtain the required approval or accomplish the required filings or other regulatory
procedures in a timely manner, or at all. If we fail to obtain the relevant approval or complete the filings and other relevant regulatory
procedures, we may be subject to an investigation by competent regulators, fines or penalties, or an order prohibiting us from conducting
an offering, and these risks could result in a material adverse change in our operations and the value of our ADSs, significantly limit
or completely hinder our ability to offer or continue to offer securities to investors, or cause such securities to significantly decline
in value or become worthless.
The Administrative Measures
on Telecommunications Business Operating Licenses (2017 Revision), or the Telecom License Measures, which was promulgated by the PRC Ministry
of Industry and Information Technology (MIIT) on March 1, 2009 and last amended on July 3, 2017, requires that any approved telecommunications
services provider shall conduct its business in accordance with the specifications in its license for VATS License. Shenzhen uCloudlink
Network Technology Co. Ltd. obtained the VATS License issued by the MIIT in 2017 for conducting business of information technology services
and sales of terminals and data related products. As we continued to evaluate our business plan, we have decided to adjust our business
model in mainland China, and we believe the VATS License is no longer required. We terminated the contractual arrangements
on March 17, 2022. The VATS License previously held by Shenzhen uCloudlink Network Technology Co. Ltd. was also terminated during
the Restructuring. Apart from the approval of the CSRC, the CAC or other PRC government authorities that may be required in connection
with our offshore offerings under the laws of mainland China, we and our mainland China subsidiaries are not required to obtain other
permissions from Chinese authorities for our material operations in mainland China and issuance of securities to foreign investors. See
“Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The approval and/or other
requirements of the CSRC, the CAC, or other PRC governmental authorities may be required in connection with an offering under the rules,
regulations or policies of mainland China, and, if required, we cannot predict whether or how soon we will be able to obtain such approval,
and, even if we obtain such approval, the approval could be rescinded. Any failure to obtain or delay in obtaining such approval for this
offering, or a rescission of obtained approval, would subject us to sanctions imposed by the CSRC or other PRC government authorities.”
Cash and Asset Flows
through Our Organization
We conduct our operations
in mainland China through our mainland China subsidiaries and the former VIEs with which we have maintained contractual arrangements
historically. The laws and regulations of mainland China restrict and impose conditions on foreign investment in telecommunication businesses.
Accordingly, we operated these businesses in mainland China through the former VIEs. As our mainland China and Hong Kong subsidiaries
and former VIEs have accumulated losses since their incorporation, none of them has declared or paid any dividends or made any distributions
to their respective holding companies, including uCloudlink. In return, uCloudlink has not declared a dividend.
Prior to the completion of
our initial public offering in June 2020, our sources of funds primarily consisted of pre-IPO financing through issuance of preferred
shares, external borrowings and cash generated from operation. The sources of funds of the former VIEs primarily consisted of external
borrowings, intercompany advances from subsidiaries and cash generated from operation. The cash proceeds from the initial public offering
have been used for strategic investments and general corporate purposes, including research and development and working capital needs.
Our subsidiaries and the former
VIEs conduct business transactions that include trading activities, provision of services and intercompany advances. The cash flows that
have occurred between our subsidiaries and the former VIEs are summarized as the following:
| |
For the year ended December 31, | |
| |
2020 | | |
2021 | | |
2022 | |
| |
(US$ in millions) | |
Cash paid by former VIEs to subsidiaries for purchase of data plans and raw materials | |
| 27.1 | | |
| 1.9 | | |
| 0.9 | |
Cash paid by former VIEs to subsidiaries for marketing and software licensing services | |
| 5.5 | | |
| 5.4 | | |
| 4.7 | |
Cash paid by former VIEs to subsidiaries for subsidiary establishment | |
| — | | |
| — | | |
| 0.2 | |
Intercompany advances from former VIEs to subsidiaries | |
| — | | |
| — | | |
| 1.8 | |
Cash paid by subsidiaries to former VIEs for purchase of Wi-Fi terminals | |
| 55.9 | | |
| 29.4 | | |
| 27.7 | |
Intercompany advances from subsidiaries to former VIEs | |
| 7.7 | | |
| 3.1 | | |
| 1.5 | |
Cash paid by subsidiaries to former VIEs for transfer of equity investment | |
| — | | |
| — | | |
| 1.3 | |
Pursuant to historical contractual
agreements, Beijing uCloudlink has the exclusive rights to provide former VIEs with operational supports and consulting and technical
services required by the former VIEs’ businesses. Beijing uCloudlink owns the exclusive intellectual property rights created as
a result of the performance of the agreements. The technology service fee payable by the former VIEs to Beijing uCloudlink is
determined by the revenue of the former VIEs less the expenditures incurred for operation and capital purpose, or at an amount
subject to mutual negotiation and agreement between the parties. Since the former VIEs have incurred and accumulated losses
historically, there was no service fee payable by the former VIEs to Beijing uCloudlink.
Impact of Taxation
on Dividends
uCloudlink is incorporated
in the Cayman Islands and conducts businesses in mainland China primarily through its mainland China subsidiaries and the former VIEs.
Under the current laws of the Cayman Islands, uCloudlink is not subject to tax on income or capital gains. In addition, upon payments
of dividends to our shareholders, no Cayman Islands withholding tax will be imposed.
Our mainland China and Hong
Kong subsidiaries and former VIEs have incurred cumulative losses since inception. We have no current intention to pay dividends
to shareholders.
For purposes of illustration,
the following discussion reflects the hypothetical taxes that might be required to be paid in mainland China and Hong Kong, assuming that:
(i) we have taxable earnings, and (ii) we determine to pay a dividend in the future:
Hypothetical pre-tax earnings(1) | |
| 100.00 | |
Tax on earnings at statutory rate of 25% at Beijing uCloudlink level | |
| (25.00 | ) |
Amount to be distributed as dividend from Beijing uCloudlink to Hong Kong subsidiary(2) | |
| 75.00 | |
Withholding tax at tax treaty rate of 5% | |
| (3.75 | ) |
Amount to be distributed as dividend at Hong Kong subsidiary level and net distribution to uCloudlink | |
| 71.25 | |
Notes:
| (1) | For purposes of this example, the tax calculation has been simplified. The hypothetical book pre-tax earnings
amount is assumed to equal Chinese taxable income. Beijing uCloudlink and the former VIEs are parties to certain agreements relating to
the provision of technology and other services by Beijing uCloudlink to the former VIEs. Under the terms of our historical contractual
agreements, and by mutual agreement between Beijing uCloudlink and the former VIEs, no fees for technology services or the use of technology,
brands or other intellectual property have been charged by Beijing uCloudlink to the former VIEs in any of the periods presented. One
of the former VIEs, Shenzhen uCloudlink, currently qualifies for a 15% preferential income tax rate in China. However, such rate is subject
to qualification, is temporary in nature, and may not be available in a future period when distributions are paid. Beijing uCloudlink
is subject to enterprise income tax of 25%. |
| (2) | China’s Enterprise Income Tax Law imposes a withholding income tax of 10% on dividends distributed
by a Foreign Invested Enterprises (“FIE”) to its immediate holding company outside of Mainland China. A lower withholding
income tax rate of 5% is applied if the FIE’s immediate holding company is registered in Hong Kong or other jurisdictions that have
a tax treaty arrangement with Mainland China, subject to a qualification review at the time of the distribution. There is no incremental
tax at Hong Kong subsidiary level for any dividend distribution to uCloudlink. |
If our existing subsidiaries
in mainland China 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 subsidiaries in mainland China are permitted to pay dividends
to us only out of their retained earnings, if any, as determined in accordance with mainland China’s accounting standards and regulations.
Under the laws of mainland China, each of our subsidiaries and former VIEs 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 subsidiaries and former VIEs may allocate a portion of their after-tax profits based on mainland China’s accounting
standards to discretionary surplus funds at their 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 mainland China is subject to examination by the banks
designated by SAFE. Some of our mainland China subsidiaries will not be able to pay dividends until they generate accumulated profits
and meet the requirements for statutory reserve funds. The net liabilities of the former VIEs, in which we have no legal ownership,
amounted to US$35 million, US$53 million and US$52 million as of December 31, 2020, 2021 and 2022, respectively. For restrictions and
limitations on our ability to distribute earnings from our businesses, including subsidiaries and former VIEs, to uCloudlink and investors
as well as the ability to settle amounts owed under historical VIE agreements, see “Item 3. Key Information—D. Risk Factors—Risks
Related to Doing Business in China—Mainland China’s regulation of loans to and direct investment in mainland China entities
by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of any financing
outside mainland China to make loans to or make additional capital contributions to our mainland China subsidiaries and former VIEs, which
could materially and adversely affect our liquidity and our ability to fund and expand our business.”
Financial Information Related
to the Consolidated Former Variable Interest Entities
Set forth below are the condensed
consolidating schedule showing the financial position, results of operations and cash flows for the parent company, the WFOE, subsidiaries,
and the former VIEs, elimination and consolidated total (in thousands of US$) as of and for the years ended December 31, 2020, 2021 and
2022.
Selected Condensed
Consolidated Statements of Operations and Comprehensive (Loss)/Income Data
| |
For the year ended December 31, 2022 | |
| |
Parent | | |
Former VIEs | | |
WFOE | | |
Other
Subsidiaries | | |
Elimination | | |
Consolidated
Total | |
Condensed Consolidating Schedule of Results of Operations | |
| | |
| | |
| | |
| | |
| | |
| |
Revenues(2) | |
| — | | |
| 30,371 | | |
| — | | |
| 82,455 | | |
| (41,365 | ) | |
| 71,461 | |
Third-party revenues | |
| — | | |
| 1,761 | | |
| — | | |
| 69,700 | | |
| — | | |
| 71,461 | |
Inter-company revenues | |
| — | | |
| 28,610 | | |
| — | | |
| 12,755 | | |
| (41,365 | ) | |
| — | |
Cost of revenues(2) | |
| — | | |
| (15,624 | ) | |
| — | | |
| (45,803 | ) | |
| 22,500 | | |
| (38,927 | ) |
Third-party cost of revenues | |
| — | | |
| (1,573 | ) | |
| — | | |
| (37,354 | ) | |
| — | | |
| (38,927 | ) |
Inter-company cost of revenues | |
| — | | |
| (14,051 | ) | |
| — | | |
| (8,449 | ) | |
| 22,500 | | |
| — | |
Gross profit | |
| — | | |
| 14,747 | | |
| — | | |
| 36,652 | | |
| (18,865 | ) | |
| 32,534 | |
Operating expenses(4) | |
| (4,289 | ) | |
| (18,915 | ) | |
| (4 | ) | |
| (29,455 | ) | |
| 15,202 | | |
| (37,461 | ) |
(Loss)/income before income tax | |
| (4,472 | ) | |
| (4,382 | ) | |
| (4 | ) | |
| (7,320 | ) | |
| (3,586 | ) | |
| (19,764 | ) |
Income tax expenses | |
| — | | |
| — | | |
| — | | |
| (161 | ) | |
| — | | |
| (161 | ) |
Share of profit in equity method investment, net of tax | |
| — | | |
| 33 | | |
| — | | |
| 39 | | |
| — | | |
| 72 | |
(Loss)/income from subsidiaries(3) | |
| (15,381 | ) | |
| — | | |
| — | | |
| (7,938 | ) | |
| 23,319 | | |
| — | |
(Loss)/income from former VIEs(3) | |
| — | | |
| — | | |
| (4,349 | ) | |
| — | | |
| 4,349 | | |
| — | |
Net (loss)/income | |
| (19,853 | ) | |
| (4,349 | ) | |
| (4,353 | ) | |
| (15,380 | ) | |
| 24,082 | | |
| (19,853 | ) |
| |
For the year ended December 31, 2021 | |
| |
Parent | | |
Former VIEs | | |
WFOE | | |
Other
Subsidiaries | | |
Elimination | | |
Consolidated
Total | |
Condensed Consolidating Schedule of Results of Operations | |
| | |
| | |
| | |
| | |
| | |
| |
Revenues(2) | |
| — | | |
| 30,979 | | |
| — | | |
| 84,916 | | |
| (42,071 | ) | |
| 73,824 | |
Third-party revenues | |
| — | | |
| 3,726 | | |
| — | | |
| 70,098 | | |
| — | | |
| 73,824 | |
Inter-company revenues | |
| — | | |
| 27,253 | | |
| — | | |
| 14,818 | | |
| (42,071 | ) | |
| — | |
Cost of revenues(2) | |
| — | | |
| (26,553 | ) | |
| — | | |
| (62,841 | ) | |
| 37,404 | | |
| (51,990 | ) |
Third-party cost of revenues | |
| — | | |
| (4,867 | ) | |
| — | | |
| (47,123 | ) | |
| — | | |
| (51,990 | ) |
Inter-company cost of revenues | |
| — | | |
| (21,686 | ) | |
| — | | |
| (15,718 | ) | |
| 37,404 | | |
| — | |
Gross profit | |
| — | | |
| 4,426 | | |
| — | | |
| 22,075 | | |
| (4,667 | ) | |
| 21,834 | |
Operating expenses(4) | |
| (10,339 | ) | |
| (21,420 | ) | |
| 1 | | |
| (29,167 | ) | |
| 5,057 | | |
| (55,868 | ) |
(Loss)/income before income tax | |
| (10,266 | ) | |
| (16,531 | ) | |
| 1 | | |
| (19,679 | ) | |
| 391 | | |
| (46,084 | ) |
Income tax expenses | |
| — | | |
| — | | |
| — | | |
| (244 | ) | |
| — | | |
| (244 | ) |
Share of profit in equity method investment, net of tax | |
| — | | |
| 287 | | |
| — | | |
| — | | |
| — | | |
| 287 | |
(Loss)/income from subsidiaries(3) | |
| (35,775 | ) | |
| — | | |
| — | | |
| (15,852 | ) | |
| 51,627 | | |
| — | |
(Loss)/income from former VIEs(3) | |
| — | | |
| — | | |
| (16,244 | ) | |
| — | | |
| 16,244 | | |
| — | |
Net (loss)/income | |
| (46,041 | ) | |
| (16,244 | ) | |
| (16,243 | ) | |
| (35,775 | ) | |
| 68,262 | | |
| (46,041 | ) |
| |
For the year ended December 31, 2020 | |
| |
Parent | | |
Former VIEs | | |
WFOE | | |
Other Subsidiaries | | |
Elimination | | |
Consolidated Total | |
Condensed Consolidating Schedule of Results of Operations | |
| | |
| | |
| | |
| | |
| | |
| |
Revenues(2) | |
| — | | |
| 55,014 | | |
| 16 | | |
| 98,587 | | |
| (64,048 | ) | |
| 89,569 | |
Third-party revenues | |
| — | | |
| 7,073 | | |
| 16 | | |
| 82,480 | | |
| — | | |
| 89,569 | |
Inter-company revenues | |
| — | | |
| 47,941 | | |
| — | | |
| 16,107 | | |
| (64,048 | ) | |
| — | |
Cost of revenues(2) | |
| — | | |
| (37,636 | ) | |
| (18 | ) | |
| (82,406 | ) | |
| 58,796 | | |
| (61,264 | ) |
Third-party cost of revenues | |
| — | | |
| (8,706 | ) | |
| — | | |
| (52,558 | ) | |
| — | | |
| (61,264 | ) |
Inter-company cost of revenues | |
| — | | |
| (28,930 | ) | |
| (18 | ) | |
| (29,848 | ) | |
| 58,796 | | |
| — | |
Gross profit | |
| — | | |
| 17,378 | | |
| (2 | ) | |
| 16,181 | | |
| (5,252 | ) | |
| 28,305 | |
Operating expenses(4) | |
| (50,638 | ) | |
| (22,725 | ) | |
| (2 | ) | |
| (30,584 | ) | |
| 5,108 | | |
| (98,841 | ) |
(Loss)/income before income tax | |
| (50,925 | ) | |
| (3,528 | ) | |
| (3 | ) | |
| (8,612 | ) | |
| (162 | ) | |
| (63,230 | ) |
Income tax expenses | |
| — | | |
| — | | |
| — | | |
| (185 | ) | |
| — | | |
| (185 | ) |
Share of profit in equity method investment, net of tax | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
(Loss)/income from subsidiaries(3) | |
| (12,490 | ) | |
| — | | |
| — | | |
| (3,693 | ) | |
| 16,183 | | |
| — | |
(Loss)/income from former VIEs(3) | |
| — | | |
| — | | |
| (3,528 | ) | |
| — | | |
| 3,528 | | |
| — | |
Net (loss)/income | |
| (63,415 | ) | |
| (3,528 | ) | |
| (3,531 | ) | |
| (12,490 | ) | |
| 19,549 | | |
| (63,415 | ) |
Selected Condensed
Consolidated Balance Sheets Data
| |
As of December 31, 2022 | |
| |
Parent | | |
Former VIEs | | |
WFOE | | |
Other Subsidiaries | | |
Elimination | | |
Consolidated Total | |
Condensed Consolidating Schedule of Financial Position | |
| | |
| | |
| | |
| | |
| | |
| |
Cash and cash equivalents | |
| 463 | | |
| 1,951 | | |
| 2 | | |
| 12,505 | | |
| — | | |
| 14,921 | |
Restricted cash | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Accounts receivable, net | |
| — | | |
| 474 | | |
| — | | |
| 5,487 | | |
| — | | |
| 5,961 | |
Amounts due from subsidiaries and former VIEs(1) | |
| 127,308 | | |
| 12,766 | | |
| 38 | | |
| 36,927 | | |
| (177,039 | ) | |
| — | |
Property and equipment and intangible assets | |
| — | | |
| 775 | | |
| — | | |
| 1,209 | | |
| — | | |
| 1,984 | |
Others(2) | |
| — | | |
| 5,536 | | |
| 5 | | |
| 55,682 | | |
| (38,155 | ) | |
| 23,068 | |
Total assets | |
| 127,771 | | |
| 21,502 | | |
| 45 | | |
| 111,810 | | |
| (215,194 | ) | |
| 45,934 | |
Short term borrowings | |
| — | | |
| 574 | | |
| — | | |
| 2,302 | | |
| — | | |
| 2,876 | |
Amounts due to subsidiaries and former VIEs(1) | |
| 3,683 | | |
| 60,029 | | |
| 142 | | |
| 113,185 | | |
| (177,039 | ) | |
| — | |
Accounts payable, accrued expenses and other liabilities | |
| 397 | | |
| 12,690 | | |
| — | | |
| 17,759 | | |
| — | | |
| 30,846 | |
Contract liabilities | |
| — | | |
| 62 | | |
| — | | |
| 990 | | |
| — | | |
| 1,052 | |
Deficit in subsidiaries(3) | |
| 113,938 | | |
| — | | |
| — | | |
| 65,626 | | |
| (179,564 | ) | |
| — | |
Deficit in former VIEs(3) | |
| — | | |
| — | | |
| 51,933 | | |
| — | | |
| (51,933 | ) | |
| — | |
Others | |
| 204 | | |
| 80 | | |
| — | | |
| 1,585 | | |
| — | | |
| 1,869 | |
Total liabilities | |
| 118,222 | | |
| 73,435 | | |
| 52,075 | | |
| 201,447 | | |
| (408,536 | ) | |
| 36,643 | |
Total mezzanine equity | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Total shareholders’ equity/(deficit) | |
| 9,549 | | |
| (51,933 | ) | |
| (52,030 | ) | |
| (89,637 | ) | |
| 193,342 | | |
| 9,291 | |
| |
As of December 31, 2021 | |
| |
Parent | | |
Former VIEs | | |
WFOE | | |
Other Subsidiaries | | |
Elimination | | |
Consolidated Total | |
Condensed Consolidating Schedule of Financial Position | |
| | |
| | |
| | |
| | |
| | |
| |
Cash and cash equivalents | |
| 133 | | |
| 293 | | |
| 5 | | |
| 7,437 | | |
| — | | |
| 7,868 | |
Restricted cash | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Accounts receivable, net | |
| — | | |
| 1,333 | | |
| — | | |
| 13,590 | | |
| — | | |
| 14,923 | |
Amounts due from subsidiaries and former VIEs(1) | |
| 126,536 | | |
| 8,067 | | |
| 41 | | |
| 32,849 | | |
| (167,493 | ) | |
| — | |
Property and equipment and intangible assets | |
| — | | |
| 1,195 | | |
| — | | |
| 1,610 | | |
| — | | |
| 2,805 | |
Others(2) | |
| 8 | | |
| 9,602 | | |
| 7 | | |
| 66,336 | | |
| (34,424 | ) | |
| 41,529 | |
Total assets | |
| 126,677 | | |
| 20,490 | | |
| 53 | | |
| 121,822 | | |
| (201,917 | ) | |
| 67,125 | |
Short term borrowings | |
| — | | |
| 941 | | |
| — | | |
| 2,236 | | |
| — | | |
| 3,177 | |
Amounts due to subsidiaries and former VIEs(1) | |
| 3,997 | | |
| 55,623 | | |
| 154 | | |
| 107,719 | | |
| (167,493 | ) | |
| — | |
Accounts payable, accrued expenses and other liabilities | |
| 1,188 | | |
| 16,458 | | |
| — | | |
| 22,920 | | |
| — | | |
| 40,566 | |
Contract liabilities | |
| — | | |
| 89 | | |
| — | | |
| 1,486 | | |
| — | | |
| 1,575 | |
Deficit in subsidiaries(3) | |
| 101,138 | | |
| — | | |
| — | | |
| 62,750 | | |
| (163,888 | ) | |
| — | |
Deficit in former VIEs(3) | |
| — | | |
| — | | |
| 52,639 | | |
| — | | |
| (52,639 | ) | |
| — | |
Others | |
| 262 | | |
| 18 | | |
| — | | |
| 1,435 | | |
| — | | |
| 1,715 | |
Total liabilities | |
| 106,585 | | |
| 73,129 | | |
| 52,793 | | |
| 198,546 | | |
| (384,020 | ) | |
| 47,033 | |
Total mezzanine equity | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Total shareholders’ equity/(deficit) | |
| 20,092 | | |
| (52,639 | ) | |
| (52,740 | ) | |
| (76,724 | ) | |
| 182,103 | | |
| 20,092 | |
| |
As of December 31, 2020 | |
| |
Parent | | |
Former VIEs | | |
WFOE | | |
Other Subsidiaries | | |
Elimination | | |
Consolidated Total | |
Condensed Consolidating Schedule of Financial Position | |
| | |
| | |
| | |
| | |
| | |
| |
Cash and cash equivalents | |
| 3,332 | | |
| 1,734 | | |
| 9 | | |
| 16,914 | | |
| — | | |
| 21,989 | |
Restricted cash | |
| — | | |
| — | | |
| — | | |
| 8,237 | | |
| — | | |
| 8,237 | |
Accounts receivable, net | |
| — | | |
| 1,450 | | |
| — | | |
| 5,295 | | |
| — | | |
| 6,745 | |
Amounts due from subsidiaries and former VIEs(1) | |
| 123,337 | | |
| 6,663 | | |
| 40 | | |
| 19,629 | | |
| (149,669 | ) | |
| — | |
Property and equipment and intangible assets | |
| — | | |
| 2,311 | | |
| — | | |
| 1,757 | | |
| — | | |
| 4,068 | |
Others(2) | |
| 358 | | |
| 9,399 | | |
| 6 | | |
| 81,193 | | |
| (34,741 | ) | |
| 56,215 | |
Total assets | |
| 127,027 | | |
| 21,557 | | |
| 55 | | |
| 133,025 | | |
| (184,410 | ) | |
| 97,254 | |
Short term borrowings | |
| — | | |
| — | | |
| — | | |
| 3,704 | | |
| — | | |
| 3,704 | |
Amounts due to subsidiaries and former VIEs(1) | |
| 3,888 | | |
| 42,442 | | |
| 151 | | |
| 103,188 | | |
| (149,669 | ) | |
| — | |
Accounts payable, accrued expenses and other liabilities | |
| 1,078 | | |
| 14,276 | | |
| 5 | | |
| 19,084 | | |
| — | | |
| 34,443 | |
Contract liabilities | |
| — | | |
| 215 | | |
| — | | |
| 674 | | |
| — | | |
| 889 | |
Deficit in subsidiaries(3) | |
| 65,346 | | |
| — | | |
| — | | |
| 45,878 | | |
| (111,224 | ) | |
| — | |
Deficit in former VIEs(3) | |
| — | | |
| — | | |
| 35,376 | | |
| — | | |
| (35,376 | ) | |
| — | |
Others | |
| 321 | | |
| — | | |
| — | | |
| 1,503 | | |
| — | | |
| 1,824 | |
Total liabilities | |
| 70,633 | | |
| 56,933 | | |
| 35,532 | | |
| 174,031 | | |
| (296,269 | ) | |
| 40,860 | |
Total mezzanine equity | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Total shareholders’ equity/(deficit) | |
| 56,394 | | |
| (35,376 | ) | |
| (35,477 | ) | |
| (41,006 | ) | |
| 111,859 | | |
| 56,394 | |
Selected Condensed
Consolidated Cash Flows Data
| |
For the year ended December 31, 2022 | |
| |
Parent | | |
Former VIEs | | |
WFOE | | |
Other Subsidiaries | | |
Elimination | | |
Consolidated Total | |
Condensed Consolidating Schedules of Cash Flows | |
| | |
| | |
| | |
| | |
| | |
| |
Cash flows from operating activities | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Intercompany cash receipts from sales | |
| 3,100 | | |
| 27,681 | | |
| — | | |
| 9,729 | | |
| (40,510 | ) | |
| — | |
Intercompany cash payments for purchases | |
| (4,120 | ) | |
| (5,560 | ) | |
| — | | |
| (30,830 | ) | |
| 40,510 | | |
| — | |
Third parties cash activities | |
| (2,335 | ) | |
| (21,263 | ) | |
| (3 | ) | |
| 28,005 | | |
| — | | |
| 4,404 | |
Net cash (used in)/generated from operating activities(5) | |
| (3,355 | ) | |
| 858 | | |
| (3 | ) | |
| 6,904 | | |
| — | | |
| 4,404 | |
Cash flows from investing activities | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Purchase of property and equipment | |
| — | | |
| (17 | ) | |
| — | | |
| (394 | ) | |
| — | | |
| (411 | ) |
Purchase of intangible assets | |
| — | | |
| (14 | ) | |
| — | | |
| — | | |
| — | | |
| (14 | ) |
Proceeds from disposal of property and equipment | |
| — | | |
| 231 | | |
| — | | |
| 35 | | |
| — | | |
| 266 | |
Cash paid for equity investment | |
| — | | |
| (151 | ) | |
| — | | |
| (1,288 | ) | |
| 1,439 | | |
| — | |
Proceeds from equity investment | |
| — | | |
| 1,288 | | |
| — | | |
| 151 | | |
| (1,439 | ) | |
| — | |
Cash paid for long-term investment | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Increase in short-term deposit | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Purchase of other investments | |
| — | | |
| — | | |
| — | | |
| (3 | ) | |
| — | | |
| (3 | ) |
Intercompany fund transfers(6) | |
| — | | |
| (1,767 | ) | |
| — | | |
| (1,446 | ) | |
| 3,213 | | |
| — | |
Interest received from fund transfer within the group | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Net cash (used in)/generated from investing activities | |
| — | | |
| (430 | ) | |
| — | | |
| (2,945 | ) | |
| 3,213 | | |
| (162 | ) |
Cash flows from financing activities | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Proceeds from other borrowing | |
| — | | |
| — | | |
| — | | |
| 213 | | |
| — | | |
| 213 | |
Repayment of other borrowing | |
| — | | |
| — | | |
| — | | |
| (163 | ) | |
| — | | |
| (163 | ) |
Proceeds from bank borrowings | |
| — | | |
| 1,412 | | |
| — | | |
| 8,084 | | |
| — | | |
| 9,496 | |
Repayments of bank borrowings | |
| — | | |
| (1,570 | ) | |
| — | | |
| (7,883 | ) | |
| — | | |
| (9,453 | ) |
Proceeds from issuance of convertible bonds | |
| 4,735 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 4,735 | |
Redemption of convertible bonds | |
| (1,050 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| (1,050 | ) |
Payments relating to current lease liability | |
| — | | |
| (58 | ) | |
| — | | |
| (180 | ) | |
| — | | |
| (238 | ) |
Proceeds from initial public offering, net of issuance costs | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Proceeds from exercise of share options | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Intercompany fund transfers(6) | |
| — | | |
| 1,446 | | |
| — | | |
| 1,767 | | |
| (3,213 | ) | |
| — | |
Interest paid for fund transfer within the group | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Net cash generated from/(used in) financing activities | |
| 3,685 | | |
| 1,230 | | |
| — | | |
| 1,838 | | |
| (3,213 | ) | |
| 3,540 | |
Increase/(decrease) in cash, cash equivalents and restricted cash | |
| 330 | | |
| 1,658 | | |
| (3 | ) | |
| 5,797 | | |
| — | | |
| 7,782 | |
Cash, cash equivalents and restricted cash at beginning of year | |
| 133 | | |
| 293 | | |
| 5 | | |
| 7,437 | | |
| — | | |
| 7,868 | |
Effect of exchange rates on cash, cash equivalents and restricted cash | |
| — | | |
| — | | |
| — | | |
| (729 | ) | |
| — | | |
| (729 | ) |
Cash, cash equivalents and restricted cash at end of year | |
| 463 | | |
| 1,951 | | |
| 2 | | |
| 12,505 | | |
| — | | |
| 14,921 | |
| |
For the year ended December 31, 2021 | |
| |
Parent | | |
Former VIEs | | |
WFOE | | |
Other Subsidiaries | | |
Elimination | | |
Consolidated Total | |
Condensed Consolidating Schedules of Cash Flows | |
| | |
| | |
| | |
| | |
| | |
| |
Cash flows from operating activities | |
| | |
| | |
| | |
| | |
| | |
| |
Intercompany cash receipts from sales | |
| — | | |
| 29,584 | | |
| — | | |
| 7,298 | | |
| (36,882 | ) | |
| — | |
Intercompany cash payments for purchases | |
| — | | |
| (7,300 | ) | |
| — | | |
| (29,584 | ) | |
| 36,884 | | |
| — | |
Third parties cash activities | |
| (1,483 | ) | |
| (28,837 | ) | |
| (4 | ) | |
| 8,586 | | |
| — | | |
| (21,738 | ) |
Net cash (used in)/generated from operating activities(5) | |
| (1,483 | ) | |
| (6,553 | ) | |
| (4 | ) | |
| (13,700 | ) | |
| 2 | | |
| (21,738 | ) |
Cash flows from investing activities | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Purchase of property and equipment | |
| — | | |
| (191 | ) | |
| — | | |
| (596 | ) | |
| — | | |
| (787 | ) |
Purchase of intangible assets | |
| — | | |
| (89 | ) | |
| — | | |
| (3 | ) | |
| — | | |
| (92 | ) |
Proceeds from disposal of property and equipment | |
| — | | |
| 102 | | |
| — | | |
| 91 | | |
| — | | |
| 193 | |
Cash paid for equity investment | |
| — | | |
| — | | |
| — | | |
| (247 | ) | |
| — | | |
| (247 | ) |
Cash paid for long-term investment | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Increase in short-term deposit | |
| — | | |
| — | | |
| — | | |
| (2 | ) | |
| — | | |
| (2 | ) |
Purchase of other investments | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Intercompany fund transfers(6) | |
| (3,000 | ) | |
| — | | |
| — | | |
| (4,413 | ) | |
| 7,413 | | |
| — | |
Interest received from fund transfer within the group | |
| — | | |
| — | | |
| — | | |
| 61 | | |
| (61 | ) | |
| — | |
Net cash (used in)/generated from investing activities | |
| (3,000 | ) | |
| (178 | ) | |
| — | | |
| (5,109 | ) | |
| 7,352 | | |
| (935 | ) |
Cash flows from financing activities | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Proceeds from other borrowing | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Repayment of other borrowing | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Proceeds from bank borrowings | |
| — | | |
| 938 | | |
| — | | |
| 10,481 | | |
| — | | |
| 11,419 | |
Repayments of bank borrowings | |
| — | | |
| — | | |
| — | | |
| (11,968 | ) | |
| — | | |
| (11,968 | ) |
Proceeds from initial public offering, net of issuance costs | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Proceeds from exercise of share options | |
| 1,284 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 1,284 | |
Intercompany fund transfers(6) | |
| — | | |
| 4,413 | | |
| — | | |
| 3,000 | | |
| (7,413 | ) | |
| — | |
Interest paid for fund transfer within the group | |
| — | | |
| (61 | ) | |
| — | | |
| — | | |
| 61 | | |
| — | |
Net cash generated from/(used in) financing activities | |
| 1,284 | | |
| 5,290 | | |
| — | | |
| 1,513 | | |
| (7,352 | ) | |
| 735 | |
(Decrease)/increase in cash, cash equivalents and restricted cash | |
| (3,199 | ) | |
| (1,441 | ) | |
| (4 | ) | |
| (17,296 | ) | |
| 2 | | |
| (21,938 | ) |
Cash, cash equivalents and restricted cash at beginning of year | |
| 3,332 | | |
| 1,734 | | |
| 9 | | |
| 25,151 | | |
| — | | |
| 30,226 | |
Effect of exchange rates on cash, cash equivalents and restricted cash | |
| — | | |
| — | | |
| — | | |
| (418 | ) | |
| (2 | ) | |
| (420 | ) |
Cash, cash equivalents and restricted cash at end of year | |
| 133 | | |
| 293 | | |
| 5 | | |
| 7,437 | | |
| — | | |
| 7,868 | |
| |
For the year ended December 31, 2020 | |
| |
Parent | | |
Former VIEs | | |
WFOE | | |
Other Subsidiaries | | |
Elimination | | |
Consolidated Total | |
Condensed Consolidating Schedules of Cash Flows | |
| | |
| | |
| | |
| | |
| | |
| |
Cash flows from operating activities | |
| | |
| | |
| | |
| | |
| | |
| |
Intercompany cash receipts from sales | |
| — | | |
| 56,307 | | |
| — | | |
| 32,627 | | |
| (88,934 | ) | |
| — | |
Intercompany cash payments for purchases | |
| — | | |
| (32,663 | ) | |
| (148 | ) | |
| (56,159 | ) | |
| 88,970 | | |
| — | |
Third parties cash activities | |
| (1,514 | ) | |
| (28,577 | ) | |
| (2 | ) | |
| 28,055 | | |
| — | | |
| (2,038 | ) |
Net cash (used in)/generated from operating activities(5) | |
| (1,514 | ) | |
| (4,933 | ) | |
| (150 | ) | |
| 4,523 | | |
| 36 | | |
| (2,038 | ) |
Cash flows from investing activities | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Purchase of property and equipment | |
| — | | |
| (1,118 | ) | |
| — | | |
| (134 | ) | |
| — | | |
| (1,252 | ) |
Purchase of intangible assets | |
| — | | |
| (460 | ) | |
| — | | |
| (22 | ) | |
| — | | |
| (482 | ) |
Proceeds from disposal of property and equipment | |
| — | | |
| 382 | | |
| — | | |
| (152 | ) | |
| — | | |
| 230 | |
Cash paid for equity investment | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Cash paid for long-term investment | |
| — | | |
| — | | |
| — | | |
| (811 | ) | |
| — | | |
| (811 | ) |
Increase in short-term deposit | |
| — | | |
| — | | |
| — | | |
| (3 | ) | |
| — | | |
| (3 | ) |
Purchase of other investments | |
| — | | |
| — | | |
| — | | |
| (33,126 | ) | |
| — | | |
| (33,126 | ) |
Intercompany fund transfers(6) | |
| (38,598 | ) | |
| — | | |
| 642 | | |
| (6,905 | ) | |
| 44,861 | | |
| — | |
Interest received from fund transfer within the group | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Net cash (used in)/generated from investing activities | |
| (38,598 | ) | |
| (1,196 | ) | |
| 642 | | |
| (41,153 | ) | |
| 44,861 | | |
| (35,444 | ) |
Cash flows from financing activities | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Proceeds from other borrowing | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Repayment of other borrowing | |
| — | | |
| (1,819 | ) | |
| — | | |
| — | | |
| — | | |
| (1,819 | ) |
Proceeds from bank borrowings | |
| — | | |
| — | | |
| — | | |
| 3,674 | | |
| — | | |
| 3,674 | |
Repayments of bank borrowings | |
| — | | |
| (2,864 | ) | |
| — | | |
| (2,210 | ) | |
| — | | |
| (5,074 | ) |
Proceeds from initial public offering, net of issuance costs | |
| 29,904 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 29,904 | |
Proceeds from exercise of share options | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Intercompany fund transfers(6) | |
| — | | |
| 7,671 | | |
| (1,408 | ) | |
| 38,598 | | |
| (44,861 | ) | |
| — | |
Interest paid for fund transfer within the group | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Net cash generated from/(used in) financing activities | |
| 29,904 | | |
| 2,988 | | |
| (1,408 | ) | |
| 40,062 | | |
| (44,861 | ) | |
| 26,685 | |
(Decrease)/increase in cash, cash equivalents and restricted cash | |
| (10,208 | ) | |
| (3,141 | ) | |
| (916 | ) | |
| 3,432 | | |
| 36 | | |
| (10,797 | ) |
Cash, cash equivalents and restricted cash at beginning of year | |
| 13,540 | | |
| 4,875 | | |
| 925 | | |
| 20,934 | | |
| — | | |
| 40,274 | |
Effect of exchange rates on cash, cash equivalents and restricted cash | |
| — | | |
| — | | |
| — | | |
| 785 | | |
| (36 | ) | |
| 749 | |
Cash, cash equivalents and restricted cash at end of year | |
| 3,332 | | |
| 1,734 | | |
| 9 | | |
| 25,151 | | |
| — | | |
| 30,226 | |
Notes:
(1) | It represents the elimination of intercompany balances among the parent company, the former VIEs, the
WFOE, and subsidiaries. |
(2) | Intercompany sales of data plans, raw materials and Wi-Fi terminals were eliminated at the consolidation
level. |
(3) | It represents the elimination of the investment in the former VIEs, the WFOE and subsidiaries by the parent
company. |
(4) | Intercompany marketing and software licensing services were provided to the former VIEs by subsidiaries
and the related expenses were eliminated at the consolidated level. |
(5) | The cash flows which have occurred between subsidiaries, the WFOE and the former VIEs included the following: |
| ● | Cash paid by the former VIEs to subsidiaries for purchase
of data plans and raw materials; |
| ● | Cash paid by the former VIEs to subsidiaries for marketing
and software licensing services; |
| ● | Cash paid by the former VIEs to subsidiaries for subsidiary
establishment; |
| ● | Cash paid by subsidiaries and the WFOE to the former VIEs
for purchase of Wi-Fi terminals; |
| ● | Cash paid by subsidiaries to the former VIEs for transfer
of equity investment; |
With respect to sales
of data plans and raw materials, our subsidiaries received cash from the former VIEs amounted to US$27.1 million, US$1.9 million and US$0.9
million for the year ended December 31, 2020, 2021 and 2022 respectively. With respect to provision of marketing and software licensing
services, our subsidiaries received cash from the former VIEs amounted to US$5.5 million, US$5.4 million and US$4.7 million for the year
ended December 31, 2020, 2021 and 2022 respectively. With respect to subsidiary establishment, our subsidiary received cash from the former
VIEs amounted to nil, nil and US$0.2 million for the year ended December 31, 2020, 2021 and 2022 respectively. For purchase of Wi-Fi terminals,
our subsidiaries paid cash to the former VIEs amounted to US$55.9 million, US$29.4 million and US$27.7 million for the year ended December
31, 2020, 2021 and 2022 respectively. With respect to transfer of equity investment, our subsidiary paid cash to the former VIEs amounted
to nil, nil and US$1.3 million for the year ended December 31, 2020, 2021 and 2022 respectively.
