UTime Limited(UTME) - 2023 Q4 - Annual Report

Part I Item 1. Identity of Directors, Senior Management and Advisers This section is not applicable as per the report - The report states that this item is not applicable Item 2. Offer Statistics and Expected Timetable This section is not applicable as per the report - The report states that this item is not applicable Item 3. Key Information This section outlines the company's VIE structure, presents condensed financial data, and details significant business, structural, and regulatory risk factors Holding Company Structure and VIE UTime Limited, a Cayman Islands holding company, operates in China through a Variable Interest Entity (VIE) structure due to PRC foreign investment restrictions, relying on contractual agreements for control and facing associated enforceability and regulatory risks - UTime Limited is a Cayman Islands holding company operating in China through a VIE structure due to PRC foreign investment regulations in telecommunication sectors[31] - Control over the VIE is established through contractual arrangements, including equity pledge, exclusive technical consultation, and call option agreements, enabling consolidation of the VIE's financials under U.S. GAAP[32][33] - The company acknowledges substantial risks, including the legal enforceability of VIE contracts in PRC courts and potential regulatory actions by the Chinese government that could disrupt operations or render shares worthless[33][34][35] - Cash transfers from the VIE to the holding company are managed through service fees and are subject to PRC regulations on foreign exchange and dividend distribution, potentially including withholding taxes[45][46][47] Financial Information Related to the Condensed Consolidated VIE This section presents condensed consolidating financial schedules for the Parent, VIE, WFOE, and other entities, detailing comprehensive loss, balance sheets, and cash flows for fiscal years 2021-2023 Selected Condensed Consolidated Statements of Comprehensive Loss (in thousands of RMB) | | Year Ended March 31, 2021 | Year Ended March 31, 2022 | Year Ended March 31, 2023 | | :--- | :--- | :--- | :--- | | Consolidated Totals | | | | | Net sales | 246,899 | 275,508 | 200,547 | | Gross profit (loss) | 18,167 | 13,785 | 30,065 | | Loss from operations | (14,530) | (34,501) | (84,044) | | Net loss | (16,627) | (39,330) | (90,022) | | VIE Only | | | | | Net sales | 240,742 | 273,979 | 200,450 | | Net loss | (10,722) | (29,643) | (19,222) | Selected Condensed Consolidated Balance Sheet Data (in thousands of RMB) | | As of March 31, 2022 | As of March 31, 2023 | | :--- | :--- | :--- | | Consolidated Totals | | | | Total Assets | 250,639 | 313,139 | | Total Liabilities | 186,171 | 272,407 | | Total Shareholders' Equity | 64,468 | 40,732 | | VIE Only | | | | Total Assets | 151,573 | 194,010 | | Total Liabilities | 184,568 | 266,773 | Selected Condensed Consolidated Cash Flows Data (in thousands of RMB) | | Year Ended March 31, 2021 | Year Ended March 31, 2022 | Year Ended March 31, 2023 | | :--- | :--- | :--- | :--- | | Consolidated Totals | | | | | Net cash used in operating activities | (2,521) | (20,865) | (15,138) | | Net cash used in investing activities | (2,201) | (5,830) | (2,900) | | Net cash provided by financing activities | 14,000 | 86,888 | 18,295 | | VIE Only | | | | | Net cash used in operating activities | (3,020) | (19,806) | (15,270) | Risk Factors This section outlines numerous risks, including a history of losses, customer concentration, VIE structure vulnerabilities, internal control weaknesses, regulatory uncertainties in China and India, and share price volatility - Business Risks: The company has a history of significant losses, with a net loss of RMB 90.0 million in fiscal 2023, and is heavily reliant on a few major customers, with the top three accounting for 47.3% of net revenues in fiscal 2023[70][75] - Corporate Structure Risks: The company relies on a VIE structure, carrying risks related to contractual enforceability in China, and has identified material weaknesses in internal control over financial reporting due to insufficient U.S. GAAP accounting personnel and policies[193][199][151] - China-Related Risks: The company's shares face potential delisting under the HFCA Act due to PCAOB inspection issues, alongside risks from PRC government intervention, currency controls, and complex overseas listing regulations[243][233][279] - India-Related Risks: The Indian subsidiary, Do Mobile, has faced non-compliance issues regarding share capital issuance and reporting under FEMA, potentially leading to regulatory action, and is subject to India's economic and political conditions[348][353][332] Item 4. Information On The Company This section provides a comprehensive overview of the company's history, corporate structure, business operations, product lines, growth strategies, global market focus, and regulatory environments in China and India History and Development of the Company The company, established in 2008, underwent a 2018-2019 reorganization to form a Cayman Islands holding company controlling its China operations