VIE Structure and Foreign Investment - The VIE structure is used to replicate foreign investment in China-based companies, allowing the company to control and receive economic benefits from affiliated entities despite restrictions on direct foreign investment [41]. - Revenues from affiliated entities accounted for substantially all of the company's total revenues in 2019, 2020, and 2021 [45]. - The company faces potential restrictions on transferring funds or assets due to PRC government interventions, which could impact its financial operations [47]. - The VIE structure poses unique risks, including potential breaches of contractual arrangements by VIE shareholders, which could adversely affect operational control [42]. Financial Performance and Dividends - The company has not paid any dividends or made distributions to shareholders, including U.S. investors, since 2019 [46]. - The company expects to distribute earnings and settle service fees based on business needs, with no dividends anticipated in the foreseeable future [46]. - The company reported significant net losses of RMB233.5 million, RMB425.2 million, and RMB904.5 million (US$141.9 million) for the years 2019, 2020, and 2021 respectively, with operating cash outflows of RMB161.6 million, RMB216.5 million, and RMB238.1 million (US$37.4 million) during the same periods [86]. - The company has incurred substantial investments in developing new cloud-based communication solutions and enhancing existing ones, which continue to drive negative cash flows [86]. Regulatory Compliance and Risks - The company has obtained necessary licenses and permits for operations in China, but future compliance with evolving regulations remains uncertain [49]. - The company is subject to the Cybersecurity Review Measures, which may require compliance for operations affecting national security [49]. - The company is required to comply with extensive and evolving laws and regulations in the PRC, which may adversely affect its business prospects [60]. - The company may face significant compliance costs due to new cybersecurity laws and regulations, which could adversely affect business performance [137]. Legal and Litigation Issues - Significant legal and other expenses were incurred due to employee misconduct and transaction irregularities, impacting the company's financial position and reputation [63]. - The company has faced class action lawsuits from securities purchasers, which could materially affect its business and financial condition [65]. - The SEC settlement regarding employee misconduct resulted in the loss of certain exemptions under federal securities laws [63]. - The company has been the target of cyberattacks, which, while not materially significant to date, pose ongoing risks to operations [146]. Internal Controls and Financial Reporting - Material weaknesses in internal control over financial reporting were identified, including insufficient accounting personnel and lack of documented financial closing policies [68][69]. - The company is implementing remedial measures to address identified weaknesses, including employee training and improving internal policies [70]. - The company has experienced delays in SEC filings due to material weaknesses in internal control over financial reporting, which could affect investor confidence [76]. Market Competition and Customer Relations - The company faces intense competition in the cloud-based communications market, with pricing pressures from competitors offering lower-priced solutions [96]. - The company must attract new customers and retain existing ones to increase revenues, which is contingent on the quality and competitiveness of its solutions [78]. - The company has experienced customer loss during the COVID-19 outbreak, primarily due to a decrease in the number of smaller enterprise customers [148]. - The company has experienced challenges in configuring and implementing solutions for large enterprises, which may affect customer satisfaction and retention [110]. Growth and Expansion Strategies - The company has established overseas subsidiaries in Japan, Philippines, Malaysia, South Korea, Singapore, and Mexico, with plans for further expansion into the Middle East and South America [185]. - The company recognizes revenues over the subscription term, which means downturns in new sales may not immediately impact current results but will affect future revenues [177]. - The company has plans to enhance customer support and innovate solutions to maintain high levels of customer satisfaction as it focuses on serving large enterprises [158]. - Future international expansion will require significant investment and may expose the company to new operational risks [187]. Financial Management and Capital Needs - The company may require additional capital for growth, which could involve selling equity or debt securities, potentially diluting existing shareholders [193]. - The company has incurred substantial share-based compensation expenses, with 26,385,975 Class A ordinary shares options granted under the 2016 Plan as of the report date [182]. - Share-based compensation expenses increased from RMB27.1 million in 2019 to RMB277.6 million (US$43.6 million) in 2021, with unrecognized expenses of RMB87.3 million (US$13.7 million) and RMB133.9 million (US$21.0 million) as of December 31, 2021 [184]. Risks Related to Data and Cybersecurity - The company has access to sensitive data and must comply with evolving data privacy and cybersecurity regulations, which could lead to significant penalties if not adhered to [127][130]. - The PRC Data Security Law, effective September 1, 2021, imposes obligations on entities regarding data security and introduces a tiered protection system based on data importance [131][132]. - The company must comply with various data protection and cybersecurity practices of suppliers and contractors, which adds to operational complexity [142]. - The interpretation and enforcement of new laws and regulations regarding data protection and cybersecurity remain uncertain, potentially impacting business operations [137]. Operational Challenges and Risks - The company faces significant operational strains due to its expansion, necessitating investments in operational, financial, and managerial controls [157]. - The company has outsourced certain non-core software development activities, which may lead to operational difficulties if service providers fail to meet standards [181]. - The company relies on third-party cloud infrastructure, making it vulnerable to disruptions that could adversely affect its business and financial condition [169]. - Errors or defects in solutions could lead to reputational damage and loss of customers, adversely affecting financial results [114].
Cloopen(RAASY) - 2021 Q4 - Annual Report