(6) | The fund transfer within the group of the company between subsidiaries,
the WFOE and the former VIEs included the following: |
| ● | With respect to the fund transfer from the parent company
to subsidiaries, subsidiaries received cash from the parent company amounted to US$38.6 million, US$3.0 million and nil for the year
ended December 31, 2020, 2021 and 2022 respectively. |
| ● | With respect to the fund transfer between the former VIEs
and the WFOE, the former VIEs repaid cash to the WFOE amounted to US$0.6 million, nil and nil for the year ended December 31, 2020, 2021
and 2022, respectively. |
| ● | With respect to the fund transfer between the former VIEs
and subsidiaries, the former VIE received cash from subsidiaries amounted to US$8.3 million, US$4.4 million and US$1.5 million for the
year ended December 31, 2020, 2021 and 2022 respectively; the former VIE paid cash to subsidiaries amounted to nil, nil and US$1.8 million
for the year ended December 31, 2020, 2021 and 2022 respectively. |
| ● | With respect to the fund transfer between the WFOE and subsidiaries,
the WFOE repaid cash to subsidiaries amounted to US$1.4 million, nil and nil for the year ended December 31, 2020, 2021 and 2022, respectively. |
Set forth below is the table
showing the movement of investment in subsidiaries and the former VIEs in the parent’s financial statements as of and for the years
ended December 31, 2020, 2021 and 2022.
Deficit
in subsidiaries and the former VIEs | |
| US$’000 | |
December 31, 2019 | |
| 51,723 | |
Loss from subsidiaries and the former VIEs | |
| 12,490 | |
Foreign currency translation | |
| 1,133 | |
December 31, 2020 | |
| 65,346 | |
Loss from subsidiaries and the former VIEs | |
| 35,775 | |
Foreign currency translation | |
| 17 | |
December 31, 2021 | |
| 101,138 | |
Loss from subsidiaries and the former VIEs | |
| 15,381 | |
Foreign currency translation | |
| (2,581 | ) |
December 31, 2022 | |
| 113,938 | |
A. [Reserved]
The following selected consolidated
statements of comprehensive income/(loss) data for the years ended December 31, 2020, 2021 and 2022, selected consolidated balance sheets
data as of December 31, 2021 and 2022 and selected consolidated statements of cash flow data for the years ended December 31, 2020, 2021
and 2022 have been derived from our audited consolidated financial statements included elsewhere in this annual report. The following
selected consolidated statements of comprehensive loss data for the years ended December 31, 2018 and 2019, selected consolidated balance
sheets data as of December 31, 2018, 2019 and 2020 and selected consolidated statements of cash flow data for the year ended December
31, 2018 and 2019 have been derived from our audited consolidated financial statements not included in this annual report. Our consolidated
financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States of America,
or U.S. GAAP. Our historical results are not necessarily indicative of results expected for future periods. You should read this section
together with our consolidated financial statements and the related notes and “Item 5. Operating and Financial Review and Prospects”
included elsewhere in this annual report.
The following table presents
our selected consolidated statements of comprehensive (loss)/income data for the periods indicated:
| |
For the Year Ended December 31, | |
| |
2018 | | |
2019 | | |
2020 | | |
2021 | | |
2022 | |
| |
(US$ in thousands) | |
Revenues | |
| | |
| | |
| | |
| | |
| |
Revenues from services | |
| 88,448 | | |
| 91,110 | | |
| 46,150 | | |
| 37,798 | | |
| 46,228 | |
Sales of products | |
| 37,951 | | |
| 67,271 | | |
| 43,419 | | |
| 36,026 | | |
| 25,233 | |
Total revenues | |
| 126,399 | | |
| 158,381 | | |
| 89,569 | | |
| 73,824 | | |
| 71,461 | |
Cost of revenues | |
| | | |
| | | |
| | | |
| | | |
| | |
Cost of services | |
| (46,074 | ) | |
| (35,594 | ) | |
| (26,392 | ) | |
| (21,556 | ) | |
| (20,346 | ) |
Cost of products sold | |
| (34,170 | ) | |
| (57,869 | ) | |
| (34,872 | ) | |
| (30,434 | ) | |
| (18,581 | ) |
Total cost of revenues | |
| (80,244 | ) | |
| (93,463 | ) | |
| (61,264 | ) | |
| (51,990 | ) | |
| (38,927 | ) |
Gross profit | |
| 46,155 | | |
| 64,918 | | |
| 28,305 | | |
| 21,834 | | |
| 32,534 | |
Research and development expenses(1) | |
| (20,401 | ) | |
| (15,108 | ) | |
| (26,359 | ) | |
| (13,697 | ) | |
| (8,430 | ) |
Sales and marketing expenses(1) | |
| (29,658 | ) | |
| (24,367 | ) | |
| (29,261 | ) | |
| (13,620 | ) | |
| (10,305 | ) |
General and administrative expenses(1) | |
| (19,919 | ) | |
| (20,224 | ) | |
| (43,221 | ) | |
| (28,551 | ) | |
| (18,726 | ) |
Other income/(expense), net | |
| 658 | | |
| 290 | | |
| 7,554 | | |
| (11,876 | ) | |
| (14,265 | ) |
(Loss)/income from operations | |
| (23,165 | ) | |
| 5,509 | | |
| (62,982 | ) | |
| (45,910 | ) | |
| (19,192 | ) |
Interest income | |
| 435 | | |
| 193 | | |
| 37 | | |
| 14 | | |
| 18 | |
Interest expense | |
| (3,385 | ) | |
| (438 | ) | |
| (285 | ) | |
| (188 | ) | |
| (441 | ) |
Amortization of beneficial conversion feature | |
| — | | |
| — | | |
| — | | |
| — | | |
| (149 | ) |
(Loss)/income before income tax | |
| (26,115 | ) | |
| 5,264 | | |
| (63,230 | ) | |
| (46,084 | ) | |
| (19,764 | ) |
Income tax expenses | |
| — | | |
| (57 | ) | |
| (185 | ) | |
| (244 | ) | |
| (161 | ) |
Share of (loss)/profit in equity method investment, net of tax | |
| (442 | ) | |
| — | | |
| — | | |
| 287 | | |
| 72 | |
Net (loss)/income | |
| (26,557 | ) | |
| 5,207 | | |
| (63,415 | ) | |
| (46,041 | ) | |
| (19,853 | ) |
Accretion of Series A-2 ordinary shares and Series A Preferred Shares | |
| (2,209 | ) | |
| (2,540 | ) | |
| (1,293 | ) | |
| — | | |
| — | |
Income allocation to participating preferred shareholders | |
| — | | |
| (296 | ) | |
| — | | |
| — | | |
| — | |
Net (loss)/income attributable to ordinary shareholders of the Company | |
| (28,766 | ) | |
| 2,371 | | |
| (64,708 | ) | |
| (46,041 | ) | |
| (19,853 | ) |
Net (loss)/income | |
| (26,557 | ) | |
| 5,207 | | |
| (63,415 | ) | |
| (46,041 | ) | |
| (19,853 | ) |
Other comprehensive (loss)/income, net of tax | |
| | | |
| | | |
| | | |
| | | |
| | |
Foreign currency translation adjustment | |
| 537 | | |
| 32 | | |
| (1,135 | ) | |
| (17 | ) | |
| 2,322 | |
Total comprehensive (loss)/income | |
| (26,020 | ) | |
| 5,239 | | |
| (64,550 | ) | |
| (46,058 | ) | |
| (17,531 | ) |
(Loss)/income per share attributable to ordinary shareholders of the Company | |
| | | |
| | | |
| | | |
| | | |
| | |
Basic and diluted | |
| (0.16 | ) | |
| 0.01 | | |
| (0.25 | ) | |
| (0.16 | ) | |
| (0.06 | ) |
Weighted average number of ordinary shares used in computing net (loss)/income per share | |
| | | |
| | | |
| | | |
| | | |
| | |
Basic and diluted | |
| 185,370,982 | | |
| 232,178,037 | | |
| 259,852,204 | | |
| 285,979,036 | | |
| 312,485,140 | |
Note:
(1) | Including share-based compensation of US$2.3 million, US$0.2 million, US$50.6 million, US$8.8 million
and US$3.1 million in 2018, 2019, 2020, 2021 and 2022, respectively. Share-based compensation in 2020 mainly includes share options granted
to our employees, directors and officers. Share-based compensation in 2021 and 2022 mainly includes restricted share units and share options
granted to our employees, directors and other consultants. As of December 31, 2022, there was US$2.1 million of unrecognized share-based
compensation expense related to granted restricted share units and share options. |
The following table presents
our selected consolidated balance sheet data as of the dates indicated:
| |
As of December 31, | |
| |
2018 | | |
2019 | | |
2020 | | |
2021 | | |
2022 | |
| |
(US$ in thousands) | |
Cash and cash equivalents | |
| 36,464 | | |
| 37,320 | | |
| 21,989 | | |
| 7,868 | | |
| 14,921 | |
Restricted cash | |
| 163 | | |
| 2,954 | | |
| 8,237 | | |
| — | | |
| — | |
Accounts receivable, net | |
| 16,631 | | |
| 25,767 | | |
| 6,745 | | |
| 14,923 | | |
| 5,961 | |
Inventories | |
| 12,020 | | |
| 10,518 | | |
| 5,847 | | |
| 6,133 | | |
| 3,624 | |
Prepayments and other current assets | |
| 10,423 | | |
| 7,828 | | |
| 7,477 | | |
| 6,225 | | |
| 4,255 | |
Total assets | |
| 80,505 | | |
| 90,097 | | |
| 97,254 | | |
| 67,125 | | |
| 45,934 | |
Accrued expenses and other liabilities | |
| 18,755 | | |
| 21,319 | | |
| 25,742 | | |
| 27,580 | | |
| 24,014 | |
Accounts payables | |
| 12,673 | | |
| 16,728 | | |
| 8,701 | | |
| 12,986 | | |
| 6,832 | |
Total liabilities | |
| 43,469 | | |
| 47,653 | | |
| 40,860 | | |
| 47,033 | | |
| 36,643 | |
Total mezzanine equity | |
| 20,437 | | |
| 22,977 | | |
| — | | |
| — | | |
| — | |
Total shareholders’ equity | |
| 16,599 | | |
| 19,467 | | |
| 56,394 | | |
| 20,092 | | |
| 9,291 | |
Total liabilities, mezzanine equity and shareholders’ equity | |
| 80,505 | | |
| 90,097 | | |
| 97,254 | | |
| 67,125 | | |
| 45,934 | |
The following table presents
our selected consolidated cash flow data for the periods indicated:
| |
For the Year ended December 31, | |
| |
2018 | | |
2019 | | |
2020 | | |
2021 | | |
2022 | |
| |
(US$ in thousands) | |
Selected Consolidated Cash Flow Data: | |
| | |
| | |
| | |
| | |
| |
Net cash (used in)/generated from operating activities | |
| (19,472 | ) | |
| 5,761 | | |
| (2,038 | ) | |
| (21,738 | ) | |
| 4,404 | |
Net cash used in investing activities | |
| (4,569 | ) | |
| (3,267 | ) | |
| (35,444 | ) | |
| (935 | ) | |
| (162 | ) |
Net cash generated from financing activities | |
| 4,421 | | |
| 1,528 | | |
| 26,685 | | |
| 735 | | |
| 3,540 | |
(Decrease)/increase in cash, cash equivalents and restricted cash | |
| (19,620 | ) | |
| 4,022 | | |
| (10,797 | ) | |
| (21,938 | ) | |
| 7,782 | |
Effect of exchange rates on cash, cash equivalents and restricted cash | |
| (559 | ) | |
| (375 | ) | |
| 749 | | |
| (420 | ) | |
| (729 | ) |
Cash, cash equivalents and restricted cash at beginning of year | |
| 56,806 | | |
| 36,627 | | |
| 40,274 | | |
| 30,226 | | |
| 7,868 | |
Cash, cash equivalents and restricted cash at end of year | |
| 36,627 | | |
| 40,274 | | |
| 30,226 | | |
| 7,868 | | |
| 14,921 | |
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Summary of Risk Factors
An investment in our ADSs
involves significant risks. All the operational risks associated with being based in and having operations in mainland China also apply
to operations in Hong Kong. You should carefully consider all of the information in this annual report, including the risks and uncertainties
described below, before making an investment in our ADSs. Any of the following risks could have a material adverse effect on our business,
financial condition and results of operations. In any such case, the market price of our ADSs could decline, and you may lose all or part
of your investment. Below please find a summary of the principal risks we and the former VIEs face, organized under relevant
headings. These risks are discussed more fully after this summary in “Item 3. Key Information—D. Risk Factors.”
Risks Relating to
Our Business and Industry
We and the former VIEs are
subject to risks and uncertainties related to our business and industry, including, but not limited to, the following:
| ● | Our business has been and may continue to be materially and
adversely affected by the effects of COVID-19 pandemic in China and globally. See “Item 3. Key Information—D. Risk Factors—Risks
Related to Our Business and Industry—Our business has been and may continue to be materially and adversely affected by the effects
of COVID-19 pandemic in China and globally.” |
| ● | We depend on network operators for their wireless networks,
infrastructures and data traffic, and any disruptions of or limitations on our use of such networks, infrastructures and data traffic
may adversely affect our business and financial results. See “Item 3. Key Information—D. Risk Factors—Risks Related
to Our Business and Industry—We depend on network operators for their wireless networks, infrastructures and data traffic, and
any disruptions of or limitations on our use of such networks, infrastructures and data traffic may adversely affect our business and
financial results.” |
| ● | Our ability to grow our business and user base for our service
may be limited unless we can continue to obtain data traffic at favorable rates. See “Item 3. Key Information—D. Risk Factors—Risks
Related to Our Business and Industry—Our ability to grow our business and user base for our service may be limited unless we can
continue to obtain data traffic at favorable rates.” |
| ● | We are and may be subject to extensive telecommunications
regulations, and any change in the regulatory environment may materially impact us. See “Item 3. Key Information—D. Risk
Factors—Risks Related to Our Business and Industry—We are and may be subject to extensive telecommunications regulations,
and any change in the regulatory environment may materially impact us.” |
| ● | Our intellectual property rights are valuable, and any inability
to protect them could reduce the value of our products, services, and brand. See “Item 3. Key Information—D. Risk Factors—Risks
Related to Our Business and Industry—Our intellectual property rights are valuable, and any inability to protect them could reduce
the value of our products, services, and brand.” |
| ● | We are, and may in the future be, subject to intellectual
property claims, which are costly to defend, could result in significant damage awards, disrupt our business operation, and could limit
our ability to use certain technologies in the future. See “Item 3. Key Information—D. Risk Factors—Risks Related to
Our Business and Industry—We are, and may in the future be, subject to intellectual property claims, which are costly to defend,
could result in significant damage awards, disrupt our business operation, and could limit our ability to use certain technologies in
the future.” |
| ● | We have a limited operating history, which makes it difficult
to evaluate our future prospects. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—We
have a limited operating history, which makes it difficult to evaluate our future prospects.” |
| ● | Our and the former VIEs’ business is subject to complex
and evolving Chinese and international laws and regulations regarding data privacy and cybersecurity. The improper use or disclosure
of data could have a material and adverse effect on our business and prospects. Many of these laws and regulations are subject to change
and uncertain interpretation, and could result in claims, penalties, changes to our business practices, increased cost of operations,
damages to our reputation and brand, or otherwise harm our business. See “Item 3. Key Information—D. Risk Factors—Risks
Related to Our Business and Industry—Our and the former VIEs’ business is subject to complex and evolving Chinese and international
laws and regulations regarding data privacy and cybersecurity. The improper use or disclosure of data could have a material and adverse
effect on our business and prospects. Many of these laws and regulations are subject to change and uncertain interpretation, and could
result in claims, penalties, changes to our business practices, increased cost of operations, damages to our reputation and brand, or
otherwise harm our business.” |
| ● | We face risks relating to our business partnerships and strategic
alliances. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—We face risks
relating to our business partnerships and strategic alliances.” |
Risks Related to
Our Corporate Structure
We and the former VIEs face
risks and uncertainties related to the former corporate structure, including, but not limited to, the following:
| ● | If the PRC government determines that the contractual arrangements
with the former VIEs structure did not comply with the regulations of mainland China, or if these regulations change or are interpreted
differently in the future, our shares and/or ADSs may decline in value or become worthless if we are deemed to be unable to assert our
contractual control rights over the assets of the former VIEs. See “Item 3. Key Information—D. Risk Factors—Risks Related
to Our Corporate Structure—If the PRC government determines that the contractual arrangements with the former VIEs structure did
not comply with the regulations of mainland China, or if these regulations change or are interpreted differently in the future, our shares
and/or ADSs may decline in value or become worthless if we are deemed to be unable to assert our contractual control rights over the
assets of the former VIEs.” |
Risks Related to
Doing Business in China
We and the former VIEs face
risks and uncertainties related to doing business in China in general, including, but not limited to, the following:
| ● | Changes in China’s economic, political or social conditions
or government policies could have a material adverse effect on our business and operations. The enforcement of laws and rules and regulations
in mainland China may change quickly with little advance notice, which could result in a material adverse change in our operations and
the value of our ADSs. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Changes
in China’s economic, political or social conditions or government policies could have a material adverse effect on our business
and operations.” |
| ● | The approval and/or other requirements of the CSRC, the CAC,
or other PRC governmental authorities may be required in connection with an offering under the rules, regulations or policies of mainland
China, and, if required, we cannot predict whether or how soon we will be able to obtain such approval, and, even if we obtain such approval,
the approval could be rescinded. Any failure to obtain or delay in obtaining such approval for this offering, or a rescission of obtained
approval, would subject us to sanctions imposed by the CSRC or other PRC government authorities. See “Item 3. Key Information—D.
Risk Factors—Risks Related to Doing Business in China—The approval and/or other requirements of the CSRC, the CAC, or other
PRC governmental authorities may be required in connection with an offering under the rules, regulations or policies of mainland China,
and, if required, we cannot predict whether or how soon we will be able to obtain such approval, and, even if we obtain such approval,
the approval could be rescinded. Any failure to obtain or delay in obtaining such approval for this offering, or a rescission of obtained
approval, would subject us to sanctions imposed by the CSRC or other PRC government authorities.” |
| ● | The PRC government’s significant oversight over our
business operation could result in a material adverse change in our operations and the value of our ADSs. The PRC government may intervene
or influence our operations as the government deems appropriate to advance regulatory and social goals and policy positions. Any actions
taken or policies released by the PRC government could significantly impact our industry or limit or completely hinder our operations
and cause the value of such securities to significantly decline or become worthless. See “Item 3. Key Information—D. Risk
Factors—Risks Related to Doing Business in China—The PRC government’s significant oversight over our business operation
could result in a material adverse change in our operations and the value of our ADSs.” |
| ● | The PCAOB had historically been unable to inspect our auditor
in relation to their audit work performed for our financial statements and the inability of the PCAOB to conduct inspections of our auditor
in the past has deprived our investors with the benefits of such inspections. See “Item 3. Key Information—D. Risk Factors—Risks
Related to Doing Business in China—The PCAOB had historically been unable to inspect our auditor in relation to their audit work
performed for our financial statements and the inability of the PCAOB to conduct inspections of our auditor in the past has deprived
our investors with the benefits of such inspections.” |
| ● | Our ADSs may be prohibited from trading in the United States
under the HFCAA in the future if the PCAOB is unable to inspect or investigate completely our current auditor. The delisting of the ADSs,
or the threat of their being delisted, may materially and adversely affect the value of your investment. See “Item 3. Key Information—D.
Risk Factors—Risks Related to Doing Business in China—Our ADSs may be prohibited from trading in the United States under
the HFCAA in the future if the PCAOB is unable to inspect or investigate completely our current auditor. The delisting of the ADSs, or
the threat of their being delisted, may materially and adversely affect the value of your investment.” |
Risks Related to
The ADSs
Risks and uncertainties related
to our ADSs include, but are not limited to, the following:
| ● | The trading price of the ADSs may be volatile, which could
result in substantial losses to you. See “Item 3. Key Information—D. Risk Factors—Risks Related to The ADSs—The
trading price of the ADSs may be volatile, which could result in substantial losses to you.” |
| ● | If we fail to meet Nasdaq’s minimum bid price or other
continued listing requirements, our ADSs could be subject to delisting, which may significantly reduce the liquidity of our ADSs and
cause further declines to the market price of our ADSs. See “Item 3. Key Information—D. Risk Factors—Risks Related
to The ADSs—If we fail to meet Nasdaq’s minimum bid price or other continued listing requirements, our ADSs could be subject
to delisting, which may significantly reduce the liquidity of our ADSs and cause further declines to the market price of our ADSs.” |
| ● | Our dual class share structure with different voting rights
will limit your ability to influence corporate matters and could discourage others from pursuing any change of control transactions that
holders of our Class A ordinary shares and ADSs may view as beneficial. See “Item 3. Key Information—D. Risk Factors—Risks
Related to The ADSs—Our dual class share structure with different voting rights will limit your ability to influence corporate
matters and could discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares and
ADSs may view as beneficial.” |
Risks Related to Our Business
and Industry
Our business has
been and may continue to be materially and adversely affected by the effects of COVID-19 pandemic in China and globally.
Beginning in 2020, outbreaks
of COVID-19 resulted in the temporary closure of many corporate offices, retail stores, and manufacturing facilities across China. Normal
economic life throughout China was sharply curtailed. We took a series of measures to protect our employees, including temporarily closing
our offices, facilitating remote working arrangements for our employees, and canceling business meetings and travels. The operations of
our business partners in China and globally were also impacted. The population in most of the major cities in China was locked down to
a greater or lesser extent at various times and opportunities for discretionary consumption were extremely limited. At the same time,
the outbreak of COVID-19 has caused a severe decline in the level of business and leisure travel around the globe. As a result, demand
for our international data connectivity services is significantly reduced. Such decline also caused a decrease in revenues from sales
of terminals and provision of PaaS and SaaS services to our business partners. In addition to the decrease in demand of individual consumers
that use our services and purchase our products, our business partners have also been adversely affected by the outbreak, purchasing fewer
of our terminals and using less of our PaaS and SaaS services. Customers may require additional time to pay us or fail to pay us at all.
These events have materially and adversely affected our business since 2020 and contributed to lower revenues, increased accounts receivable,
additional allowances for doubtful accounts, write-off of bad debts, rising material costs and reduced profits.
China began to modify its
zero-COVID policy at the end of 2022, and most of the travel restrictions and quarantine requirements were lifted in December. There were
surges of cases in many cities during this time, and there remains uncertainty as to the future impact of the virus, especially in light
of this change in policy. The extent to which the pandemic impacts our results of operations going forward will depend on future developments
which are highly uncertain and unpredictable, including the frequency, duration and extent of outbreaks of COVID-19, the appearance of
new variants with different characteristics, the effectiveness of efforts to contain or treat cases, and future actions that may be taken
in response to these developments. China may experience lower domestic consumption, higher unemployment, severe disruptions to exporting
of goods to other countries and greater economic uncertainty, which may impact our business in a materially negative way as our business
depends substantially on economic conditions and the general demand for cross-border travels. International travels will need time to
recover from the effects of the pandemic even after business conditions begin to return to normal. Consequently, the COVID-19 pandemic
may continue to materially and adversely affect our business, financial condition and results of operations in the current and future
years.
We depend on network
operators for their wireless networks, infrastructures and data traffic, and any disruptions of or limitations on our use of such networks,
infrastructures and data traffic may adversely affect our business and financial results.
We do not own or operate a
physical network, but rather utilize the global wireless communication networks of mobile network operators (MNOs) through data
traffic procurement from data traffic suppliers. The reliable service we provide to our users depends on those networks. If the MNOs fail
to maintain their wireless facilities and government authorizations or to comply with government policies and regulations, the connection
of our terminals, be it the initial connection or continued service connection, may be adversely affected. Some of the risks related
to MNOs’ wireless communication networks and infrastructures include: major equipment failures, breaches of network or information
technology security that affect their wireless networks, including transport facilities, communications switches, routers, microwave links,
cell sites or other equipment or third-party owned local and long-distance networks on which we rely, power surges or outages, software
defects and disruptions beyond their control, such as natural disasters and acts of terrorism, among others. Any impact on their wireless
communication networks could disrupt our operations, require significant resources, result in a loss of users or impair our ability to
attract new users, which in turn could have a material adverse effect on our business, results of operations and financial condition.
Furthermore, while no data
traffic supplier supplies a considerable portion of our SIM cards in our SIM pool and there are usually multiple available networks in
major markets, our business may be materially adversely impacted if certain data traffic suppliers limit or deny our access to and usage
of their networks and data traffic. The data traffic suppliers may determine that the service we provide or the cloud SIM technology we
use does not fully comply with local telecommunications regulations, or is not fully compatible with the data traffic suppliers’
technical requirements, policies or contract provisions. The contracts we entered into for the network service and data traffic supply
demonstrated varying degrees of certainties on whether and to what extent we are allowed to use the data traffic supply pursuant to our
business model. A small number of contracts can be interpreted to have prohibited commercial use of our procured SIM cards. If data traffic
suppliers consider that our business model and usage of data traffic do not comply with the agreements contained in relevant contracts,
or in violation of local regulations, they can, among others, block the hotspot Wi-Fi function, limit the speed of the network we use,
or completely terminate their services. Any of these actions taken by data traffic suppliers may have a material adverse effect on our
business, results of operations and financial condition. In addition, our business may be adversely affected if certain mobile network
operators restrict the data usage of SIM cards, for example, by changing infinite data packages to limited data packages, which may reduce
the data available to users.
Our ability to grow
our business and user base for our service may be limited unless we can continue to obtain data traffic at favorable rates.
To further expand our business,
we must continue to obtain wireless data traffic at favorable rates and terms. Our operating performance and ability to attract new users
may be adversely affected if we are unable to meet increasing demands for our services in a timely and efficient manner.
Negotiations with prospective
and existing data traffic suppliers also require substantial time, effort and resources. We may ultimately fail in our negotiations, resulting
in costs to our business without any associated benefits. The termination or failure of renewal of our contracts with major suppliers
for our data traffic can adversely affect our business and financial results. These contracts are in most cases for finite terms and,
therefore, there can be no guarantee that they will be renewed at all or on favorable terms to us. Our business and results of operations
would be adversely affected if these contracts were terminated or we were unable to enter into data traffic supply agreements in the future
to provide our services to our users, which could result in a reduction of our revenues and profits.
Mergers and acquisitions among
MNOs and MVNOs, either voluntary or government-driven, can result in fewer players in the telecommunications market, and as a consequence
reduce our options for data traffic supply as well as our bargaining power. A more consolidated telecommunications market in a region
may also partially negate the demand for our mobile data connectivity service as resources are combined and fewer negotiations are needed
among the operators for network sharing or roaming.
We are and may be
subject to extensive telecommunications regulations, and any change in the regulatory environment may materially impact us.
In most countries in which
we operate, we may be required to comply with various regulatory obligations governing the provision of our products and services, primarily
relating to telecommunications regulations. Due to the international reach of our services, it is difficult and costly to evaluate the
regulatory environment in a given market and to what extent we are in compliance. Across different jurisdictions, we may be viewed as
providing different services, and thus are required to obtain different licenses and permits. In addition, we may face and be subject
to the governmental investigation and inquiries, initiated by the governmental authorities on their own or by responding the reports or
complaints from our competitors, and/or our users. Below we list a few examples of regional regulatory frameworks in selected markets
where we have entered or plan to enter in the future.
Telecommunications operators
in mainland China are subject to regulation by, and under the supervision of, the MIIT, the primary regulator of the telecommunications
industry in mainland China. Other PRC government authorities also take part in regulating the telecommunications industry in areas such
as tariff policies and foreign investment. The MIIT, under the direction of the State Council, has been preparing a draft telecommunications
law, which, once adopted, will become the fundamental telecommunications statute and the legal basis for telecommunications regulations
in mainland China. In 2000, the State Council promulgated a set of telecommunications regulations, or the Telecommunications Regulations,
that apply in the interim period prior to the adoption of the telecommunications law. In 2020, mainland China also tightened the enforcement
of certain telecommunication regulations such as real-name authentication for SIM card users and restrictions on the use of machine-to-machine
data SIM cards.
On May 17, 2013, the MIIT
announced the Mobile Telecommunication Resale Service Pilot Scheme to encourage private investment in the telecommunications industry,
which represented the official approval of the MVNO business. See “Item 4. Information on the Company—B. Business Overview—Regulation—Mainland
China—Regulations Related to Mobile Data Traffic Service.” According to the laws and regulations of mainland China related
to MVNO, and our consultation with the local branch of MIIT, we understand that the key character of MVNO is that it purchases mobile
telecommunication services from MNOs who own physical network, and then re-organize and resell these services to end-users under their
own brands. We understand our business is significantly different from mobile telecommunication resale service in mainland China, including,
(i) we only use our own brands to provide terminals and technology to our users, but not to resale mobile telecommunication services,
and we emphasize in our users’ agreement that we only provide mobile data connectivity services, while all the data traffic are
produced and provided by MNOs or MVNOs; (ii) we enable end-users to gain access to mobile data traffic without physical SIM cards by our
services, but end-users do not gain access to any other mobile telecommunication services, for example, among others, voice services,
short messages, through our services; (iii) MVNOs usually provide physical SIM cards with a specific phone number to users, through which
users are able to get access to data traffic and voice services. However, our mobile data connectivity services do not contain physical
SIM cards or phone numbers. Based on the above understanding, our PRC legal counsel, Han Kun Law Offices, is of the opinion that the service
we provide in mainland China is not mobile telecommunication resale service stipulated definitely under the laws and regulations of mainland
China. We received an Investigation Notice issued by GCA on July 16, 2019, which indicates that Shenzhen uCloudlink has been reported
to engage in the mobile telecommunication resale business without requisite approvals. We attended an interview conducted by the GCA on
July 19, 2019. However, as of the date of this annual report, we have not received any clearance from the GCA which indicates that it
regards us as not engaging in the mobile telecommunication resale service, and there can be no assurance that we will be able to receive
such final clearance. Our PRC legal counsel advised us that as the regulations of mainland China related to MVNOs and mobile telecommunication
resale service is still in a nascent stage and keeps developing, and our business model shares certain similarities with mobile telecommunication
resale service, there is no assurance that our competitors, our users will not report us to the PRC governmental authorities again, and
there is no assurance that the PRC governmental authorities will hold the same opinion in the future and will not regard us as an MVNO.
We have also entered into cooperation with an MVNO to conduct certain business transactions. There is no assurance that such cooperation
will resolve all compliance issues under the developing regulatory regime of mainland China.
As a network service provider
in mainland China, we are obligated to require the users to provide their real identity information when signing agreements or confirmations
on the provision of services stipulated under relevant laws and regulations. Historically, one of our terminals in mainland China enabled
the end-users to gain access to the data traffic without providing any users’ identity information, for which we received a rectification
order from the GCA on May 7, 2019. We have submitted our rectification plan to the GCA. As of the date of this annual report, we have
not received any final clearance from the GCA that our rectification plan is sufficient, and there can be no assurance that we will receive
such final clearance. We received an Investigation Notice issued by GCA on July 16, 2019, which indicates that Shenzhen uCloudlink provides
network access service for end-users without requiring them to provide identity information. We attended an interview conducted by the
GCA on July 19, 2019. As of the date of this annual report, we do not receive any clearance from the GCA which indicates that we have
fulfilled the obligation of real-name authentication obligation, and there can be no assurance that we will be able to receive such final
clearance. As MNOs and MVNOs are required to obtain the real identity information of their users when conduct network access formalities
for mobile phone numbers, we establish our authentication method on top of such by requiring our users to provide us the verification
codes we sent to their mobile phone numbers when they first register in our Apps. The users will provide their information for the real
name registration to MNOs and MVNOs directly.
We purchase machine to machine
data SIM cards, or M2M Data SIM Cards, to support our service in mainland China. In addition to the usage limitation set forth in the
purchase agreements, laws and regulations of mainland China also have other restrictions, and further require the MVOs and MVNOs to oversee
and regulate the usage of M2M Data SIM Cards, including but not limited to prohibition of reselling M2M Data SIM Cards or using M2M Data
SIM Cards for non-industry uses. We received a rectification notice from the GCA on February 24, 2020. The notice indicates that it came
to GCA’s knowledge that one of the former VIEs, Shenzhen uCloudlink, has been changing the usage scenarios of M2M Data SIM Cards.