via VIE agreements, completed its IPO in 2021, and expanded into Latin America through acquisitions - The company commenced operations in 2008 through UTime SZ, with a significant 2018-2019 reorganization establishing the current Cayman holding company structure controlling UTime SZ via VIE agreements[377][378][379] - The company completed its Initial Public Offering (IPO) of 3,750,000 ordinary shares in April 2021[385] - As part of its expansion strategy, the company acquired a 51% interest in Gesoper (Mexico) in December 2021, which subsequently acquired an 85% interest in Firts (Mexico) in January 2022[386][387] Business Overview The company designs and sells mobile phones and consumer electronics via OEM/ODM and own brands, focusing on global markets, particularly Latin America and Africa, supported by strategic product diversification, manufacturing facilities, and intellectual property - The company's business model includes providing OEM/ODM services to well-known brands and selling products under its own 'UTime' and 'Do' brands[411] Revenue by Product Line (in thousands of RMB) | Category | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | | Feature phone | 144,032 | 111,066 | 106,279 | | Smart phone | 56,885 | 154,143 | 73,819 | | Face mask | 44,747 | - | - | | Others | 1,235 | 10,299 | 20,449 | | Total | 246,899 | 275,508 | 200,547 | - Key growth strategies include optimizing OEM/ODM orders, developing its own brands, expanding its sales network in Mexico and the U.S., and diversifying its product portfolio with items like tablets and triple-proof phones[427][428][429] - The company has shifted its strategic focus from India to Latin America, acquiring two local companies in Mexico to develop business with local telecom carriers, and entered the Japanese market with ODM tablet orders in fiscal 2023[468][425] - As of the report date, the company holds 41 patents, 44 registered software copyrights, and 43 trademarks inside and outside of China[479] Organizational Structure This section illustrates the company's corporate structure, detailing UTime Limited as the Cayman Islands parent company, its Hong Kong subsidiaries, and control over the PRC-based VIE and its various subsidiaries - The report includes a diagram illustrating the corporate structure, showing the relationship between the Cayman Islands holding company, its subsidiaries, and the VIE[650][651] Property, Plants and Equipment The company does not directly own real estate or land use rights, as land in the PRC is state-owned, and its facilities are primarily leased - The company does not own real estate or land use rights; its facilities, including offices and factories, are leased[652] Item 4A. Unresolved Staff Comments This section is not applicable as per the report - The report states that this item is not applicable Item 5. Operating And Financial Review And Prospects This section analyzes the company's financial performance, highlighting a revenue decrease, improved gross margin, increased net loss, liquidity challenges, key market trends, and critical accounting estimates Operating Results For fiscal year 2023, revenue decreased by 27.2% to RMB 200.5 million, while gross profit increased by 118.1% to RMB 30.1 million with margin improving to 15.0%, leading to a net loss of RMB 90.0 million due to surging operating expenses Financial Performance Comparison (in thousands of RMB) | | FY 2022 | FY 2023 | Change (%) | | :--- | :--- | :--- | :--- | | Revenues | 275,508 | 200,547 | -27.2% | | Gross Profit | 13,785 | 30,065 | +118.1% | | Operating Expenses | 48,286 | 114,109 | +136.3% | | Net Loss | (39,330) | (90,022) | +128.9% | - The decrease in revenue for FY2023 was mainly due to a RMB 73.5 million drop in OEM/ODM sales[658] - Gross profit margin increased from 5.0% in FY2022 to 15.0% in FY2023, attributed to a shift in product mix towards higher-margin feature phones, tablets, and technical services[662] - The significant increase in operating expenses in FY2023 was primarily due to a RMB 69.0 million rise in general and administrative expenses, which included share-based compensation of $9.3 million (RMB 63.7 million)[665][667][690] Liquidity and Capital Resources As of March 31, 2023, the company reported a working capital deficit of RMB 8.7 million and an accumulated deficit of RMB 175.9 million, with liquidity supported by operational cash flow and secured borrowings from Chinese banks Liquidity Position (in thousands of RMB) | | As of March 31, 2022 | As of March 31, 2023 | | :--- | :--- | :--- | | Working Capital | 29,800 | (8,700) | | Accumulated Deficit | (88,277) | (175,893) | | Cash, Cash Equivalents & Restricted Cash | 67,192 | 72,434 | Cash Flow Summary (in thousands of RMB) | | FY 2022 | FY 2023 | | :--- | :--- | :--- | | Net cash used in operating activities | (20,865) | (15,138) | | Net cash used in investing activity | (5,830) | (2,900) | | Net cash provided by financing activities | 86,888 | 18,295 | - The company relies on numerous short-term and long-term credit facilities from banks such as China Resources Bank, Shenzhen Rural Commercial Bank, and WeBank to fund its operations, with