The notice requires Shenzhen uCloudlink to take rectification measures with respect to the services we provide to users in mainland China,
including shutting down the systems related to SIM BANK and stop selling or sending data traffic by separating the phone numbers from
M2M Data SIM Cards no later than March 13, 2020. Upon receiving the notice, we started adjusting our technologies and operations accordingly
and communicating with the GCA regarding rectification measures to take. On April 9, 2020, we officially submitted our rectification report
to the GCA, which indicates that we will (i) stop selling in mainland China all portable Wi-Fi devices with SIM BANK function and using
data allowances provided by domestics carriers of mainland China; (ii) stop using the technology to separate physical M2M Data SIM cards
from phone numbers or to remotely insert virtual numbers to the devices; (iii) by the end of 2020, adjust our services to current end-users
by providing alternative services and shutting down functions relating to mobile network switching, provided that the end-users will
be entitled to refunds if the users are not satisfied with the adjustment; and (iv) report to the GCA on the progress of our rectifications.
On May 8, 2020, we submitted a supplementary rectification report to GCA to further update the progress of our rectification measures.
As of the date of this annual report, we have not received any final clearance from the GCA on our rectification measures, and there can
be no assurance that we will receive such final clearance. Since the interpretation and application of regulations and laws related to
M2M Data SIM Cards in mainland China remain unclear, and there are uncertainties as to the restriction on the use of M2M Data SIM Cards,
including the definition of resale and non-industry uses, our usage of M2M Data SIM Cards may be deemed in violation of relevant regulations.
In that case, we could be subject to administrative proceedings, orders, fines, or penalties, our cooperative MNOs and MVNOs may block
data traffic or even terminate our cooperation, and our business, financial condition, results of operations and prospects may be materially
and adversely affected.
In Japan, the Telecommunications
Business Act, generally requires that those who plan to provide telecommunications services be registered as telecommunications business
operators. We have finished the registration of, and obtained an MVNO license for, our subsidiary in Japan.
Telecommunications business
operators in Japan are prohibited from acquiring, using without permission, or leaking private communications (including, but not limited
to, the contents of communications, the dates and places of the communications, the names and addresses, telephone numbers and IP addresses).
The Telecommunications Business Act also requires a telecommunications business operator to, among other things, provide its service in
a fair manner and, in certain emergency situations such as a natural disaster, prioritize important public communications. If, among other
things, the acquisition, use without permission or leakage of private communications occurs or is not appropriately prevented in connection
with the operation of the telecommunications business, a telecommunications business operator does not satisfy the foregoing requirements,
or its business operation is otherwise inappropriate or unreasonable, such telecommunications business operator may be subjected to administrative
or criminal sanctions.
In Hong Kong, the Telecommunications
Ordinance (Chapter 106 of the Laws of Hong Kong), generally requires, among others, that those who plan to (i) deal in the course of trade
or business in apparatus or material for radio communications; or (ii) offer in the course of business a telecommunication services, to
apply for an appropriate license. Currently, we have a Radio Dealers License (Unrestricted) and are preparing an application to the Communications
Authority in Hong Kong for a Services-Based Operator License. However, there is no assurance that due to the expansion and changes to
our product and service offerings from time to time, we possess or will possess all relevant or required licenses. See “Item 4.
Information on the Company—B. Business Overview—Regulation—Hong Kong—Laws and Regulations Related to Telecommunication
Services and Import and Export of Telecommunication Devices.” In the event that the Communications Authority in Hong Kong is of
the view that we are required to, but have not obtained, the specific license at the relevant time, we and any responsible directors or
other officers may be subject to fines and/or criminal liabilities. After obtaining a specific license from the Communications Authority,
we will also be subject to any licensing conditions imposed by the Communications Authority and there is no assurance that this will not
require us to change our practices and/or require additional expenditures on resources to ensure compliance.
In January 2021, the Hong
Kong Government proposed a Real-name Registration Programme for Subscriber Identity Module (SIM) Cards. On 1 September 2021, the Telecommunications
(Registration of SIM cards) Regulation (Chapter 106AI of the Laws of Hong Kong) was enacted and it applies to any form of SIM card, be
it physical or non-physical SIM cards, and SIM cards with changeable SIM profiles which may be downloaded over-the-air, or any other technical
means which identifies and authenticates a subscriber for access to a telecommunications service provided in Hong Kong by a licensee holding
a unified carrier licence, SBO licence or person given a right under a class licence created under the Telecommunications Ordinance. It
requires that all SIM cards issued by telecommunications operators of Hong Kong to be used for local person-to-person communications shall
have real-name registration within a specified period before activation. The Real-name Registration Programme is implemented
in two phases. Telecommunications operators are required to put in place relevant infrastructure and systems for implementing real-name
registration within phase one (i.e. on or before February 28, 2022). Phase two of the Real-name Registration Programme began
on March 1, 2022, whereby all newly effective SIM service plan (SSP) services and new pre-paid SIM (PPS) cards issued from March 1, 2022
onwards will require real-name registration before activation. For pre-paid SIM cards, a licensee shall register no more than 10
SIM cards for any individual user, and 25 SIM cards for any organization user holding a valid business/branch registration certificate
under the Business Registration Ordinance, and it shall check and verify specific information and keep and store the specified information
collected for a specified time. A licencee is responsible for fulfilling the obligation under Telecommunications (Registration of SIM
cards) Regulation (Chapter 106AI of the Laws of Hong Kong). Certain types of SIM cards are excluded from the registration requirements.
In March 2022, we have launched our newly developed real name registration platform after liaising with Hong Kong Office of the Communications
Authority.
The overall legal framework
of the European Union (EU) was modified by the Directive (EU) 2018/1972 of December 11, 2018 establishing the European Electronic Communications
Code (also known as the new European Electronic Communications Code – EECC) which took effect on December 20, 2018. The EU member
states were required to transpose the requirements of the EECC into national law by December 21, 2020. With effect from December 21, 2020,
the EECC repealed four main directives on:
| ● | a common regulatory framework for electronic communications
networks and services; |
| ● | the authorization of electronic communications networks and
services; |
| ● | access to and interconnection of electronic communications
networks and associated facilities; |
| ● | universal service and users’ rights relating to electronic
communications networks and services. |
With respect to roaming, Regulation
(EU) 2015/2120 of November 25, 2015 (also known as the Telecoms Single Market package—TSM), which aims, in particular, to eliminate
surcharges for international roaming within the European Union, and Regulation (EU) 2017/920 of May 17, 2017, which lays down the rules
for wholesale roaming markets:
| ● | impose, in the context of fair usage, the alignment of international
roaming retail prices with national prices for intra-European communications (voice, SMS and data) from June 15, 2017; |
| ● | expand, for users using their cell phones outside the EU,
pricing transparency requirements and bill shock prevention measures for European operators; |
| ● | grant a regulated right of access to European mobile data
connectivity services for MVNOs and resellers, and sets new caps on wholesale markets. |
The EU regulations and proposals,
by reducing the price for international roaming, increasing pricing transparency for users, and lowering entry barriers for the provision
of mobile data connectivity services, may reduce the demand for and growth potential of our international mobile data connectivity services.
With respect to the regulation
of communication services, most of the obligations intended to protect end-users are for Internet access service and services using public
numbering plan resources, independently of the service provider. Other services, such as interpersonal communication services independent
of the numbering plan and signal transport services are only subject to a limited number of obligations.
In the U.S., the Federal Communications
Commission, or FCC, Federal Trade Commission, or FTC, and Consumer Financial Protection Bureau, or CFPB, and other federal, state and
local, as well as international, governmental authorities assert jurisdiction over the telecommunications industry. The licensing, construction,
operation, sale and interconnection arrangements of wireless telecommunications systems are regulated by the FCC and, depending on the
jurisdiction, international, state and local regulatory agencies. In particular, the FCC imposes significant regulation on licensees of
wireless spectrum with respect to how radio spectrum is used by licensees, the nature of the services that licensees may offer and how
the services may be offered, and resolution of issues of interference between spectrum bands. The FCC grants wireless licenses for terms
of generally ten years that are subject to renewal. If a licensee fails to comply with the key terms of its license, including build-out
requirements, its license may be subject to revocation. Over the past few years, the FCC and other federal and state agencies have engaged
in increased regulatory and enforcement activity as well as investigations of the industry generally. Enforcement activities or investigations
could make it more difficult and expensive to provide services like international or local mobile data connectivity service.
In addition to telecommunications
regulations of FCC and FTC, the U.S. Congress and various executive agencies have enacted or imposed a series of measures aimed at increasing
oversight of certain commercial transactions involving Chinese companies or investments by such companies in the United States. Such measures
include Executive Order 13873, issued in May 2019, which the Department of Commerce recently proposed to implement through an interim
final rule that broadly empowers that agency (in consultation with other executive agencies) to block or condition any “transaction”
involving the “acquisition, importation, transfer, installation, dealing in, or use of any information and communications technology
or service” designed, developed, manufactured, or supplied by a Chinese company (i.e. given China’s designation as a “foreign
adversary” under Executive Order 13873) that poses “undue risks of sabotage to or subversion of” information and communications
technology and services in the United States or that otherwise threatens the resiliency or national security of the United States. An
additional Executive Order, issued January 19, 2021, directs the Commerce Department to adopt rules requiring Infrastructure as a Service
providers to collect additional information about their customers and new record-keeping requirements, and would allow the Department
of Commerce to take actions to address “malicious cyber-enabled activities.” These Executive Orders, together with enhanced
powers assigned to the Committee on Foreign Investment in the United States and other actions by the Department of Commerce subjecting
certain Chinese companies to export controls regulations, could result in increased scrutiny of transactions involving our business and
potential interference with business transactions that we deem to be beneficial.
Overall, the telecommunications
law and other new telecommunications regulations or rules in the regions listed above or other regions where we operated or plan to enter
may contain provisions that could have a material adverse effect on our business, financial condition, results of operations and prospects.
Additional costs or fees imposed
by governmental regulation could adversely affect our revenues, future growth, and results of operations. Furthermore, our business activities
and results of operations may be materially adversely affected by legislative or regulatory changes, sometimes of an extraterritorial
nature, or by changes to government policy, and in particular by decisions taken by regulatory authorities.
Our intellectual
property rights are valuable, and any inability to protect them could reduce the value of our products, services, and brand.
Our patents, trademarks, trade
secrets, copyrights, and other intellectual property rights are important assets. However, our existing and future intellectual property
rights may not be sufficient to protect our products, technologies or designs and may not prevent others from developing competing products,
technologies or designs. We may not have sufficient intellectual property rights in all countries and regions to prevent unauthorized
third parties from misappropriating our proprietary technologies, and the scope of our intellectual property might be more limited in
certain countries and regions. Furthermore, there is always the possibility, despite our efforts, that the scope of the protection gained
will be insufficient or that an issued patent may be deemed invalid or unenforceable.
In addition, confidentiality,
intellectual property ownership and non-compete agreements 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 or enforce our intellectual property rights in China.
Litigation may be necessary
to enforce our intellectual property rights. For example, in August 2018, we filed a complaint against SIMO Holdings Inc., or SIMO, and
Skyroam Inc. in the United States District Court for the Northern District of California, claiming infringement of two of our U.S. patents.
On August 30, 2021, we entered into a settlement agreement with SIMO. Pursuant to the settlement agreement, the parties filed joint motions
to the United States District Court for the Northern District of California for the dismissal of the patent infringement case. The case
was dismissed in September 2021. Other then pending litigations in mainland China were also dismissed pursuant to the settlement agreement.
We also filed multiple lawsuits against SIMO’s affiliates in mainland China. For example, we filed a lawsuit against Shenzhen Skyroam
Technology Co., Ltd. in 2020, in the Intermediate People’s Court of Shenzhen, claiming patent infringement on our patent No. 352.6. We
have applied for withdrawal of the litigation and the Intermediate People’s Court of Shenzhen has issued the ruling approving our
petition of withdrawal of the litigation on April 26, 2021.
Initiating infringement proceedings
against third parties can be expensive and time-consuming, and divert management’s attention from other business concerns. In addition,
we may not prevail in litigations to enforce our intellectual property rights against unauthorized use.
We are, and may
in the future be, subject to intellectual property claims, which are costly to defend, could result in significant damage awards, disrupt
our business operation, and could limit our ability to use certain technologies in the future.
As we adopt new technologies
and roll out new products and services, we face the risk of being subject to intellectual property infringement claims. Dealing with any
intellectual property claims, with or without merit, could be time-consuming and expensive, and could divert our management’s attention
away from the execution of our business plan. Moreover, any settlement or adverse judgment resulting from such claims may require us to
pay substantial amounts of damages or obtain a license to continue to use the intellectual property that is the subject of the claims,
for which we will have to pay royalties, or otherwise restrict or prohibit our use of the technologies in certain jurisdictions.
For example, in June 2018,
two of our wholly owned subsidiaries were named as defendants in a complaint filed by SIMO in the United States District Court for the
Southern District of New York, alleging patent infringements. The trial judge approved total compensatory and enhanced damages of approximately
US$2.8 million in June 2019. The court also granted plaintiff’s motion for permanent injunction, effective on September 1, 2019,
to enjoin us from selling, offering to sell, importing, or enabling the use of three models of portable Wi-Fi terminals and one model
of GlocalMe World Phone that the court believes infringed upon SIMO’s patent in the United States. In October 2019,
the court amended the total damages to US$8.2 million to include pre-judgement interest on the awards and supplemental damages for certain
sales occurring between January 1, 2019 and August 1, 2019, and certain sales occurring overseas for devices that had previously been
sold within the United States between August 13, 2018 and August 31, 2019. We upgraded the allegedly infringing products by pushing a
redesigned software update to the devices. On December 9, 2019, the trial court lifted the injunction against the upgraded devices and
concluded that they are not infringing. Our sales and services have generally resumed since the lift of the injunction. On January 5,
2021, the U.S. Court of Appeals for the Federal Circuit reversed the decision by the United States District Court for the Southern District
of New York and held that we are entitled to summary judgment of noninfringement. On April 8, 2021, the above-mentioned permanent injunction
against our products was dissolved by the trial court.
In January 2020, SIMO Holdings,
Inc., Skyroam, Inc., and Shenzhen Skyroam Technology Co., Ltd. filed a lawsuit for patent infringement and trade secret misappropriation
against Hong Kong uCloudlink Network Tech. Ltd. and Shenzhen Ucloudlink Technology Limited in the United States District Court for the
Eastern District of Texas, or “EDTX”. The patent infringement claim is based on patent No. 9,736,689, which is
the same patent the Federal Circuit addressed in its decision reversing a judgment of infringement from the United States District Court
for the Southern District of New York. The trade secret allegations are the same as allegations SIMO previously made in a case
between the parties in the United States District Court for the Northern District of California. Those allegations were dismissed
from case in California with prejudice. We moved to transfer the patent infringement claim to the United States District Court for the
Southern District of New York and to dismiss or transfer the claims for trade secret misappropriation to the United States District Court
for the Northern District of California. On November 24, 2020, EDTX denied both motions. Following our success in the above-mentioned
patent infringement case in New York, the plaintiffs dropped their patent infringement claim in EDTX on April 6, 2021. On August
30, 2021, we entered into a settlement agreement with SIMO. Pursuant to the settlement agreement, the parties filed joint motions to the
United States District Court for the Eastern District of Texas for the dismissal of the trade secret case initiated by SIMO. The case
was dismissed in September 2021.
In addition, in 2020, Shenzhen
Skyroam Technology Co., Ltd. filed five invalidation petitions against patents No. 011.8, No. 209.9, No. 366.4, No. 352.6 and No. 323.5
owned by us in Patent Reexamination Board of National Intellectual Property Administration in mainland China, respectively. The National
Intellectual Property Administration issued orders which invalidated patent No. 366.4, patent No. 352.6 and patent No. 323.5 in September
2020, November 2020 and April 2021, respectively. Shenzhen Ucloudlink Technology Limited filed lawsuits at the Beijing Intellectual Property
Court to challenge the invalidation decisions. Beijing Intellectual Property Court issued the first instance judgment upholding the invalidation
decision for patent No. 352.6 in September 2022, and we have appealed to the Supreme People’s Court against the first instance judgment
in October 2022. With respect to patent No. 366.4, Beijing Intellectual Property Court has held the hearing in November 2022 and the first
instance judgment has not been issued. For patent No. 323.5, the hearing has not been scheduled by Beijing Intellectual Property Court.
We reached a global settlement
with SIMO for the series of cases held in both the United States and mainland China by entering into the Settlement Agreement. According
to the settlement, we and SIMO have applied to withdraw all lawsuits initiated by either party. After the settlement with SIMO, we are
currently involved in three pending patent invalidation cases as mentioned above. Therefore, there is no significant amounts of damages,
legal fees or costs occurred in these cases against us. See “Item 8. Financial Information—Legal Proceedings.”
Further, our internal procedures
and licensing practices may not be effective in completely preventing the unauthorized use of copyrighted materials or the infringement
of other rights of third parties by us or our officers or employees. Competitors and other third parties may claim that our officers or
employees have infringed, misappropriated or otherwise violated their software copyright, confidential information, trade secrets, proprietary
technology or other intellectual property rights in the course of their employment with us. We also license and use software or technologies
from third parties in our applications and platform. These third-party software or technology licenses may not continue to be available
to us on acceptable terms or at all, and may expose us to liability. Any such liability, or our inability to use any of these third-party
software or technologies, could result in disruptions to our business that could materially and adversely affect our operating and financial
results.
We have a limited
operating history, which makes it difficult to evaluate our future prospects.
We commenced operation in
2014. As a result of our relatively limited operating history, our ability to forecast our future results of operations is limited and
subject to a number of uncertainties. We experienced rapid growth historically. There is no assurance that we will be able to maintain
our historical growth in future periods. Our growth may fluctuate for various reasons, many of which are beyond our control. In that case,
investors’ perceptions of our business and business prospects may be adversely affected and the market price of the ADSs could fluctuate
accordingly. You should consider our prospects in light of the risks and uncertainties that fast-growing companies with limited operating
histories may encounter. We may not be able to manage our expansion effectively. Continuous expansion may increase the complexity of our
business and place a strain on our management, operations, technical systems, financial resources and internal control functions. Our
current and planned personnel, systems, resources and controls may not be adequate to support and effectively manage our future operations.
Our and the former VIEs’ business
is subject to complex and evolving Chinese and international laws and regulations regarding data privacy and cybersecurity. The improper
use or disclosure of data could have a material and adverse effect on our business and prospects. Many of these laws and regulations are
subject to change and uncertain interpretation, and could result in claims, penalties, changes to our business practices, increased cost
of operations, damages to our reputation and brand, or otherwise harm our business.
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 from transactions and other activities on our platforms, 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 these data. |
Many jurisdictions, including
the United States, the European Union and mainland China, continue to consider the need for greater regulation or reform to the existing
regulatory frameworks for data privacy and data protection. If any data that we possess belongs to data categories that are subject to
heightened scrutiny, we may be required to adopt stricter measures for protection and management of such data. In the United States, all
50 states have now passed laws to regulate the actions that a business must take in the event of a data breach, such as prompt disclosure
and notification to affected users and regulatory authorities. In addition to the data breach notification laws, some states have also
enacted statutes and rules governing the ways in which businesses may collect, use, and retain personal information, granting data privacy
rights to certain individuals, or requiring businesses to reasonably protect certain types of personal information they hold or otherwise
comply with certain specified data security requirements for personal information. One such example is the California Consumer Privacy
Act, which came into effect in 2020. The U.S. federal and state governments will likely continue to consider the need for greater regulation
aimed at restricting certain uses of personal data, including for the purposes of targeted advertising. In the European Union, or EU,
the General Data Protection Regulation, or GDPR, which came into effect in 2018, increased our burden of regulatory compliance and required
us to change certain of our data privacy and security practices in order to achieve compliance. The GDPR implements stringent operational
requirements for processors and controllers of personal data, including, for example, requiring expanded disclosures about how personal
information is to be used, limitations on retention of information, mandatory data breach notification requirements, and higher standards
for data controllers to demonstrate that they have obtained either valid consent or have another legal basis in place to justify their
data processing activities. The GDPR provides that EU member states may make their own additional laws and regulations in relation to
certain data processing activities, which could further limit our ability to use and share personal data and could require localized changes
to our operating model. Recent legal developments in the EU have created complexity and uncertainty regarding transfers of personal information
from the EU to “third countries,” especially the United States. For example, last year the Court of Justice of the EU invalidated
the EU-U.S. Privacy Shield Framework (a mechanism for the transfer of personal information from the EU to the US) and made clear that
reliance on standard contractual clauses (another such mechanism) alone may not be sufficient in all circumstances. In addition, after
the United Kingdom, or UK, left the EU, the UK enacted the UK GDPR, which, together with the amended UK Data Protection Act 2018, retains
the GDPR in UK national law. The UK’s departure from the EU has also created complexity and uncertainty regarding transfers between
the UK and the EU. Under both the GDPR and UK GDPR, fines of up to €20 million (£17.5 million) or up to 4% of the total worldwide
annual turnover of the preceding financial year, whichever is higher, may be assessed for non-compliance, which significantly increases
our potential financial exposure if we fail to comply with all requirements under such laws.
In mainland China, governmental
authorities have enacted a series of laws and regulations to enhance the protection of privacy and data. The regulatory and enforcement
regime in mainland China with regard to data security and data protection is evolving and may be subject to different interpretations
or significant changes. Moreover, different regulatory bodies of mainland China, including the Standing Committee of the NPC, the Ministry
of Industry and Information Technology, or the MIIT, the CAC, the MPS and the State Administration for Market Regulation (the “SAMR”),
have enforced data privacy and protections laws and regulations with varying standards and applications. The PRC Cybersecurity Law and
relevant regulations require network operators, which may include us, to ensure the security and stability of the services provided via
network and protect individual privacy and the security of personal data in general by requiring the consent of internet users prior to
the collection, use or disclosure of their personal data. Under the Cybersecurity Law, the owners and administrators of networks and network
service providers have various personal information security protection obligations, including restrictions on the collection and use
of personal information of users, and they are required to take steps to prevent personal data from being divulged, stolen, or tampered
with. See “Item 4. Information on the Company—B. Business Overview—Regulation—Mainland China—Regulations
Related to Internet Information Security and Personal Information Protection.”
Pursuant to the Review Measures,
critical information infrastructure operators that purchase network products and services and data processing operators engaging in data
processing activities that affect or may affect national security must be subject to the cybersecurity review. However, there remain uncertainties
regarding the further interpretation and implementation of those laws and regulations. For example, the scope of “core data”
and “important data,” two important concepts in the PRC Data Security Law, are yet to be determined. It is uncertain whether
and when the draft Regulations on the Network Data Security will be adopted, and if the adopted version will contain the same provisions
as the draft Regulations. We face uncertainties as to whether we should obtain such clearance as a listed company in the United States
and whether such clearance can be timely obtained, or at all. In early July 2021, regulatory authorities in mainland China launched cybersecurity
investigations with regard to several mainland China-based companies that are listed in the United States. The relevant regulatory authorities
in mainland China continue to monitor the websites and apps in relation to the protection of personal data, privacy and information security,
and may impose additional requirements from time to time. The relevant regulatory authorities also publicize, from time to time, their
monitoring results and require relevant enterprises listed in such notices to rectify non-compliance. If any of our mobile apps is found
not in compliance with these regulations, we could be subject to penalties, including revocation of our business licenses and permits.
As of the date of this annual report, no detailed rules or implementation rules have been issued by any authority and we have not been
informed that we are a critical information infrastructure operator by any government authorities.
On August 17, 2021, the State
Council promulgated the Regulations on Security Protection of Critical Information Infrastructure, which became effective on September
1, 2021. Pursuant to the Regulations on Protection of Critical Information Infrastructure, critical information infrastructure refers
to any important network facilities or information systems of an important industry or field such as public communication and information
service, energy, transport, water conservation, finance, public services, e-government affairs and national defense science, and other
industries and sectors that may endanger national security, people’s livelihood and public interest in case of damage, function
loss or data leakage. In addition, relevant administration departments of each critical industry and sector are responsible for formulating
eligibility criteria and determining the critical information infrastructure in the respective industry or sector. The operators will
be informed about the final determination as to whether they are categorized as critical information infrastructure operators, or CIIOs.
As of the date of this annual report, no detailed rules or interpretation has been issued and we have not been informed as a CIIO by any
governmental authorities. Furthermore, the exact scope of CIIOs, under the current regulatory regime remains unclear, and the PRC governmental
authorities may have discretion in the interpretation and enforcement of these laws and regulations. Therefore, it is uncertain whether
we would be deemed as a CIIO under the laws and regulations of mainland China.
On August 20, 2021, the Standing
Committee of the National People’s Congress of the PRC, or the SCNPC, promulgated the Personal Information Protection Law, which
integrates the scattered rules with respect to personal information rights and privacy protection and took effect on November 1, 2021.
Our mobile apps and websites only collect basic user personal information that is necessary to provide the corresponding services. We
do not collect any sensitive personal information or other excessive personal information that is not related to the corresponding services.
We update our privacy policies from time to time to meet the latest regulatory requirements of Cyberspace Administration of mainland China
and other authorities and adopt technical measures to protect data and ensure cybersecurity in a systematic way. Nonetheless, the Personal
Information Protection Law raises the protection requirements for processing personal information, and many specific requirements of the
Personal Information Protection Law remain to be clarified by the Cyberspace Administration of mainland China, other regulatory authorities,
and courts in practice. We may be required to make further adjustments to our business practices to comply with the personal information
protection laws and regulations.
Despite our efforts to comply
with applicable laws, regulations and other obligations relating to privacy, data protection and information security, we cannot assure
you that we will be compliant with such new laws, regulations and obligations in all respects, and we may be ordered to rectify and terminate
any actions that are deemed non-compliant by the regulatory authorities and become subject to fines and other sanctions. In general, we
expect that data security and data protection compliance will receive greater attention and focus from regulators, both domestically and
globally, 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, including fines, suspension of business and website, taken down of our operating applications, revocation
of required licenses and other penalties, and our reputation and results of operations could be materially and adversely affected.
In addition to the above,
many jurisdictions including, for example, Indonesia, have adopted or are adopting new data privacy and data protection laws that may
impose further onerous compliance requirements, such as data localization, which prohibits companies from storing data relating to resident
individuals in data centers outside the jurisdiction. The proliferation of such laws within jurisdictions and countries in which we operate
may result in conflicting and contradictory requirements.
In order for us to maintain
or achieve compliance with applicable laws as they come into effect, it may require substantial expenditures of resources to continually
evaluate our policies and processes and adapt to new requirements that are or become applicable to us. Complying with any additional or
new regulatory requirements on a jurisdiction-by-jurisdiction basis may impose significant burdens and costs on our operations or require
us to alter our business practices. While we strive to protect our users’ privacy and data security and to comply with data protection
laws and regulations applicable to us, however, we cannot assure that our existing user information protection system and technical measures
will be considered sufficient under all applicable laws and regulations in all respects. Any failure or perceived failure by us to comply
with applicable data privacy laws and regulations, including in relation to the collection of necessary end-user consents and providing
end-users with sufficient information with respect to our use of their personal data, may result in fines and penalties imposed by regulators,
governmental enforcement actions (including enforcement orders requiring us to cease collecting or processing data in a certain way),
litigation and/or adverse publicity. Proceedings against us—regulatory, civil or otherwise—could force us to spend money and
devote resources in the defense or settlement of, and remediation related to, such proceedings. Our international business expansion could
be adversely affected if the existing or future laws and regulations are interpreted or implemented in a manner that is inconsistent with
our current business practices or requires changes to these practices. If these laws and regulations materially limit our ability to collect,
transfer, and use user data, our ability to continue our current operations without modification, develop new services or features of
the products and expand our user base may be impaired, and our operation and financial results could be negatively affected.
We face risks relating
to our business partnerships and strategic alliances.
We have entered into and may
in the future enter into cooperation and alliances with various third parties to further our business purpose from time to time. Our data
connectivity business and its further expansion depends on the distribution channels we work with. We operate portable Wi-Fi services
through multiple channels, including multiple Roamingman e-commerce platforms, online travel agencies, airlines and other
travel related companies, sells portable Wi-Fi terminals on online e-commerce platforms, as well as on in-flight magazines with support
from airlines. Our uCloudlink 2.0 model aims to provide mobile data connectivity services to local users across different MNOs in a single
country, the success of which depends on our GlocalMe Inside implementation for smartphones and other smart hardware
devices. Some local regulators require additional telecommunication licenses and permits, so we try to obtain requisite licenses and permits
through both forming joint venture with local business partners who possess such licenses and permits and application by ourselves. Any
deterioration of our relationship or unsuccessful cooperation with these partners or alliances could have a material adverse effect on
our operating results.
These alliances could subject
us to a number of other risks, including risks associated with sharing proprietary information, failing to obtain or maintain the requisite
certificates or licenses, 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 suffer 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.
If our efforts to
attract and retain users do not achieve the expected results, our results of operations could be materially and adversely affected.
Our success depends on introducing
new products and services and upgrading existing ones to attract and retain users. In order to attract and retain users and compete against
our competitors, we must continue to invest significant resources in research and development to enhance our technologies, improve our
existing products and services, and introduce additional high-quality products and services, local data traffic service and GlocalMe
Inside service. Despite testing prior to the release and throughout the lifecycle, our products and services sometimes contain
coding or manufacturing errors, and result in other negative consequences. The detection and correction of any errors in released products
and services can be time consuming and costly, causing delay in the development or release of new products or services or new versions
of products or services, and adverse impact on market acceptance of our products or services. Furthermore, we may incur significant sales
and marketing expenses in promoting our brand and new products and services in order to attract and retain our users. If we are unable
to anticipate user preferences or industry changes, or if we are unable to enhance the quality of our products and services on a timely
basis, we may suffer a decline in the size of our user base. Our results of operations may also suffer if our innovations do not respond
to the needs of our users, are not appropriately timed with market opportunities or are not effectively brought to market.
We face risks related
to natural disasters, terrorist acts or acts of war, social unrest, health epidemics or other public safety concerns or hostile events,
which could significantly disrupt our operations.
Since we are headquartered
in Hong Kong and some of our assets and operations are located there, if any significant negative developments to the political, economic
or social environment were to occur, our business, results of operations and financial condition would be adversely affected. For example,
the protests and demonstrations in 2019 in Hong Kong, which resulted in violence, impacted the local economy and the travel industry in
Hong Kong, and the daily operations of our headquarter would be affected adversely although our substantial business operations are not
in Hong Kong. In addition, Hong Kong implemented measures including the Prevention and Control of Disease (Prohibition on Gathering)
Regulation (Chapter 599G of the Laws of Hong Kong) and the Prevention and Control of Disease (Requirements and Directions) (Business and
Premises) Regulation (Chapter 599F of the Laws of Hong Kong) in 2020 to combat the spread of COVID-19 in Hong Kong. Public gatherings
were reduced as a result of COVID-19 and concern for public health. Many of the requirements implemented under the policies to combat
COVID-19 have now been lifted. On June 30, 2020, the Law of the People’s Republic of China on Safeguarding National Security in
the Hong Kong Special Administrative Region was passed and took effect on the same day. Since then, the protests have subsided for the
most part.
Our business could be materially
and adversely affected by natural disasters, terrorist acts or acts of war, social unrest, health epidemics or other public safety concerns
or hostile events. Natural disasters may give rise to server interruptions, breakdowns, system or technology platform failures, or internet
failures, which would adversely affect our ability to operate our platform and provide our services. In addition, our results of operations
could be adversely affected to the extent that any such event affects the economic condition in general and the travel industry in particular.
Our business has been adversely
affected by the outbreak of COVID-19, and could also be adversely affected by the outbreak of Ebola virus disease, H1N1 flu, H7N9 flu,
avian flu, SARS, or other epidemics. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and
Industry—Our business has been and may continue to be materially and adversely affected by the effects of COVID-19 pandemic in China
and globally.”
Interruption or
failure of our own technology systems or those provided by third-party service providers we rely upon could impair our ability to provide
products and services, which could damage our reputation and harm our results of operations.
Our ability to provide products
and services depends on the continuing operation of our technology systems or those provided by third-party service providers, such as
cloud service providers. Any damage to or failure of such systems could interrupt our services. Service interruptions could reduce our
revenue and profit and damage our brand if our systems are perceived to be unreliable. Our systems are vulnerable to damage or interruption
as a result of terrorist attacks, wars, earthquakes, floods, fires, power loss, telecommunications failures, undetected errors or “bugs”
in our software, malware, computer viruses, interruptions in access to our platform through the use of “denial of service”
or similar attacks, hacking or other attempts to harm our systems, and similar events. Some of our systems are not fully redundant, and
our disaster recovery planning does not account for all possible scenarios. If we cannot continue to retain third-party services on acceptable
terms, our services may be interrupted. If we experience frequent or persistent system failures on our platform, whether due to interruptions
and failures of our own technology and or those provided by third-party service providers that we rely upon, our reputation and brand
could be severely harmed.
We are in the process of developing
and optimizing our billing system, which will place a key role in our existing and planned business initiatives. We will make the billing
process more automatic so that it is in line with the global expansion of our business. Any error in the billing system could disrupt
our operations and impact our ability to provide or bill for our services, retain customers, attract new customers, or negatively impact
overall customer experience. Any occurrence of the foregoing could cause material adverse effects on our operations and financial condition,
material weaknesses in our internal control over financial reporting, and reputational damage.
We may need additional
capital, and financing may not be available on terms acceptable to us, or at all.
We believe that our current
cash and cash equivalents will be sufficient to meet our anticipated cash needs for the next 12 months. We may, however, require additional
cash resources due to changed business conditions or other future developments, including any changes in our pricing policy, marketing
initiatives or investments we may decide to pursue. If these resources are insufficient to satisfy our cash requirements, we may seek
to obtain a credit facility or sell additional equity or debt securities. The sale of additional equity securities could result in dilution
of our existing shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating
and financing covenants that would restrict our operations. It is uncertain whether financing will be available in amounts or on terms
acceptable to us, if at all. For example, in January 2022, we entered into definitive agreements with YA II PN, Ltd., a limited partnership
managed by Yorkville Advisor Global (“Yorkville”), pursuant to which we would issue and sell convertible debentures in a principal
amount of US$5.0 million to Yorkville at a purchase price equal to 95% of the principal amount through private placement. We also issued
to Yorkville 1,000,000 Class A ordinary shares as commitment fee. In October 2022, we redeemed
US$1.0 million principal amount of the convertible debentures, and Yorkville had from time to time, converted all of the remaining amount
for an aggregate of 76,943,540 Class A ordinary shares.
Further, we may be adversely
affected by a crisis in the banking industry. For example, on March 10, 2023, the Federal Deposit Insurance Corporation, took control
and was appointed as the receiver of Silicon Valley Bank, or SVB. Although we have not held funds at SVB, we have funds at other banks
in the United States and several other countries. If banks and financial institutions enter receivership or become insolvent in the future
and a portion of our cash or cash equivalents is held in such banks and financial institutions, our ability to access our existing cash
and cash equivalents may be impacted, which could have a material adverse effect on our business and financial condition.
We have incurred
losses in the past.
Due to the adverse impacts
of COVID-19 pandemic, we incurred loss from operations of US$63.0 million, US$45.9 million and US$19.2 million in 2020, 2021 and 2022,
and our net cash used in operating activities was US$2.0 million and US$21.7 million in 2020 and 2021, while net cash generated from operating
activities was US$4.4 million in 2022.
The historical losses reflect
the substantial investments we made to grow our business. We cannot assure you that we will be able to generate net profits in the foreseeable
future.
We expect to continue to invest
in the development and expansion of our business in areas including:
| ● | research and development; |
| ● | expansion of our operations and infrastructure; and |
| ● | incurring costs associated with general administration, including legal, accounting and other expenses
related to being a public company. |
As a result of these increased
expenses, we will have to generate and sustain increased revenue to be profitable in future periods. Further, in future periods, we may
not be able to generate sufficient revenue growth to offset higher costs and sustain profitability. If we fail to sustain or increase
profitability, our business and operating results could be adversely affected.
The current tensions
in international economic relations may negatively affect the cost of our operations, the growth of our business, and the size of our
target market.
Recently there have been heightened
tensions in international economic relations, such as the one between the U.S. and China and as a result of the conflict between Ukraine
and Russia and relevant sanctions on Russia. Since July 2018, the U.S. government has imposed, and has proposed to impose additional,
new or higher tariffs on certain products imported from China to penalize China for what it characterizes as unfair trade practices. China
has responded by imposing, and proposing to impose additional, new or higher tariffs on certain products imported from the U.S. In May
2019, the U.S. government announced to increase tariffs to 25%, and China responded by imposing tariffs on certain U.S. goods on a smaller
scale, and proposed to impose additional tariffs on U.S. goods. On May 16, 2019, the U.S. government placed Huawei Technologies Co. Ltd
and its affiliates on the entity list, which effectively banned U.S. companies from selling to the Chinese telecoms company without U.S.
government’s approval. On June 1, 2019, the tariffs announced in May 2019 became in effect on US$60 billion worth of U.S. goods
exported to China. On September 1, 2019, as announced, U.S. began implementing tariffs on more than US$125 billion worth of Chinese imports.
On September 2, 2019, China lodged a complaint against the U.S. over import tariffs to the World Trade Organization. On October 11, 2019,
the U.S. government announced that the two countries had reached a “Phase 1” agreement, which was signed on January 16, 2020.
Nevertheless, it remains unclear how much economic relief from the trade war it will offer.
In light of the existing and
future measures, we may be required to adjust or relocate certain parts of our operations, which can be costly and time consuming. Similarly,
our supply chain may be negatively affected too. In addition, given that certain measures are centered on the information and communications,
the global implementation of 5G mobile communication systems could be delayed, which may reduce the pace of growth in need for mobile
data connectivity services worldwide. Escalations of the tensions that affect trade relations may lead to slower growth in global travels
and global economy in general, and potentially negatively affect our business, financial condition and results of operations. We cannot
provide any assurances or forecasts as to how the current Sino-U.S. economic relations may evolve.
We face competition
from other players in the international mobile data connectivity service industry and local mobile data connectivity service industry
and their adjacent industries, including MNOs, MVNOs, and other mobile data connectivity service providers.
The international mobile data
connectivity service industry and local mobile data connectivity service industry are competitive, and competition for users is increasing.
While we create unique values to and collaborate with MNOs and MVNOs, who are important participants on our mobile data traffic sharing
marketplace, we also face competition from them. As a result, their interests may be different from, or adverse to, ours. These and other
competitors have developed or may develop technologies that compete directly with our solutions.
Some of the MNOs and MVNOs
we compete with are substantially larger than we are and have substantially longer operating histories. We may not be able to fund or
invest in certain areas of our business to the same degree as these competitors. Many have substantially greater product development and
marketing budgets and other financial and personnel resources than we do. Some also have greater name and brand recognition and a larger
base of subscribers or users than we have. In addition, our competitors may provide services that we generally do not, such as cellular,
local exchange and long-distance services, voicemail and digital subscriber lines. Users that desire these services may choose to also
obtain mobile wireless connectivity services from a competitor that provides these additional services rather than from us. Furthermore,
our competitors, particularly the MNOs and MVNOs can leverage a variety of competition strategies that may affect our business, such as
raising claimed noncompliance to regulatory bodies, initiating legal or administrative proceedings against us for contractual, competition,
antitrust, or other causes of actions, or even lobbying for legislations that may have a disproportionate impact on us.
In addition, as our business
model matures and technology direction becomes proven, players along the value chain of our services may expand into our territory, further
intensifying the competition. Competition could increase our selling and marketing expenses and related user acquisition costs. We may
not have the financial resources, technical expertise or marketing and support capabilities to continue to compete successfully. A failure
to respond to established and new competitors may adversely impact our business and operating results.
We may also face pressure
to reduce prices for our products and services. As competition in the international mobile data connectivity service industry and local
mobile data connectivity service industry has increased, MNOs have lowered prices or increased the data traffic available under plans
to attract or retain users, either through individual initiatives or joint actions among MNOs. To remain competitive, we may be compelled
to reduce the prices for our mobile data connectivity services, which may in turn adversely affect our profitability and results of operations.
We may also be harmed by negative
publicity instigated by our competitors, regardless of its validity. We have encountered and may in the future continue to encounter disputes
with our competitors, including lawsuits involving claims asserted under intellectual property laws, trade secret misappropriation and
defamation, which may adversely affect our business and reputation. See “Item 8. Financial Information—Legal Proceedings.”
Failure to compete with current and potential competitors could materially harm our business, financial condition and our results of operations.
We may not be able
to obtain licenses to use third-party intellectual property on commercially reasonable terms or at all.
Certain of products and services
we offer incorporate third-party intellectual property, which requires licenses from those third parties. Based on past experience and
industry practice, we believe such licenses generally can be obtained on reasonable terms. However, there can be no assurance that we
would be able to obtain such licenses on commercially reasonable terms, if at all, that we would be able to develop alternative technology
on a timely basis, if at all, or that we would be able to obtain a license to use a suitable alternative technology to permit us to continue
offering, and our users to continue using, our affected products and services. Failure to obtain the right to use third-party intellectual
property, or to use such intellectual property on commercially reasonable terms, could preclude us from selling certain products or services,
or otherwise have a material adverse impact on our financial condition and operating results.
If our expansions
into new businesses do not achieve the expected results, our future results of operations and growth prospects may be materially and adversely
affected.
As part of our growth strategy,
we enter into new markets, such as mobile data connectivity services for local users, develop new businesses, find new applications for
our technologies, such as IoT, and explore new monetization opportunities. Expansions into new businesses may present operating, marketing
and compliance challenges that differ from those that we currently encounter. There can be long lead time and various uncertainties associated
with the development of new products and services. Our potential lack of familiarity with new products and services and the lack of relevant
marketing data relating to these products and services may make it more difficult for us to anticipate user demand and preferences. We
may misjudge market demand, and may not be able to effectively control our costs and expenses in rolling out these new products and services.
Furthermore, it may take a long time for users to recognize the value of the new products and services and we may need to price our new
products or services more aggressively to penetrate new markets and gain market share or remain competitive. One of the strategies we
employ to expand is to introduce new and innovative business models. In the markets in which we operate the new business models, the regulators
may not be familiar with the business model and new legislations that adapt to the new business model may be lacking, creating uncertainties
in the outcome of the regulators determinations or our compliance status. We have historically experienced investigations or inquiries
from the regulators regarding our new business models.
We started to commercially
offer products and services for uCloudlink 2.0 model in 2018, through which we aim to provide mobile data connectivity services for local
users across different MNOs or help MNOs improve the service quality to their users, since local mobile data traffic represents a much
bigger market than international data roaming. We have expanded the business scope of our local data connectivity service in line with
the development of our strategy. We may not be able to effectively control our costs and expenses in these new business initiatives. We
may encounter regulatory issues, bad reception by the market, or difficulties in securing partnerships with smartphone companies. If our
new business initiatives do not achieve the level of success we expected, our operating results and growth prospect can be adversely affected.
We generate a substantial
portion of our revenues from provision of international mobile data connectivity services. If we fail to diversify our revenue base or
increase our market share in the future, our sales growth and operating results may be adversely affected.
In 2020, 2021 and 2022, we
derived 34.4%, 29.4% and 39.3%, respectively, of our total revenues from our international mobile data connectivity services. While we
expect to continue to diversify our revenue base, there can be no assurance the new products and services we introduce will be successful.
Accordingly, our future success depends upon our ability to enhance and expand our international mobile data connectivity service and
maintain or further increase our market share in the international data roaming market, which involves substantial time, costs and risks.
Our revenues from international mobile data connectivity services are expected to be affected by travel and consumer spending, because
users seek to access the mobile internet while they are on-the-go, and because spending on internet access is often a consumer discretionary
spending decision. Any severe or prolonged slowdown in the global and/or Chinese economy or the recurrence of any financial disruptions
could reduce expenditures for travel, which in turn may adversely affect our operating results and financial condition. In addition, the
COVID-19 pandemic and its consequences have caused a severe decline in global travel since 2020. As a result, demand for our international
data connectivity services is significantly reduced. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our
Business and Industry—Our business has been and may continue to be materially and adversely affected by the effects of COVID-19
pandemic in China and globally.” Furthermore, we already occupy considerable market shares in some of our focused geographic markets,
leaving less potential for rapid growth in those markets. If we do not achieve the targeted results from enhancing and expanding our international
mobile data connectivity service and maintaining or further increasing our market share, for technological or other reasons, our sales
growth and operating results may be adversely affected.
The international
nature of our business exposes us to certain business risks that could limit the effectiveness of our growth strategy and cause our results
of operations to suffer.
Global expansion is an element
of our growth strategy. Introducing and marketing our services internationally, developing direct and indirect international sales and
support channels and managing global operations require significant management attention and financial resources. We face a number of
risks associated with expanding our business internationally that could negatively impact our results of operations, including:
| ● | compliance with foreign laws, including more stringent laws in foreign jurisdictions relating to the privacy
and protection of third-party data; |
| ● | regulatory requirements governing the provision of communication services in foreign jurisdictions; |
| ● | competition from companies with international operations, including large international competitors and
entrenched local companies; |
| ● | to the extent we choose to make acquisitions to enable our international expansion efforts, the identification
of suitable acquisition targets in the markets into which we want to expand; |
| ● | difficulties in protecting intellectual property rights in international jurisdictions; |
| ● | political and economic instability in some overseas markets; |
| ● | difficulties in recruiting and managing local employees in overseas operations with different cultural
backgrounds; |
| ● | currency fluctuations and exchange rates; and |
| ● | potentially adverse tax consequences or an inability to realize tax benefits. |
We may not succeed in our
efforts to expand our international presence as a result of the factors described above or other factors that may have an adverse impact
on our financial condition and results of operations.
We have expanded our uCloudlink
2.0 business since 2020. Since the governments in countries and regions have strengthened the enforcement of regulation over use of M2M
cards and real-name registration for SIM card users, the development of our 2.0 business may be slowed down to some extent.
We are subject to
inventory risks.
For our hardware terminals,
such as GlocalMe portable Wi-Fi terminals and GlocalMe World Phones, we must forecast inventory needs
and place orders with our contract manufacturers and component suppliers based on our estimates of future demand for particular products.
We may be unable to meet customer or distributor demand for our products or may be required to incur higher costs to secure the necessary
production capacity and components. We could also overestimate future demand for our products and risk carrying excess product and component
inventory, in which case our business and operating results could be adversely affected.
We are subject to
risks related to data demand projection.
To ensure adequate supply
of data traffic for our users, we must forecast the demand. While our uCloudlink cloud SIM platform and our SIM card allocation algorithm
significantly increase the efficiency and utilization rate of the SIM cards, our ability to accurately forecast demand for our services
could be affected by many factors, including specific events at a location, sales promotions by us or our distribution partners, and unanticipated
changes in general market and economic conditions, among others. If we fail to accurately forecast user demand, we may experience shortage
of network coverage or data traffic, limiting or interrupting the service to our users, and the users will lose confidence in our services.
As market competition for products or services similar to ours intensifies, it could become more difficult to forecast demand.
Developments in
alternative connectivity services, improvements in the existing networks or services, or advances in existing or alternative technologies
may encroach our market share, or make our technologies obsolete, thereby materially and adversely affecting the demand for our products
and services.
Developments in alternative
connectivity services, improvements in the existing networks or services, or advances in existing or alternative technologies, such Low-Earth-Orbit
satellite-based communication technologies, or successful combinations of those may encroach our market share and materially and adversely
affect our business and prospects in ways we do not currently anticipate. For example, improvements in the existing networks or services
of MNOs that result in more flexible offerings at lower prices of both international mobile data connectivity service and local mobile
data connectivity service could undermine the competitiveness of our products and services, resulting in decreased revenue and a loss
of market share to competitors or providers of alternative services.
Introduction of
new business models may encroach our market share.
New business models can be
introduced in the markets we operate in or their adjacent markets, which can be the result of technology development, industry consolidation,
or new players entering the market. For example, many venues offer free mobile Wi-Fi as an incentive or value-added benefit to their users.
Free Wi-Fi may reduce retail user demand for our services, and put downward pressure on the prices we charge our retail users. In addition,
telecommunications operators may offer free mobile Wi-Fi as part of a home broadband or other service contract, which also may force down
the prices we charge our retail users. In addition, some mobile apps work with MNOs to offer free data traffic that can be utilized only
by such apps, which may reduce the demand for our mobile data connectivity service. If these new business models are more attractive to
users than the business models we currently use, our users may switch to our competitors’ services, and we may lose market share.
We may acquire companies
or make investments in, or enter into licensing or cooperation arrangements with, other companies with technologies that are complementary
to our business and these acquisitions or arrangements could have negative impacts on our business or cause us to require additional financing.
We may acquire companies,
assets or the rights to technologies in the future in order to develop new services or enhance existing services, to enhance our operating
infrastructure, to fund expansion, to respond to competitive pressures or to acquire complementary businesses. For example, in April 2019
and September 2020, we made an equity investment in Beijing Huaxianglianxin Technology Co., Ltd., an MVNO that has entered into mobile
data resale contracts with both China Mobile and China Unicom. In the same month, we established a long-term strategic partnership with
the Shenzhen Branch of China United Network Communications Group Co., Ltd. to jointly improve network quality to achieve better user experience
and services in various areas, and to collaborate with each other in joint marketing and promotional activities. In December 2020, we
established a strategic cooperation relationship with China Vehicle Interconnected Transport Capacity Technology Co., Ltd. to develop
intelligent container solutions in various areas for both domestic and international freight markets. Entering into these types of arrangements
entails many risks, any of which could materially harm our business, including:
| ● | diversion of management’s attention from other business concerns; |
| ● | failure to effectively integrate the acquired technology or company into our business; |
| ● | incurring of significant acquisition costs; |
| ● | loss of key employees from either our current business or the acquired business; and |
| ● | assumption of significant liabilities of the acquired company. |
Any of the foregoing or other
factors could harm our ability to achieve anticipated levels of profitability from acquired businesses or to realize other anticipated
benefits of acquisitions. We may not be able to identify additional appropriate acquisition targets or consummate any future acquisitions
on favorable terms, or at all. If we do effect an acquisition, it is possible that the financial markets or investors will view the acquisition
negatively. We may encounter difficulties in securing necessary financing on terms that would be acceptable to us and may not be able
to close the proposed acquisition. Even if we successfully complete an acquisition, it could adversely affect our business.
We are subject to
risks and uncertainties faced by companies in rapidly evolving industries.
We operate in the rapidly
evolving international mobile data connectivity service industry and local mobile data connectivity service industry, which makes it difficult
to predict our future results of operations. Accordingly, you should consider our future prospects in light of the risks and uncertainties
experienced by companies in evolving industries. Some of these risks and uncertainties relate to our ability to:
| ● | maintain our market share; |
| ● | successfully expand into new businesses and explore additional monetization opportunities, such as mobile
data connectivity services for local users such as GlocalMe Inside; |
| ● | offer attractive, useful and innovative products and services to attract and retain a larger user base; |
| ● | upgrade our technology to support increased traffic and expanded product and service offerings; |
| ● | further enhance our brand; |
| ● | respond to competitive market conditions; |
| ● | respond to evolving user preferences or industry changes; |
| ● | respond to changes in the regulatory environment and manage legal risks, including those associated with
intellectual property rights; |
| ● | maintain effective control of our costs and expenses; |
| ● | execute our strategic investments and acquisitions and post-acquisition integrations effectively; and |
| ● | build profitable operations in new markets we have entered into. |
If we are unsuccessful in
addressing any of these risks and uncertainties, or if the international mobile data connectivity service industry or local mobile data
connectivity service industry do not grow as quickly as expected, our results of operation and financial condition may be materially and
adversely affected.
Actions of joint
venture partners could negatively impact our performance.
We may enter into joint ventures
in the future. Such joint venture investments may involve risks not otherwise present in a branch or subsidiary, including, without limitation:
| ● | the risk that our joint venture partner might become bankrupt, insolvent or otherwise unable to meet its
financial obligations under the terms of the joint venture; |
| ● | the risk that our joint venture partner may at any time have economic or business interests or goals which
are, or which become, inconsistent with our business interests or goals; |
| ● | the risk that our joint venture partner may be in a position to take actions that are contrary to the
agreed upon terms of the joint venture, our instructions or our policies or objectives; |
| ● | the risk that we may incur liabilities as a result of an action taken by our joint venture partner; |
| ● | the risk that disputes between us and our joint venture partner may result in litigation or arbitration
that would increase our expenses and occupy the time and attention of our officers and directors; |
| ● | the risk that neither joint venture partner may have the ability to unilaterally control the joint venture
with respect to certain major decisions, and as a result an irreconcilable impasse may be reached with respect to certain decisions; and
the risk that we may not be able to sell our interest in a joint venture when we desire to exit the joint venture, or at an attractive
price. |
The occurrence of any of the
foregoing risks with respect to a joint venture could have an adverse effect on the financial performance of such joint venture, which
could in turn have an adverse effect on our financial performance and the value of an investment in our company.
In connection with
the audits of our consolidated financial statements included in this annual report, we and our independent registered public accounting
firm identified two material weaknesses in our internal control over financial reporting. If we fail to develop and maintain an effective
system of internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud.
Prior to our initial public
offering, we were a private company with limited accounting personnel and other resources with which we address our internal control over
financial reporting. In connection with the audits of our consolidated financial statements included in this annual report, we and our
independent registered public accounting firm identified two material weaknesses in our internal control over financial reporting. As
defined in the standards established by the U.S. Public Company Accounting Oversight Board, a “material weakness” is a deficiency,
or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
The material weaknesses that
have been identified relate to our (i) lack of sufficient resources regarding financial reporting and accounting personnel in the application
of U.S. GAAP and the reporting requirements set forth by the SEC and (ii) lack of comprehensive U.S. GAAP accounting policies and financial
reporting procedures. The material weaknesses, if not timely remedied, may lead to significant misstatements in our consolidated financial
statements in the future.
Neither we nor our independent
registered public accounting firm undertook a comprehensive assessment of our internal control for purposes of identifying and reporting
material weaknesses and other control deficiencies in our internal control over financial reporting. Had we performed a formal assessment
of our internal control over financial reporting or had our independent registered public accounting firm performed an audit of our internal
control over financial reporting, additional deficiencies may have been identified.
Following the identification
of the material weaknesses, we have taken measures and plan to continue to take measures to remedy the material weaknesses. See “Item
15. Controls and Procedures—Management’s Annual Report on Internal Control over Financial Reporting.” However, the implementation
of these measures may not fully address the material weaknesses in our internal control over financial reporting, and we cannot conclude
that they have been fully remediated. Our failure to correct the material weaknesses or our failure to discover and address any other
control deficiencies could result in inaccuracies in our financial statements and impair our ability to comply with applicable financial
reporting requirements and related regulatory filings on a timely basis. Moreover, ineffective internal control over financial reporting
could significantly hinder our ability to prevent fraud.
We are subject to the Sarbanes-Oxley
Act of 2002. Section 404 of the Sarbanes-Oxley Act, or Section 404, requires that we include a report from management on the effectiveness
of our internal control over financial reporting in our annual report. In addition, once we cease to be an “emerging growth company”
as such term is defined in 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, as we are 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.
During the course of documenting
and testing our internal control procedures, in order to satisfy the requirements of Section 404, we may identify other weaknesses and
deficiencies in our internal control over financial reporting. In addition, 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 in accordance with Section 404. If we fail to achieve
and maintain an effective internal control environment, we could suffer material misstatements in our consolidated 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
the ADSs. 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 consolidated financial statements for prior periods.
We have recognized
a substantial amount of share-based compensation expense in the past and will incur additional share-based compensation expense in the
future, which will have an impact on our results of operations.
In July 2019, our shareholders
and board of directors adopted the Amended and Restated 2018 Stock Option Scheme and the Amended and Restated 2019 Share Incentive Plan,
which we refer to as the 2018 Plan and 2019 Plan, respectively, in this annual report, for the purpose of granting share-based compensation
awards to employees, directors and consultants to incentivize their performance and align their interests with ours. The maximum aggregate
number of ordinary shares that may be issued under the 2018 Plan is 40,147,720 shares. The maximum aggregate number of ordinary shares
that may be issued pursuant to all awards under the 2019 Plan is initially 23,532,640 shares, which will be increased by a number equal
to 1.0% of the total number of shares issued and outstanding on the last day of the immediately preceding fiscal year on the first day
of each fiscal year, commencing with the fiscal year ended December 31, 2020, if determined and approved by the board of directors for
the relevant fiscal year. As of February 28, 2023, the maximum number of issuable shares under the 2019 Plan was 26,353,926. As of February
28, 2023, 17,521,000 share options had been granted and outstanding under the 2018 Plan, 140,000 share options and 8,210,870 restricted
share units had been granted and outstanding under the 2019 Plan. The vesting of the share options granted by us was conditional upon
completion of our initial public offering, and upon the completion of such offering in 2020, we began to recognize a substantial amount
of share-based compensation expense. We recognized share-based compensation expenses of US$50.6 million in 2020, US$8.8 million in 2021
and US$3.1 million in 2022, respectively. Moreover, with additional share options or other equity incentives granted to our employees
or directors in the future, we will incur additional share-based compensation expense and our results of operations will be further adversely
affected. For further information on our equity incentive plans and information on our recognition of related expenses, please see “Item
6. Directors, Senior Management and Employees—B. Compensation—Amended and Restated 2018 Stock Option Scheme” and “Item
6. Directors, Senior Management and Employees—B. Compensation—Amended and Restated 2019 Share Incentive Plan.”
We are subject to
taxation-related risks in multiple jurisdictions.
The tax laws applicable to
our business activities are subject to change and uncertain interpretation. Our tax position could be adversely impacted by changes in
tax rates, tax laws, tax practice, tax treaties or tax regulations or changes in the interpretation thereof by the tax authorities in
jurisdictions in which we do business.
Moreover, we conduct operations
through our subsidiaries in various tax jurisdictions pursuant to transfer pricing arrangements between us and our subsidiaries. While
we believe that we operate in compliance with applicable transfer pricing laws and intend to continue to do so, our transfer pricing procedures
are not binding on applicable tax authorities. If tax authorities in any jurisdiction in which we operate were to successfully challenge
our transfer prices as not reflecting arms’ length transactions, they could require us to adjust our transfer prices and thereby
reallocate our income to reflect these revised transfer prices, which could result in a higher tax liability to us. Furthermore, a tax
authority could assert that we are subject to tax in a jurisdiction where we believe we have not established a taxable connection, and
such an assertion, if successful, could increase our expected tax liability in one or more jurisdictions. Such circumstances could adversely
affect our financial condition, results of operations and cash flows.
Fluctuations in
exchange rates could have a material adverse impact on our results of operations and the value of your investment.
We operate in multiple markets,
which exposes us to the effects of fluctuations in currency exchange rates as we report our financials and key operational metrics in
U.S. dollars. We earn revenue denominated in local currencies of our markets in mainland China, Japan, Hong Kong, Taiwan, North America,
Southeast Asia and Europe, among other currencies, while some of our costs and expenses are paid in other foreign currencies. We do not
rely on any single currency as we earn revenue in different local currencies across our markets and keep a significant cash position in
U.S. dollars. However, fluctuations in the exchange rates among the various currencies that we use could cause fluctuations in our operational
and financial results. Our expenses may become higher and our revenue and operating metrics may become lower than would be the case if
exchange rates were stable or if we were operating and reporting in one currency. Movements in foreign currency exchange rates may have
a material adverse effect on our results of operations, which may cause our financial and operational metrics reported in U.S. dollars
to be not fully representative of our underlying business performance. A significant amount of our revenue and some of our operating metrics
are denominated in certain local currencies that have been subject to significant volatility in the past. Because fluctuations in the
value of these local currencies are not necessarily correlated, our results of operations in any period may be adversely affected by such
volatility. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk.”
We may enter into foreign
exchange derivatives transactions and incur relevant costs from time to time to manage our exposure to exchange rate risk. Such derivatives
transactions while intended to be non-speculative, are designed to protect us against increases or decreases in exchange rates, but not
both. If we have entered into derivatives transactions to protect against, for example, decreases in the value of a local currency and
such local currency instead increases in value, we may incur financial losses. Such losses could materially and adversely affect our financial
condition and results of operations.
A significant portion of our
business operations are conducted in mainland China. The conversion of Renminbi into foreign currencies, including U.S. dollars, is based
on rates set by the People’s Bank of China. The Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably.
The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in
political and economic conditions in China and by mainland China’s foreign exchange policies, among other things. 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 the Renminbi and the U.S. dollar in the future.
In addition, significant fluctuation of the Renminbi may have a material adverse effect on your investment. For example, to the extent
that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have
an adverse effect on the Renminbi amount we would receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S.
dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of
the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us.
Very limited hedging options
are available in mainland China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any material hedging
transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions
in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure
or at all. In addition, our currency exchange losses may be magnified by mainland China’s exchange control regulations that restrict
our ability to convert Renminbi into foreign currency.
We would be harmed
by data loss or other security breaches.
Our business involves the
receipt, storage, and transmission of sensitive information of our users, customers and employees, including personal information and
other confidential information about or held by our company. We have also outsourced elements of our operations to third parties, and
as a result we manage a number of third-party contractors who have access to our confidential information, including third party vendors
of IT and data security systems and services. While we have agreements requiring such vendors to use best practices for data security,
we have no operational control over them. Despite the implementation of security measures, unauthorized access to confidential information
may be difficult for us or our third-party vendors to anticipate, detect, or prevent, particularly given that the methods of unauthorized
access constantly change and evolve. We are subject to the threat of unauthorized access or disclosure of confidential information by
state-sponsored parties, malicious actors, third parties or employees, errors or breaches by third-party suppliers, or other security
incidents that could compromise the confidentiality and integrity of confidential information. Cyber-attacks, such as denial of service
and other malicious attacks, could disrupt our internal systems and applications, impair our ability to provide services to our users,
and have other adverse effects on our business and that of others who depend on our services. Mobile networks are considered a critical
infrastructure provider and therefore may be more likely to be the target of such attacks. Such attacks against companies may be perpetrated
by a variety of groups or persons, including those in jurisdictions where law enforcement measures to address such attacks are ineffective
or unavailable, and such attacks may even be perpetrated by or at the behest of foreign governments.
Our procedures and safeguards
to prevent unauthorized access to confidential information and to defend against attacks seeking to disrupt our services must be continually
evaluated and revised to address the ever-evolving threat landscape. We cannot make assurances that all preventive actions taken will
adequately repel a significant attack or prevent information security breaches or the misuses of data, unauthorized access by third parties
or employees, or exploits against third-party supplier environments. If we or our third-party suppliers are subject to such attacks or
security breaches, we may incur significant costs or other material financial impact, which may not be covered by, or may exceed the coverage
limits of, our cyber insurance, be subject to regulatory investigations, sanctions and private litigation, experience disruptions to our
operations or suffer damage to our reputation. Any future cyber-attacks, data breaches, or security incidents may have a material adverse
effect on our business, financial condition, and operating results.
Our products and
services may experience quality problems from time to time, which could result in decreased sales, adversely affect our results of operations
and harm our reputation.
Our products and services
could contain design and manufacturing defects in their materials, hardware, and firmware. Defects may also occur in components and materials
that we purchase from third-party suppliers, such as batteries. These defects could include defective materials or components, or “bugs,”
that can unexpectedly interfere with the products’ intended operations. Although we extensively test new and enhanced products and
services before their release, there can be no assurance we will be able to detect, prevent, or fix all defects. Failure to do so could
result in loss of revenue, significant warranty and other expenses and harm to our reputation.
Any unauthorized
control or manipulation of our products or systems could result in a material adverse effect on our business.
We have designed, implemented
and tested security measures intended to prevent unauthorized access to our information technology networks, our products and systems.
However, hackers or even our own employees may attempt to gain unauthorized access to modify, alter and use such networks, products and
systems to gain control of, or to change, our products’ functionality, user interface and performance characteristics, exploit our
services for free and possibly for illegal use. Any unauthorized access to or control of our products or systems could result in legal
claims, proceedings or investigations that cause interruptions of our operations, and damage to our reputation. In addition, we can be
held liable for the illegal activities conducted through such unauthorized control or manipulation of our products and systems.
Our use of open-source
software could negatively affect our ability to offer our products and services and subject us to possible litigation.
A portion of the technologies
we use incorporates open-source software, and we may incorporate open-source software in the future. Such open-source software is generally
licensed by its authors or other third parties under open-source licenses. These licenses may subject us to certain unfavorable conditions,
including requirements that we offer our products and services that incorporate the open-source software for no cost, that we make publicly
available source code for modifications or derivative works we create based upon, incorporating, or using the open-source software, or
that we license such modifications or derivative works under the terms of the particular open source license.
Additionally, if a third-party
software provider has incorporated open-source software into software that we license from such provider, we could be required to disclose
or provide at no cost any of our source code that incorporates or is a modification of such licensed software. If an author or any third
party that distributes open-source software that we use or license were to allege that we had not complied with the conditions of the
applicable license, we may need to incur significant legal expenses defending against such allegations and could be subject to significant
damages and enjoined from the sale of our products and services that contained the open-source software. Any of the foregoing could disrupt
the distribution and sale of our products and services and harm our business.
If we are unable
to take advantage of technological developments on a timely basis, we may experience a decline in demand for our products and services
or face challenges in implementing or evolving our business strategy.
Our future success depends
on our ability to respond to rapidly changing technologies, adapt our products and services to evolving industry standards and improve
the performance and reliability of our products and services. Significant technological changes continue to impact the international mobile
data connectivity service industry and local mobile data connectivity service industry. In general, these technological changes may enable
certain companies to offer services competitive with ours. In order to grow and remain competitive with new and evolving technologies,
we will need to adapt to future changes in technology. Adopting new and sophisticated technologies may result in implementation issues
such as system instabilities, unexpected or increased costs, technological constraints, regulatory permitting issues, user dissatisfaction,
and other issues that could cause delays in launching new technological capabilities, which in turn could result in significant costs
or reduce the anticipated benefits of the upgrades. In general, the development of new services in the international mobile data connectivity
service industry and local mobile data connectivity service industry will require us to anticipate and respond to the continuously changing
demands of our users, which we may not be able to do accurately or timely. If we fail to keep up with rapid technological changes to remain
competitive, or consequently fail to retain users with products and services of exceptional quality, our future success may be materially
and adversely affected.
Our success depends
substantially on the continuing efforts of our senior executives and other key personnel, and our business may be severely disrupted if
we lose their services.
Our success depends heavily
upon the continuing services of our management team. If one or more of our executives or other key personnel are unable or unwilling to
continue in their present positions for various reasons such as legal actions and negative publicity, and we are not able to find their
successors in a timely manner, our business may be disrupted and our financial condition and results of operations may be adversely affected.
Competition for management and key personnel is intense, the pool of qualified candidates is limited, and we may not be able to retain
the services of our executives or key personnel, or attract and retain experienced executives or key personnel in the future.
If any of our executives or
other key personnel joins a competitor or forms a competing company, we may not be able to successfully retain users, distributors, know-how
and key personnel. Each of our executive officers and key employees has entered into an employment agreement with us, containing confidentiality
and non-competition provisions. If any disputes arise between any of our executives or key personnel and us, we cannot assure you of the
extent to which any of these agreements may be enforced.
We rely on highly
skilled personnel. If we are unable to retain or motivate them or hire additional qualified personnel, we may not be able to grow effectively.
Our performance and future
success depend on the talents and efforts of highly skilled individuals. We will need to continue to identify, hire, develop, motivate
and retain highly skilled personnel for all areas of our organization and business operations. Our continued ability to compete effectively
depends on our ability to attract new employees and to retain and motivate our existing employees. As we expand internationally, we also
face the difficulties in recruiting and managing overseas employees, such as cultural differences, language barriers, and different regulatory
requirement. As competition in the international mobile data connectivity service industry and local mobile data connectivity service
industry intensifies, it may be more difficult for us to hire, motivate and retain highly skilled personnel. If we do not succeed in attracting
additional highly skilled personnel or retaining or motivating our existing personnel, we may be unable to grow effectively.
If our employees
commit fraud or other misconduct, including noncompliance with regulatory standards, our business may experience serious adverse consequences.
We are exposed to the risk
of employee fraud or other misconduct. Certain laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing
and promotion, sales commission, user incentive programs and other business arrangements. Employee misconduct could also involve the improper
use of information obtained in the provision of services, which could result in regulatory sanctions and serious harm to our reputation.
Furthermore, employee misconduct could subject us to financial losses and regulatory sanctions and could seriously harm our reputation
and negatively affect our business. It is not always possible to identify and deter employee misconduct, and the precautions we take to
detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental
investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions
are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant
impact on our business, including the imposition of significant fines or other sanctions.
We are subject to
anti-corruption, anti-bribery, anti-money laundering, financial and economic sanctions and similar laws, and noncompliance with such laws
can subject us to administrative, civil and criminal fines and penalties, collateral consequences, remedial measures and legal expenses,
all of which could adversely affect our business, results of operations, financial condition and reputation.
We are subject to anti-corruption,
anti-bribery, anti-money laundering, financial and economic sanctions and similar laws and regulations in various jurisdictions in which
we conduct activities, including the U.S. Foreign Corrupt Practices Act, or FCPA, the U.K. Bribery Act 2010, and other anti-corruption
laws and regulations. Non-compliance with anti-corruption, anti-bribery, anti-money laundering or financial and economic sanctions laws
could subject us to whistleblower complaints, adverse media coverage, investigations, and severe administrative, civil and criminal sanctions,
collateral consequences, remedial measures and legal expenses, all of which could materially and adversely affect our business, results
of operations, financial condition and reputation. In addition, changes in economic sanctions laws in the future could adversely impact
our business and investments in the ADSs.
We cooperate with
our contract manufacturers to manufacture our products. If we encounter issues with them, our business and results of operations could
be materially and adversely affected.
We cooperate with certain
contract manufacturers to produce our products. We may experience operational difficulties with our contract manufacturers, including
reductions in the availability of production capacity, failure to comply with product specifications, insufficient quality control, failure
to meet production deadlines, increases in manufacturing costs and longer lead time. Our contract manufacturers may experience disruptions
in their manufacturing operations due to equipment breakdowns, labor strikes or shortages, natural disasters, component or material shortages,
cost increases, violation of environmental, health or safety laws and regulations, or other problems. We may be unable to pass on the
cost increases to our users. We may have disputes with our contract manufacturers, which may result in litigation expenses, divert our
management’s attention and cause supply shortages to us. If our contract manufacturers were unable to perform their obligations
or were to end their relationship with us, it may take up a significant amount of time to identify and onboard a new manufacturer that
has the capability and resources to build our products to our specifications in sufficient volume, and our business and results of operations
could be materially and adversely affected.
While we have regular access
to each manufacturing facility of our contract manufacturers, and have quality control teams to continually monitor the manufacturing
processes at our contract manufacturers’ facilities, any failure of such manufacturers to perform may have a material negative impact
on our cost or supply of finished goods.
Furthermore, although our
agreements with our contract manufacturers contain confidentiality obligations, and we have adopted security protocols to ensure knowhow
and technologies for manufacturing our products could not be easily leaked or plagiarized, we cannot guarantee the effectiveness of these
efforts, and any leakage or plagiary of our knowhow and technologies could be detrimental to our business prospects and results of operations.
We are dependent
on our suppliers to provide certain components of our products, and inability of these suppliers to continue to deliver and do so on time,
or their refusal to deliver, necessary components of our products at prices and volumes acceptable to us would have a material adverse
impact on our business, prospects and operating results.