many loans guaranteed by the founder and secured by company assets[696][702][711] Trend Information The company's performance is influenced by competitive consumer electronics markets, heavy reliance on OEM/ODM orders, strategic expansion into new markets, and potential negative impacts from sales declines, supply chain disruptions, and geopolitical changes - The company's revenue is principally derived from OEM/ODM orders, which accounted for 99.4% and 99.99% of revenue in fiscal 2022 and 2023, respectively[724] - A key trend is the expansion into new markets, with aggregate sales in Mexico, Japan, and Africa growing to constitute 42.2% of total revenue in fiscal 2023, up from 13.9% in fiscal 2022[724] - The business faces risks from the coronavirus outbreak, potentially affecting production, logistics, and component costs, and from the changing business environment in India, prompting a strategic shift to other markets[728][729] Critical Accounting Estimates Management identifies critical accounting estimates requiring significant judgment, including the allowance for doubtful accounts, impairment of inventories, and impairment of long-lived assets, all based on various financial and market assessments - Key accounting estimates involve significant judgment regarding allowances for doubtful accounts, impairment of inventories, and impairment of long-lived assets[732] - The allowance for doubtful accounts is determined by assessing historical bad debts, customer financial stability, and prevailing economic conditions[733][734] - Inventory is valued at the lower of cost or net realizable value, with write-downs for estimated excess and obsolete inventory based on product life-cycle and market situation[736][737] Item 6. Directors, Senior Management and Employees This section details the company's executive officers, directors, compensation, board practices, and employee count, highlighting recent leadership changes, committee structures, and significant share ownership by the founder Directors, Executive Officers and Key Employees The company's leadership team includes key executive officers, with significant board changes in 2023, including the appointment of Hengcong Qiu as CEO and Chairman, and three new independent directors - In May 2023, Hengcong Qiu was appointed as the new Chief Executive Officer and Chairman of the Board, succeeding founder Minfei Bao in these roles[744][745] - The board of directors underwent significant changes in 2023 with the appointment of three new independent directors: Xiaoqian Jia (May 2023), Na Cai (July 2023), and Hailin Xie (July 2023)[749][750][751] Compensation For fiscal year 2023, aggregate cash compensation for executive officers was RMB 0.8 million (approximately $0.1 million), while non-executive directors received US$180,000, with no equity awards granted FY2023 Compensation | Group | Aggregate Compensation | | :--- | :--- | | Executive Officers | RMB 0.8 million (~$0.1M) | | Non-Executive Directors | US$ 180,000 | - No equity awards were granted to directors or executive officers during the fiscal year ended March 31, 2023[756] Board Practices The board comprises five directors, including three independent members, and has established independent Audit, Compensation, and Nominating and Corporate Governance Committees, with specific chairpersons for each - The Board of Directors consists of five members, three of whom are independent[770] - The Audit Committee is chaired by Na Cai, who is qualified as an 'audit committee financial expert'[771] - The Compensation Committee is chaired by Hailin Xie, and the Nominating and Corporate Governance Committee is chaired by Xiaoqian Jia[774][775] Share Ownership As of August 8, 2023, the company had 13,567,793 ordinary shares outstanding, with founder Minfei Bao beneficially owning 32.28%, and 5,300,000 shares issued under the 2022 Performance Incentive Plan Beneficial Share Ownership (as of August 8, 2023) | Shareholder | Shares Owned | Percentage | | :--- | :--- | :--- | | Minfei Bao (Director) | 4,380,000 | 32.28% | | Grandsky Phoenix Limited | 4,380,000 | 32.28% | | All directors and executive officers as a group | 4,380,000 | 32.28% | - On November 7, 2022, the company issued 5,300,000 ordinary shares under its 2022 Performance Incentive Plan[784][794] Item 7. Major Shareholders and Related Party Transactions This section details related party transactions, including amounts due to the controlling shareholder, balances with an equity method investee, and references to VIE arrangements and share issuances involving related parties - As of March 31, 2023, the company had amounts due to its controlling shareholder, Minfei Bao, totaling RMB 4.8 million[792] - The company has ongoing financial balances with Philectronics Inc., an equity method investee, with RMB 0.5 million due from and RMB 0.5 million due to Philectronics as of the report date[789] - The company's VIE arrangements, critical to its operations, are considered related party transactions[794] Item 8. Financial Information This section presents the company's consolidated financial statements, details ongoing legal proceedings