While we obtain components
from multiple sources whenever possible, certain components used in our products are purchased by us from limited sources. We believe
that we may be able to establish alternate supply relationships and can obtain or engineer replacement components for our limited source
components, but we may be unable to do so in the short term or at all at prices or costs that are favorable to us. In particular, we rely
on a major chip manufacturer based in the United States and our largest supplier of chips, for chips installed on our products. If we
were to experience any material disruption to our sourcing of chips or any delay in the delivery, we may not be able to switch to an alternative
supplier of chips within a short period time or at all. Furthermore, because our GlocalMe Inside service requires smartphone
chips that support cloud SIM technology, the successful development and adoption of GlocalMe Inside service and our cooperation
with smartphone companies in that regard depend on supply of smartphone chips featuring that function. If, for some reason, chip manufacturers
remove or deny our access to that function from the chips they supply to the smart phone companies, the development of GlocalMe
Inside business will be hindered.
We rely on distributors
in marketing and selling our products and services, and failure to retain key distributors or attract additional distributors could materially
and adversely affect our business.
We rely on third-party distributors
in marketing and selling our products and services. If our distributors are not effective in selling and marketing our products and services,
do not provide quality services to our users or otherwise breach their contracts with our users, or engage in inappropriate marketing
conducts such as so-called “click farming” usually seen on e-commerce platforms, we may experience slower growth in a particular
market, lose users and our results of operations may be materially and adversely affected. Since most of our distributors are not bound
by long-term contracts, we cannot assure you that we will continue to maintain favorable relationships with them. If our major distributors
decide to exit the cooperation with us or if we fail to retain our key distributors or attract additional distributors on terms that are
commercially reasonable, our business and results of operations could be materially and adversely affected.
We are subject to
payment-related risks.
We enable our users to make
payments by working with various third-party payment processing service providers. As we rely on third parties to provide payment processing
services, including processing payments made with credit cards and payment apps, it could disrupt our business if these companies become
unwilling or unable to provide these services to us. We may be subject to late payment, breach, human error, fraud and other illegal activities
in connection with third-party online payment services. If our data security systems are breached or compromised, we may lose our ability
to accept payments through credit and payment app from our users, and we may be subject to claims for damages from our users and third
parties, all of which could adversely affect our reputation and results of operations.
We may incur losses
arising from our investment in financial investment products.
As of December 31, 2020, 2021
and 2022, we had US$37.0 million, US$24.6 million and US$11.7 million other investments, respectively. Other investments included: (i)
in June 2020, we made an investment in an investment fund representing ownership interest in an entity, for which the underlying assets
were comprised of debt and equity securities for a cash consideration of US$15 million; and (ii) in June 2020, we made an investment in
an investment product for which the underlying assets were mainly comprised of unlisted bonds and subordinated debentures for a cash consideration
of US$17 million with a period of three years. For more details, see “Item 5. Operating and Financial Review and Prospects—
B. Liquidity and Capital Resources.” We may invest in more financial investment products in the future. Financial investment products
typically have high market risks, such as interest rate risk, equity risk, and credit risk. As a result, we may incur losses from our
investment in the financial investment products in the event of significant market fluctuations. Such losses could materially and adversely
affect our financial condition and results of operations.
We use third parties
to perform shipping functions. A failure or disruption at our logistics providers would harm our business.
Currently, we use third-party
logistics providers to perform shipment for us, including exports. If our logistics providers fail to deliver our products as required,
we may face reputational damage or legal liabilities for breaching a contract. Although the shipping services required by us may be available
from a number of providers, it is time-consuming and costly to qualify and implement these relationships. If one or more of our logistics
providers suffer an interruption in their businesses, or experience delays, disruptions or quality control problems in their operations,
or we choose to change or add additional logistics providers, our ability to ship products would be delayed and our business, results
of operations and financial condition would be adversely affected.
Our results of operations
are likely to fluctuate because of seasonality in the travel industry.
Our business can experience
fluctuations, reflecting seasonal variations in demand for travel services. For example, summers generally see more global travels and
generate more revenues for our data connectivity services. Consequently, our results of operations may fluctuate with the season. As we
continue to expand internationally, we could reduce the degree to which we are subject to seasonality in specific markets.
Any inability to
renew our leases on favorable terms could negatively impact our financial results.
We lease office space, warehouses,
server rooms, data centers and counters. Generally, our leases provide us with the opportunity to renew the leases at our option for periods
typically ranging from one to three years. For the leases that do not contain renewal options, or for which the option to renew has been
exhausted or passed, we cannot guarantee the landlord will renew the lease, or will do so at a rate that will allow us to maintain profitability
on that particular space. While we proactively monitor these leases and conduct ongoing negotiations with landlord, our ability to renegotiate
renewals is inherently limited by the original contract language, including option renewal clauses. If we are unable to renew, we may
incur substantial costs to move our infrastructure and to restore the property to its required condition. There is no guarantee that we
will be able to find appropriate and sufficient space. The occurrence of any of these events could adversely impact our business, financial
condition, results of operations and cash flows.
We have limited
insurance coverage, which could expose us to significant costs and business disruption.
Insurance companies in mainland
China currently offer limited business insurance products. While we maintain product liability insurance coverage, we do not have any
business liability or disruption insurance coverage for our operations. Any business disruption may result in our incurring substantial
costs and the diversion of our resources. In addition, as we may purchase supplemental insurances to support our business expansion, our
cost could be increased and our financial results could be negatively affected as a result.
Our business depends
on our brands including GlocalMe and Roamingman, and if we are not able to maintain and enhance our brands, our business and results of
operations may be harmed.
We believe that our brands
including GlocalMe and Roamingman have contributed to the success of our business. We also believe that
maintaining and enhancing the brands is critical as we try to retain and expand our user base for our international mobile data connectivity
service and venture into new business opportunities such as GlocalMe Inside. If we fail to maintain and further promote our
brands, or if we incur excessive expenses in this effort, our business and results of operations may be materially and adversely affected.
In addition, any negative publicity about our company, our products and services, our employees, our business practices, or our partners,
regardless of its veracity, could harm our brand image and in turn adversely affect our business and results of operations.
We are involved
in legal proceedings in the ordinary course of our business from time to time. If the outcomes of these proceedings are adverse to us,
it could have a material adverse effect on our business, results of operations and financial condition.
We are involved in various
legal proceedings in the ordinary course of business from time to time, involving competitors, business partners, customers and employees,
among others. Claims arising out of actual or alleged violations of law could be asserted under a variety of laws, including but not limited
to intellectual property laws, contract laws, tort laws, unfair competition laws, labor and employment laws, data privacy laws and property
laws. No assurances can be given as to the outcome of any pending legal proceedings, which could have a material adverse effect on our
business, results of operations and financial condition. Even if we are successful in our attempt to defend ourselves in legal and administrative
actions or to assert our rights under various laws, enforcing our rights against the various parties involved may be expensive, time-consuming
and ultimately futile. These actions could expose us to negative publicity and to substantial monetary damages and legal defense costs,
injunctive reliefs, and criminal and civil liabilities and/or penalties.
Risks Related to Our Corporate
Structure
If the PRC government
determines that the contractual arrangements with the former VIEs structure did not comply with the regulations of mainland China, or
if these regulations change or are interpreted differently in the future, our shares and/or ADSs may decline in value or become worthless
if we are deemed to be unable to assert our contractual control rights over the assets of the former VIEs.
The Regulations for the Administration
of Foreign-Invested Telecommunications Enterprises, promulgated by the State Council on December 11, 2001 and last amended with
immediate effect on February 6, 2016, requires foreign-invested value-added telecommunications enterprises in mainland China
to be established as Sino-foreign joint ventures, and foreign investors shall not acquire more than 50%
of the equity interest of such an enterprise. In addition, the main foreign investor who invests in such an enterprise must demonstrate a
good track record and experience in such industry. Moreover, the joint ventures must obtain approvals from the MIIT and the
Ministry of Commerce of the PRC (“MOFCOM”), or their authorized local counterparts, before launching
the value-added telecommunications business in mainland China. On March 29, 2022, the Decision of the State Council on Revising
and Repealing Certain Administrative Regulations, which took effect on May 1, 2022, was promulgated to amend certain provisions of regulations
including the Provisions on the Regulations for the Administration of Foreign-Invested Telecommunications Enterprises (2016 Revision),
the requirement for major foreign investor to demonstrate a good track record and experience in operating value-added telecommunications
businesses is deleted.
The Special Administrative Measures
(Negative List) for Access of Foreign Investment (2021 version) (the “Negative List”) was jointly promulgated by the National
Development and Reform Commission of the PRC (“NDRC”) and MOFCOM on December 27, 2021 and came into effect on January
1, 2022. According to the Negative List, the proportion of foreign investments in an entity engages in value-added telecommunications
business (except for e-commerce, domestic multi-party communications, storage-forwarding and call centers) shall not exceed 50%.
Accordingly, none of our subsidiaries
is eligible to provide commercial internet content or other value-added telecommunication service, which foreign-owned companies are or
restricted from conducting in mainland China. To comply with the laws and regulations of mainland China, we have conducted such business
activities to offer internet access services through the former VIEs in mainland China. Beijing uCloudlink has entered into contractual
arrangements with the former VIEs and their respective shareholders, and such contractual arrangements enable us to exercise effective
control over, receive substantially all of the economic benefits of, and have an exclusive option to purchase all or part of the equity
interest and assets in the former VIEs when and to the extent permitted by the laws of mainland China. Because of these contractual arrangements,
we are the primary beneficiary of the former VIEs in mainland China for accounting purposes for the effective period of these contractual
arrangements. Accordingly, under U.S. GAAP, the financial statements of the former VIEs are consolidated as part of our financial statements
for the years ended December 31, 2020, 2021 and 2022 in this annual report.
As we continued to evaluate
our business plan, we have decided to adjust our business model in mainland China. Therefore, we initiated the Restructuring to adjust
our local business in mainland China and unwind the aforementioned contractual arrangements so that the former VIEs become wholly-owned
subsidiaries of Shenzhen Ucloudlink Technology Limited. On March 17, 2022, the equity of the former VIEs was transferred to Shenzhen Ucloudlink
Technology Limited, and the original VIE agreements were terminated. We believe that the Restructuring did not affect our uCloudlink 1.0
international data connectivity services in mainland China. After the Restructuring, we now carry out the PaaS and SaaS platform services
in mainland China, which were the primary business operated by the former VIEs, in cooperation with local business partners, such as Beijing
Huaxianglianxin Technology Company, which have the required licenses to provide local data connectivity services in mainland China. See
“Item 4. Information on the Company—C. Organizational Structure—Contractual Arrangements with the Former VIEs and Their
Respective Shareholders.”
After the Restructuring, certain
of our immaterial businesses are still in the process of reorganization. If any PRC authority finds that we, our mainland China subsidiaries
or the former VIEs are in violation of any existing or future laws or regulations of mainland China or lack the necessary permits or licenses
to operate any of our businesses in mainland China, the relevant governmental authorities would have broad discretion in dealing with
such violation, including, without limitation: (i) imposing fines on us, (ii) confiscating any of our income that they deem to be obtained
through illegal operations, (iii) discontinuing or placing restrictions or onerous conditions on our operations, (iv) placing restrictions
on our right to collect revenues, and (v) shutting down our servers or blocking our mobile apps and websites. Any of these events could
cause 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.
In addition, although the
contractual agreements with the former VIEs have been terminated on March 17, 2022, there are substantial uncertainties regarding the
interpretation and application of current and future laws of mainland China, regulations, and rules relating to the agreements that established
the former VIE structure for our operations in mainland China, including potential future actions by the PRC government, which may retroactively
affect the enforceability and legality of our historical contractual arrangements with the former VIEs and, consequently, significantly
affect the historical financial condition and results of operations of the former VIEs, and our ability to consolidate the results of
the former VIEs into our consolidated financial statements for the periods prior to the completion of the Restructuring. If the PRC government
finds such agreements non-compliant with relevant laws of mainland China, regulations, and rules, or if these laws, regulations, and rules
or the interpretation thereof change in the future, and such changes may be retroactively applied to our historical contractual arrangements,
we could be subject to severe penalties and our control over the former VIEs may be rendered ineffective, which could result in potential
restatement of our financial statements for the years ended December 31, 2020, 2021 and 2022 included in this annual report. As a result,
our shares and/or ADSs may decline in value or become worthless.
Risks Related to Doing
Business in China
Changes in China’s
economic, political or social conditions or government policies could have a material adverse effect on our business and operations.
Certain portion of our operations
are located in China. Accordingly, our business, financial condition, results of operations and prospects may be influenced to a significant
degree by political, economic, social conditions and government policies in China generally. The Chinese economy differs from the economies
of most developed countries in many respects, including the level of government involvement, level of development, growth rate, control
of foreign exchange and allocation of resources. Although the PRC 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 PRC government
continues to play a significant role in regulating industry development by imposing industrial policies. The PRC 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 Chinese economy
has experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the
economy, and the rate of growth has been slowing 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. COVID-19 had a severe and negative impact on Chinese and global economy in the past three years. Whether this
will lead to a prolonged downturn in the economy is still unknown. The conflict between Ukraine and Russia and the imposition of broad
economic sanctions on Russia may raise cost for our operations in Europe. The PRC government has implemented various measures to encourage
economic growth and guide the allocation of 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 results of operations may be adversely affected by government control
over capital investments or changes in tax regulations. In addition, in the past the PRC government has implemented certain measures,
including interest rate adjustment, to control the pace of economic growth. These measures may cause decreased economic activity in China,
which may adversely affect our business and operating results.
The approval and/or
other requirements of the CSRC, the CAC, or other PRC governmental authorities may be required in connection with an offering under the
rules, regulations or policies of mainland China, and, if required, we cannot predict whether or how soon we will be able to obtain such
approval, and, even if we obtain such approval, the approval could be rescinded. Any failure to obtain or delay in obtaining such approval
for this offering, or a rescission of obtained approval, would subject us to sanctions imposed by the CSRC or other PRC government authorities.
The Regulations on Mergers
and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, purport to require offshore special purpose vehicles
that are controlled by mainland China’s companies or individuals and that have been formed for the purpose of seeking a public listing
on an overseas stock exchange through acquisitions of domestic companies or assets in mainland China to obtain CSRC approval prior to
any public securities offerings on an overseas stock exchange. The interpretation and application of the regulations remain unclear. If
a governmental approval is required, it is uncertain how long it will take for us to obtain such approval, and, even if we obtain such
approval, the approval could be rescinded. Any failure to obtain or a delay in obtaining the requisite governmental approval for an offering,
or a rescission of such CSRC approval if obtained by us, may subject us to sanctions imposed by the relevant PRC regulatory authority,
which could include fines and penalties on our and the former VIEs’ operations in mainland China, restrictions or limitations on
our ability to pay dividends outside of mainland China, and other forms of sanctions that may materially and adversely affect our business,
financial condition, and results of operations.
Our PRC counsel, has advised
us that, based on its understanding of the current laws and regulations of mainland China, we will not be required to submit an application
to the CSRC for the approval under the M&A Rules for an offering because (i) the CSRC currently has not issued any definitive rule
or interpretation concerning whether our offerings are subject to this regulation; and (ii) we did not acquire any equity interests or
assets of a “domestic company” as such terms are defined under the M&A Rules.
However, our PRC 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 authorities, including
the CSRC, would reach the same conclusion as our PRC counsel, and hence, we may face regulatory actions or other sanctions from them.
Furthermore, relevant PRC governmental authorities promulgated the Opinions on Strictly Cracking Down Illegal Securities Activities, which
provided that the administration and supervision of overseas-listed mainland China-based companies will be strengthened, and the special
provisions of the State Council on overseas issuance and listing of shares by such companies will be revised, clarifying the responsibilities
of domestic industry competent authorities and regulatory authorities. However, the Opinions on Strictly Cracking Down Illegal Securities
Activities were still leaving uncertainties regarding the interpretation and implementation of these opinions. It is possible that any
new rules or regulations may impose additional requirements on us. Furthermore, the Review Measures required that, in addition to network
products and services acquired by critical information infrastructure operators, online platform operators are also subject to cybersecurity
review if they carry out data processing activities that affect or may affect national security, and online platform operators listing
in a foreign country with more than one million users’ personal information data must apply for a cybersecurity review with the
Cybersecurity Review Office. According to the Data Export Measures, any data processor who processes or exports personal information exceeding
a certain volume threshold pursuant to the measures shall apply for a security assessment by the CAC before transferring any personal
information abroad. The security assessment requirement also applies to any transfer of important data outside of mainland China. As uncertainties
remain regarding to what extent we would be subject to such measures, we cannot assure you that we will be able to comply with such regulations
in all respects, and we may be ordered to rectify or terminate any actions that may be deemed illegal by regulatory authorities. It is
uncertain whether we would be deemed as a CIIO, an online platform operator, or a data processor transferring important data outbound,
which is under the censorship of the Review Measure or the Data Export Measures in the future. In the event that we become under investigation
or review by the CAC, we may have to substantially change our current business and our operations may be materially and adversely affected.
If it is determined in the future that CSRC approval or other procedural requirements are required to be met for and prior to an offering,
it is uncertain whether we can or how long it will take us to obtain such approval or complete such procedures and any such approval could
be rescinded. Any failure to obtain or delay in obtaining such approval or completing such procedures for an offering, or a rescission
of any such approval, could subject us to sanctions by the relevant PRC governmental authorities. The governmental authorities may impose
restrictions and penalties on our operations in mainland China, such as the suspension of our apps and services, revocation of our licenses,
or shutting down part or all of our operations, limit our ability to pay dividends outside of mainland China, delay or restrict the repatriation
of the proceeds from an offering into mainland China or take other actions that could have a material adverse effect on our business,
financial condition, results of operations and prospects, as well as the trading price of the ADSs. The PRC governmental authorities may
also take actions requiring us, or making it advisable for us, to halt an offering before settlement and delivery of the ADSs offered
hereby. Consequently, if you engage in market trading or other activities in anticipation of and prior to settlement and delivery, you
do so at the risk that settlement and delivery may not occur. In addition, if the PRC governmental authorities later promulgate new rules
or explanations requiring that we obtain their approvals for filings, registrations or other kinds of authorizations for an offering,
we cannot assure you that we can obtain the approval, authorizations, or complete required procedures or other requirements in a timely
manner, or at all, or obtain a waiver of the requisite requirements if and when procedures are established to obtain such a waiver.
On April 2, 2022, the CSRC
published the Provisions on Strengthening the Confidentiality and Archives Administration Related to the Overseas Securities Offering
and Listing by Domestic Enterprises (Draft for Comments), or the Draft Provisions on Confidentiality and Archives Administration, which
was open for public comments until April 17, 2022. The Draft Provisions on Confidentiality and Archives Administration requires that,
in the process of overseas issuance and listing of securities by domestic entities, the domestic entities, and securities companies and
securities service institutions that provide relevant securities service shall strictly implement the provisions of relevant laws and
regulations and the requirements of these provisions, establish and improve rules on confidentiality and archives administration. Where
the domestic entities provide with or publicly disclose documents, materials or other items related to the state secrets and government
work secrets to the relevant securities companies, securities service institutions, overseas regulatory authorities, or other entities
or individuals, the companies shall apply for approval of competent departments with the authority of examination and approval in accordance
with law and report the matter to the secrecy administrative departments at the same level for record filing. Where there is unclear or
controversial whether or not the concerned materials are related to state secrets, the materials shall be reported to the relevant secrecy
administrative departments for determination. However, the Draft Provisions on Confidentiality and Archives Administration have not yet
been settled or become effective, and there remain uncertainties regarding the further interpretation and implementation of the Draft
Provisions on Confidentiality and Archives Administration.
On February 17, 2023, the
CSRC issued the Trial Measures, which will become effective on March 31, 2023. On the same date, the CSRC circulated the Guidance Rules
and Notice. The Trial Measures, together with the Guidance Rules and Notice, reiterate the basic principles of the Draft Administrative
Provisions and Draft Filing Measures and impose substantially the same requirements for the overseas securities offering and listing by
domestic enterprises. Under the Trial Measures and the Guidance Rules and Notice, domestic enterprises conducting overseas securities
offering and listing, either directly or indirectly, shall complete filings with the CSRC pursuant to the Trial Measures’ requirements
within three working days following the submission of an application for initial public offering or listing.
As of the date of this annual
report, we have not received any inquiry or notice or any objection to this annual report from the CSRC, the CAC or any other PRC governmental
authorities that have jurisdiction over our operations. However, given the current regulatory environment in mainland China, there remains
uncertainty regarding the interpretation and enforcement of the laws of mainland China, which can change quickly with little notice in
advance and subject to any future actions within the discretion of PRC authorities. If the CSRC or other regulatory authorities later
promulgate new rules or explanations requiring that we obtain their approvals or accomplish the required filing or other regulatory procedures
for this offering, we may be unable to obtain a waiver of such approval requirements, if and when procedures are established to obtain
such a waiver.
Any failure of us to fully
comply with new regulatory requirements may significantly limit or completely hinder our ability to offer or continue to offer the ADSs,
cause significant disruption to our business operations and severely damage our reputation, which would materially and adversely affect
our financial condition and results of operations and cause the ADSs to significantly decline in value or become worthless.
The PRC government’s
significant oversight over our business operation could result in a material adverse change in our operations and the value of our ADSs.
We have conducted our business
in mainland China primarily through the former variable interest entities and their subsidiaries. Our operations in mainland China are
governed by the laws and regulations of mainland China. The PRC government has significant oversight over the conduct of our business,
and may intervene or influence our operations as the government deems appropriate to advance regulatory and social goals and policy positions.
The PRC government deems appropriate to advance regulatory and social goals and policy positions. The PRC government has recently published
new policies that significantly affected certain industries and we cannot rule out the possibility that it will in the future release
regulations or policies that directly or indirectly affect our industry or require us to seek additional permission to continue our operations,
which could result in a material adverse change in our operation and/or the value of our ADSs. Therefore, investors of our company and
our business face potential uncertainty from actions taken by the PRC government affecting our business.
The PCAOB had historically
been unable to inspect our auditor in relation to their audit work performed for our financial statements and the inability of the PCAOB
to conduct inspections of our auditor in the past has deprived our investors with the benefits of such inspections.
Our auditor, the independent
registered public accounting firm that issues the audit report included elsewhere in this annual report, as an auditor of companies that
are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which
the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Our previous auditor is located
in mainland China, a jurisdiction where the PCAOB was historically unable to conduct inspections and investigations completely before
2022. As a result, we and investors in the ADSs were deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to
conduct inspections of auditors in mainland China in the past has made it more difficult to evaluate the effectiveness of our independent
registered public accounting firm’s audit procedures or quality control procedures as compared to auditors outside of mainland China
that are subject to the PCAOB inspections. On December 15, 2022, the PCAOB issued a report that vacated its December 16, 2021 determination
and removed mainland China and Hong Kong from the list of jurisdictions where it is unable to inspect or investigate completely registered
public accounting firms. Our current auditor is a Singapore-based accounting firm that is registered with the PCAOB and can be inspected
by the PCAOB. However, if the PCAOB determines in the future that it no longer has full access to inspect and investigate completely our
current auditor, we and investors in our ADSs would be deprived of the benefits of such PCAOB inspections again, which could cause investors
and potential investors in the ADSs to lose confidence in our audit procedures and reported financial information and the quality of our
financial statements.
Our ADSs may be
prohibited from trading in the United States under the HFCAA in the future if the PCAOB is unable to inspect or investigate completely
our current auditor. The delisting of the ADSs, or the threat of their being delisted, may materially and adversely affect the value of
your investment.
Pursuant to the HFCAA, if
the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspections
by the PCAOB for two consecutive years, the SEC will prohibit our shares or ADSs from being traded on a national securities exchange or
in the over-the-counter trading market in the United States.
On December 16, 2021, the
PCAOB issued a report to notify the SEC of its determination that the PCAOB was unable to inspect or investigate completely registered
public accounting firms headquartered in mainland China and Hong Kong and our previous auditor was subject to that determination. In May
2022, the SEC conclusively listed us as a Commission-Identified Issuer under the HFCAA following the filing of our annual report on Form
20-F for the fiscal year ended December 31, 2021. On December 15, 2022, the PCAOB removed mainland China and Hong Kong from the list of
jurisdictions where it is unable to inspect or investigate completely registered public accounting firms. In addition, our current auditor
is a Singapore-based accounting firm that is registered with the PCAOB and can be inspected by the PCAOB. For these reasons, we do not
expect to be identified as a Commission-Identified Issuer under the HFCAA after we file this annual report on Form 20-F for the fiscal
year ended December 31, 2022.
Each year, the PCAOB will
determine whether it can inspect and investigate completely audit firms in mainland China and Hong Kong, among other jurisdictions. If
the PCAOB determines in the future that it no longer has full access to inspect and investigate completely our current auditor, we would
be identified as a Commission-Identified Issuer following the filing of the annual report on Form 20-F for the relevant fiscal year. In
accordance with the HFCAA, our securities would be prohibited from being traded on a national securities exchange or in the over-the-counter
trading market in the United States if we are identified as a Commission-Identified Issuer for two consecutive years in the future. If
our shares and ADSs are prohibited from trading in the United States, there is no certainty that we will be able to list on a non-U.S.
exchange or that a market for our shares will develop outside of the United States. A prohibition of being able to trade in the United
States would substantially impair your ability to sell or purchase our ADSs when you wish to do so, and the risk and uncertainty associated
with delisting would have a negative impact on the price of our ADSs. Also, such a prohibition would significantly affect our ability
to raise capital on terms acceptable to us, or at all, which would have a material adverse impact on our business, financial condition,
and prospects.
Uncertainties with
respect to the PRC legal system could adversely affect us.
The PRC legal system is a
civil law system based on written statutes. Unlike the common law system, prior court decisions under the civil law system may be cited
for reference but have limited precedential value. 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 the enforcement of these laws, regulations
and rules involves uncertainties.
In 1979, the PRC government
began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation
over the past three decades has significantly enhanced the protections afforded to various forms of foreign investments in mainland China.
However, China has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover
all aspects of economic activities in mainland China. In particular, the interpretation and enforcement of these laws and regulations
involve uncertainties. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory
provisions and contractual terms, it may be difficult to evaluate the outcome of administrative and court proceedings and the level of
legal protection we enjoy. These uncertainties may affect our judgment on the relevance of legal requirements and our ability to enforce
our contractual rights or tort claims. In addition, the regulatory uncertainties may be exploited through unmerited or frivolous legal
actions or threats in attempts to extract payments or benefits from us.
Furthermore, the PRC legal
system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all and may
have retroactive effect. As a result, we may not be aware of our violation of any of these policies and rules until sometime after the
violation. In addition, any administrative and court proceedings in mainland China may be protracted, resulting in substantial costs and
diversion of resources and management attention.
We may rely on dividends
and other distributions on equity paid by our mainland China subsidiaries to fund any cash and financing requirements we may have, and
any limitation on the ability of our mainland China subsidiaries to make payments to us and any tax we are required to pay could have
a material adverse effect on our ability to conduct our business.
We are a Cayman Islands holding
company and we may rely on dividends and other distributions on equity from our mainland China subsidiaries for our cash requirements,
including the funds necessary to pay dividends and other cash distributions to our shareholders and for services of any debt we may incur.
Our subsidiaries’ ability to distribute dividends is based upon their distributable earnings. Current regulations of mainland China
permit our mainland China subsidiaries to pay dividends to their respective shareholders only out of their accumulated profits, if any,
determined in accordance with mainland China’s accounting standards and regulations. In addition, each of our mainland China subsidiaries
and the former VIEs is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until
such reserve reaches 50% of its registered capital. Each of such entities in mainland China is also required to further set aside a portion
of its after-tax profits to fund the employee welfare fund, although the amount to be set aside, if any, is determined at the discretion
of its board of directors. These reserves are not distributable as cash dividends. If our mainland China subsidiaries incur debt on their
own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us.
Any limitation on the ability of our mainland China subsidiaries to distribute dividends or other payments to their respective shareholders
could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses,
pay dividends or otherwise fund and conduct our business.
In response to the persistent
capital outflow and RMB’s depreciation against U.S. dollar in the fourth quarter of 2016, the People’s Bank of China and the
State Administration of Foreign Exchange, or SAFE, have implemented a series of capital control measures, including stricter vetting procedures
for mainland China-based companies to remit foreign currency for overseas acquisitions, dividend payments and shareholder loan repayments.
For instance, the People’s Bank of China issued the Circular on Further Clarification of Relevant Matters Relating to Offshore RMB
Loans Provided by Domestic Enterprises, or the PBOC Circular 306, on November 22, 2016, which provides that offshore RMB loans provided
by a domestic enterprise to offshore enterprises that it holds equity interests in shall not exceed 30% of the domestic enterprise’s
ownership interest in the offshore enterprise. The PBOC Circular 306 may constrain our mainland China subsidiaries’ ability to provide
offshore loans to us. The PRC government may continue to strengthen its capital controls and our mainland China subsidiaries’ dividends
and other distributions may be subjected to tighter scrutiny in the future. Any limitation on the ability of our mainland China subsidiaries
to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments or acquisitions
that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.
Under the EIT Law and related
regulations, dividends, interests, rent or royalties payable by a foreign invested enterprise, such as our mainland China subsidiaries,
to any of its foreign non-resident enterprise investors, and proceeds from any such foreign enterprise investor’s disposition of
assets (after deducting the net value of such assets) are subject to a 10% withholding tax, unless the foreign enterprise investor’s
jurisdiction of incorporation has a tax treaty with mainland China that provides for a reduced rate of withholding tax. Undistributed
profits earned by foreign-invested enterprises prior to January 1, 2008 are exempted from any withholding tax. The Cayman Islands, where
UCLOUDLINK GROUP INC., is incorporated, does not have such a tax treaty with mainland China. Hong Kong has a tax arrangement with mainland
China that provides for a 5% withholding tax on dividends subject to certain conditions and requirements, such as the requirement that
the Hong Kong resident enterprise own at least 25% of the mainland China enterprise distributing the dividend at all times within the
12-month period immediately preceding the distribution of dividends and be a “beneficial owner” of the dividends. For example,
UCLOUDLINK (HK) LIMITED, which directly owns our mainland China subsidiaries, is incorporated in Hong Kong. However, if UCLOUDLINK (HK)
LIMITED is not considered to be the beneficial owner of dividends paid to it by our mainland China subsidiaries under the tax circulars
promulgated in February and October 2009, such dividends would be subject to withholding tax at a rate of 10%. If our mainland China subsidiaries
declare and distribute profits to us, such payments will be subject to withholding tax, which will increase our tax liability and reduce
the amount of cash available to our company.
Mainland China’s
regulation of loans to and direct investment in mainland China entities by offshore holding companies and governmental control of currency
conversion may delay or prevent us from using the proceeds of any financing outside mainland China to make loans to or make additional
capital contributions to our mainland China subsidiaries and former VIEs, which could materially and adversely affect our liquidity
and our ability to fund and expand our business.
Any funds we transfer to our
mainland China subsidiaries, 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 mainland China. According to the relevant regulations on foreign-invested enterprises,
or FIEs, in mainland China, capital contributions to our mainland China subsidiaries are subject to filing with the MOFCOM in its foreign
investment comprehensive management information system and registration with other governmental authorities in mainland China. In addition,
any loans provided by us to our mainland China subsidiaries and former VIEs are subject to mainland China’s regulations and foreign
exchange loan registrations. Such loans to any of our mainland China subsidiaries and former VIEs cannot exceed a statutory limit and
must be filed with SAFE through the online filing system of SAFE pursuant to the applicable regulations of mainland China. Any loan to
be provided by us to our mainland China subsidiaries and former VIEs with a term of one year or more must be recorded and registered with
the NDRC. See “Item 4. Information on the Company—B. Business Overview—Regulation—Mainland China—Regulations
Related to Foreign Exchange.”
In addition, a foreign invested
enterprise shall use its capital pursuant to the principle of authenticity and self-use within its business scope. The capital of a foreign
invested enterprise shall not be used for the following purposes: (i) directly or indirectly used for payment beyond the business scope
of the enterprises or the payment prohibited by relevant laws and regulations; (ii) directly or indirectly used for investment in securities
or investments other than banks’ principal-secured products unless otherwise provided by relevant laws and regulations; (iii) the
granting of loans to non-affiliated enterprises, except where it is expressly permitted in the business license; and (iv) paying the expenses
related to the purchase of real estate that is not for self-use (except for the foreign-invested real estate enterprises).
In light of the various requirements
imposed by mainland China’s regulations on loans to and direct investment in entities in mainland China by offshore holding companies,
we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals
or filings on a timely basis, if at all, with respect to future loans by us to our mainland China subsidiaries or former VIEs or with
respect to future capital contributions by us to our mainland China subsidiaries. If we fail to complete such registrations or obtain
such approvals, our ability to use the proceeds from our securities offerings to capitalize or otherwise fund our operations in mainland
China may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business.
Our use of some
leased properties could be challenged by third parties or governmental authorities, which may cause interruptions to our business operations.
As of the date of this annual
report, some of the lessors of our properties leased by us in mainland China have not provided us with their property ownership certificates
or any other documentation proving their right to lease those properties to us. If our lessors are not the owners of the properties and
they have not obtained consents from the owners or their lessors or permits from the relevant governmental authorities, our leases could
be invalidated. If this occurs, we may have to renegotiate the leases with the owners or other parties who have the right to lease the
properties, and the terms of the new leases may be less favorable to us. Although we may seek damages from such lessors, such leases may
be void and we may be forced to relocate. We can provide no assurance that we will be able to find suitable replacement sites on terms
acceptable to us on a timely basis, or at all, or that we will not be subject to material liability resulting from third parties’
challenges on our use of such properties. As a result, our business, financial condition and results of operations may be materially and
adversely affected.
In addition, some of our leasehold
interests in leased properties have not been registered with the relevant PRC governmental authorities as required by relevant laws of
mainland China. Though the failure to register leasehold interests may not void the respective lease agreement, it may expose us to potential
warnings and penalties up to RMB10,000 per unregistered leased property.
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 mainland China. We receive a significant portion of our revenues in Renminbi. Under our current corporate structure,
our Cayman Islands holding company may rely on dividend payments from our mainland China subsidiaries to fund any cash and financing
requirements we may have. Under existing foreign exchange regulations of mainland China, 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 subsidiaries in mainland 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 mainland 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 mainland China subsidiaries
and consolidated affiliated entities to pay off their respective debt in a currency other than Renminbi owed to entities outside mainland
China, or to make other capital expenditure payments outside mainland China in a currency other than Renminbi.
In
light of the recent flood of capital outflows of mainland China due to the weakening RMB, 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 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 the ADSs.
It
may be difficult for overseas regulators to conduct investigation or collect evidence within mainland China.
Shareholder
claims or regulatory investigation that are common in the United States generally are difficult to pursue as a matter of law or practicality
in mainland China. For example, in mainland China, there are significant legal and other obstacles to providing information needed for
regulatory investigations or litigation initiated outside mainland China. Although the authorities in mainland China may establish a
regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision
and administration, such cooperation with the securities regulatory authorities in the Unities States may not be efficient in the absence
of mutual and practical cooperation mechanism. Furthermore, according to Article 177 of the PRC Securities Law, or Article 177, which
became effective in March 2020, no overseas securities regulator is allowed to directly conduct investigation or evidence collection
activities within the territory of mainland China. While detailed interpretation of or implementation rules under Article 177 have yet
to be promulgated, the inability for an overseas securities regulator to directly conduct investigation or evidence collection activities
within mainland China may further increase difficulties faced by you in protecting your interests. See also “Item 3. Key Information—D.
Risk Factors—Risks Related to The ADSs—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” for risks associated with
investing in us as a Cayman Islands company.
If
our preferential tax treatments are revoked or become unavailable or if the calculation of our tax liability is successfully challenged
by the PRC tax authorities, we may be required to pay tax, interest and penalties in excess of our tax provisions.
Under
the PRC Enterprise Income Tax Law and its implementation rules, the statutory enterprise income tax rate is 25%, but certain “high
and new technology enterprises,” or HNTE, are qualified for a preferential enterprise income tax rate of 15% subject to certain
qualification criteria. Currently, Shenzhen Ucloudlink Technology Limited and Shenzhen uCloudlink enjoy a preferential enterprise income
tax rate of 15% as they are recognized as HNTEs by relevant PRC governmental authorities. Shenzhen Ucloudlink Technology Limited and
Shenzhen uCloudlink will apply for renewing the qualification as an HNTE in June, 2023. The qualification as an HNTE is subject to annual
evaluation and a three-year review by the relevant PRC governmental authorities. In addition, Shenzhen Ucloudlink Technology Limited
and Shenzhen uCloudlink enjoy other tax preferences, including the tax preference as the small and medium-sized technology-based enterprises.
If Shenzhen Ucloudlink Technology Limited and Shenzhen uCloudlink fail to maintain their respective statuses, experiences any increase
in the enterprise income tax rate, or faces any discontinuation, retroactive or future reduction or refund of any of the preferential
tax treatments currently enjoyed, our business, financial condition and results of operations could be materially and adversely affected.
The
M&A Rules and certain other mainland China’s regulations establish complex procedures for some acquisitions of Chinese companies
by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in mainland China.
The
M&A Rules 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 MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor takes control of a
domestic enterprise of mainland China. Moreover, the Anti-Monopoly Law requires that the anti-monopoly law enforcement authority shall
be notified in advance of any concentration of undertaking if certain thresholds are triggered. In addition, the security review rules
issued by the State Council that became effective in March 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. We cannot assure that
our merge or acquisition activities, including but not limited to the Restructuring, have been or will be satisfied with the M&A
Rules in all respects. 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 counterparts may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business
or maintain our market share.
Mainland
China’s regulations relating to offshore investment activities by domestic residents and enterprises of mainland China may increase
our administrative burden and restrict our overseas and cross-border investment activities. If our domestic residents and enterprise
shareholders fail to make any applications and filings required under these regulations, we may be unable to distribute profits to such
shareholders and may become subject to liability under the laws of mainland China.
SAFE
promulgated the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through
Special Purpose Vehicles, or SAFE Circular 37, in July 2014 that requires domestic residents or entities of mainland China 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 with such domestic residents or entities’ legally owned assets or equity interests in domestic
enterprises or offshore assets or interests. In addition, such domestic residents or 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
domestic citizens or residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares,
or mergers or divisions.
If
our shareholders who are domestic residents or entities of mainland China do not complete their registration with the local SAFE branches,
our mainland China subsidiaries 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 mainland China subsidiaries. Moreover,
failure to comply with the SAFE registration described above could result in liability under the laws of mainland China for evasion of
applicable foreign exchange restrictions.
We
have notified all domestic residents or entities of mainland China who directly or indirectly hold shares in our Cayman Islands holding
company and who are known to us as being domestic residents of mainland China to complete the foreign exchange registrations, among which,
some domestic residents are in the process of updating their registrations required in connection with our recent corporate restructuring,
furthermore, the foreign exchange registrations of several domestic residents are yet to be completed, and there is no assurance that
they will complete the relevant registrations finally, or at all. However, we may not be informed of the identities of all the domestic
residents or entities holding direct or indirect interest in our company, nor can we compel our beneficial owners to comply with SAFE
registration requirements. As a result, we cannot assure you that all of our shareholders or beneficial owners who are domestic residents
or entities of mainland China have complied with, and will in the future make, obtain or update any applicable registrations or approvals
required by, SAFE regulations. Failure by such shareholders or beneficial owners to comply with SAFE regulations, or failure by us to
amend the foreign exchange registrations of our mainland China subsidiaries, could subject us to fines or legal sanctions, restrict our
overseas or cross-border investment activities, limit our mainland China subsidiaries’ ability to make distributions or pay dividends
to us or affect our ownership structure, which could adversely affect our business and prospects.
In
August 2014, the MOFCOM promulgated the Measures for the Administration of Overseas Investment, and in December 2014, the National Development
Reform Committee, or the NDRC, promulgated the Administrative Measures for the Approval and Filing of Overseas Investment Projects. In
December 2017, the NDRC further promulgated the Administrative Measures of Overseas Investment of Enterprises, which became effective
in March 2018. Pursuant to these regulations, any outbound investment of domestic enterprises in the area and industry that is not sensitive
is required to be filed with the MOFCOM and the NDRC or their local branch. Upon filing of an enterprise’s overseas investment,
where there is any change in the overseas investment matters stated in the original Certificate of Overseas Investments of Enterprises,
such enterprise shall complete change formalities with the MOFCOM or its local branches which processed the original filing. Regarding
to the overseas reinvestments by the overseas enterprise, the entities registered in mainland China as the shareholder of such overseas
enterprise, shall, upon completion of overseas legal formalities, report to the MOFCOM. Certain of our enterprise shareholders that are
entities registered in mainland China have completed the filing with the MOFCOM, and have not yet completed filing with the NDRC and
the report and change formalities with the MOFCOM as of the date of this annual report and we cannot assure you that they will be able
to complete such filing in time or at all. Moreover, we can provide no assurance that we are or will in the future continue to be informed
of the identities of all domestic residents and domestic enterprises holding direct or indirect interest in our company, and even if
we are aware of such shareholders or beneficial owners who are domestic residents or enterprises of mainland China, we may not be able
to compel them to comply with SAFE Circular 37 and outbound investment related regulations, and we may not even have any means to know
whether they comply with these requirements. Any failure or inability by such individuals or enterprises to comply with SAFE and outbound
investment related regulations may subject such individuals or the responsible officers of such enterprises to fines or legal sanctions,
and may result in adverse impact on us, such as restrictions on our ability to distribute or pay dividends.
Furthermore,
as these foreign exchange and outbound investment related regulations are relatively new and their interpretation and implementation
have been constantly evolving, it is uncertain how these regulations, and any future regulations concerning offshore or cross-border
investments and transactions, will be interpreted, amended and implemented by the relevant government authorities. For example, we may
be subject to a more stringent review and approval process with respect to our foreign exchange activities, such as remittance of dividends
and foreign-currency-denominated borrowings, which may adversely affect our financial condition and results of operations. Due to the
complexity and constantly changing nature of the foreign exchange and outbound investment related regulations as well as the uncertainties
involved, we cannot assure you that we have complied or will be able to comply with all applicable foreign exchange and outbound investment
related regulations. In addition, if we decide to acquire a domestic company registered in mainland China, we cannot assure you that
we or the owners of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings
and registrations required by the foreign exchange regulations. This may restrict our ability to implement our acquisition strategy and
could adversely affect our business and prospects.
Any
failure to comply with mainland China’s regulations regarding the registration requirements for employee stock incentive plans
may subject the plan participants or us to fines and other legal or administrative sanctions.
Under
the applicable regulations and SAFE rules, domestic citizens of mainland China who participate in an employee stock ownership plan or
a stock option plan in an overseas publicly listed company are required to register with SAFE and complete certain other administrative
procedures. In February 2012, SAFE promulgated the Notices on Issues concerning the Foreign Exchange Administration for Domestic Individuals
Participating in Stock Incentive Plans of Overseas Publicly Listed Companies, or the Stock Option Rules. Pursuant to the Stock Option
Rules, if a domestic resident participates in any stock incentive plan of an overseas publicly-listed company, a qualified domestic agent
must, among other things, file on behalf of such participant an application with SAFE to conduct the SAFE registration with respect to
such stock incentive plan and obtain approval for an annual allowance with respect to the purchase of foreign exchange in connection
with the exercise or sale of stock options or stock such participant holds. Such participating domestic residents’ foreign exchange
income received from the sale of stock and dividends distributed by the overseas publicly listed company must be fully remitted into
a domestic collective foreign currency account opened and managed by the domestic agent before distribution to such participants. We
and our domestic resident employees who have been granted stock options or other share-based incentives of our Company are subject to
the Stock Option Rules since our Company is an overseas listed company. If we or our domestic resident participants fail to comply with
these regulations, we and/or our domestic resident participants may be subject to fines and legal sanctions and may also limit our ability
to contribute additional capital into our mainland China subsidiaries and limit our mainland China subsidiaries’ 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 the laws of mainland China. See “Item 4. Information on the Company—B. Business Overview—Regulation—Mainland
China—Regulations Related to Foreign Exchange—Regulations on Stock Incentive Plans.”
The
State Administration of Taxation, or SAT, has issued certain circulars concerning employee share options and restricted shares. Under
these circulars, our employees working in mainland China who exercise or transfer share options or are granted restricted shares will
be subject to mainland China’s individual income tax. Our mainland China subsidiaries have 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. See “Item 4. Information
on the Company—B. Business Overview—Regulation—Mainland China—Regulations Related to Foreign Exchange—Regulations
on Stock Incentive Plans.”
If
we are classified as a mainland China resident enterprise for income tax purposes, such classification could result in unfavorable tax
consequences to us and our non-mainland-China noteholders, shareholders or ADS holders.
Under
the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of mainland China with its “de
facto management body” within mainland China is considered a “resident enterprise” and will be subject to mainland
China’s enterprise income tax on its global income at the rate of 25%. The implementation rules define the term “de facto
management body” as the body that exercises full and substantial control and overall management over the business, productions,
personnel, accounts and properties of an enterprise. In 2009, the Notice Regarding the Determination of Chinese-Controlled Offshore-Incorporated
Enterprises as Mainland China Tax Resident Enterprises on the basis of de facto management bodies, or the SAT Circular 82, issued by
SAT on April 22, 2009, and further amended on December 29, 2017, provides certain specific criteria for determining whether the “de
facto management body” of a mainland China-controlled enterprise that is incorporated offshore is located in mainland China. Although
this circular only applies to offshore enterprises controlled by mainland China enterprises or mainland China enterprise groups, not
those controlled by mainland China individuals or foreigners, the criteria set forth in the circular may reflect the SAT’s general
position on how the “de facto management body” text should be applied in determining the tax resident status of all offshore
enterprises. According to SAT Circular 82, an offshore incorporated enterprise controlled by a mainland China enterprise or a mainland
China enterprise group will be regarded as a mainland China tax resident by virtue of having its “de facto management body”
in mainland China and will be subject to mainland China’s enterprise income tax on its global income only if all of the following
conditions are met: (i) the primary location of the day-to-day operational management is in mainland China; (ii) decisions relating to
the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in mainland
China; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions,
are located or maintained in mainland China; and (iv) at least 50% of voting board members or senior executives habitually reside in
mainland China.
We
believe none of our entities outside of mainland China is a mainland China resident enterprise for tax purposes. However, the tax resident
status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation
of the term “de facto management body.” If the PRC tax authorities determine that UCLOUDLINK GROUP INC. is a mainland China
resident enterprise for enterprise income tax purposes, we may be required to withhold a 10% withholding tax from interest or dividends
we pay to our noteholders and shareholders that are non-resident enterprises, including the holders of the ADSs. In addition, non-resident
enterprise noteholders and shareholders (including our ADS holders) may be subject to mainland China’s tax at a rate of 10% on
gains realized on the sale or other disposition of the notes. ADSs or ordinary shares, if such income is treated as sourced from within
mainland China. Furthermore, if PRC tax authorities determine that we are a mainland China resident enterprise for enterprise income
tax purposes, interest or dividends paid to our non-mainland-China individual noteholders and shareholders (including our ADS holders)
and any gain realized on the transfer of the notes. ADSs or ordinary shares by such holders may be subject to mainland China’s
tax at a rate of 20% (which, in the case of interest or dividends, may be withheld at source by us), if such gains are deemed to be from
sources of mainland China. These rates may be reduced by an applicable tax treaty, but it is unclear whether non-mainland-China shareholders
of UCLOUDLINK GROUP INC. would be able to claim the benefits of any tax treaties between their country of tax residence and mainland
China in the event that UCLOUDLINK GROUP INC. is treated as a mainland China resident enterprise. Any such tax may reduce the returns
on your investment in the ADSs.
We
face uncertainty with respect to indirect transfer of equity interests in mainland China resident enterprises by their non-resident 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 State Administration of Taxation issued the Bulletin
on Issues of Enterprise Income Tax on Indirect Transfers of Assets by Non-Resident Enterprises, or Bulletin 7. Pursuant to Bulletin 7,
an “indirect transfer” of domestic assets, including a transfer of equity interests in an unlisted non-resident holding company
of a mainland China resident enterprise, by non-resident enterprises may be re-characterized and treated as a direct transfer of the
underlying domestic assets, if such arrangement does not have a reasonable commercial purpose and was established for the purpose of
avoiding payment of mainland China’s enterprise income tax. As a result, gains derived from such indirect transfer may be subject
to mainland China’s enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated
to withhold the applicable taxes, currently at a rate of 10%, for the transfer of equity interests in a mainland China resident enterprise.
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. On October 17, 2017, the SAT issued the Announcement of the State Administration
of Taxation on Issues of Tax Withholding regarding Non-resident Enterprise Income Tax, or Bulletin 37, which came into effect on December
1, 2017. The Bulletin 37 further clarifies the practice and procedure of the withholding of non-resident enterprise income tax.
There
is uncertainty as to the application of Bulletin 37 or previous rules under Bulletin 7. We face uncertainties on the reporting and consequences
of private equity financing transactions, share exchanges or other transactions involving the transfer of shares in our company by investors
that are non-resident enterprises. Our company may be subject to filing obligations or taxes if our company is the transferor in such
transactions, and may be subject to withholding obligations if our company is the transferee in such transactions, under Bulletin 37
and Bulletin 7.
Uncertainties
exist with respect to the interpretation and implementation of Anti-Monopoly Guidelines for Internet Platforms and how it may impact
our business operations.
In
February 2021, the Anti-Monopoly Guidelines for Internet Platforms was promulgated by the Anti-monopoly Commission of the PRC State Council.
The Anti-Monopoly Guidelines for Internet Platforms is consistent with the Anti-Monopoly Law of the PRC and prohibits monopoly agreements,
abuse of dominant position and concentration of undertakings that may have the effect of eliminating or restricting competitions in the
field of platform economy. More specifically, the Anti-Monopoly Guidelines for Internet Platforms outlines certain practices that may,
if without justifiable reasons, constitute abuse of dominant position, including without limitation, tailored pricing using big data
and analytics, actions or arrangements seen as exclusivity arrangements, using technology means to block competitors’ interface,
using bundled services to sell services or products, and compulsory collection of user data. Besides, Anti-Monopoly Guidelines for Internet
Platforms expressly states that concentration involving VIE will also be subject to antitrust filing requirements.
In
April 2021, the SAMR, together with certain other PRC government authorities convened an administrative guidance meeting, focusing on
unfair competition acts in community group buying, self-inspection and rectification by major internet companies of possible violations
of anti-monopoly, anti-unfair competition, tax and other related laws and regulations, and requesting such companies to comply with relevant
laws and regulations strictly and be subject to public supervision. In addition, many internet companies, including the over 30 companies
which attended such administrative guidance meeting, are required to conduct a comprehensive self-inspection and make necessary rectification
accordingly. The SAMR has stated it will organize and conduct inspections on the companies’ rectification results. If the companies
are found to conduct illegal activities, more severe penalties are expected to be imposed on them in accordance with the laws.
Since
the Anti-Monopoly Guidelines for Internet Platforms are relatively new, uncertainties still exist in relation to its interpretation and
implementation, although we do not believe we engage in any foregoing situations, we cannot assure you that our business operations will
comply with such regulation in all respects, and any failure or perceived failure by us to comply with such regulation may result in
governmental investigations, fines and/or other sanctions on us.
The
enforcement of the PRC Labor Contract Law and other labor-related regulations in mainland China may adversely affect our business and
results of operations.
The
SCNPC enacted the Labor Contract Law in 2008 and amended it on December 28, 2012. The Labor Contract Law introduced specific provisions
related to fixed-term employment contracts, part-time employment, probationary periods, consultation with labor unions and employee assemblies,
employment without a written contract, dismissal of employees, severance, and collective bargaining to enhance previous labor laws of
mainland China. Under the Labor Contract Law, an employer is obligated to sign an unlimited-term labor contract with any employee who
has worked for the employer for ten consecutive years. Further, if an employee requests or agrees to renew a fixed-term labor contract
that has already been entered into twice consecutively, the resulting contract, with certain exceptions, must have an unlimited term,
subject to certain exceptions. With certain exceptions, an employer must pay severance to an employee where a labor contract is terminated
or expires. In the case of retrenching 20 or more employees or where the number of employees to be retrenched is less than 20 but comprises
10% or more of the total number of employees of such employer under certain circumstances, the employer shall explain the situation to
the labor union or all staff 30 days in advance and seek the opinion of the labor union or the employees, the employer may carry out
the retrenchment exercise upon reporting the retrenchment scheme to the labor administrative authorities. In addition, the PRC governmental
authorities have continued to introduce various new labor-related regulations since the effectiveness of the Labor Contract Law.
Under
the PRC Social Insurance Law and the Administrative Measures on Housing Fund, employees are required to participate in pension insurance,
work-related injury insurance, medical insurance, unemployment insurance, maternity insurance, and housing funds and employers are required,
together with their employees or separately, to pay the social insurance premiums and housing funds for their employees. If we fail to
make adequate social insurance and housing fund contributions, or fail to withhold individual income tax adequately, we may be subject
to fines and legal sanctions, and our business, financial conditions and results of operations may be adversely affected. In our operation
history, certain of our mainland China subsidiaries have not made adequate contributions to employee benefit plans, or not withheld individual
income tax adequately, as required by applicable laws and regulations of mainland China. In addition, certain of our mainland China subsidiaries
engage third-party human resources agencies to make social insurance and housing fund contributions for some of their employees, and
there is no assurance that such third-party agencies will make such contributions in full in a timely manner, or at all. As of the date
of this annual report, we are not aware of any notice from regulatory authorities in this regard, which may result in a material adverse
effect on us. However, we cannot assure you that the relevant regulatory authorities will not require us to pay outstanding amounts and
impose late payment penalties or fines on us, which may materially and adversely affect our business, financial condition and results
of operations.
These
laws designed to enhance labor protection tend to increase our labor costs. In addition, as the interpretation and implementation of
these regulations are still evolving, our employment practices may not be at all times be deemed in compliance with the regulations.
As a result, we could be subject to penalties or incur significant liabilities in connection with labor disputes or investigations. Due
to the Company’s recent business development and further corporate restructuring plan, a certain number of our employees may be
eliminated and we may encounter additional risks related to labor disputes. As of the date of this annual report, we are not aware of
any significant dispute or claim from our employees.
Some
of our service stores in mainland China may have engaged in business activities without the necessary approvals from or registration
with local authorities, which could subject us to fines or other penalties that may negatively impact our results of operations or interfere
with our ability to operate our business.
As
required by the laws of mainland China, a company that uses an office in a location outside its domicile to conduct business operation
must register such office as a branch company with the competent local authority. As of February 28, 2023, we registered 13 branches
in mainland China, of which 11 are registered for the purpose of picking-up and returning terminals, while some of our service stores
established for the purpose of picking-up and returning terminals are not registered as branches. As we quickly expand our operations,
we may need to register additional branch companies from time to time. However, whether a service store or a pick-up point will be deemed
as having business nature or otherwise qualified for branch company registration is subject to the sole discretion of the government
authorities. We cannot assure you that the governmental authorities will take the same view with us on whether a service store or picking
up point is required or qualified to be registered as a branch company. If the government authorities find that we fail to complete branch
company registrations for any of our service stores or pick-up points in a timely manner or otherwise violate relevant regulations on
branch companies, we may be subject to penalties, including fines, confiscation of income, or being ordered to cease business. We may
be subject to these penalties as a result of our failure to meet the registration requirements, and these penalties may substantially
inhibit our ability to operate our business. The maximum potential penalty we may be subject to is RMB100,000 for our failure to register
a service store or pick-up point as a branch company if the government authorities determine that such branch company registrations are
required.
Risks
Related to The ADSs
The
trading price of the ADSs may be volatile, which could result in substantial losses to you.
The
trading price of our ADSs has been volatile since our ADSs started to trade on the Nasdaq Global Market in June 2020. The trading price
of the ADSs may continue to be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad
market and industry factors, like the performance and fluctuation in the market prices or the underperformance or deteriorating financial
results of other listed companies based in China. The securities of some of these companies have experienced significant volatility since
their initial public offerings, including, in some cases, substantial price declines in the trading prices of their securities. The trading
performances of other Chinese companies’ securities after their offerings may affect the attitudes of investors toward Chinese
companies listed in the United States, which consequently may impact the trading performance of the ADSs, regardless of our actual operating
performance. In addition, any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting,
corporate structure or matters of other Chinese companies may also negatively affect the attitudes of investors towards Chinese companies
in general, including us, regardless of whether we have conducted any inappropriate activities. In addition, securities markets may from
time to time experience significant price and volume fluctuations that are not related to our operating performance, such as the large
decline in share prices in the United States, China and other jurisdictions in late 2008, early 2009 and the second half of 2011, which
may have a material adverse effect on the trading price of the ADSs.
In
addition to the above factors, the price and trading volume of the ADSs may be highly volatile due to multiple factors, including the
following:
| ● | regulatory
developments affecting us or our industry, users, suppliers or third-party sellers; |
| ● | announcements
of studies and reports relating to the quality of our product and service offerings or those
of our competitors; |
| ● | changes
in the economic performance or market valuations of other players in the industry; |
| ● | actual
or anticipated fluctuations in our quarterly results of operations and changes or revisions
of our expected results; |
| ● | changes
in financial estimates by securities research analysts; |
| ● | conditions
in the mobile data connectivity service market; |
| ● | announcements
by us or our competitors of new product and service offerings, acquisitions, strategic relationships,
joint ventures, capital raisings or capital commitments; |
| ● | additions
to or departures of our senior management; |
| ● | fluctuations
of exchange rates between the RMB and the U.S. dollar; |
| ● | litigation
or other legal proceedings involving us; |
| ● | detrimental
negative publicity about us or our industry; |
| ● | release
or expiry of lock-up or other transfer restrictions on our issued and outstanding shares
or ADSs; and |
| ● | sales
or perceived potential sales of additional ordinary shares or ADSs. |
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 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.
If
we fail to meet Nasdaq’s minimum bid price or other continued listing requirements, our ADSs could be subject to delisting, which
may significantly reduce the liquidity of our ADSs and cause further declines to the market price of our ADSs.
Our
ADSs are currently listed on the Nasdaq Global Market, or Nasdaq. The Nasdaq Listing Rules have minimum requirements that a company must
meet for continued listing on Nasdaq. These requirements include maintaining a minimum bid price of US$1.00 per ADS and a minimum market
value of publicly held shares of US$5 million for a period of 30 consecutive trading days, among others. On September 12, 2022, we received
a written notification from Nasdaq indicating that for the last 30 consecutive business days,
the closing bid price for the ADSs was below the minimum bid price of US$1.00 per share requirement. We were granted a grace period
of 180 calendar days, expiring on March 13, 2023, to regain compliance. We regained compliance with the minimum bid price requirement
on November 22, 2022. On September 22, 2022, we received a notice from Nasdaq indicating that we no longer meet the continued listing
requirement of minimum Market Value of Publicly Held Shares (“MVPHS”) for the Nasdaq Global. Market because our MVPHS for
the last 30 consecutive business days was below the minimum MVPHS requirement of US$5 million. We were granted a grace period of 180
calendar days, expiring on March 21, 2023, to regain compliance. We regained compliance with the minimum MVPHS requirement om November
16, 2022. We also received a notification letter from Nasdaq indicating that we did not comply
with the continued listing requirement of minimum stockholders’ equity for the Nasdaq Global Market. We regained compliance with
the alternative on December 5, 2022.
As
of the date of this annual report, we are in compliance with the requirements for continued listing on Nasdaq. However, there can be
no assurance that we will stay compliant with the requirements for continued listing at all times going forward. The delisting of our
ADSs or transfer of listing may significantly reduce the liquidity of our ADSs, cause further declines to the market price of our ADSs,
and make it more difficult for us to obtain adequate financing to support our continued operation.
The
sale or availability for sale of substantial amounts of the ADSs in the public market could adversely affect their market price.
Sales
of substantial amounts of the ADSs in the public market, 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. 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.
Our
dual class share structure with different voting rights will limit your ability to influence corporate matters and could discourage others
from pursuing any change of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial.
Our
ordinary shares consist of Class A ordinary shares and Class B ordinary shares. In respect of matters requiring the votes of shareholders,
holders of Class A ordinary shares are entitled to one vote per share, while holders of Class B ordinary shares are entitled to 15 votes
per share based on our dual class share structure. Each Class B ordinary share is convertible into one Class A ordinary share at any
time by the holder thereof, while Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon
any sale of Class B ordinary shares by a holder thereof to any person other than an affiliate of our two founders, namely, Mr. Chaohui
Chen and Mr. Zhiping Peng, their family members or any entity controlled by the founders or their family members, such Class B ordinary
shares shall be automatically and immediately converted into the same number of Class A ordinary shares.
Our
two founders, Mr. Chaohui Chen and Mr. Zhiping Peng, beneficially own all of our issued Class B ordinary shares. As of February 28, 2023,
these Class B ordinary shares constituted approximately 33.0% of our total issued and outstanding share capital and 88.1% of the aggregate
voting power of our total issued and outstanding share capital due to the disparate voting powers associated with our dual-class share
structure. As a result of the dual class share structure and the concentration of ownership, holders of Class B ordinary shares will
have considerable influence over matters such as decisions regarding mergers, consolidations and the sale of all or substantially all
of our assets, election of directors and other significant corporate actions. Holders of Class B ordinary shares will continue to control
the outcome of a shareholder vote (i) with respect to matters requiring an ordinary resolution which requires the affirmative vote of
a simple majority of shareholder votes, to the extent that the Class B ordinary shares represent more than 6.2% of our total issued and
outstanding share capital; and (ii) with respect to matters requiring a special resolution which requires the affirmative vote of no
less than two-thirds of shareholder votes, to the extent that the Class B ordinary shares represent at least 11.8% of our total issued
and outstanding share capital. Such holders may take actions that are not in the best interest of us or our other shareholders. This
concentration of ownership may discourage, delay or prevent a change in control of our company, which could have the effect of depriving
our other shareholders of the opportunity to receive a premium for their shares as part of a sale of our company and may reduce the price
of the ADSs. This concentrated control will limit your ability to influence corporate matters and could discourage others from pursuing
any potential merger, takeover or other change of control transactions that holders of Class A ordinary shares and ADSs may view as beneficial.
The
dual-class structure of our ordinary shares may adversely affect the trading market for the ADSs.
S&P
Dow Jones and FTSE Russell have previously announced changes to their eligibility criteria for inclusion of shares of public companies
on certain indices, including the S&P 500, to exclude companies with multiple classes of shares and companies whose public shareholders
hold no more than 5% of total voting power from being added to such indices. In addition, several shareholder advisory firms have announced
their opposition to the use of multiple class structures. As a result, the dual class structure of our ordinary shares may prevent the
inclusion of the ADSs representing Class A ordinary shares in such indices and may cause shareholder advisory firms to publish negative
commentary about our corporate governance practices or otherwise seek to cause us to change our capital structure. Any such exclusion
from indices could result in a less active trading market for the ADSs. Any actions or publications by shareholder advisory firms critical
of our corporate governance practices or capital structure could also adversely affect the value of the ADSs.
Our
directors, officers and principal shareholders collectively control a significant amount of our shares, and their interests may not align
with the interests of our other shareholders.
Currently,
our officers, directors and principal shareholders collectively hold a substantial majority of total voting power in our company. This
significant concentration of share ownership and voting power may adversely affect or reduce the trading price of the ADSs because investors
often perceive a disadvantage in owning shares in a company with one or several controlling shareholders. Furthermore, our directors
and officers, as a group, have the ability to significantly influence or control the outcome of all matters requiring shareholders’
approvals, including electing directors and approving mergers or other business combination transactions. These actions may be taken
even if they are opposed by our other shareholders. This concentration of share ownership and voting power may also discourage, delay
or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their
shares as part of a sale of our company.
If
securities or industry analysts do not publish research or publish inaccurate or unfavorable research 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 the ADSs depends in part on the research and reports that securities or industry analysts publish about us or our
business. If research analysts do not establish and maintain adequate research coverage or if one or more of the analysts who covers
us downgrades the ADSs or publishes inaccurate or unfavorable research about our business, the market price for the ADSs would likely
decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility
in the financial markets, which, in turn, could cause the market price or trading volume for the ADSs to decline.
Because
we do not expect to pay dividends in the foreseeable future, you must rely on price appreciation of the ADSs for return on your investment.
We
currently intend to retain most, if not all, of our available funds and any future earnings 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 the 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
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 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 the ADSs will likely depend entirely upon any future
price appreciation of the ADSs. There is no guarantee that the ADSs will appreciate in value or even maintain the price at which you
purchased the ADSs. You may not realize a return on your investment in the ADSs and you may even lose your entire investment in the ADSs.
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
vote your ordinary shares.
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. As an ADS holder, you will only be able to exercise the voting
rights carried by the underlying Class A 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. If we ask for your instructions, then upon receipt of your voting instructions, the depositary will try, as far as
is practicable, to vote the underlying Class A 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 your right to vote with respect to the underlying Class A
ordinary shares represented by your ADSs unless you cancel and withdraw the 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 withdraw the underlying Class A ordinary shares represented by your ADSs and become the registered holder of such shares 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 memorandum and articles of association, for the purposes of determining those shareholders
who are entitled to attend and vote at any general meeting, our directors may close our register of members and/or fix in advance a record
date for 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 A 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. If we ask for your instructions, the depositary
will notify you of the upcoming vote and will arrange to deliver our voting materials to you. We have agreed to give the depositary notice
of shareholder meetings sufficiently in advance of such meetings. Nevertheless, we cannot assure you that you will receive the voting
materials in time to ensure that you can instruct the depositary to vote the underlying Class A ordinary shares represented by your ADSs.
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 A ordinary
shares represented by your ADSs are voted and you may have no legal remedy if the underlying Class A ordinary shares represented by your
ADSs are not voted as you requested. In addition, in your capacity as an ADS holder, you will not be able to call a shareholders’
meeting.
If
we asked the depositary to solicit your instructions at least 30 days before the meeting date but the depositary does not receive voting
instructions from you by the specified date and we confirm to the depositary that (i) we wish to receive a discretionary proxy; (ii)
we reasonably do not know of any substantial shareholder opposition to the proxy item(s); and (iii) the proxy item(s) is not materially
adverse to the interests of our shareholders, then the depositary will consider you to have authorized and directed it to give a discretionary
proxy to a person designated by us to vote the number of deposited securities represented by the ADSs as to the proxy item(s).
The
effect of this discretionary proxy is that you cannot prevent the underlying Class A ordinary shares represented by your ADSs from being
voted, except under the circumstances described above. This may make it more difficult for shareholders to influence the management of
our company. Holders of our ordinary shares are not subject to this discretionary proxy.
Your
right to participate in any future rights offerings may be limited, which may cause dilution to your holdings.
We
may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights
available to you in the United States unless we register both the rights and the securities to which the rights relate under the Securities
Act or an exemption from the registration requirements is available. Under the deposit agreement, the depositary will not make rights
available to you unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the
Securities Act or exempt from registration under the Securities Act. We are under no obligation to file a registration statement with
respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective and we may not
be able to establish a necessary exemption from registration under the Securities Act. Accordingly, you may be unable to participate
in our rights offerings and may experience dilution in your holdings.
You
may not receive cash dividends if the depositary decides it is impractical to make them available to you.
The
depositary will pay cash dividends on the ADSs only to the extent that we decide to distribute dividends on our Class A ordinary shares
or other deposited securities, and we do not have any present plan to pay any cash dividends on our Class A ordinary shares in the foreseeable
future. To the extent that there is a distribution, the depositary of the ADSs has agreed to pay to you the cash dividends or other distributions
it or the custodian receives on our Class A ordinary shares or other deposited securities after deducting its fees and expenses. You
will receive these distributions in proportion to the number of Class A ordinary shares your ADSs represent. However, the depositary
may, at its discretion, decide that it is inequitable or impractical to make a distribution available to any holders of ADSs. For example,
the depositary may determine that it is not practicable to distribute certain property, or that the value of certain distributions may
be less than the cost of distributing them. In these cases, the depositary may decide not to distribute such property to you.
We
and the depositary are entitled to amend the deposit agreement and to change the rights of ADS holders under the terms of such agreement,
and we may terminate the deposit agreement, without the prior consent of the ADS holders.
We
and the depositary are entitled to amend the deposit agreement and to change the rights of the ADS holders under the terms of such agreement,
without the prior consent of the ADS holders. We and the depositary may agree to amend the deposit agreement in any way we decide is
necessary or advantageous to us. Amendments may reflect, among other things, operational changes in the ADS program, legal developments
affecting ADSs or changes in the terms of our business relationship with the depositary. In the event that the terms of an amendment
prejudice a substantial existing right of ADS holders, ADS holders will only receive 30 days’ advance notice of the amendment,
and no prior consent of the ADS holders is required under the deposit agreement. Furthermore, we may decide to terminate the ADS facility
at any time for any reason. For example, terminations may occur when we decide to list our shares on a non-U.S. securities exchange and
determine not to continue to sponsor an ADS facility or when we become the subject of a takeover or a going-private transaction. If the
ADS facility will terminate, ADS holders will receive at least 90 days’ prior notice, but no prior consent is required from them.
Under the circumstances that we decide to make an amendment to the deposit agreement that prejudices a substantial existing right of
ADS holders or terminate the deposit agreement, the ADS holders may choose to sell their ADSs or surrender their ADSs and become direct
holders of the underlying Class A ordinary shares, but will have no right to any compensation whatsoever.
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 A ordinary shares provides that, to the fullest extent permitted by law,
ADS holders waive the right to a jury trial of any claim that they may have against us or the depositary arising out of or relating to
our ordinary shares, the ADSs or the deposit agreement, including any claim under the U.S. federal securities laws.
If
we or the depositary opposed a jury trial demand based on the waiver, the court would determine whether the waiver was enforceable based
on the facts and circumstances of that case in accordance with the 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, 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 provision, courts will generally consider whether a party knowingly, intelligently and voluntarily
waived the right to a jury trial. We believe that this is 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 entering into the deposit agreement.
If
you or any other owners and holders 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 owner and holder 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 had, including results that could be less favorable to the plaintiff(s) in any such action.
No
condition, stipulation or provision of the deposit agreement or ADSs serves as a waiver by any owner and holder 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. If the jury trial waiver provision is not permitted by applicable law, an action could proceed under the terms of the deposit
agreement with a jury trial. As a holder of our ADSs, you may incur additional cost and liabilities as a result of the jury trail.
You
may be subject to limitations on transfer of your ADSs.
Your
ADSs are transferable on the books of the depositary. However, the depositary may close its transfer 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. The depositary may also close its books in emergencies, and on weekends and public holidays. In addition, the depositary may
refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any
time if we or the depositary deems it 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.
Certain
judgments obtained against us by our shareholders may not be enforceable.
We
are an exempted company incorporated under the laws of the Cayman Islands. A majority of our assets are located in mainland China and
Hong Kong. All of our directors and executive officers are nationals or residents of jurisdictions 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 mainland China may render you unable to enforce
a judgment against our assets or the assets of our directors and officers.
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 incorporated under the laws of the Cayman Islands with limited liability. Our corporate affairs are governed
by our memorandum and articles of association, the Companies Act 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 our directors, actions by our 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, 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 (save for our
memorandum and articles of association, our register of mortgages and charges and special resolutions of our shareholders) or to obtain
copies of lists of shareholders of these companies. Our directors have discretion under our articles of association 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 motion 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 Act of the Cayman Islands and
the laws applicable to companies incorporated in the United States and their shareholders, see “Item 10. Additional Information—B.
Memorandum and Articles of Association—Differences in Corporate Law.”
We
have not determined a specific use for a portion of the net proceeds from our initial public offering and we may use these proceeds in
ways with which you may not agree.