including a significant dispute involving its Indian subsidiary, and outlines its dividend policy of retaining earnings for business expansion - The company is involved in several legal proceedings, notably a key case involving its Indian subsidiary, Do Mobile, where a complaint alleging mismanagement was filed in 2018, with litigation still pending despite a partial settlement[799][805] - A construction contract dispute with Guangdong Jian'an resulted in a judgment against UTime GZ for RMB 2.23 million, with a settlement agreement reached in May 2023 for installment payments[810] - The company has never declared or paid dividends and does not anticipate doing so in the foreseeable future, intending to retain all earnings for business operations and expansion[818] Item 9. The Offer and Listing The company's ordinary shares are listed and traded on the NASDAQ Capital Market under the trading symbol 'UTME', with trading commencing on April 5, 2021 - The company's ordinary shares are listed on the NASDAQ Capital Market under the symbol 'UTME' since April 5, 2021[820] Item 10. Additional Information This section provides detailed corporate and legal information, including the company's memorandum and articles of association, material contracts, exchange controls in the PRC, and a comprehensive overview of taxation in the Cayman Islands, PRC, India, and the U.S Memorandum and Articles of Association The company, a Cayman Islands exempted company, has authorized share capital of 140,000,000 ordinary and 10,000,000 preference shares, with provisions for voting, director indemnification, and procedures for shareholder meetings and director appointments - The company's authorized capital is 140,000,000 ordinary shares and 10,000,000 preference shares, with the board authorized to issue preference shares with specific rights without shareholder approval[828][857] - Directors and officers are indemnified against liabilities, except for those arising from their own actual fraud or willful default[848] - The company is governed by the Companies Act of the Cayman Islands, with significant differences from Delaware corporate law detailed, particularly regarding mergers, shareholder suits, and fiduciary duties of directors[861][864][869] Material Contracts The company has entered into numerous material contracts, primarily bank credit agreements with Chinese banks for working capital and credit facilities, alongside purchase agreements for production lines and factory lease agreements - The company has multiple credit and loan agreements with Chinese banks, including Shenzhen Rural Commercial Bank, China Resources Bank, and Industrial and Commercial Bank of China, to finance its operations[901] - Material purchase agreements were signed in early 2022 for SMT testing assembly lines and an assembly production line for its Guangxi facility[902][903] Exchange Controls While the Cayman Islands has no exchange controls, the PRC imposes strict currency conversion controls, requiring SAFE approval for capital-account transactions like direct investments and capital repatriation - There are no exchange control regulations in the Cayman Islands applicable to the company or its shareholders[905] - The PRC government imposes controls on the convertibility of Renminbi, with capital-account transactions requiring SAFE approval, potentially restricting fund flows for investment or repatriation[906][907] Taxation This subsection details tax implications across key jurisdictions, including no taxes in the Cayman Islands, potential resident enterprise risks and withholding taxes in the PRC, corporate tax in India, and significant Passive Foreign Investment Company (PFIC) risks for U.S. Holders - Cayman Islands: The company is not subject to profits, income, gains, or appreciation taxes and has received a 20-year undertaking against future taxation[911][913] - PRC: The standard EIT rate is 25%, with a risk that the company could be deemed a 'resident enterprise,' subjecting its global income to PRC tax and potentially requiring withholding on dividends paid to non-PRC shareholders[916][918] - India: The Indian subsidiary is subject to corporate tax, and following a law change effective April 1, 2020, dividends are now taxed in the hands of the shareholders[923][929] - United States: There is a risk that the company could be classified as a Passive Foreign Investment Company (PFIC), which would lead to adverse tax consequences for U.S. Holders, including higher ordinary income rates and interest charges on gains and 'excess distributions'[955][956][958] Item 11. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to foreign exchange risk from U.S. dollar and Renminbi transactions, affecting revenue and operating results, and interest rate risk on its bank deposits and investments, impacting fair value or income - The company faces foreign exchange risk from transactions in U.S. dollars and Renminbi, where Renminbi appreciation could adversely affect the value of U.S. dollar proceeds converted for operations in China[973][974] - Interest rate risk exists for the company's cash held in interest-bearing deposits and potential future investments, where rising rates can decrease the fair value of fixed-rate securities, and falling rates can reduce income from floating-rate instruments[975][976] Item 12. Description Of Securities Other Than Equity Securities This section is not applicable as per the report - The report states that this item and its sub-parts (Debt Securities, Warrants and Rights, etc.) are not applicable[977][978][979][980] Part II Item 13. Defaults, Dividend Arrearages And Delinquencies This section is not applicable as per the report - The report states that this item is not applicable Item 14. Material Modifications To The Rights Of Security Holders And Use Of Proceeds There have been no material modifications to security holder rights, and the company details the use of approximately US$12.1 million net proceeds from its April 2021 IPO - The company received net proceeds of approximately US$12.1 million from its IPO, which closed on April 8, 2021[985][987] - Total expenses for the IPO were approximately US$2.9 million, including US$1.1 million in underwriting discounts[986] Item 15. Controls and Procedures Management concluded that as of March 31, 2023, the company's disclosure controls and internal control over financial reporting were ineffective due to material weaknesses, including insufficient U.S. GAAP personnel and lack of comprehensive accounting policies, with remediation efforts underway - Management concluded that both disclosure controls and procedures and internal control over financial reporting were not effective as of March 31, 2023[989][991] - Two material weaknesses were identified: 1) lack of sufficient qualified financial reporting and accounting personnel with U.S. GAAP expertise, and 2) lack of a comprehensive accounting policies and procedures manual[994] - Remediation efforts include hiring qualified finance staff and appointing independent directors, with plans to establish a dedicated reporting department and provide ongoing training[995] - As an emerging growth company, the company is exempt from the auditor attestation requirement for internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act[997] Item 16. Corporate Governance and Other Disclosures This section covers corporate governance, including the designation of an 'audit committee financial expert', adoption of a code of ethics, principal accountant fees, and the company's adherence to home country practices as a foreign private issuer - The board has identified Na Cai as the 'audit committee financial expert'[999] - A code of ethics has been adopted and is publicly available on the company's investor relations website[1000][1001] Principal Accountant Fees (in USD) | | FY 2022 | FY 2023 | | :--- | :--- | :--- | | BDO China Shu Lun Pan Certified Public Accountants LLP. | 61,000 | - | | Audit Alliance LLP | 200,000 | 180,000 | | Total | 261,000 | 180,000 | - As a foreign private issuer, the company follows home country practices in lieu of certain Nasdaq corporate governance requirements, such as the requirement to hold an annual shareholder meeting[1007][1008][1013] Part III Item 17. Financial Statements The company has elected to provide financial statements pursuant to Item 18 - The company has chosen to provide financial statements under Item 18 instead of Item 17[1015] Item 18. Financial Statements This section presents the full consolidated financial statements for UTime Limited and its subsidiaries for fiscal years 2021-2023, including the auditor's report which highlights a 'Material Uncertainty relating to Going Concern' due to accumulated deficit and recurring net losses - The auditor's report from Audit Alliance LLP expresses a 'Material Uncertainty relating to Going Concern' due to the company's accumulated deficit of US$25.6 million and net loss of US$13.1 million for the year ended March 31, 2023[1042] Consolidated Balance Sheet Summary (in thousands of RMB) | | As of March 31, 2022 | As of March 31, 2023 | | :--- | :--- | :--- | | Total Assets | 250,639 | 313,139 | | Total Liabilities | 186,171 | 272,407 | | Total Shareholders' Equity | 64,468 | 40,732 | Consolidated Statement of Comprehensive Loss Summary (in thousands of RMB) | | FY 2021 | FY 2022 | FY 2023 | | :--- | :--- | :--- | :--- | | Net Sales | 246,899 | 275,508 | 200,547 | | Gross Profit | 18,167 | 13,785 | 30,065 | | Net Loss | (16,627) | (39,330) | (90,022) | | Basic and Diluted Loss per Share (RMB) | (3.68) | (4.76) | (7.80) | Item 19. Exhibits This section lists all exhibits filed as part of the annual report, including the Amended and Restated Memorandum and Articles of Association, various VIE structure agreements, numerous credit and loan agreements, and officer certifications - Key exhibits include the company's Amended and Restated Memorandum and Articles of Association[1017] - The contractual agreements establishing the VIE structure are filed as exhibits, including the Business Operation, Exclusive Call Option, Equity Pledge, and Power of Attorney agreements[1017] - Numerous credit, loan, and factoring agreements with various banks and financial institutions are included as exhibits[1017][1019]