We
have not determined a specific use for a portion of the net proceeds of our initial public offering, and our management will have considerable
discretion in deciding how to apply these proceeds. You will not have the opportunity to assess whether the proceeds are being used appropriately
before you make your investment decision. You must rely on the judgment of our management regarding the application of the net proceeds
of our initial public offering. We cannot assure you that the net proceeds will be used in a manner that would improve our results of
operations or increase our ADS price, nor that these net proceeds will be placed only in investments that generate income or appreciate
in value.
Since
we are a Cayman Islands exempted company, the rights of our shareholders may be more limited than those of shareholders of a company
organized in the United States.
Under
the laws of some jurisdictions in the United States, majority and controlling shareholders generally have certain fiduciary responsibilities
to the minority shareholders. Shareholder action must be taken in good faith, and actions by controlling shareholders which are obviously
unreasonable may be declared null and void. Cayman Islands law protecting the interests of minority shareholders may not be as protective
in all circumstances as the law protecting minority shareholders in some U.S. jurisdictions. In addition, the circumstances in which
a shareholder of a Cayman Islands company may sue the company derivatively, and the procedures and defenses that may be available to
the company, may result in the rights of shareholders of a Cayman Islands company being more limited than those of shareholders of a
company organized in the United States.
Furthermore,
our directors have the power to take certain actions without shareholder approval which would require shareholder approval under the
laws of most U.S. jurisdictions. The directors of a Cayman Islands company, without shareholder approval, may implement a sale of any
assets, property, part of the business, or securities of the company. Our ability to create and issue new classes or series of shares
without shareholders’ approval could have the effect of delaying, deterring or preventing a change in control without any further
action by our shareholders, including a tender offer to purchase our ordinary shares at a premium over then current market prices.
The
memorandum and articles of association contains anti-takeover provisions that could discourage a third party from acquiring us and adversely
affect the rights of holders of our ordinary shares and the ADSs.
Our
memorandum and articles of association contains provisions to limit the ability of others to acquire control of our company or cause
us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity
to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company
in a tender offer or similar transaction. Our dual class voting structure gives disproportionate voting power to the Class B ordinary
shares. Our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more
series and to fix their designations, powers, preferences, privileges, and relative participating, optional or special rights and the
qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation
preferences, any or all of which may be greater than the rights associated with our ordinary shares, in the form of ADS or otherwise.
Preferred shares could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal
of management more difficult. If our board of directors decides to issue preferred shares, the price of the ADSs may fall and the voting
and other rights of the holders of our ordinary shares and ADSs may be materially and adversely affected.
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. |
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 the Nasdaq Global Market. 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.
As
an exempted 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.
As
a Cayman Islands company that are listed on the Nasdaq Global Market, we are subject to Nasdaq listing standards. However, the 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 listing standards. For example, neither
the Companies’ Act of the Cayman Islands nor our memorandum and articles of association requires us to hold an annual general meeting,
and we did not hold an annual general meeting in 2022. We also relied on home country practice to sell or potentially issue securities
equaling 20% or more of our ordinary shares without obtaining shareholders’ approval. As we rely on home country practice with
respect to our corporate governance, and our shareholders may be afforded less protection than they otherwise would under Nasdaq listing
standards applicable to U.S. domestic issuers.
There
can be no assurance that we will not be a passive foreign investment company, or PFIC, for United States federal income tax purposes
for any taxable year, which could subject United States holders of the ADSs or ordinary shares to significant adverse United States income
tax consequences.
A
non-U.S. corporation, such as our company, will be classified as a passive foreign investment company, or PFIC, for U.S. federal income
tax purposes for any taxable year if either (i) 75% or more of its gross income for such year consists of certain types of “passive”
income or (ii) 50% or more of the value of its assets (generally determined on the basis of a quarterly average) during such year produce
or are held for the production of passive income. Although the law in this regard is unclear, we treat the former VIEs as being owned
by us for U.S. federal income tax purposes, because we control their management decisions and are entitled to substantially all of their
economic benefits, and, as a result, we consolidate their results of operations in our consolidated U.S. GAAP financial statements. Assuming
that we are the owner of the former VIEs for U.S. federal income tax purposes and based on the current and anticipated value of our assets
and the composition of our income and assets, including goodwill and other unbooked intangibles, we do not believe we were a PFIC for
our taxable year ended December 31, 2022, and we do not presently expect to be a PFIC for the current taxable year or the foreseeable
future.
While
we do not expect to be or become a PFIC in the current or future taxable years, no assurance can be given in this regard because the
determination of whether we will be or become a PFIC is a factual determination made annually that will depend, in part, upon the composition
and classification of our income and assets. Furthermore, fluctuations in the market price of the ADSs may cause us to be classified
as a PFIC for the current or future taxable years because the value of our assets for purposes of the asset test, including the value
of our goodwill and other unbooked intangibles, may be determined by reference to the market price of the ADSs from time to time (which
may be volatile). In particular, recent fluctuations in the market price of our ADSs increased our risk of becoming a PFIC. The market
price of our ADSs may continue to fluctuate considerably and, consequently, we cannot assure you of our PFIC status for any taxable year.
The composition of our income and assets may also be affected by how, and how quickly, we use our liquid assets. If we determine not
to deploy significant amounts of cash for active purposes or if it were determined that we do not own the stock of the consolidated affiliated
entities for United States federal income tax purposes, our risk of being a PFIC may substantially increase.
If
we are a PFIC in any taxable year, a U.S. Holder (as defined in “Item 10. Additional Information—E. Taxation—United
States Federal Income Tax Considerations”) may incur significantly increased United States income tax on gain recognized on the
sale or other disposition of the ADSs or ordinary shares and on the receipt of distributions on the ADSs or ordinary shares to the extent
such gain or distribution is treated as an “excess distribution” under the United States federal income tax rules, and such
holder may be subject to burdensome reporting requirements. Further, if we are a PFIC for any year during which a U.S. Holder holds the
ADSs or ordinary shares, we generally will continue to be treated as a PFIC for all succeeding years during which such U.S. Holder holds
the ADSs or ordinary shares. For more information see “Item 10. Additional Information—E. Taxation—United States Federal
Income Tax Considerations—Passive Foreign Investment Company Considerations.” and “Item 10. Additional Information—E.
Taxation—United States Federal Income Tax Considerations—Passive Foreign Investment Company Rules.”
We
will incur increased costs as a result of being a public company, particularly after we cease to qualify as an “emerging growth
company.”
We
are now 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 Securities and Exchange Commission, or the SEC, and
Nasdaq, impose various requirements on the corporate governance practices of public companies. As a company with less than US$1.235 billion
in revenues for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth
company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies.
These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, or Section
404, in the assessment of the emerging growth company’s internal control over financial reporting and permission to delay adopting
new or revised accounting standards until such time as those standards apply to private 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 costlier. After we are no longer an “emerging growth company,” 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, in comparison with a private company, we need an increased number of independent directors and
have to adopt policies regarding internal controls and disclosure controls and procedures. Operating as a public company makes it more
difficult and more expensive for us to obtain director 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 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.
Item 4. Information on the Company
A. History and Development of the Company
We
commenced our operations by establishing Shenzhen uCloudlink Network Technology Co., Ltd. in August 2014 and Beijing uCloudlink New Technology
Co., Ltd. three months later. Our holding company, UCLOUDLINK GROUP INC., was incorporated in August 2014 in the Cayman Islands to facilitate
financing and offshore listing. In September 2014, our holding company established a wholly-owned subsidiary in Hong Kong, UCLOUDLINK
(HK) LIMITED, which is a subsidiary of HONG KONG UCLOUDLINK NETWORK TECHNOLOGY LIMITED, an entity through which we conduct our business
operations in Hong Kong. In February 2021, we established a new subsidiary in the U.K. named UCLOUDLINK UK LIMITED to further facilitate
our expansion in the U.K. market and improve the efficiency of local management.
In
January 2015, we established Beijing uCloudlink Technology Co., Ltd., through which we gained control over Shenzhen uCloudlink Network
Technology Co., Ltd. and Beijing uCloudlink New Technology Co., Ltd. by entering into a series of contractual arrangements with Shenzhen
uCloudlink Network Technology Co., Ltd. and Beijing uCloudlink New Technology Co., Ltd. and their respective shareholders.
In
addition, we conduct our business through the following entities:
primarily
for marketing and sales:
| ● | UCLOUDLINK
(UK) CO. LTD in the UK in October 2014; |
| ● | Ucloudlink
(America), Ltd. in the United States in August 2016; |
| ● | UCLOUDLINK
(SINGAPORE) PTE. LTD. in Singapore in May 2017; |
| ● | UCLOUDLINK
SDN. BHD. in Malaysia in August 2017; |
| ● | uCloudlink
Japan Co., Ltd. in Japan in March 2018; |
| ● | UCLOUDLINK
UK LIMITED in the UK in February 2021; |
primarily
for technology research and development:
| ● | Shenzhen
Ucloudlink Technology Limited in mainland China in July 2015; and |
primarily
for hardware exportation:
| ● | Shenzhen
uCloudlink Co., Ltd. in mainland China in June 2018. |
We
refer to Beijing uCloudlink Technology Co., Ltd. as Beijing uCloudlink, to Shenzhen uCloudlink Network Technology Co., Ltd. as Shenzhen
uCloudlink, and to Beijing uCloudlink New Technology Co., Ltd. as Beijing Technology. We refer to Shenzhen uCloudlink and Beijing Technology
collectively as the former VIEs in this annual report. Our contractual arrangements with the former VIEs and their shareholders allow
us to (i) exercise effective control over the former VIEs, (ii) receive substantially all of the economic benefits of the former VIEs,
and (iii) have an exclusive option to purchase or designate any third party to purchase all or part of the equity interests in and assets
of the former VIEs when and to the extent permitted by the laws of mainland China. For more details, including risks associated
with the former VIE structure, please see “Item 4. Information on the Company—C. Organizational Structure—Contractual
Arrangements with the Former VIEs and Their Respective Shareholders” and “Item 3. Key
Information—D. Risk Factors—Risks Related to Our Corporate Structure.”
As
a result of our direct ownership in Beijing uCloudlink and the historical VIE contractual arrangements, we are regarded as the primary
beneficiary of the former VIEs, and we treat them and their subsidiaries as our consolidated affiliated entities under U.S. GAAP. Prior
to the termination of our historical contractual arrangements with the former VIEs and their shareholders, we have consolidated the financial
results of the former VIEs and their respective subsidiaries with our consolidated financial statements in accordance with U.S. GAAP
for the years ended 2020, 2021 and 2022 in this annual report.
In
February 2022, we established Shenzhen Yulian Cloud Technology Co., Ltd. under Shenzhen uCloudlink Network Technology Co., Ltd. to facilitate
our business development in mainland China.
As
we continued to evaluate our business plan, we have decided to adjust our business model in mainland China. Therefore, we initiated the
Restructuring to adjust our local business in mainland China and unwind the aforementioned contractual arrangements so that the former
VIEs become wholly-owned subsidiaries of Shenzhen Ucloudlink Technology Limited. On March 17, 2022, the equity of the former VIEs was
transferred to Shenzhen Ucloudlink Technology Limited, and the original VIE agreements were terminated. After the Restructuring, we now
carry out the PaaS and SaaS platform services in mainland China, which were the primary business operated by the former VIEs, in cooperation
with local business partners, such as Beijing Huaxianglianxin Technology Company, which have the required licenses to provide local data
connectivity services in mainland China. See “Item 4. Information on the Company—C. Organizational Structure—Contractual
Arrangements with the Former VIEs and Their Respective Shareholders.”
On
June 9, 2020, the ADSs representing our Class A ordinary shares commenced trading on Nasdaq under the symbol “UCL.” We raised
from our initial public offering US$27.6 million in net proceeds after deducting underwriting commissions and discounts and the offering
expenses payable by us.
In
January 2022, we entered into definitive agreements with YA II PN, Ltd., a limited partnership managed by Yorkville Advisor Global (“Yorkville”),
pursuant to which we issued and sold convertible debentures in a principal amount of US$5.0 million to Yorkville at a purchase price
equal to 95% of the principal amount through private placement at a rate of 5% per year. The convertible debentures will mature upon
one-year anniversary of the issuance date unless redeemed or converted in accordance with their terms prior to such date. Subject to
and upon compliance with the terms of the convertible debentures, Yorkville has the right to convert all or any portion of the convertible
debentures at its option at any time. Upon conversion, we will deliver to Yorkville our Class A ordinary shares, par value US$0.00005
per share, which may be represented by the ADSs. The conversion price shall be the lower of (i) US$3.50 per ADS, or (ii) 85% of a reference
price benchmarked against the trading price of the Company’s ADSs. In addition, we also issued to Yorkville 1,000,000 Class A ordinary
shares as commitment fee at closing. In October 2022, we redeemed US$1.0 million principal amount
of the convertible debentures, and Yorkville had, from time to time, converted all of the remaining amount for an aggregate of 76,943,540
Class A ordinary shares.
Corporate
Information
Our
principal executive offices are located at Unit 2214-Rm1, 22/F, Mira Place Tower A, 132 Nathan Road, Tsim Sha Tsui, Kowloon, Hong Kong.
Our telephone number at this address is +852 2180-6111. Our registered office in the Cayman Islands is located at the office of Maples
Corporate Services Limited at PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands.
SEC
maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file
electronically with the SEC on www.sec.gov. You can also find information on our website https://ir.ucloudlink.com/. The
information contained on our website is not a part of this annual report.
Overview
We
are the pioneer of introducing the sharing economy business model into the telecommunications industry, creating a marketplace for mobile
data traffic. Leveraging our innovative cloud SIM technology and architecture, we redefine the mobile data connectivity experience, allowing
users to gain access to mobile data traffic allowance shared by network operators on our marketplace. We have aggregated mobile data
traffic allowances from 337 mobile network operators (MNOs) in 144 countries and regions in our cloud SIM architecture as of December
31, 2022.
Our
innovative cloud SIM technology sets the technological foundation of our marketplace, which is built upon our cloud SIM architecture.
We have developed our proprietary cloud SIM technology based on remote SIM connection, which means that SIM cards are not embedded in
the mobile terminals but remotely connected on the cloud. Our cloud SIM technology allows dynamic selection of network services based
on signal coverage and cost, and intelligent distribution of data traffic in the SIM card pool to terminals that may support multiple
end devices through our cloud SIM platform, to achieve better network quality, more reliable connection and lower cost.
Leveraging
our cloud SIM technology and architecture, we provide mobile data connectivity services with reliable connection, high speed and competitive
price, allowing users to enjoy a smooth mobile connectivity experience. We have transformed the traditional telecommunication business
model, where users can only access the wireless network provided by their contracted MNOs and are not able to use the networks of other
local MNOs. By giving users access to our distributed SIM card pool, we free users from this exclusivity, and give them the freedom to
access the mobile networks of other MNOs without physically changing SIM cards wherever they are in the world as long as it is one of
the 144 countries and regions we cover. In 2022, average daily active terminals connected to our platform reached approximately 290,500
and each of our active terminals on average used 1,745 megabytes of mobile data per day. In addition to mobile data users, we also create
unique values to the other stakeholders in the telecommunications industry worldwide, including smartphone and smart-hardware companies,
mobile virtual network operators (MVNOs), MNOs and more broadly to society. Our business partners can also utilize our platform-as-a-service
(PaaS) and software-as-a-service (SaaS) to manage their business operations such as connectivity management, terminal management,
customer relationship management (CRM) system and big data analysis, thereby improving end-users’ experience with their services.
We
have developed proprietary algorithms to analyze historical data usage patterns and predict future data traffic demand. We use the insights
gained from the data analytic results to efficiently procure data traffic allowances from MNOs and other sources globally, dynamically
select network services based on signal coverage and cost, and intelligently allocate data traffic in the SIM card pool to terminals,
then to end devices. As a result, we are able to achieve better network quality, more reliable connection and lower cost for users, as
well as improve our cost efficiency. As the first entrance for users to access mobile internet, we may also leverage the data analytics
to develop a number of value-added services, such as advertisement.
Average
daily active terminals connected to our platform decreased by 2.3% from approximately 246,618 in 2020 to 241,046 in 2021, and increased
by 20.5% to 290,507 in 2022. The average daily data usage per active terminal decreased from 2,254 megabytes in 2020 to 1,941 megabytes
in 2021, and decreased to 1,745 megabytes in 2022. Total data consumed through our platform were approximately 193,400, 162,879 and 176,499
terabytes in 2020, 2021 and 2022, respectively, including data consumed by users who contributed to our revenues from data connectivity
services, which we procured, and data consumed by users who did not contribute to our revenues from data connectivity services, which
our business partners procured. In addition, the demand for our uCloudlink 2.0 business increased during the COVID-19 pandemic and the
demand of local data connectivity services continued to be strong, primarily due to the development of our local mobile broadband (MBB)
business in Japan and the expansion of GlocalMe brand in North America. We generate revenue primarily from our mobile
data connectivity services and hardware terminals that incorporate the services. Our revenues decreased from US$89.6 million in 2020
to US$73.8 million in 2021, and decreased to US$71.4 million in 2022. Our gross margin decreased from 31.6% in 2020 to 29.6% in 2021,
but increased to 45.5% in 2022. We had a net loss of US$63.4 million in 2020, a net loss of US$46.0 million in 2021, and a net loss of
US$19.9 million in 2022. In 2020, 2021 and 2022, we generated 89.2%, 94.8% and 97.4%, respectively, of our revenues from customers outside
of mainland China.
Evolution
of Our Business
Our
uCloudlink cloud SIM platform is designed for shared mobile data connectivity services by allocating the SIM cards remotely and dynamically
to users. All users can access and use the SIM card resources in our distributed SIM card pool supplied by different network operators
via our platform. We operate our business under what we refer to as uCloudlink 1.0 and uCloudlink 2.0 models, and plan to launch uCloudlink
3.0 model in the future. We support various networks and technical systems in countries and regions around the globe. In the meantime,
we focus on users’ experience and allow our business partners to enjoy reliable services with reasonable pricing. We believe our
technology is compatible with various application scenarios where smooth connection is needed.
uCloudlink
1.0 model focuses on cross-border travelers that need mobile data connectivity services across different countries. We started to conduct
our business under uCloudlink 1.0 model in 2014. When a terminal connects in a foreign country or region, a local SIM card in our distributed
SIM card pool will be allocated dynamically based on the terminal’s location to avoid roaming fees. We operate Roamingman portable
Wi-Fi services in China and Malaysia to provide global mobile data connectivity services. We also offer GlocalMe portable
Wi-Fi terminals and provide our cloud SIM architecture to business partners such as MVNOs, MNOs and portable Wi-Fi terminal rental companies
to offer global mobile data connectivity services directly to their users. Our GlocalMe Inside implementation in smartphones
and other smart terminals also supports cross-border mobile data connectivity within uCloudlink 1.0 model. Our uCloudlink 1.0 business
such as rental business of Roamingman business of our business partners were also negatively affected by the COVID-19
pandemic, which led us and our global business partners to focus more on local data connectivity services.
uCloudlink
2.0 model aims to provide mobile data connectivity services to local users across different MNOs in a single country or region. We started
to offer this service in 2018. We allocate another SIM card to a terminal when its current MNO does not have coverage in a certain location,
or allocate a SIM card with cheaper data charges or better network quality when multiple MNOs offer coverage in that location. We develop GlocalMe
Inside implementation for smartphones and other smart hardware products, enabling them to obtain access to our cloud SIM architecture
and use our distributed SIM card pool. Users with GlocalMe Inside embedded terminals can enjoy reliable and high-speed
data connectivity experience at competitive cost. We have launched the GlocalMe World Phones series, cooperated with
third-party smartphone companies to implement GlocalMe Inside, and developed cloud SIM modules for smart hardware products.
An MNO or MVNO may also leverage our GlocalMe products under uCloudlink 2.0 model to provide local data connectivity
in areas where it does not have strong network deployment. During the COVID-19 pandemic, due to the lock-down measures in many countries
and regions, many people chose to work from home, held video meetings and conferences, and needed to access remote education, leading
to an increase in demand for better and reliable data connectivity. This has created great opportunities for our uCloudlink 2.0 model,
which can scan for multiple mobile networks and provide better coverage, better speed and better connectivity service quality for users.
We
have expanded the business scope of our local data connectivity service. Apart from the mobile broadband (MBB) business opportunities
such as sales of mobile Wi-Fi terminals and services through online sales and offline distribution and through our business partners,
we also enhanced our local service brand as we expand our e-commerce exposure in key markets such as the United States and Europe, optimize
our websites and streamline our sales team. We also invested in Beijing Huaxianglianxin Technology Co., Ltd., a licensed MVNO in China,
and iQsim S.A based in France as a component of our global investment strategy.
uCloudlink
3.0 models features a full-blown marketplace of data traffic. We anticipate that our proposed uCloudlink 3.0 model has the potential
to further improve the efficiency of data connectivity services through our innovative cloud SIM architecture that is compatible with
multiple technologies, including physical SIM, soft SIM and eSIM. We plan to establish and expand our data traffic marketplace to promote
mobile data transaction and sharing by integrating our Cloud SIM technology and other technologies, such as blockchain technology. This
business is in its trial. We believe that the success of our uCloudlink 1.0 and uCloudlink 2.0 models will pave the path for the development
of uCloudlink 3.0 model.
To
support our business evolution from 1.0 model to 3.0 model, we have strategized our cloud SIM business model in three key stages to fully
capitalize the value of our cloud SIM technology and architecture:
| ● | Stage
1 - B2C Retail: We started our business primarily by selling or leasing GlocalMe hardware and data packages directly to retail
consumers in order to gain market recognition and to prove our cloud SIM technology and architecture, as well as the scalability and
profitability of our business model. We provide high quality data connectivity services to end-users backed up by our PaaS and SaaS. |
| ● | Stage
2 - B2B2C Wholesale: Once we have proved the concept of cloud SIM, and gained tractions from the market on our product and services,
we are able to attract local business partners to collaborate with us and distribute our hardware and data packages in their countries
and regions. Our business partners tailor their marketing strategies to resell or lease our hardware and data packages to their local
audience, and these tailored operations have helped us expedite our global expansion. Our business partners can also manage their business
via our PaaS and SaaS to provide better services to their end-users, including connectivity management, terminal management, terminal
rental and sales, customer service systems (CRM), and big data analysis. |
| ● | Stage
3 - PaaS/SaaS Platform based connectivity ecosystem: With extensive experience at serving our business partners across the globe,
our core cloud SIM technology, hyper-connectivity technology and architecture became more mature and comprehensive, and we are able to
open up our proprietary platform and software to our business partners to support their operations. Our business partners can rely on
our PaaS and SaaS platform for SIM and connectivity management, and focus on sales and marketing, as well as procure customized ODM (Original
Design Manufacture) hardware and data packages from their proprietary sources to fully exploit their edge in their local markets. Such
specialization enables us and our business partners to operate more efficiently. |
We
are gradually becoming more platform-centric and elevating our data connectivity services via upgrading our PaaS/SaaS Platform during
stage 1, stage 2 and stage 3 going forward. We continue to focus on developing and serving our customers and business partners with our
core capabilities – cloud SIM technology, hyper-connectivity technology and architecture, and delegate other functions to our local
business partners. This model will allow us to further expedite our global expansion by forming a global partner ecosystem. Simultaneously,
our business partners will also further comprehend our mobile network offering by hosting their SIM cards on our platform locally.
We
constantly focus on elevating user experience and one way we are able to do it is via our “Navigation + Electronic Toll Pass”
service over mobile network accomplished through our hyper-connectivity technology through PaaS and SaaS platform. We innovatively apply
“Navigation + Electronic Toll Pass” concept to data connectivity services market. Like installing “Navigation + Electronic
Toll Pass” for traffic, “Navigation” can automatically identify network congestion and actively choose the better network
and “Electronic Toll Pass” allows users to avoid long queues in network when switching among mobile networks and intelligently
elevate data connectivity user experience.
Our
Cloud SIM Technology and Architecture
Relying
on our cloud SIM technology and architecture, we provide users with mobile data connectivity service with reliable connectivity, high
speed or competitive price. The cloud SIM technology enables compatible terminals to use local data network without changing SIM cards,
whereas the cloud SIM architecture supports the operation of cloud SIM technology.
Cloud
SIM Technology
We
have developed our cloud SIM technology based on remote SIM connection, which means that SIM cards are not located inside the mobile
terminals but remotely connected. Because SIM cards are not locally hosted on the terminals, we can easily switch the SIM card from one
to another dynamically over the cloud. Cloud SIM technology requires two connections simultaneously, many chipsets in the market support
our cloud SIM technology through firmware upgrade.
The
key advantages of our cloud SIM technology include:
| ● | Availability.
Users are no longer limited to one particular MNO. MNOs become suppliers of data traffic and can be easily replaced by their competitors. |
| ● | Hyper-connectivity.
Cloud SIM technology allows dynamic selection of network services based on signal coverage and cost to achieve better network quality
and more reliable connection with flexible solution. The definition of hyper-connectivity includes level one which is the evaluation
of connection quality of various wireless-access networks, level two which is network selection and optimization based on cloud SIM technology
and level three which is optimizing and acceleration of application routing. Our platform supports various kind of SIM cards and enables
users to smoothly switch between multiple types of network. Our cloud SIM technology such as smart multi-network reselection technology
reduces network crossing time to milliseconds and facilitates cloud application. We believe hyper-connectivity will bring higher efficiency
and better experience to our business partners and users, respectively. |
| ● | Security.
The cloud SIM technology follows the existing telecoms technology and presents no additional security risk. |
Cloud
SIM Architecture
The
cloud SIM architecture mainly consists of (i) a distributed SIM card pool with data traffic purchased by us or provided by our business
partners, hosted locally or remotely using SIM banks and other terminals; (ii) uCloudlink cloud SIM platform, including software and
necessary infrastructures for users and business partners; and (iii) user-end terminals such as GlocalMe portable
Wi-Fi terminals and smartphones, and GlocalMe Inside implementations in third-party smartphones as well as smart-hardware
products. Network data supplied from the distributed SIM card pool are delivered to end terminals through uCloudlink cloud SIM platform
using cloud SIM technology.
Our
cloud SIM architecture allows a broad range of business partners, such as mobile terminal brands, MVNOs, MNOs, mobile Wi-Fi terminal
rental companies and distribution channels, to participate in our fast-growing business. Our distributed SIM card pool includes distributed
SIM banks operated by us and our business partners, contributing to a data supply network with global coverage. Our cloud SIM platform
supports our business partners so that they can offer reliable services and generate revenues efficiently. The end terminals allow users
to enjoy mobile data connectivity services with reliable connectivity and high speed.
Distributed
SIM Card Pool—Supply for Mobile Data Connectivity Services
Our
distributed SIM card pool includes SIM cards purchased and managed by us, and those hosted and managed by our business partners using
primarily SIM banks. SIM banks can be hosted by us with SIM cards from us or business partners, and business partners can purchase SIM
banks and manage relevant business via our PaaS and SaaS platform.
Our
SIM Banks. We operate our own distributed SIM banks to host a large number of local data SIM cards, which altogether enable us to
provide global mobile data connectivity services in 144 countries and regions, including those countries traditionally renowned for high
roaming cost. With cloud SIM technology, we simply purchase and use local SIM cards locally, reducing our data cost and eliminating the
need to negotiate complicated roaming terms with MNOs. See “Item 4. Information on the Company—B. Business Overview—Mobile
Data Procurement and Management.”
Business
Partners’ SIM Banks. Local SIM banks can also host a large number of data SIM cards, which can be physical SIM cards, e-SIM
or soft SIM cards, and may be managed by our business partners directly. For example, a MNO or MVNO from whom we procure data may operate
a local SIM bank and manage the data plans and SIM cards more efficiently. A portable Wi-Fi rental service business partner may purchase
data locally and host these SIM cards in local SIM banks to meet its data demand within its operating region. We charge our business
partners by the number of SIM cards hosted and the data volume provided through our architecture.
SIM
Box and Other SIM Terminals. GlocalMe SIM box is our cloud SIM technology solution for users who need to have multiple
SIM cards standby. SIM box is designed to be placed at home instead of being carried around. Users of our SIM box can remotely connect
via their smartphones to the SIM cards in the box for data connectivity, calls and text messages. We monetize GlocalMe SIM
box by selling the hardware products, and will add more features and provide services through SIM box in the future.
uCloudlink
Cloud SIM Platform—Dispatcher of Mobile Data Connectivity Services
Our
uCloudlink cloud SIM platform is the core of our cloud SIM architecture. The cloud SIM platform manages terminal information and user
accounts and intelligently allocates all the SIM cards hosted in our cloud SIM architecture. It computes detailed scores for network
performance of various mobile data networks in a given location. Such integrated knowledge allows the cloud SIM platform to detect and
select the better local network or cost-efficient network available in our distributed SIM card pool for each user, and automatically
connect the associated SIM card to the terminal. The cloud SIM platform further includes portals and tools for users and business partners
to track and manage the mobile data connectivity service and smart terminals. We also provide open Application Programming Interface
(API) to allow easy integration into business partners’ and enterprise customers’ existing management software.
Platform-as-a-Service
(PaaS)/Software-as-a-Service (SaaS). We offer our uCloudlink cloud SIM platform as PaaS/SaaS to our business partners and charge
associated service fees. Our SIM card allocation algorithm increases the efficiency and utilization rate of the SIM cards, allowing business
partners and us to generate attractive usage economics and minimize data wastage. In addition, as SIM cards purchased by us and those
hosted by various business partners are incorporated in the architecture as an integrated SIM card pool, mobile data connectivity service
providers such as MNO and MVNO business partners can not only offer their own data connectivity service on our platform, but also easily
obtain access to data connectivity services from other service providers via our PaaS and SaaS platform. Our business partners can also
management their business via our PaaS and SaaS platform to provide better services to their end-users, including connectivity management,
terminal management, terminal rental and sales, customer service systems (CRM), and big data analysis.
Big
Data and Advanced Algorithms. As our platform represents our users’ first entry-point to the mobile internet, we are able to
obtain timely and first-hand feedback from users of our mobile data connectivity services, and gain access to a large volume of network
coverage and performance related information. We develop and leverage big data analytics to enhance the accuracy of our data usage demand
predictions, optimize our operations, and deliver high-quality user experience. For example, insights into the network performance and
user data traffic demand help us react to network spikes and interruptions quickly. We may provide such insights as business intelligence
to our business partners in the future to optimize their network infrastructure deployment and improve the service experience of their
customers and to provide more advanced value-added services, such as advertisement.
Cloud
Infrastructure. We have built a robust technology infrastructure to support the delivery of mobile data connectivity solutions globally.
We currently utilize third-party clouds to host our network infrastructure and cloud SIM platform servers. Cloud infrastructure allows
elastic and distributed supply of computing power and bandwidths to accommodate traffic spikes, increasing the robustness of our system.
When we experience elevated demand from our users, for example during summer holidays or other peak traveling seasons, we may expand
our cloud SIM platform efficiently in various countries and regions to address the increased demand. In the unlikely event that our access
to one of our platform servers is interrupted, cloud technology allows immediate service supplement from servers in other places to fill
in and provide continuous services. We also back-up our servers and data on a daily basis using cloud technology to minimize the risk
of data loss, which enables instant system restoration and reliable service.
Smart
Terminals—Demand for Mobile Data Connectivity Services
Terminals
that are compatible with our cloud SIM technology are a vital part of our business. Empowered by our cloud SIM technology, these terminals
free users from physically changing SIM cards, ready to connect to global mobile networks with reliable connectivity, high speed and
competitive prices. Our cloud SIM technology enables the terminals to communicate to our cloud SIM platform the basic information regarding
network selection and cloud SIM card matching, and provides the terminals with high-speed mobile data connectivity services. Terminals
report information of network performance at their locations back to the cloud SIM platform so that it can dynamically improve its network
allocation efficiency. Users may purchase local data packages and international data packages and manage their terminals through our GlocalMe apps.
Supported
by our broad network coverage and powerful cloud SIM platform, we have introduced a range of compatible terminals, including portable
Wi-Fi terminals, GlocalMe Inside embedded smartphones and other smart-hardware products such as IoT terminals. Under
uCloudlink 1.0 model, most of the smart terminals are portable Wi-Fi terminals for international roaming purposes. Under uCloudlink 2.0
model, most terminals are smartphones with GlocalMe Inside implementation, through which users can enjoy both local
and international mobile data connectivity services. See “—Our Products and Services.”
GlocalMe
Connect and Other Apps. The GlocalMe Connect app enables seamless usage of our mobile data connectivity services
on compatible third-party terminals. Our app is adopted through either pre-installation or subsequent firmware update in third-party
smartphones of leading global handset brands, or offered by our business partners under the own brands. Users need to activate this app
to enjoy our mobile data connectivity services. Users may easily check balance of their current data plans, renew their plans, purchase
and top up other local and global data packages, maintain their accounts and obtain access to online customer support. For each country
or region, users can choose from unlimited data pass in particular periods, normal data packages by data amounts, and packages for multiple
countries in that region. Besides GlocalMe Connect app, we also offer GlocalMe app that can be downloaded
from app stores to manage portable Wi-Fi terminals, and GlocalMe Call app to manage voice calls and text messages that
are remotely hosted on SIM boxes.
Our
Products and Services
Leveraging
on our integral cloud SIM technology and architecture, the core of our business is to provide reliable and high-speed mobile data connectivity
services at competitive prices, which we deliver through a range of hardware products and service solutions to our business partners,
retail and enterprise customers. The main hardware terminals we offer include portable Wi-Fi terminals, smartphones and smart-hardware
products for international and local mobile data connectivity services. We also provide business solutions using multiple types of terminals
to enterprise customers, as well as other value-added services to our business partners.
Since
October 2019, our cloud SIM platform is ready to support traffic from 5G networks. While MNOs globally are rolling out 5G networks and
smartphone manufacturers are launching 5G-compatible models, smooth and reliable 5G experience outside of home country will not achieve
in the near- to mid-term, as MNOs will probably require new 5G roaming agreements and tariff arrangements. Similarly, in local markets,
5G roaming agreements between MNOs are also required for wider 5G coverage by combining the 5G networks of multiple MNOs. Our 5G-ready
cloud SIM platform offers a ready-to-use solution for MNOs and smartphone manufacturers that enables roaming-free inter-carrier 5G network
access domestically and internationally.
GlocalMe
Portable Wi-Fi
We
launched our GlocalMe portable Wi-Fi solutions in 2014 as a signature product under uCloudlink 1.0 model. Empowered
by our cloud SIM architecture, our portable Wi-Fi solutions provide high-speed network connection in 144 countries and regions without
physically changing SIM cards and supports simultaneous connection for up to five end devices. As we allocate local data SIM cards in
our distributed SIM card pool using our cloud SIM technology, cross-border travelers using our portable Wi-Fi solutions enjoy local mobile
data connection just like local users, which is reliable and fast and at competitive rates.
Although GlocalMe portable
Wi-Fi solutions are primarily targeting users with international roaming needs, they can also be used locally under uCloudlink 2.0 model.
As the mobile terminals incorporating our portable Wi-Fi solutions can automatically choose the local mobile data network with better
performance at the location, local users may enjoy greater mobile data coverage, more reliable network connection, and lower price, without
being restricted to a particular MNO or MVNO.
We
offer several models of hardware terminals incorporating our portable Wi-Fi solutions, including those with or without screens. GlocalMe hardware
terminals come with GlocalMe app, through which users may purchase global data using pay-as-you-go system, or choose
from various local and international data packages. In February 2021, we launched various models of mobile Wi-Fi products such as First
G, Duo Turbo and Tri Force of GlocalMe brands globally.
Services
through “Roamingman” Brand
Roamingman is
our brand of the global portable Wi-Fi service business, primarily targeting Chinese users who are traveling abroad under uCloudlink
1.0 model. Besides China, we also operate Roamingman business in Malaysia. Empowered by our cloud SIM architecture, Roamingman provides
global data connection through using our terminals. Users may obtain our portable Wi-Fi through multiple channels, including multiple Roamingman e-commerce
platforms, online travel agencies such as Ctrip and Fliggy, airlines and other travel related companies. We offer flexible use periods,
coverage regions and extension options to address the diverse needs from cross-border travelers. After reserving the terminals with deposits,
users may pick up and return the terminals at airports, convenience stores, or via courier services.
We
typically charge users a daily service fee that includes unlimited data usage in that day. The price of the daily service fee depends
on the countries and regions the users plan to visit.
Direct
Sales
We
also directly sell our GlocalMe portable Wi-Fi solutions to enterprise and retail customers through online and offline
channels in multiple countries and regions, such as China, Japan, Europe and the United States. Frequent cross-border travelers and enterprise
customers may be better off by buying our terminals with data plans instead of short-term leasing. Our customers also include local users
who seek to access more reliable and less expensive mobile data network locally following uCloudlink 2.0 model. We generate revenue by
selling the solutions, including the hardware and data packages for future use. We also generate revenue when users purchase additional
data package through our products. Users may purchase our terminals on online e-commerce platforms such as Amazon and T-mall. Since 2021,
in order to further elevate our local service brand GlocalMe, we have enhanced our e-commerce exposure in key markets such
as the United States, Europe and Southeast Asia, optimized our websites and streamlined our sales team.
Cooperation
with Business Partners
We
have collaborated with business partners to provide access to our portable Wi-Fi solutions in other countries. Our business partners
for GlocalMe portable Wi-Fi solutions include MNOs, MVNOs and portable Wi-Fi rental companies. Typically, we generate
revenue by selling the hardware terminals to our business partners and providing mobile data connectivity services through our cloud
SIM architecture. Our uCloudlink cloud SIM platform offers customer management tools, back-end SIM card tracking and data billing system,
and provides access to global mobile data networks. In addition to utilizing data traffic available on our cloud SIM platform, business
partners may also procure SIM cards and host the SIM cards in our cloud SIM architecture to provide data connectivity services to their
customers.
Platform-as-a-Service
(PaaS) / Software-as-a-Service (SaaS)
We
offer uCloudlink cloud SIM platform as a service to our business partners with a service charge. Our uCloudlink cloud SIM platform intelligently
chooses better performing local network, supporting a massive number of terminals and users. Our PaaS and SaaS offering consists of modules
such as customer relationship management, operations support system, business support system, and SIM card enterprise resource planning
and management, which enable our PaaS and SaaS customers to become over-the-top (OTT) operators. PaaS targets sophisticated business
partners that have their own business operation software, such as MNOs and portable Wi-Fi rental companies, to improve their cooperation
with us. The cloud SIM platform includes APIs to allow easy integration into business partners’ and enterprise customers’
existing business management software.
SaaS
targets business partners that do not have their own business operation software. We support full business software solutions such as
customer management and billing, sales and purchase of data packages, data package design, traffic supply and demand analysis, and multiple
payment methods. Leveraging on the network data we collected through our operation, we are able to provide insights to our business partners
to boost their operation efficiency through advanced algorithms. Business partners may access to a dashboard through ucloudlink.com.
Our
distributed SIM card pool includes distributed SIM banks that may be operated by our business partners locally to maintain and manage
their SIM cards, which will be dispatched through our cloud SIM platform. Our business partners include MNOs, MVNOs, portable Wi-Fi rental
companies, and smartphone and smart-hardware companies. See “Item 4. Information on the Company—B. Business Overview—Our
Cloud SIM Technology and Architecture—Cloud SIM Architecture.”
PaaS
and SaaS related service fees typically include revenue derived from SIM card performance improvement, SIM card hosting fees and management
fees, software license fees and data pool exchange service fees and other customer management services which are highly recurring monetization
models. We typically charge our business partners for service fees for PaaS and SaaS provided and based on the number of SIM cards hosted
in our distributed SIM card pool. As business partners realize the commercial benefits from leveraging uCloudlink’s PaaS and SaaS
services, we believe they will gradually migrate more of their SIM and data traffic management functions to uCloudlink. Our PaaS and
SaaS services are complementary in nature and form a complete value cycle at serving our business partners’ needs.
GlocalMe
Inside Implementations
We
believe that reliable and high-quality connectivity is the crucial factor for mobile phones no matter how many fancy add-on features
they come with. Hence, we provide GlocalMe Inside implementation solutions for smartphones so that users can enjoy reliable
network experience with the mobile phone itself using the respective GlocalMe Inside app, without physically changing
SIM card or carrying an external portable Wi-Fi terminal.
This
was done via a series of technological collaborations between us, mobile terminal brands and major chipset brands. We enable GlocalMe
Inside services in existing mobile models with supporting chipsets by simply notifying the mobile terminal users to update their
firmware. Alternatively, third-party mobile phone brands can also pre-install our GlocalMe Inside solutions on their
new mobile terminals, which can also become a unique selling feature of their new products. We believe by having an embedded data solution,
third-party mobile terminal brands will be able to diversify their product offerings and participate in telecommunication ecosystem.
While GlocalMe
Inside is capable of providing both local and international mobile data connectivity services, given the convenience that comes
with an embedded data solution, GlocalMe Inside will further promote our signature implementation of uCloudlink 2.0
model, targeting high-speed seeking reliable and fast local data connectivity.
Collaboration
with Mobile Terminal Business Partners
We
partner with various smartphone manufacturers to provide GlocalMe Inside implementation in certain mobile phone models.
We sell data packages to mobile terminal users through GlocalMe Inside implementation ourselves or through our mobile
terminal brand business partners. We collect user payment when they purchase data packages through the pre-installed app and will pay
the smartphone company a pre-determined percentage of such payments we received as commissions. The percentage depends on the nature
of the collaborations and the countries where the mobile terminal users are using our mobile data connectivity services. For GlocalMe
Inside implementation, we piggyback our business partners’ sales efforts to sell their mobile terminals with our data
connectivity services embedded. Alternatively, we can become distribution channels of our business partners by selling their terminals
and our mobile data connectivity services. In September 2019, we began this model whereby we purchase handsets from our business partners,
then implement GlocalMe Inside, and sell the handsets to wholesalers.
GlocalMe
World Phone
Prior
to the commercialization of GlocalMe Inside in third-party mobiles terminals, we launched GlocalMe World
Phones in 2018, mobile phones that come with GlocalMe Inside implementation and allow users to easily gain access to
data network options through GlocalMe Connect app, showcasing our GlocalMe Inside technology. GlocalMe World
Phones can instantly connect to global and local mobile network without extra equipment or changing SIM card using our cloud SIM technology.
They monitor the network performance in real time and automatically switch to the better available network locally. At the same time, GlocalMe World
Phones can serve as Wi-Fi hotspot for five simultaneous connections. We generate revenue by selling the hardware products and offering
data packages for the smartphones. We have terminated the World Phones sales in 2022.
GlocalMe
Inside in other Smart Hardware
Some
of other smart terminals also use smartphone chipsets and satisfy the requirements of cloud SIM technology. We provide the firmware upgrade
to third parties without additional hardware cost to enable global mobile data connectivity services on these terminals, including mobile
Wi-Fi, intelligent translators, industrial routers, and smart speakers.
Other
Products and Services
IoT
Module
In
the new era of IoT, we offer IoT modules with GlocalMe Inside implementation to meet the huge demand for mobile data
from various terminals, and provide integrated network solutions to our customers. IoT modules are primarily targeting enterprise customers
seeking for cost-effective and reliable data connectivity with low network latency in their products, to be used locally and internationally.
For example, we provide data network solutions for translation terminals. We also help logistic companies to deploy their freight trucks
using IoT modules installed on the vehicles. We expect to generate revenue from IoT modules by selling hardware and data packages. As
5G becomes more available, IoT providers will be more dependent on our cloud SIM architecture and hyper-connectivity technology.
Our
cloud SIM technology and hyper-connectivity technology, including the smart multi-network reselection technology, is compatible with
and brings unique advantages to various IoT applications scenarios such as Internet of Vehicles, augmented reality, virtual reality,
autopilot, cargos, logistics and other car equipment. We are cooperating with business partners in various aspects of IoT applications.
SIM
Cards
As
a complementary product, we sell SIM cards with prepaid data packages that we procure from various sources around the world to outbound
travelers who prefer the traditional method of physically changing the SIM cards in their smartphones.
Value-Added
Services
As
users surf on internet through the mobile data connectivity services we provide, we are the first entrance for users and their information.
Based on this advantage, we provide a number of value-added services to our business partners, such as advertisement. We collaborate
with our business partners and other third-party advertisement agencies to provide advertisements on our products based on our big data
analysis results. These advertisements are displayed on the screens of our portable Wi-Fi terminals, GlocalMe World
Phones and our GlocalMe Connect app. We also provide other value-added services to our users, especially cross-border
travelers, such as map, translation, car reservation and itinerary planning.
Mobile
Data Procurement and Management
We
provide mobile data connectivity services to our users, and collaborate with business partners by assisting them with servicing their
users. Data allowance originally purchased by us, which was primarily used by users who contributed to our revenues from data connectivity
services, decreased from approximately 19,200 terabytes in 2020 to 19,000 terabytes in 2021, and increased to 20,747 terabytes in 2022,
while data originally purchased by our business partners, which was primarily used by users who did not contribute to our revenues from
data connectivity services, decreased from approximately 174,100 terabytes in 2020 to 143,800 terabytes in 2021, and increased to 155,752
terabytes in 2022.
Data
Procurement
Our
data sources include MNOs and their sales channels, MVNOs, and other SIM-card trading companies. We have aggregated mobile data traffic
allowances from 337 MNOs in 144 countries and regions in our cloud SIM architecture. When we start to offer uCloudlink 3.0 model in the
future, users will also become our suppliers of mobile data. We have a dedicated team of data procurement personnel to purchase global
mobile data from various sources. Our data purchasing team covers 144 countries and regions, divided by geographic regions and languages.
We
ask for quotations from MNOs and resellers in a region and specify our technical requirements to support cloud SIM technology. Negotiation
with MNOs and their sales channels often lasts for up to two months. We generally use framework agreements for data procurement. We notify
MNOs of our request for cloud SIM technology support and sometimes include the requirement in the agreement. See “Item 3. Key Information—D.
Risk Factors—Risks Related to Our Business and Industry—We depend on network operators for their wireless networks, infrastructures
and data traffic, and any disruptions of or limitations on our use of such networks, infrastructures and data traffic may adversely affect
our business and financial results.”
As
we have aggregated mobile data traffic allowances from 337 MNOs, we possess bargaining power during the negotiation due to competition
among MNOs and sometimes offer bidding process to purchase data with better price and terms. As our user base grows, larger demand for
data also drives up our bargaining power with data suppliers. We further increase our bargaining power from our algorithm on pricing
and user demand prediction. We technically analyze data packages across MNOs and other data suppliers and choose the combination with
lower price or better network coverage. As our service maximizes network utilization, simplifies the cooperation among MNOs, improves
network coverage and service quality of MNOs and fully utilizes network capacity, especially 5G, MNOs are more willing to offer us leftover
data with low price.
Our
operation under uCloudlink 2.0 model involves the purchase and use of local data, and some local regulator require additional telecommunication
licenses and permits. We make efforts to obtain the requisite licenses and permits by collaborating with or forming joint venture with
local business partners who possess such licenses and permits or by applying by ourselves. For example, in April 2019 and September 2020,
we made an investment in a licensed MVNO primarily engaged in telecommunications related business, which was successfully listed on the
China National Equities Exchange and Quotations (“NEEQ”) on January 12, 2023.
The
procured data, especially those from sources other than MNOs themselves, are subject to testing and validation before commercially loaded
in our distributed SIM card pool. This ensures that the data included in the SIM card has the volume and network performance parameters
as the agreement specified.
Data
Demand Projection
To
ensure reliable mobile data connectivity services to our users, we have a planning team to predict mobile data demand through modeling.
The model looks at seasonality, regions and countries, network performance and other features to predict users’ data demand at
a specific time in a geographic area.
In
the rare event where mobile data demand spikes and our normally procured data cannot fulfill that one-off demand, we have set up procedures
to ensure our service quality. When the data usage reaches a threshold percentage of our distributed SIM card pool, our system will alert
us. We may activate backup SIM cards, which often provide more expensive data package and do not incur cost before activation. For example,
in the event that the data demand in Hong Kong spikes, we may activate a backup SIM card in Hong Kong, and if no local backup SIM card
is available, activate a Thailand SIM card using daily international roaming plan, to cover data demand in Hong Kong. Based on the prediction
from modeling, if we find that our data traffic is not sufficient to cover the data demand, we may utilize data traffic made available
by our business partners on our platform or purchase SIM cards from MNOs. If these measures still cannot solve the demand, we will temporarily
stop service for new users or suspend new data package orders. In the worst situation, we may pause service for users with low data demand.
Data
Pricing Strategy
We
set the prices of our mobile data packages based on prevailing market price. We also use algorithms to create our data plans by a fresh
combination of the data packages in our distributed SIM card pool. This significantly enhances the efficiency of our data SIM card management
and increases the margin of our data operation.
Leveraging
our Business Operations Support System (BOSS), we allow users to customize the data packages they wish to purchase, and we assign tailor-made
pricing to the data packages created by the users, based on their own needs and some metrics, such as the length of the data plan, the
data supplier, the geographic region covered and volume of data traffic needed. We are developing additional customization features so
that users may personalize and purchase data plans based on their needs. Such flexibility will enable more reasonable cost for users
and increase our network operation efficiency.
Manufacturing
and Supply of Components
To
produce our hardware terminals that incorporate our mobile data connectivity services, we rely on our manufacturing partners. A significant
portion of this manufacturing is currently performed by a small number of outsourcing partners. We have master agreements with our manufacturing
partners and issue purchase orders each time, with varying prices. Before engaging a manufacturing partner, we evaluate the plant’s
manufacturing capabilities, including quality control system, managing mechanism and business performance. We request the manufacturing
partner to produce a small batch as testing process. We work closely with our manufacturing partners on manufacturing schedules and components
management to ensure that they are able to meet their production commitments. We have an on-site quality control team to randomly test
the products and oversees the working flow from components to end products.
We
have a dedicated team to purchase required components to meet specified requirements of our customers. Most components essential to our
business are generally available from multiple sources. However, a few components, such as chipsets, are at times subject to industry-wide
shortage, significant pricing fluctuations and long supply cycles. We communicate with chipset manufacturers or their agents periodically
regarding their production plans. We also apply our own monthly demand prediction for the following three months to purchase and store
components.
We
engage our manufacturing partners for component inventory storage as well. We also outsourced the logistics service to third-party courier
companies.
Marketing
and Business Development
We
promote our products and services through a variety of online and offline marketing and promotional activities. We primarily market our Roamingman portable
Wi-Fi service through online travel agencies as well as through offline channels. We also promote our Roamingman brand
with embedded advertisement in movies to reach broader consumer market. For GlocalMe portable Wi-Fi terminals, we publish
advertisement on in-flight magazines with support from airlines. For GlocalMe Inside and other services based on our
cloud SIM architecture, we establish our brand recognition to reach more potential business partners by participating exhibitions in
tourism, consumer electronics and telecommunications. To promote GlocalMe Inside, we provide promotional data traffic allowance
from time to time to acquire new users, and we collaborate with smartphone companies that use GlocalMe Inside implementations
to activate their existing users by pushing advertising messages to the handsets and conducting other targeted marketing. When holidays
approach, we also promote data discount through WeChat accounts, email newsletters and short text messages.
We
have a dedicated business development team in charge of the marketing of our other products and services to potential business partners
and enterprise customers. We believe that sales of our reliable and high-quality products and services are enhanced by knowledgeable
salespersons who can convey the value of our cloud SIM technology and hyper-connectivity technology and demonstrate various use scenarios
enabled by our products. We further believe providing direct contact with our business partners is an effective way to demonstrate the
advantages of our products and providing a high-quality sales and after-sales support experience is critical to attracting new and retaining
existing business partners. Most of our sales personnel previously work in notable technology companies and have years of sales experience
and technological knowledge base to support their sales activities. We establish our brand recognition to reach more potential business
partners by participating exhibitions in tourism, consumer electronics and telecommunications.
Customer
Support
We
maintain a dedicated customer service team in our ongoing efforts to maintain end-user satisfaction and improve our products and services.
We offer customer support for global users in Chinese, English, Japanese and Cantonese. Users may contact customer support directly from GlocalMe
Connect app anytime to report issues and voluntarily provide feedback on our products and services, which help us further improve
our current business or develop and launch new services. We currently provide all of customer service by ourselves, but some of our customer
service was outsourced in the past. Our business partners, such as MNOs, MVNOs, portable Wi-Fi terminal rental companies and smartphone
companies and vendors, often employ their own customer service teams as the first line facing users. We provide additional customer service
and technical support for these teams.
Our
customer support team typically solves the following issues: (i) consultation on data packages and their definitions, (ii) questions
regarding payment methods, and (iii) network performance glitches. For portable Wi-Fi terminals, users may mail back the broken terminal
for repair and we often plan for backup terminals to cover our Roamingman services. When we receive a user complaint,
our customer support team will solve according to our service policy. If the user is not satisfied, the issue will be escalated to our
management team.
Research
and Development
We
invest significant resources in research and development to improve our technology and develop solutions supporting our cloud SIM operations.
We incurred US$26.4 million, US$13.7 million and US$8.4 million of research and development expenses in 2020, 2021 and 2022, respectively.
We
have a team of experienced engineers who are primarily based in China. We recruit most of our engineers locally and have established
various recruiting and training programs to keep them abreast of the most advanced technologies. As of December 31, 2022, our technology
team had a total of 141 engineers, primarily focusing on the development of cloud SIM technology and our architecture, firmware
and software development, big data analysis and hardware development.
Data
Privacy and Security
We
are committed to protecting information security of all users and business partners within our cloud SIM architecture. We have established
and implemented a strict company-wide policy on data collection, processing and usage. We collect network performance information and
other data that is related to the services we provide and use the collected data for our operations, all with users’ consent.
We
build our security protocols and processes for research and development, supply chain and other aspects of our business operations. We
have a security team of engineers and technicians dedicated to protecting the security of our data and our system. The mechanism of our
cloud SIM technology is secure as it does not authorize third parties to modify SIM card profiles. We anonymize and encrypt confidential
personal information and take other technological measures to ensure the secure processing, transmission and usage of data. We have also
established stringent internal protocols under which we grant classified access to confidential personal data only to limited employees
with strictly defined and layered access authority. In addition, we use third-party security system provided by our cloud service providers.
Our security system is capable of handling malicious attacks each day to safeguard the security of our architecture and to protect the
privacy of our users.
We
adopt security and data privacy practices in compliance with local cyber security law and data privacy regulations in the countries and
regions that we operate, including cyber security law of mainland China and GDPR. See “Item 3. Key Information—D. Risk Factors—Risks
Related to Our Business and Industry—Our and the former VIEs’ business is subject to complex and evolving Chinese and international
laws and regulations regarding data privacy and cybersecurity. The improper use or disclosure of data could have a material and adverse
effect on our business and prospects. Many of these laws and regulations are subject to change and uncertain interpretation, and could
result in claims, penalties, changes to our business practices, increased cost of operations, damages to our reputation and brand, or
otherwise harm our business” and “Item 4. Information on the Company—B. Business Overview—Regulation—Mainland
China—Regulations Related to Internet Information Security and Personal Information Protection.”
Intellectual
Property
We
regard our patents, trademarks, copyrights, domain names, know-how, proprietary technologies, and similar intellectual property as critical
to our success. As of December 31, 2022, we owned 130 patents relating to the cloud SIM technology in mainland China, Japan, United States
and other jurisdictions, and had 45 pending patent applications. Our patents cover our key technologies, including cloud SIM architecture
and supporting terminals, design patents, hardware antenna and hardware configuration. We also own 109 registered trademarks, including GlocalMe,
Roamingman and uCloudlink, copyrights to 43 software programs developed by us relating to various aspects of our operations,
and 35 registered domain names, including www.ucloudlink.com, www.GlocalMe.com and www.roamingman.com.
We
seek to protect our technology and associated intellectual property rights through a combination of patent, copyright and trademark laws,
as well as license agreements and other contractual protections. In addition, we enter into confidentiality and non-disclosure agreements
with our employees, our suppliers and manufacturers, our business partners and others to protect our proprietary rights. The agreements
we enter into with our employees also provide that all patents, software, inventions, developments, works of authorship and trade secrets
created by them during the course of their employment are our property.
We
intend to protect our technology and proprietary rights vigorously. We have employed internal policies, confidentiality agreements, encryptions
and data security measures to protect our proprietary rights. However, there can be no assurance that our efforts will be successful.
Even if our efforts are successful, we may incur significant costs in defending our rights. From time to time, third parties may initiate
litigation against us alleging infringement of their proprietary rights or declaring their non-infringement of our intellectual property
rights. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—Our intellectual
property rights are valuable, and any inability to protect them could reduce the value of our products, services, and brand” and
“Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—We are, and may in the future
be, subject to intellectual property claims, which are costly to defend, could result in significant damage awards, disrupt our business
operation, and could limit our ability to use certain technologies in the future.”
Competition
The
mobile data connectivity services industry is rapidly evolving and increasingly competitive. While we create unique values to and collaborate
with MNOs and MVNOs, who are important participants on our mobile data traffic sharing marketplace. Our cloud SIM technology backed by
our PaaS and SaaS platform is our core competitiveness in data connectivity market, which will support physical SIM, eSIM and soft SIM
technologies. We also face potential competition from other companies with such technologies in data connectivity services. We believe
that we are strategically positioned in global mobile data connectivity services industry and we compete with others based on the following
factors: (1) strong relationships with business partners around the globe to expand our product penetration; (2) advanced cloud SIM technology,
hyper-connectivity technology and architecture that deliver high quality mobile data connectivity experience to end users; (3) innovative
GlocalMe Inside solutions that bring new opportunities to the hardware terminal value chain; and (4) experience and track record
of success in the telecommunications business.
Insurance
We maintain various insurance
policies to safeguard against risks and unexpected events. We have contracted with leading insurance companies and providers to obtain
insurance coverage for product liability and freight transportation. In addition to providing social insurance for our employees as required
by the laws of mainland China, we also provide supplemental commercial medical insurance for our employees. We have maintained product
liability insurance for our terminals.
Regulation
This section sets forth a
summary of the principal laws and regulations of mainland China and Hong Kong which are relevant to our business and operations.
Mainland China
Regulations Related to
Foreign Investment
Company Law of the PRC
The Company Law of the PRC,
or the Company Law, which was promulgated by the SCNPC, on December 29, 1993, came into effect on July 1, 1994, and was most recently
amended in 2018, provides that companies established in mainland China may either be limited liability companies or companies limited
by shares. Each company has the status of a legal person and owns its own assets. Assets of a company may be used in full for the company’s
liability. The Company Law applies to foreign-invested companies unless relevant laws provide otherwise.
Guidance Catalog of Industries for Foreign Investment
Investment activities in mainland
China by foreign investors are principally governed by the Guidance Catalogue of Industries for Foreign Investment, or the Catalog (2017
Edition), which was promulgated by the MOFCOM and the NDRC on June 28, 2017 and became effective on July 28, 2017, and the Provisions
on Guiding Foreign Investment Direction, which was promulgated by the State Council on February 11, 2002 and came into effect on April
1, 2002, classify all foreign investment projects into four categories: (1) encouraged projects, (2) permitted projects, (3) restricted
projects, and (4) prohibited projects.
On December 27, 2021, the
NDRC, and the MOFCOM, promulgated the Special Entry Management Measures (Negative List) for the Access of Foreign Investment (2021 version),
or the Negative List (2021 Version), which came into effect on January 1, 2022. In addition, the NDRC and the MOFCOM promulgated the Encouraged
Industry Catalogue for Foreign Investment (2022 version), or the 2022 Encouraged Industry Catalogue, which came into effect on January
1, 2023. Industries not listed in the 2021 Negative List (2021 Version) and 2022 Encouraged Industry Catalogue are generally open for
foreign investments unless specifically restricted by other laws of mainland China. The establishment of wholly foreign-owned enterprises
is generally allowed in encouraged and permitted industries. Some restricted industries are limited to equity or contractual joint ventures,
while in some cases Chinese partners are required to hold the majority equity interests in such joint ventures. In addition, foreign investment
in projects in a restricted category is subject to government approvals. Foreign investors are not allowed to invest in industries in
the prohibited category.
Pursuant to the Provisional
Administrative Measures on Establishment and Modifications (Filing) for Foreign Invested Enterprises promulgated by the MOFCOM on October
8, 2016 and amended in 2017 and 2018, establishment of and changes to FIEs not subject to approvals under the special entry management
measures shall be filed with the relevant commerce authorities. However, as the PRC Foreign Investment Law has taken effect, the MOFCOM
and the SAMR, jointly approved the Foreign Investment Information Report Measures on December 30, 2019, which went into effect on January
1, 2020. According to the Foreign Investment Information Report Measures, which repealed the Provisional Administrative Measures on Establishment
and Modifications (Filing) for Foreign Invested Enterprises, foreign investors or FIEs shall report their investment-related information
to the competent local counterparts of the MOFCOM through the National Enterprise Registration System and National Enterprise Credit Information
Notification System.
The Catalog, along with the
Negative List, governs investment activities in mainland China by foreign investors. Industries not listed in the Catalog and the Negative
List are generally deemed as falling into the “permitted” category, unless specifically restricted by other laws and regulations
of mainland China. For some restricted industries, foreign investors can only conduct investment activities through equity or contractual
joint ventures, while in some cases mainland China shareholders are required to hold the majority interests in such joint ventures. In
addition, some projects in the restricted category are subject to higher-level governmental approvals. Foreign investors are not allowed
to invest in industries in the prohibited category. The value-added telecommunications services carried on by us in mainland China falls
in the restricted category, and foreign investors cannot hold over 50% of equity interests in entities providing such services.
On December 19, 2020, The
NDRC and the MOFCOM jointly promulgated the Measures for the Security Review of Foreign Investment, which became effective on January
18, 2021. Pursuant to the Measures for the Security Review of Foreign Investment, the NDRC and the MOFCOM will establish a working mechanism
office in charge of the security review of foreign investment, and any foreign investment which has or would possibly have an impact on
the national security shall be subject to security review by such working mechanism office. The Measures for the Security Review of Foreign
Investment further require that a foreign investor or its domestic affiliate shall apply for clearance of national security review with
the working mechanism office before they conduct any investment into any of the following fields: (i) investment in the military industry
or military-related industry, and investment in areas in proximity of defense facilities or military establishment; and (ii) investment
in any important agricultural product, important energy and resources, critical equipment manufacturing, important infrastructure, important
transportation services, important cultural products and services, important information technologies and internet products and services,
important financial services, critical technologies and other important fields which concern the national security where actual control
over the invested enterprise is obtained.
Foreign Investment Law of the PRC
The Foreign Investment Law
of the PRC was formally adopted by the Second session of the 13th NPC on March 15, 2019, which came into effect on January 1, 2020 and,
together with their implementation rules and ancillary regulations, replaced the trio of laws regulating foreign investment in mainland
China, namely, the Sino-foreign Equity Joint Venture Enterprise Law of the PRC, the Sino-foreign Cooperative Joint Venture Enterprise
Law of the PRC and the Wholly Foreign-owned Enterprise Law of the PRC. The organization form and activities of foreign-invested enterprises
shall be governed, among others, by the laws of the Company Law of the PRC and the Partnership Enterprise Law of the PRC. Foreign-invested
enterprises established before the implementation of this Law may retain the original business organization and so on within five years
after the implementation of this Law.
The Foreign Investment Law
of the PRC is formulated to further expand opening-up, vigorously promote foreign investment and protect the legitimate rights and interests
of foreign investors. According to the Foreign Investment Law, foreign investments are entitled to pre-entry national treatment and are
subject to negative list management system. The pre-entry national treatment means that the treatment given to foreign investors and their
investments at the stage of investment access shall not be less favorable than that of domestic investors and their investments. The negative
list management system means that the state implements special administrative measures for access of foreign investment in specific fields.
Foreign investors shall not invest in any forbidden fields stipulated in the Negative List recently effective on January 1, 2022 and shall
meet the conditions stipulated in the Negative List before investing in any restricted fields. The Foreign Investment Law does not mention
the relevant concept and regulatory regime of the former VIE structures.
Foreign investors’ investment,
earnings and other rights and interests within the territory of mainland China shall be protected in accordance with the law, and all
national policies on supporting the development of enterprises shall equally apply to foreign-invested enterprises. Among others, foreign
invested enterprises can participate in the formulation of standards in an equal manner and can participate in government procurement
activities through fair competition in accordance with the law. Further, the state shall not expropriate any foreign investment except
under special circumstances. In carrying out business activities, foreign invested enterprises shall comply with relevant provisions on
labor protection, social insurance, tax, accounting, foreign exchange and other matters stipulated in laws and regulations.
Regulations Related to
Telecommunications Service
Telecommunications Regulations of the PRC (2016 Revision)
The Telecommunications Regulations
of the PRC (2016 Revision), or the Telecom Regulations, which was promulgated on September 25, 2000 by the State Council and most recently
amended on February 6, 2016, provides a regulatory framework for telecommunications services providers in mainland China. As required
by the Telecom Regulations, a commercial telecommunications service provider in mainland China shall obtain an operating license from
the MIIT, or its counterparts at provincial level prior to its commencement of operations. The Telecom Regulations categorize all telecommunication
businesses in mainland China as either basic telecommunication services or value-added telecommunications services.
Catalog of Telecommunications Business
The Catalog of Telecommunications
Business, or the Telecom Catalog, which was issued as an attachment to the Telecom Regulations and updated in February 21, 2003, December
28, 2015 and June 6, 2019, further categorizes value-added telecommunication services into two classes: class I value-added telecommunication
services and class II value-added telecommunication services. Internet access services falls within class I value-added telecommunications
services. Information services provided via cable networks, mobile networks, or internet fall within class II value-added telecommunications
services.
Administrative Measures on Telecommunications Business Operating
Licenses (2017 Revision)
The Administrative Measures
on Telecommunications Business Operating Licenses (2017 Revision), or the Telecom License Measures, which was promulgated by the MIIT
on March 1, 2009 and last amended on July 3, 2017, requires that any approved telecommunications services provider shall conduct its business
in accordance with the specifications in its license for value-added telecommunications services, or VATS License. The Telecom License
Measures further prescribes types of requisite licenses for VATS Licenses together with qualifications and procedures for obtaining such
VATS Licenses. Where telecommunications services providers need to continue telecommunications business upon the expiry of their VATS
Licenses, they shall file an application for renewal of their VATS Licenses to the original issuing authority 90 days in advance. Apart
from the approval of the CSRC, the CAC or other PRC government authorities that may be required in connection with our offshore offerings
under the laws of mainland China, we and our mainland China subsidiaries are not required to obtain other permissions from Chinese authorities
for our material operations in mainland China and issuance of securities to foreign investors.
Administrative Measures on Internet Information Services (2011 Revision)
The Administrative Measures
on Internet Information Services (2011 Revision), which was promulgated on September 25, 2000 and amended on January 8, 2011 by the State
Council, requires that commercial internet information services providers, which mean providers of information or services to internet
users with charge, shall obtain a VATS License with the business scope of internet information services, namely the Internet Content Provider
License or the ICP License, from competent government authorities before providing any commercial internet content services within mainland
China.
Restrictions on Foreign Direct Investment in Value-Added Telecommunications
Services
Foreign direct investment
in telecommunications companies in mainland China is governed by the Provisions on the Administration of Foreign-Invested Telecommunications
Enterprises, which was promulgated on December 11, 2001 and amended on September 10, 2008 and February 6, 2016 by the State Council. The
regulations require that foreign-invested value-added telecommunications enterprises in mainland China to be established as Sino-foreign
equity joint ventures and the foreign investors may acquire up to 50% of the equity interests in such joint ventures. In addition, the
major foreign investor, as defined therein, is required to demonstrate a good track record and experience in operating value-added telecommunications
businesses. Moreover, foreign investors that meet these requirements must obtain approvals from the MIIT and the MOFCOM, or their authorized
local counterparts, which retain considerable discretion in granting approvals. On March 29, 2022, the Decision of the State Council
on Revising and Repealing Certain Administrative Regulations, which took effect on May 1, 2022, was promulgated to amend certain provisions
of regulations including the Provisions on the Regulations for the Administration of Foreign-Invested Telecommunications Enterprises (2016
Revision), the requirement for major foreign investor to demonstrate a good track record and experience in operating value-added telecommunications
businesses is deleted.
On July 13, 2006, the predecessor
of the MIIT, the Ministry of Information Industry, or the MII, released the Circular on Strengthening the Administration of Foreign Investment
in the Operation of Value-added Telecommunications Business, or the MII Circular. The MII Circular prohibits domestic telecommunications
enterprises from leasing, transferring or selling telecommunications business operation licenses to foreign investors in any form, or
providing any resources, sites or facilities to any foreign investor for their illegal operation of a telecommunication business in mainland
China. Furthermore, under the MII Circular, the Internet domain names and registered trademarks used by a foreign-invested value-added
telecommunications services operator shall be legally owned by that operator (or its shareholders). If a license holder fails to comply
with the requirements in the MII Circular and cure such non-compliance, the MII or its local counterparts have the discretion to take
measures against such license holders, including revoking their VATS Licenses.
Shenzhen uCloudlink Network
Technology Co. Ltd. obtained the VATS License issued by the MIIT in 2017 for conducting business of information technology services and
sales of terminals and data related products. As we continued to evaluate our business plan, we have decided to adjust our business model
in mainland China, and we believe the VATS License is no longer required. The VATS License previously held by Shenzhen uCloudlink Network
Technology Co. Ltd. was terminated during the Restructuring.
Regulations Related to
Mobile Data Traffic Service
Mobile Telecommunication Business Resale
Measures on Further Encouraging
and Channeling Private Capital into Telecommunications Industry, which was promulgated and came into effect on June 27, 2012, lays down
the legal landscape for the MVNOs. It prompts private capital owners to conduct businesses in eight areas of the telecommunications sector,
including a mobile communication business resale pilot program. As required by the Notice on Launching the Mobile Telecommunication Business
Resale Pilot Program and the its appendix Mobile Telecommunication Resale Service Pilot Scheme, or the Pilot Scheme, which were promulgated
and came into effect on May 17, 2013, qualified enterprises can apply to purchase mobile telecommunication services from MNOs who own
mobile network, and then re-organize these services and sell them to end-users with the approval granted by the MIIT.
Circular on Formal Commercialization
for Resale of Mobile Communications, which was promulgated by the MIIT on April 28, 2018 and came into effect on May 1, 2018, private-owned
enterprises, state-owned enterprises and foreign-invested enterprises which are incorporated within mainland China are able to apply for
the operation of mobile telecommunications resale business. Enterprises which operate the mobile telecommunications resale business shall
obtain corresponding telecommunications business operating licenses. For those enterprises which hold the approval granted by the MIIT
in relation to the Pilot Scheme, they shall renew their business contracts with MNOs and apply to change such approval for a new telecommunications
business operating license.
Regulations Related to Real-name Authentication
In June 2017, the PRC Cybersecurity
Law promulgated by the SCNPC took effect, before providing network access, domain registration services, network access formalities for
fixed-line or mobile phone, or information publication services, instant messaging services and other services to users, network operators
shall require users to provide their real identity information at the time of signing agreements with users or confirming the provision
of services. Where users fail to provide their real identity information, the network operators shall not provide them with relevant services.
According to the Circular
on the Implementation of the Provisions of the Anti-terrorism Law and other Legal Provisions to Further Implementing Real Identity Information
Registration of Users, telecommunication enterprises (including MNOs and MVNOs) shall further solidify and standardize relevant procedures
and operations, when conducting formalities for new users to enter the network. When selling M2M Data SIM Cards, telecommunication enterprises
should strictly examine and verify the purchaser, register the real name information of end users, if it is difficult to match the M2M
Data SIM Cards with the end users, the telecommunication enterprises shall register the information of the responsible entities and persons,
and prohibit a second sale in the agreement.
Regulations Related to
Manufacture and Sell of Portable Wi-Fi terminals